Tax information on convention deductions, property exchanges, and a new IRS computer system.
Deducting for Conventions
. . . plus property deals with your company, and the IRS's new computers
Traveling for Business or Pleasure You may not be clear about what you can deduct when you combine convention trips with pleasure trips, but the IRS is. This is the general rule: travel expenses incurred to attend a convention are deductible if your attendance benefits or advances your trade or business.
The IRS will allow or disallow the deduction based on whether it thinks you took the trip primarily for business or pleasure, and it will scrutinize carefully how you claim to have divided your time between these two activities. It's not surprising that deductions charged to a convention held in sunny Acapulco are more likely to attract attention than deductions from one held in overcast Seattle.
Regardless of the site, however, if the purpose of the trip is primarily for business, it is deductible. But beware: that part of the trip or attendance at the convention attributable to pleasure, except for incidental activities, is not.
* Conventions in North America. The business portions of such trips (within the United States, Canada, Mexico, and certain Caribbean Basin and Central American countries) are fully deductible. This includes travel expenses (such as airplane tickets), lodging, tips, telephone, telegraph, taxicab costs, and convention or seminar registration fees. Meals are 80% deductible. The costs of lodging, meals, and other expenses for pleasure are not deductible.
* Conventions outside North America. To qualify for a deduction, you must show that it was "as reasonable" to hold the convention outside North America as inside. If you are able to do that, the costs are 100% deductible if:
1) the trip is for seven consecutive days or less, or
2) less than 25% of the time is spent on pleasure activities, or
3) the taxpayer had no control over the travel (i.e., it was at the behest of and in the behalf of his employer), and
4) the taxpayer can substantiate that the trip and convention were primarily for business purposes, and not for obtaining a personal vacation or holiday.
The entire trip does not have to be primarily for business. For example, if only 5 out of 15 trip days are spent at a foreign convention on business, those 5 days' expenses are deductible, but travel to and from the site may not be.
* C ruise ship conventions. You may deduct expenses for conventions held on cruise ships if, in addition to the general limitations already described, the ship is registered in the United States and all its ports of call are located in the United States or its possessions. The deduction is limited to $2,000 a year per individual.
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Property Exchanges If you orchestrate a loss when buying or selling property in a transaction with your corporation, you get no tax benefit. That's because the law doesn't allow a loss deduction arising from such deals between a corporation and a shareholder who owns more than 50% of the company. But the loss can be used to reduce gain on a later sale or exchange of the same property.
To plan your strategy, you have to decide what will benefit you most -- to have the cash from the later sale wind up in your pocket or the corporate pocket.
Say you own property that cost you $25,000, and you sell it to your company for $20,000. You can't deduct the $5,000 loss. But if your company then sells the same property to an unrelated party for $31,000, it can reduce its $11,000 gain by the $5,000 you couldn't deduct. Its taxable gain will be only $6,000. Of course, you could have sold the property for $31,000 to the outsider, and your gain, too, would have been $6,000.
Since you control where the net tax benefit of this rule winds up, you can, within reason, engineer the transaction to produce the best aftertax result.
Computer Cross-Checks The IRS is close to perfecting its computer system, which means that taxpayers who fail to report all their income now have a 95% chance of being caught. The computer can cross-check the wages on your return with your W-2 statements and your interest and dividend income with Form 1099 interest and dividend reports.
If you claim an alimony deduction, you must include your ex-spouse's Social Security number on your return. If your ex-spouse's alimony income doesn't match your alimony deduction, you'll both be contacted by the IRS.
The same thing will happen with mortgage interest payments: if a lender's mortgage interest income doesn't match a borrower's claimed mortgage interest deduction, the IRS will come knocking at both their doors.
THE IRS'S SCHEDULE FOR SPEEDY REFUNDS
By 1989, you'll be able to file federal tax returns electronically in the following states:
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Alabama Nebraska Washington
Alaska Nevada West Virginia
Arizona New Hampshire Wisconsin
California New York Wyoming
Colorado North Carolina
Connecticut North Dakota
Illinois Rhode Island
Indiana South Carolina
Kentucky South Dakota
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If you're expecting a refund on your taxes, electronic filing is expected to speed up the process by three weeks. You can file only through participating tax-return preparers, however. By 1990, the system will be available in the rest of the country. n
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Irving L. Blackman, specializing in closely held businesses at Chicago-based Blackman Kallick Bartelstein, certified public accountants, speaks and writes on tax issues.