Deducting Foreign Business Travel

As the world shrinks, business owners may find themselves traveling to foreign destinations. Often, such trips are vital, leading to personal visits with suppliers and potential customers. Ideally, you’ll be able to deduct all your travel costs, but that may not be the case if you venture beyond the 50 states and Washington, D.C.

The seven-day rule

If you travel outside the U.S. for a week or less, your trip will be considered entirely for business, even if you combine business and non-business activities. Then, you can deduct all of your travel costs. A week, for this purpose, is seven consecutive days, not counting the day you leave the U.S.

            

Example 1: Denise Edwards has a clothing import business in Chicago. She travels to San Francisco on Tuesday, then flies to Hong Kong on Wednesday. After spending Thursday and Friday in business discussions, Denise spends Saturday through Tuesday sightseeing. She flies back to San Francisco on Wednesday and returns to Chicago on Thursday.

            

Here, Denise was not outside the U.S. for more than a week. (The day she departed from San Francisco does not count as a day outside the   U. S.) Therefore, she can deduct all of her travel costs. She also can deduct the cost of her stay in Hong Kong for the days she worked there but not her costs for her sightseeing days.

More than one week

Business trips longer than one week trigger another set of rules. As long as 75% or more of the trip’s total days are business days, you can deduct all your travel costs. Days traveling to and from your destination count as business days, for the purpose of reaching the 75% mark. Again, your costs for non-business days are not tax deductible.

            

If your trip is primarily for business, but you fail both the one week and the 75% tests for the travel, calculating your deduction becomes more complicated. 
You can only deduct the business portion of your cost of getting to and from your destination and must allocate your travel time on a day-to-day basis between business days and non-business days.

            

Example 2: Henry Jackson owns a restaurant supply business in Boston. He flies to Berlin on March 7 for a conference and spends time there on business until March 17. That day, Henry flies to Brussels to see friends and tour the local museums. On March 24, he returns to Boston from Brussels.

            

As the IRS looks at Henry’s itinerary, it appears that Henry could have returned to Boston on March 17, after completing his business. Thus, 11 days of the trip (March 7–17) count as business days while the other seven days (March 18–24) are non-business days.

            

With this reasoning, 7 out of 18 days of the trip were non-business days, so ⁷/₁₈ of what it would have cost him to travel round-trip between Boston and Brussels is not tax deductible.

Assume Henry’s total airfare costs were $2,000, whereas roun-dtrip airfare between Boston and Brussels would have been $1,500. Henry must subtract ⁷/₁₈ of this round-trip fare ($1,500 x ⁷/₁₈ = $583) from his actual travel expenses. 
Because Henry spent $2,000, subtracting $583 gives him a $1,417 deduction for his airfare. He can deduct his costs while in Berlin on business but not his costs while in Brussels for other purposes.

As you can see, calculating foreign business travel deductions can be complex. If you will be outside the United States for business, our office can help you set up a schedule for optimal tax benefits. 

Tougher Rules on Reverse Mortgages

The Federal Housing Administration (FHA) has imposed more stringent requirements on reverse mortgages, making them increasingly difficult to obtain. For qualified borrowers, though, continued low rates and the spread of so-called “purchase loans” can make it worthwhile to consider this type of debt.

Income instead of outflow

As the name suggests, a reverse mortgage is the opposite of a traditional home loan. With a reverse mortgage, you get cash instead of making payments to the lender. You can get a lump sum, a line of credit, or regular monthly income. The amount you borrow will be secured by your home, so reverse mortgages are for homeowners with little or no debt on their home. Most reverse mortgages are Home Equity Conversion Mortgages (HECMs), which are offered by private lenders and insured by the FHA; borrowers must be at least age 62.

            
The amount you’ll receive will be determined by current interest rates, your age, and your home equity. Interest rates are relatively low now (around 5% for a fixed-rate loan and under 3% for a loan with a variable rate that adjusts monthly), but you’ll pay an added 1.25% of the balance for mortgage insurance. The older you are and the greater your home equity, the more you’ll be able to borrow on a reverse mortgage.

            
Many reverse mortgage calculators can be found online. Near mid-year 2014, the calculator at reversemortgage.org was asked what a married couple in Indianapolis, both aged 68, could borrow against a $320,000 debt-free home. 

• A fixed-rate loan would permit an upfront payout of over $97,000, whereas a variable-rate loan would provide $971 in monthly cash flow. 
• If that couple were both age 78, the numbers would be about $106,000 upfront and $1,236 a month, respectively. In any case, no tax would be due on the borrowed funds. 

With a HECM, an owner occupant doesn’t have to make any debt repayment while still living in the home. No matter how large the loan balance becomes, the outstanding loan balance won’t be due until the borrower dies, sells the home, or is no longer using the home as a primary residence. 
Naturally, the loan balance will keep mounting: that $97,000 or $106,000 loan against a $320,000 house will approximately double in 11 years, at today’s fixed interest rates.

Higher hurdles

A reverse mortgage borrower still owns the home, which means continuing to have ownership responsibility.

 Example 1: 
Frank and Robin Grant receive a reverse mortgage that will pay them $1,000 a month. They still own their home, so they still must pay homeowners insurance premiums, local property taxes, and association dues.

             
 Under new FHA rules, reverse mortgage applicants must undergo a financial assessment in order to qualify for a loan. Lenders have to check to see that borrowers can afford to pay the required taxes and insurance bills, based on their assets and cash flow. Borrowers with questionable resources may be asked to put money into escrow or may have their application rejected.

Borrowing to buy

Reverse mortgages are aimed at seniors who wish to stay in their home as they grow older. In effect, they can use their home equity for added cash in retirement so they won’t have to move into an unfamiliar place, perhaps one that’s away from friends and family.

That’s not the case for all seniors. Some want to buy a different home that’s easier to maintain or move to a less expensive region.

 Example 2: 

Helen Parker is a widow living in a large house. She wants to buy a place in a seniors’ community, but she lacks the income to qualify for a traditional mortgage, and she is having a difficult time selling the house where she now lives.

            
Fortunately, Helen has enough assets to qualify for a reverse mortgage purchase loan, which will enable her to buy into the seniors’ community now. Helen still plans to sell her old home, but she can move right away and not have to make payments on the reverse mortgage purchase loan.

            
Reverse mortgages can be complicated, and they require various fees, but they may offer a practical way to tap home equity in specific circumstances. 

Delayed Deduction

[] Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable.

[] Any interest accrued on a reverse mortgage is not deductible until the interest is actually paid, which is usually when the loan is paid off in full. Such a payment might be made by the borrower, by an heir, or by the borrower’s estate.

[] For the party repaying the loan, the deduction may be limited because a reverse mortgage loan generally is subject to the limit on home equity debt. That limit caps deductions to the interest on $100,000 of debt.

Equipment Expensing & Bonus Depreciation

As of this this writing, the status of equipment expensing for 2014 is unclear. The same is true for bonus depreciation. The ongoing uncertainty on these issues may have an impact on your year-end plans to acquire business equipment.

           

Section 179 of the tax code allows certain types of equipment to be expensed: the purchase price is fully tax deductible when the item is placed in service, rather than deducted over a multi-year depreciation schedule. New and used equipment qualify for this tax benefit, with some exceptions (such as real estate).

            

In recent years, Congress has consistently expanded the reach of Section 179. By 2013, up to $500,000 of purchases of equipment eligible for the deduction could be expensed; a business could buy up to $2 million worth of eligible equipment that year before losing any of this benefit.

           

Example 1:
In 2013, DEF Corp. bought $2,085,000 of business equipment eligible for the Section 179 expense deduction and elected to not take bonus depreciation on the equipment. This was $85,000 over the Section 179 limit, so DEF could deduct only $415,000 (the $500,000 ceiling minus $85,000) as an expense in 2013 under Section 179. DEF must recover the other $1,670,000 of the costs of its 2013 purchases through depreciation methods.

            

The $500,000 and $2 million limits for Section 179 expired after 2013. Under current law, the 2014 limit for expensing is $25,000 worth of purchases (plus an inflation adjustment) with a phaseout beginning at $200,000 worth of purchases.

            

Similarly, bonus depreciation was available for new equipment until expiration after 2013. This provision allowed a 50% depreciation deduction on purchases of new equipment, before using an extended schedule to depreciate the balance. Currently, bonus depreciation is not permitted in 2014.

Dealing with doubts

Both houses of Congress have indicated interest in restoring an expanded Section 179 deduction as well as bonus depreciation for 2014. However, any updates probably won’t be announced until late in the year. If that’s the case, how should business owners and self-employed individuals proceed?

           

Start by acquiring any equipment that your company truly needs for current and future profitability. If your business needs the item now, buy it now, and deduct the cost as the tax law permits.

           

If the timing isn’t urgent, consider limiting purchases to those that will bring 2014 acquisitions up to $25,000, which will be the Section 179 ceiling if no extension is passed. Contact our office in late November or early December for an update on relevant legislation.

            

Keep in mind that equipment must be placed in service by the end of 2014 to qualify for depreciation deductions (if reinstated) or expensing this year, so merely paying for equipment in 2014 does not entitle you to a deduction. However, this also means that you can get the 2014 tax benefits for equipment placed in service in 2014 even if you defer payment for the equipment until 2015.