A recent tax tip from the IRS inspired us to expand on the topic to provide additional guidance on several tax planning opportunities that often come to mind during the summer months, but are relevant throughout the year.
Marriage
The IRS reminds newlyweds to report any name changes to the Social Security Administration and update address information with the IRS to make tax filing season easier. Beyond these basic administrative tasks, new couples will need to decide whether to file their taxes separately or jointly. Read this prior GYF blog post, to learn more about the two options, their tax implications and how to choose what is right for your tax situation.
Home Improvements
Many people take advantage of the longer days and warmer weather to complete home improvement projects over the summer. Some of these projects may provide tax benefits for the homeowners. If taxpayers make qualified energy-efficient improvements to their homes after January 1, 2023, they may qualify for a tax credit up to $3,200. These types of projects include water heaters, exterior windows and doors, and heating and air conditioning installations. Additional clean energy credits available for taxpayers who install solar, wind and geothermal power generation; solar water heaters; or fuel cells and battery storage. Visit IRS webpages for the Energy Efficient Home Improvement Credit and Residential Clean Energy Credit to learn more.
Sale of Residence
Summertime is a busy time for residential real estate transactions, and taxpayers who sell their “main home” may qualify to exclude all or part of any gain from the sale from their taxable income, up to $250,000 ($500,000 on a joint return in most cases). Loss from the sale of a home cannot be deducted. Visit the IRS webpage for Sale of Residence Tax Tips to learn more.
Taxpayers who own more than one home can only exclude gain only from the sale of the main home (generally the home where the most time is spent in residence). Gains realized from the sale of an alternate residence or vacation home are subject to taxes. Taxpayers may be able to exclude gain from the sale of a home that is used for business or to produce rental income if the qualifications below are met. Note, taxpayers cannot exclude the part of the gain equal to any depreciation claimed for renting the property.
To claim the exclusion, taxpayers must meet the ownership and use tests. During the five-year period ending on the date of the sale, the taxpayer must have: (1) Owned the home for at least two years (the ownership test); and (2) Lived in the home as a main home for at least two years (the use test).
Taxpayers who receive an informational income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions, must report the sale of the home even if the gain from the sale is excludable. The sale must also be reported if all of the capital gain cannot be excluded gain from income.
Seasonal Employment
Often, taxpayers who only work during the summertime or in a part-time role may not earn enough to owe federal income tax; however, these workers should still file a tax return to get any refund they may be owed. (Who Should File a Tax Return?) Some seasonal and freelance jobs produce income that qualifies the taxpayer as a “gig economy worker,” which must be reported and has specific tax implications. (Gig Economy Tax Center) If taxpayers are paid through payment apps and receive more than $600, they may receive an IRS Form 1099-K reporting their earnings, and this income should be included on personal income tax filings. Contact the GYF Tax Group for assistance with personal income tax questions
Travel
Though it may be tempting to combine some vacation time with a work trip, it is important to note that expenses must qualify as necessary for business travel to be tax-deductible. According to the IRS, “travel expenses” are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. Expenses that are lavish or extravagant, or that are for personal purposes cannot be deducted. Visit the IRS Business Travel Expenses webpage for more details and rules
Club Dues
In warmer weather, taxpayers often utilize their memberships in country clubs, yacht clubs and other similar venues to invite business contacts to join them for meals or events and may consider deducting these costs as business expenses. However, the IRS treats dues paid to these types of clubs differently than membership dues paid to professional organizations, which generally can be deducted. For tax consequences, a club’s activities, not its name nor a member’s reason for joining, control whether the IRS determines if it exists to entertain its members or if it has a business or social service purpose.
Membership dues paid to professional associations, trade associations, and public service groups may be deductible if members join for a business (rather than a social) reason; and, if the organization’s principal purpose is not to provide entertainment or access to entertainment facilities. The types of groups listed below are not considered to be clubs by the IRS for purposes of the disallowance rule. As such, dues paid to these organizations are generally deductible.
- Business leagues
- Trade associations
- Chambers of commerce
- Boards of trade
- Real estate boards
- Professional organizations (such as bar associations and medical associations)
- Civic or public service organizations (such as Kiwanis, Lions, Rotary, etc.)
Conversely, taxpayers cannot deduct membership dues paid to most social, athletic, sporting, airline, hotel, and luncheon clubs because the IRS considers these types of organizations to be providers of entertainment for their members. Other business expenses paid at a club, such as meals, may be deducted to the extent they satisfy the other requirements for a business deduction.
Meals & Entertainment
During the summer months, many sports, concerts, festivals and other entertainment activities provide opportunities for business outings that can be used to attract clients or show appreciation to employees. It is easy to think of these entertainment costs as deductible business expenses, but a recent change in the tax law eliminated the deduction for most entertainment expenses. However, businesses may still be able to deduct the cost of meals as a business expense if detailed substantiation and recordkeeping requirements are met.
As a general rule, a business can deduct 50% of the cost of meals as a business expense if the following requirements are met:
- the expense must be ordinary and necessary and paid in carrying on a trade or business;
- the expense may not be lavish or extravagant;
- the taxpayer or an employee must be present when the food or beverages are furnished;
- food and beverages must be provided to the taxpayer or a business associate; and
- if food and beverages are provided during or at an entertainment activity, separate invoicing is required.
The food or beverages must be provided to a person with whom the taxpayer could reasonably expect to engage in the active conduct of the taxpayer’s trade or business such as a customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.
The treatment and deductibility of food and beverage expenses (which include the cost of the items purchased as well as delivery fees, tips, and sales tax) depends on how they are invoiced. For food or beverages provided at or during an entertainment activity, the bill, invoice, or receipt must reflect the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment or must approximate the reasonable value of those items. If the invoices are not stated separately and no allocation can be made, the entire amount is nondeductible.
It is important to note that certain employer-provided meal expenses paid or incurred after December 31, 2025, will be prohibited. Beginning in 2026, no deduction will be allowed for amounts that an employer pays or incurs for meals that are excludable from an employee’s income because they are provided on the employer’s business premises for the convenience of the employer; or food, beverage, and eating facility expenses for facilities located at an employer’s business that provide meals that are considered a de minimis fringe benefit.
IRS Notice 2018-76 provides guidance on the deductibility of certain business meal expenses
Final Thoughts
Though the summer will soon come to an end, these potential tax-savings opportunities can be advantageous year-round. If you have questions about these topics or would like to discuss other strategies to decrease your taxable income, please contact your GYF Tax professional at 412-338-9300.
