By Drew Hinrichs, CPA, CEO of Engage Advisors
Most people have a general sense for the type of deductions the IRS allows, but when it comes to the tax code, the devil is in the details. As we move into tax season, here are some rules to follow to be sure your deductions are allowed.
Deducting Donations
When you donate clothing and household items to a charitable organization, such as the Salvation Army or Goodwill, you can deduct the value of your contribution from your taxes, but you need to properly document your donation.
If you make a single charitable contribution of $250 or more, you need the charitable organization to give you what the IRS calls a “contemporaneous written acknowledgment.” It’s basically a document – handwritten or typed –with the following information:
- Name of the charitable organization
- Amount of cash contribution
- Description (but not value) of non-cash contribution
- Statement that no goods or services were provided by the organization to you in exchange for the donation
- If goods or services were provided by the organization, include a description and good faith estimate of the value of those goods or services
- If applicable, it must specify that the only benefit you received was an intangible religious benefit.
Fair Market Value
Determining fair market value is probably the hardest part of documenting your donation. It’s not what you originally paid for an item; rather, it’s what the item is currently worth. To help determine the value, you’ll find numerous reputable resources online, such as The Salvation Army and Goodwill, who offer donation value guides.
In 2023, if you claim a deduction of over $5,000 for a non-cash charitable contribution of one or a group of similar items, you must obtain a qualified appraisal for that item or group of items and attach it to your tax return. A “group of similar items” can trigger the appraisal requirement.
That’s exactly what happened to Duncan Bass, who is notorious for losing his fight with the IRS when he tried to deduct over $25,000 in donated items. Over a two-year period, Bass made 172 trips to donate clothing which he valued at $13,852 and $11,594 for consecutive years. His intention was to keep each receipt total below $250 so he wouldn’t need documentation, but he triggered the $5,000 appraisal requirement for the group. In the end, his deductions were not allowed.
Deducting Travel
There are practically as many rules for deducting travel as there are modes of transportation. The tax code does not dictate the fastest or cheapest form of travel, so you have choices. Within that context, there are certain rules to follow, especially if you plan to leverage your business travel for a vacation. Let’s look at a few scenarios.
Traveling By Car
When you travel by car, you are expected to take a direct route. If you’re driving from Boston to San Francisco, side trips to Mount Rushmore or Las Vegas, would count as personal days and are not deductible. But for the direct route, vehicle expenses and other costs of living on the road such as expenses for meals and lodging, are deductible. You can choose to combine business and pleasure, but you can only deduct the business portion.
If Your Family Drives with You
The advantage to driving is that you spend nothing extra to have your family in the car. But keep in mind, to the IRS, bringing your family might look more like a vacation than a business trip, so be sure to keep good records. That means you need to sort expenses and limit deductions to what you would have paid for just yourself versus your family. For example, if you stay at a hotel and the single rate is $225 a night, while the two-person rate is $275, you can only deduct what you would have paid for a single rate – i.e. $225. When dining, your own meals are deductible, but meals for your other family members are non-deductible.
Travel by Plane
When you travel by plane, you can choose to fly by coach, business class, first class, by charter flight, or even fly in your own aircraft if you have one. All options are deductible, and no special rules apply to commercial air travel. You simply deduct the cost of getting to your business destination by a reasonably direct route.
As with driving a car, side trips are not deductible. If, on your way to San Francisco from Boston, you stop in Aspen, Colorado to go skiing, calculate your deduction based on what you would have paid had you flown direct. For example, if you spent $1,500 on the trip that included a stop in Aspen, while flying directly to San Francisco would have cost $850, you can only deduct $850.
If Your Family Flies with You
Plane tickets purchased for your family are not deductible. If you charter a flight or fly your own plane, it’s similar to driving a car in that there is no additional expense incurred if your family comes along.
Travel by Train
Depending on where you’re going, train travel can be considerably more expensive than other modes of transportation, but it faces no special rules other than the expectation that you take a reasonably direct route. You can deduct the cost of the tickets if you buy a sleeping room or simply travel by first class or coach. If you buy a sleeping room on the train to go from Boston to San Francisco and your Amtrak travel fare is $3,000, it is fully deductible.
If Your Family Rides the Train with You
Train tickets purchased for your family are not deductible.
Travel by Boat
For tax purposes, any vessel that sails is considered a cruise ship. Admittedly, taking a cruise from Boston to San Francisco is pretty unlikely – but given their popularity, we will review the special rules that apply to cruises – and they are special.
If you travel by cruise ship, regardless of where you travel, you may not deduct more than the daily luxury boat limits, which for 2023 are as follows:
- $1,128 a day from 1/1 to 3/31
- $996 a day from 4/1 to 4/30
- $796 a day from 5/1 to 5/31
- $1,076 a day from 6/1 to 9/30
- $776 a day from 10/1 to 10/31
- $734 a day from 11/1 to 11/30
- $1,128 a day from 12/1 to 12/31
Let’s apply this to our trip from Boston to San Francisco. If you take a 10 day cruise in November, the tax code limits your cruise ship deduction to a maximum of $7,340 per business traveler ($734 x 10). You can spend more than that if you want, but that’s all you are allowed to deduct.
If You Bring Your Family on a Cruise
Tickets purchased for family members to accompany you on a cruise are not deductible.
Tax-Free Rental Income with the Augusta Rule
This rule has grown in importance with the rising popularity of Airbnb, but the application is fairly narrow. However, if the city where you live is hosting the next Super Bowl or a future Olympics, you might be interested in the Augusta Rule.
As you probably guessed, the Augusta rule gets its name from the Masters Golf Tournament which takes place in Augusta, Georgia. According to IRC Section 280A(g), also known as the Augusta rule, members and other residents in the area may receive tax-free rent (which is not included in your gross income) by renting their homes for up to two weeks per year. But you don’t have to live in Augusta to benefit from this rule. Under the Augusta rule, if you rent your house for $1,000 a day for 14 days, you won’t qualify for rental deductions, but you don’t need to report the $14,000 as taxable income.
Consult a Dental CPA
To be sure you take advantage of all the deductions you’re entitled to, contact Engage Advisors. Our team of dental CPAs is up to date on current tax law, so you won’t miss any of the opportunities to reduce your tax liability. We’ll help you implement the right tax-saving strategies for your business, and work with you to create a plan that minimizes your obligations so you can build a financially healthy practice.