Deduct Your Spouse

A friend from Facebook, Angelina J. writes, “Frank, I am taking a business trip in a month with my husband, Brad P. How can I make his travel expenses deductible?” That's a great question. I am in a similar situation. My future wife, Jen A., and I are opening a sex toys business. She needs to find a way to make my travel expenses deductible. In her new movie, “Horrible Bosses”, Jen demonstrates her knowledge of sex toys. She plays a cougar dentist, who enjoys seducing / torturing her dental assistant. I would have been great in that role.

The key to making spouse travel expenses or any other spouse related expenses is involvement in the business. In other words, your spouse must have some substantial, active role in your business. In my case, I plan on being Jen's sex toy model. She can test the toys on me.

Angelina J. runs an adoption agency. She has to find a way to make Brad P. a contributor to her business. She could have Brad fill any of a number of roles like bookkeeping, searching for orphans to adopt, or marketing foreign kids to rich, useless American actors. For Brad's expenses to be deductible, his role in the business must be essential. The I.R.S. has seen and rejected all sorts of schemes. The more Brad's arrangement in Angelina's business looks like something an unrelated employee might do, the better the changes of sustaining deductions related to Brad's involvement.

A second factor Angelina must consider is Brad's compensation. His compensation must be commensurate with his involvement, and his expenses must be reasonable based on his level of compensation. You wouldn't spend $10,000 in travel expenses on an unrelated employee making $15,000 per year. We CPA's say, “Pigs get fat. Hogs get slaughtered.” If you get greedy, the I.R.S. will disallow your deduction.

You have some choices in how you structure your spouse's involvement in your business. If you already have employees, putting your spouse on the payroll with a salary is a great idea. If you own a pass thru entity such as an LLC, partnership, or S corporation, your spouse's salary will increase your personal income but be offset by your business's deduction for his salary. There can be some Social Security tax and Medicare implications. So you have to actually work out the numbers to make certain the additional spouse travel deductions are worth the hassle.

If you don't have employees already, you can make your spouse your only employee. However, then you begin to incur the additional administrative expense of processing payroll. That expense eats into the benefit of deducting your spouse's travel. A way around having to process payroll is to make your spouse a minority owner. If you are the only owner of an LLC, now you have created a partnership for income tax purposes when you add your spouse as an owner. If your spouse is involved in your business, his / her expenses are deductible to the business since he / she is an owner.

There is a definite downside to making your spouse an owner in your business. If you get divorced, the consequences aren't happy. If you think your marriage isn't on solid ground, give up the deductions. I am only addressing deductions in this article. I ain't no Dr. Phil. Your marriage is your business. I was bad enough at my first one that I shouldn't be giving marriage advice.

There is a more aggressive way to make spouse travel deductible. If you have a legal entity such as an LLC or corporation, you can make your spouse a member of the board of directors. Corporations are required to have annual director meetings. Hold yours someplace nice like Hawaii.

The key to successfully defending your spouse travel deduction is documentation, documentation, and more documentation. If you go to Hawaii to hold a directors' meeting, meet every day of the trip for some substantial period each day and keep detailed meeting minutes. Don't think you can create the minutes after the fact. Your computer file creation dates had better be consistent with your trip dates. If your spouse is an employee, keep the same time records you would keep for any other employee.

Arranging your business affairs to make spouse travel deductible is definitely an aggressive income tax reduction technique. If you are audited, expect the I.R.S. to question the deductions. However, if you can prove through solid documentation that your spouse is actively involved in your business, you will be able to defend your deduction successfully. But, expect a fight. If you aren't willing to have the fight, pass on the deduction.

If you are looking for not so snarky tax and business advice, please visit our main S&K web site www.skcpas.com. Thanks for reading.