Deductible Business Expenses; Foreign student taxation; Trust for Pets

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, July 9, 2000, 2000.

Copyright 2000  Robert L. Sommers, all rights reserved.

Question: As an elementary school principal, I buy doughnuts and coffee for every faculty meeting. I've been treating these costs as entertainment business expenses. Is this correct? (Note: Expenses for "meals and entertainment" must meet stringent requirements and are limited to 50% of the actual cost).

Answer: No. You are entitled to a full deduction for the cost of refreshments and other small fringe benefits provided to employees. Receipt of these benefits by your staff is non-taxable. To qualify, the expenses must be small in value and furnished by the employer merely as a means of promoting the health, good will, contentment or efficiency of the employees.

For principals, teachers, administrators and other employees, these expenses are classified as employee business expenses and are deducted as an itemized miscellaneous expense. To realize any tax advantages, though, you must itemize deductions and your expenses must exceed 2% of your adjusted gross income. Business owners, however, are entitled to a full deduction.

Other fully-deductible expenses include occasional office functions such as holiday parties, company picnics or entertainment, medical services, courtesy discounts, traditional birthday and holiday gifts (excluding money), occasional theater or sporting event tickets, coffee, doughnuts, soft drinks, snacks and local telephone calls. Also, expenses for books, flowers, fruit or similar items provided to employees because of illness, family crisis or celebration or for outstanding performance are fully-deductible.

Question: I am a student on an F-1 visa and have lived in the U.S. since 1998. Last year, I made $50,000 in short-term capital gains by day trading in stocks. Will I pay U.S. taxes on these gains?

Answer: No. Foreigners entering the U.S. temporarily on an F-visa, an M-visa, or as a student on a J-visa or a Q-visa are not considered residents in this country for U.S. tax purposes. Therefore, you are not taxed on your long-term or short-term capital gains from the sale of stock and securities. Likewise, you cannot deduct any capital losses.

Note: The sale of U.S. real property always is taxable, whether or not the seller is a non-resident foreigner or student.

Foreign students should file Form 8843 to claim this non-residency exemption. All non-resident foreigners, including students, should provide their brokers with Form W-8 (Certificate of Foreign Status) to avoid having their trades reported to IRS.

Question: May I provide for the care of my pets in my will or revocable trust?

Answer: Yes. California permits owners to create a trust for designated pets and other domestic animals. You may authorize your executor or trustee to set aside a certain sum, in trust, to be used for the maintenance, protection and care of your pets for the life of the animal. Your authorization is merely your recommendation to your executor or trustee; you cannot require them to create a trust for your pets.

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All contents copyright 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.