Today, many go-getters aren’t satisfied running one business. They pursue multiple ventures at the same time. There may be various reasons for this, including having diverse interests in different areas and wanting additional income. Whatever the reason, tax traps can snare the unwary. Here is a sampling of issues to consider.
Filing tax returns
Are your multiple businesses separate activities under a single umbrella or are they truly separate (e.g., one is conducted through a limited liability company and another is a sole proprietorship). Be sure to determine whether activities should be reported on a single form or that multiple returns are required.
Away from home expenses
If you are “away from home” on business, you can deduct what’s essentially living costs—lodging, meals (subject to a 50% limit if not provided at a restaurant), mileage, etc. This can occur when you conduct separate businesses in different locations, or when you have a job in one place and a business in another. Your “tax home” is your principal place of business—where you spend the most time, engage in the most business activity, and derive the greater portion of your income.
In one case, a grants manager with a full-time job in Palo Alto, California, started a children’s clothing business in Los Angeles. She traveled regularly to LA to make patterns and samples, and participate in sample sales. The Tax Court let her deduct away from home expenses for travel to and from LA because Palo Alto was her tax home.
Home office deduction
If you conduct business from home, you may claim a home office deduction if it’s your principal place of business (or meet other criteria) and you use the home office regularly and exclusively for business. If you have multiple businesses, each must satisfy the two-prong test. If you have a business with a storefront that’s your principal place of business, using a home office to do paperwork can technically disqualify a home office, even if you have another business run solely from home.
Aggregation rules
There are a number of tax rules that require you to aggregate your businesses—income and losses—for determining eligibility for tax breaks. These include:
- The qualified business income (QBI) deduction
- Contributions to qualified retirement plans
- Employer mandate under the Affordable Care Act to provide health coverage to full-time employees or pay a penalty
The first-year (Section 179) deduction for the cost of equipment bought and placed in service in the year has a dollar limit–$1,080,000 in 2022. There’s also a taxable income limit. The deduction cannot exceed an individual’s taxable income from all trades or businesses. For owners of pass-through entities, the dollar limit likely won’t be a problem, but the taxable income limit may limit or bar a deduction. Use care in electing this deduction if an owner may lose out because of his or her income.
For example, an individual is a sole proprietor as well as a 50% member of a limited liability company (LLC). The sole proprietorship buys equipment costing $100,000 and elects first-year expensing. The LLC buys equipment costing $400,000 and elects first-year expensing, $200,000 of which passed through to the individual. If the individual’s taxable income from these businesses—the individual’s only businesses—is only $175,000, the total Section 179 deduction is limited to this amount; $125,000 is not deductible and this write-off is lost forever.
Final thought
Running a business is complicated for tax purposes. Having more than one business raises the level of complexity. And if these businesses are located in different states, you need to understand those specific state tax rules. It’s important to work with a CPA or other tax adviser to make sure you’re meeting tax obligations for each business and taking advantage of tax breaks for having multiple businesses.
