Tax

If you own rental properties, you know the frustration: your losses do you no good until you qualify as a tax law–defined real estate professional and materially participate in the properties. Both of these tests turn on hours, and the real estate professional test alone requires 750 hours.

Here is a source of hours that many owners overlook: your drive time to and from the rentals.

The IRS says in an old audit guide that travel time should not count. But that guide dates to 2005, states on its face that it may not be cited as a technical position, and rests on a single summary opinion that by law cannot serve as precedent.

And the Tax Court has done the opposite. In the Leyh case, the court allowed the owner’s drive time to her rentals and let the couple deduct a $69,531 loss. In another matter, the IRS itself relented and allowed the drive time once the taxpayer surfaced her home office.

That home office is the key. When your home office qualifies as your principal place of business for the rental activity, trips from home to your properties become business trips. You gain three things: the home-office deduction, vehicle deductions on mileage that would otherwise be non-deductible commuting, and hours toward both participation tests.

One warning: Drive time helps only if you can prove it. Log each trip as you go—date, destination, miles, time, purpose, and which spouse drove. Reconstructed logs invite trouble.

Two more 2026 items: Consider electing to treat all your rentals as a single activity, and note that the excess business loss cap is now $256,000 ($512,000 joint) and permanent.

If you want to discuss your drive time, please call me directly at 408-778-9651.

• By Leon Clinton
• September 13, 2026

If you have children and you own a business, here is a strategy worth your attention: hire them.

Consider one example: A business owner pays her 13-year-old $16,100 in 2026 to work in her Schedule C business. The child owes zero federal income tax because the 2026 standard deduction for a single taxpayer is $16,100. Meanwhile, that $16,100 wage deduction reduces federal and state taxes and puts roughly $6,614 back in the owner’s pocket.

The family keeps the full $22,714 (child has $16,100, the owner has $6,614).

You can go further. Add a $7,500 deductible traditional IRA contribution to the child’s wages of $16,100, and the child can earn $23,600 with no federal tax at all. Better yet, if the wages stay at or below the standard deduction, put the money in a Roth instead—a deduction is worth nothing to a child paying zero tax, whereas the Roth grows and comes out tax-free.

Your choice of operating entity matters. In a proprietorship or a spouse-only partnership, wages to your under-age-18 child escape Social Security and Medicare tax, and wages to a child under age 21 escape federal unemployment tax. A corporation gets no such break, which costs the family roughly $2,500 on $16,100 in wages. Even so, this is a valuable strategy for the family with the corporation.

One caution on Section 199A: Wages to your child reduce your qualified business income and shrink that deduction. But if your income is high enough that the W-2 wage limitation applies, the wages can actually increase your deduction.

Finally, do the paperwork. One attorney lost nearly all her wage deductions and drew negligence penalties because she had no W-2s, no payroll records, and no time sheets. Pay by W-2 payroll check, require a time sheet, and document a reasonable rate of pay.

If you want to discuss hiring your child, please call me directly at 408-778-9651.

• By Leon Clinton
• September 11, 2026

If you operate as a sole proprietor or single-member LLC, earn a good income, and have no payroll and little depreciable property, you may be losing most of the Section 199A 20 percent deduction. Switching to an S corporation can fix that.

Here is the problem: Once your 2026 taxable income exceeds $276,750 (single) or $553,500 (married), the deduction depends on your W-2 wages or your depreciable property. With no payroll and no property, your deduction collapses to the new $400 statutory minimum, no matter how profitable the business is.

Consider a single taxpayer with $400,000 of proprietorship net income and $370,000 of taxable income, not in an out-of-favor specified service field. As a proprietor, the taxpayer receives the Section 199A deduction of $400.

But what if that same taxpayer incorporates, elects S corporation status, and takes a reasonable salary of $100,000? Two things happen.

First, payroll taxes drop. For the proprietorship, self-employment tax plus the additional Medicare tax runs about $35,116. With the S corporation, payroll taxes on the $100,000 salary run roughly $15,800—a savings of about $19,316.

Second, the salary creates W-2 wages, which unlocks the deduction. The calculation produces a $50,000 deduction, worth about $17,500 in the 35 percent bracket.

Together, the switch adds roughly $36,676 of after-tax cash. And because Congress repealed the Section 199A sunset, this is now an every-year result rather than a temporary one.

Two cautions: This strategy does not help if you are in an out-of-favor specified service business—doctors, lawyers, accountants, and similar fields. And the salary must be reasonable based on your facts. If you want to discuss your choice of business entity, please call me on my direct line at 408-778-9651

• By Leon Clinton
• September 9, 2026