Tax Tips for the Well-traveled Businessperson

Tax Tips for the Well-traveled Businessperson

 

As you probably already know, food and lodging expenses can be deducted when you are away from home for business purposes. This may be particularly beneficial to self-employed individuals who travel extensively. Like everything in the tax law, there are certain rules to follow. Travel, meal, and entertainment expenses must be “ordinary” and “necessary” in carrying on your trade or business and must be “directly related to” or “associated with” the active conduct of that business.

Lodging – Travel expenses are deductible only if the individuals are away from their “tax home” for more than one business day. That usually means their regular place of business.

The IRS requires that lodging expenses be substantiated by records or other evidence. Some travel expenses of less than $75 can be documented by records including diaries, logs, and expense reports, but lodging documentation generally needs to be verified with actual receipts. The lodging records must include the amount, date, and place. In addition, the reason for the trip must also be included somewhere in the documentation for the trip expenses. If meal expenses are included in the hotel bill, they must be separated out and included with meal expenses, which have limitations.

Meal Expenses – Meal expenses are deductible only if the trip is overnight or long enough that there is a need to stop for sleep or rest to properly perform one’s duties. The amount of the meal expenses must be substantiated by receipts unless the expense is less than $75, in which case it can be documented by records including diaries, logs, and expense reports. Meal expenses are deductible up to an amount not considered “lavish” (i.e., reasonable under the circumstances).

When traveling, it is not uncommon to share a meal with others and pick up the tab. Your meal is always deductible, but the cost of the other individuals sharing the meal are only deducible if actual business discussions were conducted during the meal and you can show that there was anticipation of a specific business benefit from the meal (even if the benefit does not materialize). Goodwill-generating quiet business meals “in an atmosphere conducive to business” are not deductible.

Example - Away-From-Home Meals – Margaret’s employer sent her on a five-day business trip to Minneapolis to make a sales presentation to MM&M, Inc. Margaret received no reimbursement for her meals during the trip. Margaret ate alone on the first three days away, at a total cost of $180. On the fourth night, she met a friend for dinner and paid the tab of $120. The next day, she invited Marty, a purchase representative for MM&M, Inc., to dinner. Their dinner followed a full day of discussion about MM&M’s latest order from Margaret. Margaret paid for dinner that night too, for a total of $150. Margaret’s deductible meal expense is $180 for the trip (50% x ($180 [meals alone] + $60 [her portion of dinner with her friend] + $120 [meal with Marty]).

Meal expense substantiation includes the following:

  • the cost of the meal;
  • date, time, and place;
  • business purpose; and
  • names of guests and business relationship.

Instead of keeping records of the actual cost of meal expenses, a “standard meal allowance” ranging from $46 to $71 can generally be used. The standard meal allowance depends on the locality and is set by the U.S. General Services Agency (www.gsa.gov). It is also known as the federal M&IE (meals and incidental expenses) rate.

The deduction for unreimbursed business meals, regardless of the record-keeping method, is limited to 50% of the cost that would otherwise be deductible.

Traveling Companion – Sometimes a business traveler will take a companion, such as a spouse or friend, on a business trip for company. When it comes to deducting a companion’s travel costs for business, the rules are very restrictive. Generally, you cannot deduct the companion’s travel costs unless the companion is a bona fide employee of the business. This requirement prevents deductibility in most cases.

Even if your companion is an employee, his or her presence must be for a bona fide business purpose. Generally, a companion’s presence must be “necessary” to meet the bona fide purpose test, and just being “helpful” does not meet the requirement. Being there for goodwill purposes such as serving as a hostess is generally insufficient to satisfy a business purpose. An exception to that rule would be if your companion’s presence is necessary to care for a serious medical condition that you have.

If your companion’s presence does meet the bona fide business purpose rule, then the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, and lodging, and incidental costs such as dry cleaning, phone calls, etc.

But all is not lost if your companion does not meet the qualifications. You may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50% of your travel costs to your companion. You need only allocate to him or her any additional costs that are incurred. For example, the single rate for a room is not so different than the cost for double occupancy. If you were driving, no allocation would be required because the cost would be fully deductible even if your companion did not accompany you. If you used public transportation, only your cost would be deductible. Any meals and separate costs incurred by your companion would not be deductible.

Travel expenses and documentation can be tricky. If you have any questions that may apply to your specific circumstances, please give our office a call.

“Flipping” Homes – A Reviving Trend in Real Estate

“Flipping” Homes – A Reviving Trend in Real Estate

Prior to the recent economic downturn, flipping real estate was popular.  With mortgage interest rates low and home prices at historical lows, flipping appears to be on the rise again. House flipping is, essentially, purchasing a house or property, improving it, and then selling it (presumably for a profit) in a short period of time.  The key is to find a suitable fixer-upper that is priced under market for its location, fix it up, and resell it for more than it cost to buy, hold, fix up and resell it.

If you are contemplating trying your hand at flipping, keep in mind that you will have a silent partner, Uncle Sam, who will be waiting to take his share of any profits in taxes. (And most likely, Sam’s cousin in your state capitol will also expect a share, too.)  Taxes play a significant role in the overall transaction, and tax treatment can be quite different depending upon whether you are a dealer, an investor or a homeowner.  The following is the tax treatment for each in years after 2012.

  • Dealer in Real Estate – Gains received by a non-corporate taxpayer from business operations as a real estate dealer are taxed as ordinary income (10% to 39.6% ), and in addition, individual sole proprietors are subject to self-employment tax of 15.3% of their net profit (the equivalent of the FICA taxes for a self-employed person). Higher-income sole proprietors are also subject to an additional 0.9% Medicare surtax on their earnings.  Thus, a dealer will generally pay significantly more tax on the profit than an investor.  On the other hand, if the flip results in a loss, the dealer would be able to deduct the entire loss in the year of sale, which would generally reduce his tax at the same rates.
  • Investor – Gains as an investor are subject to capital gains rates (maximum of 20%) if the property is held for more than a year (long-term).  If held short-term, ordinary income rates (10% to 39.6%) will apply.  An investor is not subject to the self-employment tax, but could be subject to the 3.8% surtax on net investment income for higher income taxpayers.  A downside for the investor who has a loss from the transaction is that, after combining all long- and short-term capital gains and losses for the year, his deductible loss is limited to $3,000, with carryover to the next year of any excess capital loss.  The rules get a bit more complicated if the investor rents out the property while trying to sell it, and are beyond the scope of this article.
  • Homeowner – If the individual occupies the property as his primary residence while it is being fixed up, he would be treated as an investor with three major differences: (1) if he owns and occupies the property for two years and has not used a homeowner gain exclusion in the two years prior to closing the sale, he can exclude gain of up to $250,000 ($500,000 for a married couple), (2) if the transaction results in a loss, he will not be able to deduct the loss or even use it to offset gains from other sales, and (3) some fix-up costs may be deemed to be repairs rather than improvements, and repairs on one’s primary residence are not deductible nor includible as part of the cost basis of the home.

 

Being a homeowner is easily identifiable, but distinguishing between a dealer and an investor is not clearly defined by the tax code.  A real estate dealer is a person who buys and sells real property with a view to the trading profits to be derived and whose operations are so extensive as to constitute a separate business. A person acquiring property strictly for investment, though disposing of investment assets at intermittent intervals, is generally not regularly engaged in dealing in real estate.

 

This issue has been debated in the tax courts frequently, and both the IRS and the courts have taken the following into consideration:

 

  • whether the individual is already a dealer in real estate, such as a real estate sales person or broker;
  • the number and frequency of sales (flips);
  • whether the individual is more committed to another profession as opposed to fixing and selling real estate; and
  • how much personal time is spent making improvements to the “flips” as opposed to another profession or employment.

 

The distinction between a dealer and an investor is truly based on the facts and circumstances of each case.  Clearly, an individual who is not already in the real estate profession and flips one house is not a dealer.  But one who flips five or more houses and/or property and has substantial profits would probably be considered a dealer.  Everything in between becomes various shades of grey and the facts and circumstances of each case must be considered.

 

Receiving Inventory With or Without Bills in QuickBooks

Receiving Inventory With or Without Bills in QuickBooks

When your goods come rolling in, be sure to document them correctly.

You’re probably happy to see couriers delivering inventory items you’ve ordered since it means you can ship to customers, but recording the new stock means yet another repetitive task.

QuickBooks’ tools can help with this, but you need to be sure you’re using the right forms. There are two different ones that you’ll use, depending on whether or not you’ve received a bill.

Bill in Hand
Either way, you’ll get started by opening the Vendors menu (or clicking the arrow next to Receive Inventory on the home page). If you do have a bill, select Receive Items and Enter Bill (Receive Inventory with Bill on the home page). The Enter Bills screen opens; select your vendor from the drop-down list. If you had entered a purchase order, you’ll see something like this:

Figure 1: If any purchase orders exist for that vendor in QuickBooks, you’ll see this message.

Click Yes. The Open Purchase Orders window will open displaying a list. Select the PO(s) for the items received by placing a checkmark in front of it/them and click OK.

Tip: If you accidentally click No, the vendor’s information will be filled in on the Enter Bills screen, and you can click the Select PO icon in the toolbar.

Now the PO item information has been entered in the window. Check the form for accuracy, then save it.

Of course, if there was no purchase order, you’ll enter the information about the items you received (descriptions, prices, etc.) in the Enter Bills screen.

Delayed Billing
If you receive items without a bill, you still need to document the shipment. Open the Vendors menu and select Receive Items (or click the arrow next to the Receive Inventory icon on the home page and select Receive Inventory without Bill).

The Create Item Receipts window opens. Select the vendor by clicking the down arrow next to that field. If a message about existing purchase orders for that vendor appears, click Yes or No, and either select the appropriate POs or enter the information about what you received.

If the items were already earmarked for a specific customer on the purchase order, the Customer column will have an entry in it, and there will be a check mark in the Billable column. If there was no purchase order and you’re entering the information, you can complete those two fields manually.

 

Figure 2: If a purchase order was already assigned to a customer and is billable, that information should appear in this window.

Enter a reference number if you’d like. The Memo field should already be filled in with Received items (bill to follow), and the Bill Received box should not be checked.

Warning: Be sure that the Items tab is highlighted when you’re recording physical inventory. If there are related costs like freight charges or sales tax, click the Expenses tab and enter them there.

Paying Up
When the bill comes in for merchandise that you’ve already recorded on an Item Receipt, you’ll use this procedure to pay it:

  • Click Vendors | Enter Bill for Received Items, which opens the Select Item Receipt window.
  • Select the vendor, then the correct Item Receipt.

Note: If the bill corresponds to more than one Item Receipt, you’ll need to convert each into a bill separately. You can create a new bill if some items received were not accounted for on Item Receipts.

  • Click the box next to Use the item receipt date for the bill dateif you want to match it to the inventory availability date.
  • Figure 3: You’ll select purchase orders that you want to create bills for in this window.
  • Click OK. The Enter Bills screen opens, which can be processed like you’d handle any bill.

Though it may seem like extra work, this last procedure is important, since it prevents you from recording the same inventory items twice.

It’s easy to get tangled up on these procedures. We hope you’ll consult us when you begin implementing inventory management in QuickBooks, or when you’re taking on a new task there. It’s a lot easier to prevent errors than to go back and fix them.

How to Request a Copy of Your Tax Return

Learn and then Earn – Income Tax Preparation Class

Federal Rules for Summer and Vacation Hires

  • Obtain W-4s from all summer employees, even the owners’ children, students working part-time and foreign students.

 

  • Withhold FITW from all employees, including the owner’s spouse/children, unless a W-4 claims exempt.

 

  • Withhold FICA from all employees, even high school students and those who receive SS benefits. Exception: Employees under 18 working for sole-owner parents.

 

  • Pay overtime for hours actually worked over 40 hours in the workweek. You are not required to include as hours worked paid time off (holidays, vacation days). Do not substitute paid nonwork hours for work hours to make all hours straight time, thus avoiding overtime pay.

 

Example: Julia works 12 hours a day the first 4 days of the workweek, but not on the 5th day, a holiday, for which she is paid for 8 hours. She is correctly paid 40 hours’ straight time + 8 hours’ overtime + 8 holiday (nonwork) hours. Julia’s employer cannot substitute the 8 hours’ holiday pay for the 8 hours’ overtime to avoid paying the overtime rate.

 

Paid holidays and vacations

  • Under federal law, paid holidays for part-time and summer help are always optional, but check state laws.
  • No paid vacation is required—but if you provide paid vacation, some federal and state laws apply.

 

Benefits

  • Temps and part-timers. Benefits are optional, but if offered, should be explained in a written benefits plan.

Real Estate

If you bought a home in 2008 and got the first-time buyer credit…IRS is no longer mailing letters to remind you about recapture of the credit. 

For buyers in 2008, the credit was really an interest-free loan from the government.  The credit you claimed is recouped over a 15-year period…$500 a year for most folks.  The Service will still track your reporting of the recapture amount on Form 5405.  Go to www.irs.gov/individuals/article/0,,id=252351,00.html to see what to report.

Please contact us for a free proposal.

Fringe Benefits

Ministers cannot exclude parsonage allowance for more than one home.

An Appeals court says in a case involving a minister who received a stipend that covered both his primary residence and a second home he owned on a lake.  A divide Tax Court had said that the tax law’s exemption of a parsonage allowance used to provide a home could be ready to apply to more than one residence.  However, the Appeals Court unanimously rejected that interpretation (Driscoll, 11th Cir.).

Please contact us for a free proposal.

Donations

There’s no tax write-off for letting a fire department burn down your house, an Appeals Court says. 

This situation commonly arises when a homeowner wants to demolish an existing residence and build a new home on the same spot.  Giving a firefighters practice exercise in burning it down serves the public good.  But to get a tax deduction, the homeowner must show that the value of the donation exceeded the value of the demolition services provided.  In this case, since the house had to be destroyed anyway, its value was negligible and didn’t exceed the value of the demolition services…worth $10,000…that the owners received (Rolfs, 7th Cir.).

Please contact us for a free proposal.

 

Enforcement

IRS reverses course on reconciling gross receipts with 1099-K forms. 

Businesses won’t have to separately report amounts sown on 1099-Ks on a special line on Schedule C on forms 1065, 1120, and 1120-S after all.  The Revenue Service had waived separate reporting for gross receipts for 2011, but firms squawked about the added work involved to reconcile the 1099-K data with their own recordkeeping systems.  So IRS waived the requirement permanently.  The Service had hoped to match amounts listed on 1099-Ks directly with return, making discrepancies easier to spot.  This decision will make the 1099-Ks less useful in uncovering businesses that underreport income, and will give more ammunition to critics in Congress who want to repeal the reporting requirements altogether.

Tax-exemption groups will get extra audit scrutiny from IRS on several fronts:

  • Unrelated business income.  Groups that listed unrelated business activities on Form 990 will hear from the tax man if they didn’t also file Form 990-T with IRS
  • Political activity.  With a presidential election coming up later this year, agents will be more watchful for impermissible intervention in political campaigns.
  • Labor unions, business leagues and organizations promotion social welfare.  These groups can declare themselves to be exempt without seeking a letter from IRS.  Now the Service has decided to send out questionnaires to check their compliance. 
  • Upper-incomers will continue to feel audit heat in 2012.  As we reported in January, IRS statistics show that people with income of $200,000 or higher has an exam rate of 3.93% in 2011.  And one in every eight millionaires was audited.  IRS officials now say that examinations of filers will incomes of at least $200,000 will be a priority this year.  Other areas that are signaled out for special attention: filers with abusive transactions, such as inflated business deductions, sham losses and false 1099-OID forms.  And visits to return preparers to check on compliance.

Please contact us for a free proposal.