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.

 

How to Request a Copy of Your Tax Return

Learn and then Earn – Income Tax Preparation Class

Tax Filing Deadline Rapidly Approaching

Just a reminder to those who have not yet filed their 2011 tax return that April 17, 2012 is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due. 

Normally the deadline is April 15, but when a due date falls on a weekend or holiday, the due date is extended until the next business day.  Thus, since April 15 falls on a Sunday and April 16 is a legal holiday in Washington, D.C. (Emancipation Day), the due date for 2011 tax returns is extended until Tuesday, April 17, 2012. 

In addition, the April 17, 2012 deadline also applies to the following:

  • Tax year 2011 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due.  Late payment penalties and interest will be assessed on any balance due, even for returns on extension.  Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.
  • Tax year 2011 contributions to a Roth or traditional IRA – April 17 is the last day contributions for 2011 can be made to either a Roth or traditional IRA, even if an extension is filed.
  • Individual estimated tax payments for the first quarter of 2012 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2012 estimated taxes are due on April 17.  If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date.  Please call this office for any questions.
  • Individual refund claims for tax year 2008 – The regular three-year statute of limitations expires on April 17 for the 2008 tax return.  Thus, no refund will be granted for a 2008 original or amended return that is filed after April 17. Caution: The statute does not apply to balances due for unfiled 2008 returns. 

If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 17 deadline.  Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute.  If it is apparent that the information will not be available in time for the April 17 deadline, then let the office know right away so that an extension request, and estimate tax vouchers if needed, may be prepared.

If your returns have not yet been filed, please call right away so that we can schedule an appointment and/or file an extension if necessary.

Please contact us for a free proposal.

Penalty Relief for Financially Distressed Taxpayers

The IRS has new penalty relief for the unemployed and certain self-employed individuals on failure-to-pay penalties, which are one of the biggest factors a financially distressed taxpayer faces on a tax bill.

To assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest, and any other penalties are fully paid by October 15, 2012.

The penalty relief will be available to two categories of taxpayers:

  • Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
  • Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or must not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Taxpayers meeting the eligibility criteria will need to request the penalty relief by filing the new Form 1127A on or before the April 17th deadline. Form 1127A is not to be attached to the income tax return, but is filed separately. CAUTION: Form 1127-A does not extend the time to file your 2011 income tax return. To get an extension of time to file, you must file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until October 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

If you have questions related to deferring your tax payment until October and the financial implications of doing so, please give this office a call.

Please contact us for a free proposal.

 

 

Can’t Pay Your Taxes by the April Due Date?

The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who end up owing?

The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don’t.

So if you are unable to pay the tax you owe, it is generally in your best interest to make other arrangements for paying your taxes rather than be subjected to the government’s penalties and interest. Here are a few options to consider.

  • Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
  • Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates.
  • Installment Agreement – If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, and there is a user fee to set up the payment plan. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
  • Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age
    59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.

Whatever you decide, don’t just ignore your tax liability because that is the worst thing you can do. Please call this office for assistance.

Please contact us for a free proposal.

IRS Tax Tip 2012-54 — Employee Business Expenses

Some employees may be able to deduct certain work-related expenses. The following facts from the IRS can help you determine which expenses are deductible as an employee business expense.

You must be itemizing deductions on IRS Schedule A to qualify.

Expenses that qualify for an itemized deduction generally include:

  • Business travel away from home 
  • Business use of your car 
  • Business meals and entertainment 
  • Travel 
  • Use of your home 
  • Education 
  • Supplies 
  • Tools 
  • Miscellaneous expenses

You must keep records to prove the business expenses you deduct. For general information on recordkeeping, see IRS Publication 552, Recordkeeping for Individuals available on the IRS website at www.irs.gov, or by calling 1-800-TAX-FORM (800-829-3676).

If your employer reimburses you under an accountable plan, you should not include the payments in your gross income, and you may not deduct any of the reimbursed amounts.

An accountable plan must meet three requirements:

1. You must have paid or incurred expenses that are deductible while performing services as an employee.

2. You must adequately account to your employer for these expenses within a reasonable time period.

3. You must return any excess reimbursement or allowance within a reasonable time period.

If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2. You must report the income and itemize your deductions to deduct these expenses.

Generally, you report unreimbursed expenses on IRS Form 2106 or IRS Form 2106-EZ and attach it to Form 1040. Deductible expenses are then reported on IRS Schedule A, as a miscellaneous itemized deduction subject to a rule that limits your employee business expenses deduction to the amount that exceeds 2 percent of your adjusted gross income.

Please contact us for more information.

 

Work at Home?

You May Qualify for the Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The IRS has the following six requirements to help you determine if you qualify for the home office deduction.

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business;

• as a place to meet or deal with patients, clients or customers in the normal course of your business; or

• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

Please contact us for more information.

Six Facts for Adoptive Parents

If you paid expenses to adopt an eligible child in 2011, you may be able to claim a tax credit of up to $13,360.

Here are six things the IRS wants you to know about the expanded adoption credit.

1. The Affordable Care Act increased the amount of the credit and made it refundable, which means you can get the credit as a tax refund even after your tax liability has been reduced to zero.

2. For tax year 2011, you must file a paper tax return, Form 8839, Qualified Adoption Expenses, and attach documents supporting the adoption. Taxpayers claiming the credit will still be able to use IRS Free File or other software to prepare their returns, but the returns must be printed and mailed to the IRS, along with all required documentation.

3. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and/or the state’s determination for special needs children.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.

6. If your modified adjusted gross income is more than $185,210, your credit is reduced. If your modified AGI is $225,210 or more, you cannot take the credit.

Please contact us for more information.