Dos and Don’ts of Business Expensing

Home office deductions

Knowing whether you can or can’t expense a purchase for business purposes can be complicated. However, there are a few hard-and-fast rules to help you.

According to the IRS, business expenses must be ordinary and necessary to be deductible. That means they are common and accepted in your business, as well as helpful and appropriate. You’ll need to maintain records (such as statements and ledgers) and supporting documents (receipts and invoices) to substantiate your deductions. Certain expenses are subject to extra requirements, as described below.

Travel expenses pertain to business trips and can include transportation to and from airports, your hotel and business meeting places. They also generally include lodging, meals, tips and other related incidentals.

Do: + Maintain trip logs describing your business expenses and the purpose of each. If your trip is mostly for business but includes personal components, separate them in your log. These nondeductible personal items could include extending your stay for a vacation or taking personal side trips.
+ Deduct travel-related meal costs, but only up to the 50 percent limit allowed by the IRS.
Don’t: Rely on estimates to determine the business vs. personal components of your expenses.
Deduct any of your travel expenses if your trip is primarily for personal purposes.
Deduct any of your meal costs if they could be considered unreasonably extravagant.

Entertainment expenses need to be either directly related to or associated with the conduct of your business. That means that business is the main purpose of the activities and it’s highly likely you’ll get income or future business benefits. Expenses from entertainment that aren’t considered directly related may still be deductible if they are associated with your business and happen right before or after an important business discussion.

Do: + Keep records of entertainment expenses, including who was present and clear descriptions of the nature, dates and times of the pertinent business discussions.
+ Deduct up to 50 percent of entertainment expenses, as allowed by the IRS.
Don’t: Claim the costs of pleasure boat outings or entertainment facilities (e.g., hunting lodges) that are not related to business activity.

Business use of your personal car is calculated according to your actual business-related expenses, or by multiplying your business mileage by the prescribed IRS rate (53.5 cents per mile in 2017).

Do: + Log odometer readings for each business trip and record your business purpose.
+ Claim actual business deductions by applying the ratio of your business-miles-to-total mileage.
Don’t: Claim mileage or expenses pertaining to commuting to and from work.

If you have any questions about how to handle your business expenses, reach out for further guidance.

Contractor or Employee?

Company benefits

Knowing the difference is important

Is a worker an independent contractor or an employee? This seemingly simple question is often the contentious subject of IRS audits. As an employer, getting this wrong could cost you plenty in the way of Social Security, Medicare, and other employment-related taxes. Here is what you need to know.

 The basics…

 

As the worker. If you are a contractor and not considered an employee you must:

Bullet Point Employee Pay self-employment taxes (Social Security and Medicare-related taxes)
Bullet Point Employee Make estimated federal and state tax payments.
Bullet Point Employee Handle your own benefits, insurance and bookkeeping.

As the employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to:

Bullet Point Employer Payment and penalties related to Social Security and Medicare taxes.
Bullet Point Employer Payment of possible overtime including penalties for a contractor reclassified as an employee.
Bullet Point Employer Legal obligation to pay for benefits.

Things to consider

When the IRS recharacterizes an independent contractor as an employee they look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the employer over the work done and they assess the worker’s independence. Here are some guidelines:

Bullet Point Consider The more the employer has the right to control the work (when, how and where the work is done), the more likely the worker is an employee.
Bullet Point Consider The more the financial relationship is controlled by the employer the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a professional manner.
Bullet Point Consider The more businesslike the arrangement the more likely you have an independent contractor relationship.

While there are no hard-set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged.

Overtime Rules Go Into Overtime

Time Clock

The fate of a Labor Department rule extending mandatory overtime pay to workers by doubling the eligible salary cap is uncertain under the new presidential administration.

The rule introduced by the Labor Department under the direction of former President Barack Obama increases the salary cap for workers eligible to receive mandatory overtime to $47,476. It extends mandatory overtime, or time-and-a-half pay, to workers primarily in managerial or administrative roles in the retail, restaurant, and nonprofit industries.

Opponents of the rule won a court injunction blocking it in November 2016. The case may be abandoned altogether depending on the priorities set by President Donald Trump’s appointee to lead the Labor Department. Andrew Puzder, chief executive of fast food corporation CKE Restaurants Holdings Inc. (owner of Hardee’s and Carl’s Jr.) is undergoing Senate confirmation for the role. Until the case is resolved, the previous salary cap of $23,660 remains in place.

 

Save

Save

Charitable Donations from Your IRA

Charitable Donations from Your IRA

Can you take advantage?

One of the temporary tax provisions made permanent as part of the tax code in late 2015 is qualified charitable distributions from IRAs for those who have reached age 70½. Unfortunately in 2014 and 2015, the law was extended too late during the calendar year to reasonably use this tax law. In 2016 you have the ability to make a planned decision to use this tax benefit. Here is what you need to know.

The rule. For those age 70½ or older, you can have up to $100,000 of your IRA paid directly to qualified tax-exempt charities each year. These pre-tax funds are not subject to income tax by the federal government. This makes the contribution income tax free. No itemized deduction for your contributions is available on these direct transfers.

The benefits

Bullet Item Taxpayers do not have the contributions from their retirement accounts added to their Adjusted Gross Income. So as a planning tool, this donation strategy can keep Adjusted Gross Income low. This can help avoid things that come with higher income levels like different Medicare premiums.
Bullet Item The contribution counts towards a taxpayer’s annual Required Minimum Distribution. If a taxpayer does not need the income and does not want to be subject to required minimum distribution penalties, this can be a great alternative.
Bullet Item The contribution is a straight write off. Remember, these funds are sitting in your IRA in pre-tax status. When they are normally withdrawn, the funds are subject to income tax. This tax feature allows you the charitable deduction without the hassle of itemizing your deductions.

Some cautions

As with all tax laws, you must be aware of the rules. Foremost among them are;

Bullet Item The contribution must be made directly between your account and the charity.
Bullet Item This benefit is on the federal level. The tax treatment in your home state will vary.
Bullet Item Since the donation does not go through the taxpayer’s income, the donation is not subject to the percentage of income limits on charitable giving by type of organization.
Bullet Item Don’t wait. Since it usually takes time to initiate and complete this transfer, do not wait until the end of the year to make your direct contribution. The money must be at the charity prior to January 1st.

While this tax opportunity is not right for everyone, it is a new tool to use when creating your annual tax plan.

Tis the Season…for Review

StopwatchAs 2015 winds to a close, there are a number of tasks that should be reviewed. To help you plan accordingly, here are some things to consider.

 

Checkmark Employee benefits. Most employer benefit plans have enrollment periods that coincide with the calendar. Please review your benefit options with your employer and make any necessary changes. Common areas of review include employer-provided health insurance, dental benefits, childcare benefits, Health Spending Account contributions, Flex Spending Account contributions, disability insurance and employer retirement account contributions.
Checkmark Beneficiary review. Make it a practice to review beneficiary assignments on all your key accounts. This is especially important for your retirement accounts as the beneficiary assignment within the account can supersede a will.
Checkmark Retirement plan contributions. Review and adjust your contributions to your retirement plans. At minimum, try to contribute enough to take advantage of any employer matching funds in your work sponsored plan. This review should include IRAs (Roth, Traditional, SEP and SIMPLE), 401(k)s, 403(b)s, and 457 plans.
Checkmark Insurance review. Consider an annual review of your insurance policies. This includes health insurance, life insurance, disability insurance, home insurance and potential umbrella policies. Are the beneficiaries up to date? Are you happy with the coverage?
Checkmark Automatic billing. Review your checking account’s automated billing transactions. This is a good time to identify what automatic monthly expenses should be reviewed, reduced or eliminated. You may also discover billing for services you thought were cancelled. This specific review often catches errors that a simple account reconciliation may be missing.
Checkmark Withholdings. Sometime in December or early January you may wish to review your payroll withholdings. Many of us do this after our tax return is filed. However, if you file close to April 15th, you are losing four plus months of proper withholdings.
Checkmark Develop your own list. The review suggestions mentioned here impact most of us. However, everyone’s situation is not the same. Use this time to develop a list of your own annual review items. It might include reviewing College Savings Accounts or having an annual sit down to go through an aging parent’s financial accounts.

Remember the Nanny Tax

Household EmployeesDo you have a household employee?
The “nanny tax” refers to the part of the tax code that deals with household workers that are treated as employees. The nanny tax rules require you to withhold Social Security and Medicare taxes for any household employee that earns $1,900 or more annually.
Who it applies to

Household employees include baby sitters, house cleaners, yard workers, and general labor that are not incorporated. It does not apply to companies that work around your home.

Steps to take

If you have suppliers that work for you, you need to find out if they work for themselves (sole-proprietor) or whether they are organized as a business entity like an S-corporation, C-corporation or Limited Liability Company (LLC).

If your help is not incorporated and you expect to pay them in excess of the threshold, please obtain the household employee’s Social Security number and then file the necessary tax forms to withhold the proper amounts.

Should you need assistance with this please call.

No Such Thing as a Free Lunch?

The IRS is making headlines on the west coast as it reviews and challenges the practice of employers providing free meals to employees. Employers consider the free meals a non-taxable fringe benefit. The IRS believes this fringe benefit is employee wages.

Cafeteria lunchBackground

Many fringe benefits offered as part of your employment are not considered taxable to you as an employee. The IRS publishes a fringe benefit guide for employers to help them navigate what benefits are income to the employee and what benefits are not. Common examples of non-taxable fringe benefits include; health insurance, certain life insurance, disability insurance and minor fringe benefits like employee outings and small branded items.

Current Situation

A number of large firms have been offering fairly elaborate free meals as part of their employment package. Firms like Google and Facebook use this fringe benefit to build employee morale and encourage their employees to spend more time on the job.

The IRS is now reviewing the interpretation of this “free” benefit and is challenging the taxability of the meals. If deemed taxable, each employee would need to include the fair market value of the meals as income on their W-2s.

What you need to know

checkmark Know the standards. If a meal is considered to be “for the convenience of the employer” it is not deemed to be wages. This typically means meals during work hours for a work related purpose that benefits the employer.
checkmark Minimal value and frequency. Occasional meals or meals of minimal value are also not taxed as wages. This includes things like employee picnics.
checkmark Meals before and after hours. Meals provided before or after work could be wages. Common exceptions to this rule are employees of restaurants and employees at cafeterias. Another exception could be work environments that prohibit getting a meal during the workday.
checkmark It is in the IRS spotlight. Each year the IRS publishes a list of initiatives, called their Priority Guidance Plan. Reviewing the taxability of employee-provided meal benefits is on their agenda for 2014-15.

If your employer provides free or reduced meals as part of your benefit package you can probably expect to see changes in the next year. Perhaps there is no such thing as a free lunch.

As always, should you have any questions or concerns regarding your situation please feel free to call.

In the News:

Severance Pay is Subject to Employment Taxes

In a recent Supreme Court decision, pay received as severance is subject to Social Security and Medicare tax. The case involved an employer who went out of business but paid severance checks to employees based on their seniority and pay. The company’s position was that this pay was not wages.

In the unanimous decision, the Supreme Court ruled that the severance payments were deemed wages and the employment taxes were owed. The impact of this ruling is far reaching. It is estimated that there are pending claims for refunds of over $1 billion from similar tax cases.

What you need to know

While you may never find yourself in this situation, should you receive a severance check please pay special attention to how the payment is treated. If you receive a Form 1099, or receive a W-2 without Social Security and Medicare withheld you could have a problem. Should this happen to you, immediately ask your former employer why they believe Social Security and Medicare payments are not required. Seek advice as soon as possible. If you delay you might be required to pay the employer’s portion of this tax as well as your own.

As always, should you have any questions or concerns regarding your situation please feel free to call.

Time to Think About Commuting

Don’t leave this benefit on the table

$3.40 to $4.00 per gallon gas prices are quickly becoming the new norm. Congress and the President appear to be doing very little to control this inflationary cost. What can you do? Thankfully there are commuting benefits that can lower your cost of getting to and from work during 2013.

Transit Passes: up to $245/ month
Van Pooling: up to $245/month
Parking Allowance: up to $245/month
Bicycle Commuting: up to $20/month

How it works

Your employer can provide you the benefits listed above and you do not have to report the benefit on your income tax return. Because the benefit does not hit your W-2, you pay no federal tax, no state tax, no Social Security or Medicare.

Some tips

  • Transit AND parking. Transit passes are good for the train, subway and bus systems and can be used in addition to parking passes. So you can park at the train station, receive a parking allowance AND receive the transit pass benefit.
  • Employer-provided. Remember these benefits are employer-provided benefits. Check with human resources to see if your employer provides these benefits.
  • The salary-reduction alternative. If your employer does not provide these benefits they might allow you to reduce your take-home pay instead. If allowed by your employer, you set aside money from your wages to pay for the passes or parking allowance. This salary-reduction would then allow you to pay for your commuting costs up to the limits in pre-tax dollars. You may not use this method to pay for bicycle commuting.
  • Bicycle commuting only. You may use the $20/ month benefit to help pay for the repair and maintenance on your bike, however you may not receive this benefit in any month that you also receive other transit benefits.

Many employees are unaware that their employer provides a transit benefit, so check it out. Even if they do not, perhaps they’ll consider creating a salary-reduction alternative instead.