Travel & Entertainment: Maximizing Tax Benefits
Tax law allows you to deduct two types of travel expenses related to your business, local and what the IRS calls "away from home."
First, local travel expenses. You can deduct local transportation expenses incurred for business purposes such as the cost of getting from one location to another via public transportation, rental car, or your own automobile. Meals and incidentals are not deductible as travel expenses, but you can deduct meals as an entertainment expense as long as certain conditions are met (see below).
Second, you can deduct away from home travel expenses-including meals and incidentals, but if your employer reimburses your travel expenses your deductions are limited.
Local Transportation Costs
The cost of local business transportation includes rail fare and bus fare, as well as costs associated with use and maintenance of an automobile used for business purposes. If your main place of business is your personal residence, then business trips from your home office and back are considered deductible transportation and not non-deductible commuting.
You generally cannot deduct lodging and meals unless you stay away from home overnight. Meals may be partially deductible as an entertainment expense.
Away From-Home Travel Expenses
You can deduct one-half of the cost of meals (50 percent) and all of the expenses of lodging incurred while traveling away from home. The IRS also allows you to deduct 100 percent of your transportation expenses--as long as business is the primary reason for your trip.
Here's a list of some deductible away-from-home travel expenses:
- Meals (limited to 50 percent) and lodging while traveling or once you get to your away-from-home business destination.
- The cost of having your clothes cleaned and pressed away from home.
- Costs for telephone, fax or modem usage.
- Costs for secretarial services away-from-home.
- The costs of transportation between job sites or to and from hotels and terminals.
- Airfare, bus fare, rail fare, and charges related to shipping baggage or taking it with you.
- The cost of bringing or sending samples or displays, and of renting sample display rooms.
- The costs of keeping and operating a car, including garaging costs.
- The cost of keeping and operating an airplane, including hangar costs.
- Transportation costs between "temporary" job sites and hotels and restaurants.
- Incidentals, including computer rentals, stenographers' fees.
- Tips related to the above.
There are limits and restrictions on deducting meal and entertainment expenses. Most are deductible at 50 percent, but there are a few exceptions. Meals and entertainment must be "ordinary and necessary" and not "lavish or extravagant" and directly related to or associated with your business. They must also be substantiated (see below).
Your home is considered a place conducive to business. As such, entertaining at home may be deductible providing there was business intent and business was discussed. The amount of time that business was discussed does not matter.
Reasonable costs for food and refreshments for year-end parties for employees, as well as sales seminars and presentations held at your home are 100 percent deductible.
If you rent a skybox or other private luxury box for more than one event, say for the season, at the same sports arena, you generally cannot deduct more than the price of a non-luxury box seat ticket. Count each game or other performance as one event. Deduction for those seats is then subject to the 50 percent entertainment expense limit.
If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. The amounts separately stated for food and beverages must be reasonable.
Deductions are disallowed for depreciation and upkeep of "entertainment facilities" such as yachts, hunting lodges, fishing camps, swimming pools, and tennis courts. Costs of entertainment provided at such facilities are deductible, subject to entertainment expense limitations.
Dues paid to country clubs or to social or golf and athletic clubs however, are not deductible. Dues that you pay to professional and civic organizations are deductible as long as your membership has a business purpose. Such organizations include business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards.
Tip: To avoid problems qualifying for a deduction for dues paid to professional or civic organizations, document the business reasons for the membership, the contacts you make and any income generated from the membership.
Entertainment costs, taxes, tips, cover charges, room rentals, maids and waiters are all subject to the 50 percent limit on entertainment deductions.
How Do You Prove Expenses Are Directly Related?
Expenses are directly related if you can show:
- There was more than a general expectation of gaining some business benefit other than goodwill.
- You conducted business during the entertainment.
- Active conduct of business was your main purpose.
Record-keeping and Substantiation Requirements
Tax law requires you to keep records that will prove the business purpose and amounts of your business travel, entertainment, and local transportation costs. For example, each expense for lodging away from home that is $75 or more must be supported by receipts. The receipt must show the amount, date, place, and type of the expense.
The most frequent reason that the IRS disallows travel and entertainment expenses is failure to show the place and business purpose of an item. Therefore, pay special attention to these aspects of your record-keeping.
Keeping a diary or log book--and recording your business-related activities at or close to the time the expense is incurred--is one of the best ways to document your business expenses.
If you need help documenting business travel and entertainment expenses, don't hesitate to call us. We'll help you set up a system that works for you--and satisfies IRS record-keeping requirements.
The Home-Based Business: Basics to Consider
More than 52 percent of businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements and attics are being transformed into the corporate headquarters of the newest entrepreneurs--home-based businesspeople.
And, with technological advances in smartphones, tablets, and iPads as well as a rising demand for "service-oriented" businesses, the opportunities seem to be endless.
Is a Home-Based Business Right for You?
Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take time to learn as much about the market for any product or service as you can. Before you invest any time, effort, or money take a few moments to answer the following questions:
- Can you describe in detail the business you plan on establishing?
- What will be your product or service?
- Is there a demand for your product or service?
- Can you identify the target market for your product or service?
- Do you have the talent and expertise needed to compete successfully?
Before you dive head first into a home-based business, it's essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss, and involves an honest assessment of your own personality, an understanding of what's involved, and a lot of hard work. You have to be willing to plan ahead and make improvements and adjustments along the way.
While there are no "best" or "right" reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:
- Are you a self-starter?
- Can you stick to business if you're working at home?
- Do you have the necessary self-discipline to maintain schedules?
- Can you deal with the isolation of working from home?
Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment. If at all possible, you should set up a separate office in your home. You must consider whether your home has the space for a business, and whether you can successfully run the business from your home.
Compliance with Laws and Regulations
A home-based business is subject to many of the same laws and regulations affecting other businesses and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.
Be aware of your city's zoning regulations. If your business operates in violation of them, you could be fined or closed down.
Restrictions on Certain Goods
Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
Registration and Accounting Requirements
You may need the following:
- Work certificate or a license from the state (your business's name may also need to be registered with the state)
- Sales tax number
- Separate business telephone
- Separate business bank account
If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.
Money fuels all businesses. With a little planning, you'll find that you can avoid most financial difficulties. When drawing up a financial plan, don't worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.
Estimating Start-Up Costs
To estimate your start-up costs, include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.
In addition, business experts say you should not expect a profit for the first eight to 10 months, so be sure to give yourself enough of a cushion if you need it.
Projecting Operating Expenses
Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums, and don't forget to include your normal living expenses. Your business must not only meet its own needs, but make sure it meets yours as well.
It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points and cash-flow statements. Use your marketing research to estimate initial sales volume.
Determining Cash Flow
Working capital--not profits--pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you're broke.
Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.
Don't hesitate to give us a call if you think a home-based business is in your future. We'll set up your business and make sure you have the proper documentation system in place to satisfy the IRS.
Paying off Debt the Smart Way
Between mortgages, car loans, credit cards, and student loans, most people are in debt. While being debt-free is a worthwhile goal, most people need to focus on managing their debt first since it's likely to be there for most of their life.
Handled wisely, that debt won't be an albatross around your neck. You don't need to shell out your hard-earned money because of
exorbitant interest rates or always feel like you're on the verge of bankruptcy. You can pay off debt the smart way, while at the same time saving money to pay it off even faster.
Assess the Situation
First, assess the depth of your debt. Write it down using pencil and paper or use a spreadsheet like Microsoft Excel. You can also use a bookkeeping program such as Quicken. Include every instance you can think of where a company has given you something in advance of payment, including your mortgage, car payment(s), credit cards, tax liens, student loans, and payments on electronics or other household items through a store.
Record the day the debt began and when it will end (if possible), the interest rate you're paying, and what your payments typically are. Next, add it all up--as painful as that might be. Try not to be discouraged! Remember, you're going to break this down into manageable chunks while finding extra money to help pay it down.
Identify High-Cost Debt
Yes, some debts are more expensive than others. Unless you're getting payday loans (which you shouldn't be), the worst offenders are probably your credit cards. Here's how to deal with them.
Don't use them. Don't cut them up, but put them in a drawer and only access them in an emergency.
Identify the card with the highest interest and pay off as much as you can every month. Pay minimums on the others. When that one's paid off, work on the card with the next highest rate.
Don't close existing cards or open any new ones. It won't help your credit rating, and in fact, will only hurt it.
Pay on time, absolutely every time. One late payment these days can lower your FICO score.
Go over your credit-card statements with a fine-tooth comb. Are you still being charged for that travel club you've never used? Look for line items you don't need.
Call your credit card companies and ask them nicely if they would lower your interest rates. It does work sometimes!
Save, Save, Save
Do whatever you can to retire debt. Consider taking a second job and using that income only for higher payments on your financial obligations. Substitute free family activities for high-cost ones. Sell high-value items that you can live without.
Do Away with Unnecessary Items to Reduce Debt Load
Do you really need the 800-channel cable option or that satellite dish on your roof? You'll be surprised at what you don't miss. How about magazine subscriptions? They're not terribly expensive, but every penny counts. It's nice to have a library of books, but consider visiting the public library or half-price bookstores until your debt is under control.
Never, Ever Miss a Payment
Not only are you retiring debt, but you're also building a stellar credit rating. If you ever move or buy another car, you'll want to
get the lowest rate possible. A blemish-free payment record will help with that. Besides, credit card companies can be quick to raise
interest rates because of one late payment. A completely missed one is even more serious.
Pay With Cash
To avoid increasing debt load, make it a habit to pay with cash. If you don't have the cash for it, you probably don't need it. You'll feel better about what you do have if you know it's owned free and clear.
Shop Wisely, and Use the Savings to Pay Down Your Debt
If your family is large enough to warrant it, invest $30 or $40 and join a store like Sam's or Costco--and use it. Shop there first, then at
the grocery store. Change brands if you have to and swallow your pride. If you're concerned about buying organic, rest assured that even at places like Costco you will have many options. Use coupons religiously. Calculate the money you're saving and slap it on your debt.
Each of these steps, taken alone, probably doesn't seem like much, but if you adopt as many as you can, you'll watch your debt decrease every month. If you need help managing debt give us a call. We can help.
Start Planning Now for Next Year's Tax Return
This year's tax deadline may have come and gone, but it's never too early to start planning for next year or to think about setting up a smart record-keeping system. With that in mind, here are seven things you can do now to make next April 15 easier.
1. Adjust your withholding. Why wait another year for a big refund? Now is as good a time as any to review your withholding and make adjustments for next year, especially if you'd prefer more money in each paycheck this year. If you owed money at tax time, perhaps you'd like next year's tax payment to be smaller.
Give us a call if you need assistance in adjusting your withholding.
2. Take action when life events occur. Life events include the birth of a child, a change in marital status or buying a home, and can affect the amount of taxes you owe. When such events occur during the year, you may need to change the amount of tax taken out of your pay by filing a new Form W-4, Employee's Withholding Allowance Certificate, with your employer. If you receive advance payments of the premium tax credit it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. Please don't hesitate to call us if you need help with this.
3. Store your return in a safe place. Put your 2013 tax return and supporting documents somewhere secure so you'll know exactly where to find them if you receive an IRS notice and need to refer to your return. Or, if you need a copy of your return when you apply for a home loan or financial aid. If it is easy to find, you can also use it as a helpful guide for next year's tax return.
4. Organize your record-keeping. Establish a central location where everyone in your household can put tax-related records all year long. Anything from a shoe box to a file cabinet works. Just be consistent to avoid a scramble for misplaced mileage logs or charity receipts come tax time.
5. Review your paycheck. Make sure your employer is properly withholding and reporting retirement account contributions, health insurance payments, charitable payroll deductions and other items. These payroll adjustments can make a big difference on your bottom line. Fixing an error in your paycheck now gets you back on track before it becomes a huge hassle.
6. Consult a tax professional early. If you are planning to use a tax professional to help you strategize, plan and make financial decisions throughout the year, then contact us now. You'll have more time when you're not up against a deadline or anxious for a refund.
7. Prepare to itemize deductions. If your expenses typically fall just below the amount to make itemizing advantageous, a bit of planning to bundle deductions into 2014 may pay off. An early or extra mortgage payment, pre-deadline property tax payments, planned donations or strategically paid medical bills could equal some tax savings.
If you need help with tax planning for 2014, we can help you prepare an approach that works best for you. Each household's financial circumstances are different so it's important to fully consider your specific situation and goals before making any financial decisions.
Feel free to contact us any time you have questions or concerns. We can help you stay abreast of tax law changes throughout the year--not just at tax time.
Bitcoins Treated as Property for Federal Tax Purposes
Many retailers and online businesses now accept virtual currency for sales transactions, but the federal tax implications were relatively unknown until recently when the IRS issued a set of FAQs on virtual currency such as bitcoins. The FAQs provide basic information about the U.S. federal tax implications of transactions in, or transactions that use, virtual currency. Here's what you need to know.
Sometimes, virtual currency such as bitcoins operate like "real" currency--i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance.
But bitcoins do not have legal tender status in any jurisdiction. If you've been paid in virtual currency, you should be aware that virtual currency is treated as property for U.S. federal tax purposes. In other words, general tax principles that apply to property transactions also apply to transactions using virtual currency. Among other things, this means that:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
If you're a business or individual that deals in virtual currency such as bitcoins, don't hesitate to call us.
Tax Tips for Students with a Summer Job
Is your child a student with a summer job? Here's what you should know about the income your child earns over the summer.
- All taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. If you have any questions about whether your child's withholding is correct, please call our office.
- Whether your child is working as a waiter or a camp counselor, he or she may receive tips as part of their summer income. All tip income is taxable and is therefore subject to federal income tax.
- Many students do odd jobs over the summer to make extra cash. If this is your child's situation, keep in mind that earnings received from self-employment are also subject to income tax. This includes income from odd jobs such as baby-sitting and lawn mowing.
- If your child has net earnings of $400 or more from self-employment, he or she also has to pay self-employment tax. (Church employee income of $108.28 or more must also pay.) This tax pays for benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed just as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.
- Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay--such as pay received during summer advanced camp--is taxable.
- Special rules apply to services performed as a newspaper carrier or distributor. As direct seller, your child is treated as being self-employed for federal tax purposes if the following conditions are met:
Generally however, newspaper carriers or distributors under age 18 are not subject to self-employment tax.
- Your child is in the business of delivering newspapers.
- All pay for these services directly relates to sales rather than to the number of hours worked.
- Delivery services are performed under a written contract which states that your child will not be treated as an employee for federal tax purposes.
A summer work schedule is sometimes a patchwork of odd jobs, which makes for confusion come tax time. Contact us if you have any questions at all about income your child earned this summer season.
Best Filing Status for Married Couples
Summer is wedding season. After you say, "I do" you'll have two filing status options to choose from when filing your 2014 tax returns: married filing jointly, or married filing separately.
Married Filing Jointly
You can choose married filing jointly as your filing status if you are married and both you and your spouse agree to file a joint return. On a joint return, you report your combined income and deduct your combined allowable expenses. You can file a joint return even if one of you had no income or deductions.
If you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Also, your standard deduction (if you do not itemize) may be higher, and you may qualify for tax benefits that do not apply to other filing statuses.
Joint Responsibility. Both of you may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return. One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse.
Married Filing Separately
If you are married, you can also choose married filing separately as your filing status. This filing status may benefit you if you want to be responsible only for your own tax or if it results in less tax than filing a joint return.
We Can Help
Give us a call if you're not sure which status to file under. If you and your spouse each have income, we will figure your tax both ways and let you know which filing status gives you the lowest combined tax.
Tax Due Dates for July 2014
Employees Who Work for Tips - If you received $20 or more in tips during June, report them to your employer. You can use Form 4070.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in June.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in June.
Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2014. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until August 11 to file the return.
Employers - Federal unemployment tax. Deposit the tax owed through June if more than $500.
Employers - If you maintain an employee benefit plan, such as a pension, profit sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2013. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends.
Certain Small Employers - Deposit any undeposited tax if your tax liability is $2,500 or more for 2014 but less than $2,500 for the second quarter.
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