Here are the Documents You Need When Deducting Business Expenses

iStock_000002942341_LargeMost ordinary and necessary business expenses are deductible as long as you have the proper documentation. If your return is audited, the IRS may require that you show the type of item purchased and that payment was made. Here are some examples of acceptable documentation.

Checks. A canceled check can be used as proof of payment if it has the name of the payee and shows the cancellation on the back. The IRS also accepts highly legible images of checks if you don’t have your checks returned.

Credit/debit card transactions. You must have an account statement that shows the amount of the charge, the transaction date, and the name of the payee.

Electronic funds transfers. The IRS requires an account statement that shows the amount of the transfer, the date the transfer was posted to the account by the financial institution, and the name of the payee.

Invoices. You must have an invoice or some other form of documentation showing what you purchased. Canceled checks, credit/debit card statements, and records of electronic funds transfers only provide proof of payment.

Cash register receipts. If you receive a receipt with no details of the items purchased, write a description of the items on the slip. As long as the purchase is for a relatively small amount, the IRS should accept it.

If it’s not self-explanatory, make sure you write the business reason for your purchase on the invoice or receipt so you’ll be prepared for any questions from the IRS. And be aware that there are separate substantiation rules for travel, entertainment, and auto expenses.

Whether you need individual or business tax advice, give us a call. We’ve got the answers you’re looking for, so don’t wait. Call us today.

Can You Deduct Your Vacation

Itemized PersonalHow would you like Uncle Sam to pay for part of your vacation? Sound unlikely? If you combine your vacation with a business trip, you may be able to deduct some of your expenses. Pay attention to the rules, though. Expenses must meet certain requirements before they’re tax deductible.

General Guidelines

As long as your primary reason for making the trip is business, you generally can deduct the cost of your transportation to and from your destination. You’ll generally be able to deduct food (within limits) and lodging costs only for the days you actually spend on business.

Bring the Family

You can bring your family along, too. While you can’t deduct their food, lodging, or airfare, you can write off your own expenses, including the single-occupancy rate for lodging on days when you’re conducting business. If you and your family travel by car, you can also deduct the full cost of transportation. Just be sure to keep detailed records.

Why You Must File and Pay Your Employee’s Withholdings on Time

There is zero wiggle room when it comes to handling the federal income taxes and FICA taxes withheld from employees’ paychecks. The taxes are government property, which employers hold “in trust” and then remit to the IRS on a set schedule. Employers are not permitted to use this “trust fund” money for other purposes.

Serious Penalty

The penalty for breaking the rules is harsh. Any person involved in collecting, accounting for, or paying the trust fund taxes — a “responsible person” — who willfully fails to do so may be liable for a penalty equal to 100% of the unpaid taxes. The penalty is aggressively enforced.

Responsible Persons

Generally, a responsible person is anyone with the power to see that the taxes are paid. This might include a corporation’s officers, directors, and shareholders; employees; and the partners in a partnership. Under certain circumstances, even family members and professional advisors may be subject to the penalty.

It’s not uncommon for there to be more than one responsible person. When that’s the case, each responsible person could be found liable for the full penalty.

A Word About Willful

Failure to pay trust fund taxes can be willful without being an intentional attempt to evade paying the taxes. Temporarily “borrowing” from the trust fund to meet bona fide business expenses in a pinch can qualify as being willful.

The Tax Benefits of Net Operating Losses

CaptureFor many businesses, profits vary from year to year. However, with proper planning, even a bad year can be helpful from a tax perspective. Where business deductions exceed gross income, a taxpayer may have a net operating loss (NOL) that can be used to offset income in another tax year, potentially generating a refund of previously paid taxes.

Who May Use an NOL?

NOLs are available to individual business owners, corporations, estates, and trusts. Partnerships and S corporations do not take NOL deductions, though their partners and shareholders may use “passed through” losses on their own returns.

How Is an NOL Applied?

The general rule is that a taxpayer may carry an NOL back two years and forward 20 years, though certain limited exceptions may apply. For example, an individual with an NOL that was caused by a casualty, theft, or disaster may use a three-year carryback period.

In general, the taxpayer will carry back an NOL to the earliest year it can be used and then carry it forward, year by year, until it is used up. The taxpayer may also elect to forego the two-year carryback and carry the loss forward for the 20-year period. However, the general preference is to use an NOL sooner rather than later because a dollar of tax saved today is generally worth more than a dollar saved in the future.

How Is an NOL Calculated?

Calculations of NOLs can be complicated. For example, a noncorporate taxpayer’s NOL is calculated without regard to any personal exemptions or NOLs from other years, and certain deductions for capital losses and nonbusiness items are limited.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

Don’t Miss these Tax Credit Opportunities

Itemized PersonalTax deductions aren’t the only things to consider when looking for ways to reduce your tax bill. There are a number of tax credits that you may be able to claim. A tax credit reduces your tax liability dollar for dollar (and, in some instances, may be fully or partially “refundable” to the extent of any excess credit).

Child-related Credits

Parents of children under age 17 may claim a child tax credit of up to $1,000 per qualified child. The child tax credit is phased out for higher income taxpayers.

A different credit of up to $13,400 is available for the payment of qualified adoption expenses, such as adoption fees, attorney fees, and court costs. The credit is phased out at certain income levels, and there are certain restrictions as to the tax year in which the credit is available.

Look into claiming the child and dependent care credit if you pay for the care of a child under age 13 while you work. It’s available for 20% (or more) of up to $3,000 of qualifying expenses ($6,000 for two or more dependents). This credit isn’t confined to child care expenses — it may also be applicable for the care of a disabled spouse or another adult dependent.

Higher Education Credits

The American Opportunity credit can be as much as $2,500 annually (per student) for the payment of tuition and related expenses for the first four years of college. A different credit — known as the Lifetime Learning credit — is available for undergraduate or graduate tuition and for job training courses (maximum credit of $2,000 per tax return). You’re not allowed to claim both credits for the same student’s expenses, and both credits are subject to income-based phaseouts and other requirements.

Sometimes Overlooked

One credit that taxpayers sometimes miss is the credit for excess Social Security taxwithheld. If you work for two or more employers and your combined wages total more than the Social Security taxable wage base ($118,500 in 2015), too much Social Security tax will be withheld from your pay. You can claim the excess as a credit against your income tax.

The alternative minimum tax (AMT) credit is another credit that’s easy to overlook. If you paid the AMT last year, you may be able to take a credit for at least some of the AMT you paid. The credit is available only for AMT paid with respect to certain “deferral preference” items, such as the adjustment required when incentive stock options are exercised.

We can provide more details regarding these and other tax credits that may be available to you or your business, so give us a call today.

There are a Variety of Steps You Can Take to Benefit Your Next Tax Year

istock_000002942341_large-4The tax year is pretty much a wrap. There’s not too much individual taxpayers can do to change the outcome. But there are a variety of steps you can take this year that will affect how your next year’s tax year plays out.

Review Tax Payments

If you customarily get a healthy tax refund, you may want to rethink how much is being withheld from your pay. Your withholding amount is based on the Form W-4 you filed with your employer. If you file a new W-4 that results in lower withholding, your take-home pay will increase. But don’t go overboard. You’ll want to make sure you’re having enough withheld to avoid underpayment penalties. Similarly, self-employed individuals and other taxpayers who make quarterly estimated tax payments should be careful to pay the appropriate amounts in a timely manner.

Make the Most of Tax-favored Accounts

Contribute as much as possible (up to the federal limit) to your 401(k), 403(b), 457, individual retirement account (IRA), or other retirement plan. Also, take full advantage of any other tax-favored accounts you’re eligible for, such as a health savings account (HSA) or a flexible spending account (FSA). Managed properly, these accounts can provide considerable tax savings.

Nurture Your Future

If you plan to change jobs and take a distribution from your employer’s tax-deferred retirement plan, be careful. It’s usually best to have your plan trustee directly transfer the funds to the trustee of your new employer’s qualified plan or to the institution that has your IRA. Although you could request a cash distribution and do the rollover yourself, required income-tax withholding can complicate the transaction. If you make a mistake and don’t roll over the full amount of the taxable distribution within 60 days, you’ll owe income taxes — and perhaps a 10% early withdrawal penalty as well.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

How to Decide Between Taxable and Tax Exempt Investments

istock_000002942341_large-4Suppose you are considering two investments. One is tax-exempt and the other is taxable. Which should you choose?

Make the Comparison

The first thing you should determine is the taxable investment’s after-tax yield. If two investments are offering the same rate of return and are of equal quality, you’re better off with the tax-exempt investment. However, taxable investments generally pay a higher rate of return. Thus, you can’t make a fair comparison without considering the taxes you would pay in your tax bracket on the income from the taxable investment.

Here is a simple three-step formula for comparing your after-tax return on a taxable investment with the return on a tax-exempt investment.

Step 1: Subtract your marginal tax rate from 100%. (For example, in a 28% tax bracket, 100% – 28% = 72%.)

Step 2: Multiply the rate of return on the taxable investment by the resulting percentage. (6% hypothetical return ´ 72% = 4.32% after-tax return.)

Step 3: Compare this rate with the rate of return on the tax-exempt investment.

In our example, the investor in a 28% marginal tax bracket would choose the taxable investment paying 6% over a tax-exempt paying less than 4.32%. A tax-exempt investment paying more than 4.32% would be the better deal, assuming it were of equal quality.

Give us a call today, so we can help you determine the right course of action for you.

Taking Family Members on a Business Trip

119353386Anyone who spends a significant amount of time traveling for business purposes will tell you that living out of a suitcase is no fun. Despite routinely traveling to destinations many people only hope to visit, many business travelers dislike having to leave home on an extended business trip. Taking a spouse or the whole family along from time to time for a combined business trip/vacation can make the travel more enjoyable. Here are some tax rules to consider when family members accompany a business traveler.

Transportation and Lodging Costs

For a person making a bona fide business trip alone to a U.S. location, the round­trip transportation costs are fully deductible ­­ as long as the primary reason for the trip is business (as opposed to vacation/recreation). Lodging costs for the business portion of the trip are also fully deductible. When a spouse or other family member without a bona fide business purpose accompanies the business traveler, the amount deductible as a business expense is limited to the single rate cost of transportation and lodging.

Example: Ed has a four-­day trade show next month in Washington, D.C. and wants to bring along his wife and son to visit the nation’s capital. The discounted airfare for all three is $500; lodging is $500 for the four nights of the trade show. If Ed makes the trip alone, the cost of a single airline ticket will be $200 and lodging for a single occupant, $400. How much is Ed’s allowable business deduction for airfare and lodging for the family trip? $600 ­­ the single rate cost.

Note: If, instead of flying on their trip to Washington, D.C., Ed and his family drive an automobile on the most direct round­trip route, the expense will be fully deductible, since that will presumably be the single­rate transportation cost.

Primary Business Purpose

Although the tax laws contain no specific rule or definition of what constitutes a trip that is primarily for business purposes, the regulations and case law generally look to the relationship between the number of business-­versus­-personal days to make the determination. A day in which the traveler conducts bona fide business constitutes a workday, even if less than the entire day is devoted to business. Therefore, if a morning business engagement ends by noon, the traveler need not schedule afternoon business activities to preserve the day as business related.

A rule of thumb used by many business travelers is that the trip should have twice as many business­related days as vacation­related days to ensure its primary business nature. If, on a particular trip, the business purpose rule is not met, none of the round­trip transportation cost is deductible. However, for the business­related days of the trip, the single­rate lodging is deductible, as well as 50% of the business meals.

Example: If Ed and his family extended their trip by one day, Ed’s transportation and lodging deduction would not change. However, extending the trip by three days could jeopardize the primary business purpose of the trip, thus making Ed’s round­trip transportation costs nondeductible.

Before planning a business trip that includes vacation time or accompanying family members, carefully consider the tax ramifications. Call us if we may be of assistance.

Federal Tax Breaks Restored

bankruptcy (2)Individual and business taxpayers can benefit from a variety of federal tax breaks that were extended or made permanent by the Protecting America from Tax Hikes (PATH) Act and the Consolidated Appropriations Act, 2016. Here are selected highlights.

State and local sales tax deduction.
The law gives individuals who itemize their deductions the option of deducting state and local sales taxes instead of state and local income taxes. Taxpayers who elect to do so may deduct the actual amount of sales taxes paid during the year or a preset amount from an IRS table. This provision has been made permanent.

Nontaxable IRA transfers to charities.
Taxpayers age 701/2 or older who directly transfer up to $100,000 annually from their individual retirement accounts (IRAs) to qualifying charities can exclude these contributions from gross income. If all qualifications are met, these contributions will still count toward the taxpayer’s required minimum distribution for the year. This provision has been made permanent.

Increase in expensing limits.
The law permanently extends the increased Section 179 expensing limit, allowing eligible businesses to expense, rather than depreciate, up to $500,000 per year of the cost of equipment and other eligible property placed in service during the tax year. The election is subject to a dollar-for-­dollar phase out as the cost of expensing­eligible property rises from $2 million to $2.5 million. The IRS will adjust the 179 limits for inflation.

First­-year bonus depreciation.
Eligible businesses may claim bonus depreciation for qualifying property acquired and placed in service during 2015 through 2019. The available bonus depreciation percentage depends on the year the property is placed in service: 50% for 2015 through 2017, 40% for 2018, and 30% for 2019. For certain longer­lived and transportation property, these percentages apply one year later than indicated, and bonus depreciation will be available through 2020.

Increase in “luxury auto” limits.
The new law increases the dollar limits on depreciation deductions (and Section 179 expensing) by $8,000 for vehicles placed in service after 2015 and before 2018. The limits are increased by $6,400 for vehicles placed in service in 2018 and by $4,800 in 2019.

All About the Earned Income Tax Credit

Individuals who are working and who have low-to-moderate taxable income may qualify for this income tax credit.

When you think about ways to offset your income as you’re preparing for income tax time, do you primarily consider the deductions you can take? Things like home mortgage interest, charitable donations, and taxes you paid that can be claimed?

Allowable credits can also work in your favor. If you meet the Internal Revenue Service’s seven criteria, you may be eligible for the Earned Income Tax Credit (sometimes called Earned Income Credit, or EIC).

Note: As you read the rules that the IRS has established, keep in mind that, as with many of the agency’s regulations, there can be exceptions. We can help you determine whether you are a candidate for this credit.

If you can answer “Yes” to these seven questions, you may be able to fill in and file a Schedule EIC:

  1. Is your Adjusted Gross Income (AGI) less than the IRS’s limits? For 2015, this is:

    • 3+ qualifying children: $47,747 ($53,267 for married filing jointly)
    • 2 qualifying children: $44,454 ($49,974 for married filing jointly)
    • 1 qualifying child: $39,131 ($44,651 for married filing jointly)
    • No qualifying children: $14,820 ($20,330 for married filing jointly)

      If you qualify for the Earned Income Credit, you’ll need to complete a Schedule EIC, which can be filed with either the Form 1040 or 1040A.

  2. Do you have a valid Social Security number?

    If you are filing jointly, both you and your spouse are required to have valid Social Security numbers issued by the Social Security Administration (SSA) by the date your tax return is due (including extensions). Any qualifying child claimed must also have one.

  3. Is your status “married filing jointly” or “head of household”?

    Couples whose filing status is “married filing separately” cannot claim the EIC. An exception here: A couple is married, but one spouse did not reside in the home at any time during the second half of the year. The spouse who remained might qualify for the EIC if his or her filing status is “head of household.”

  4. Were you or your spouse a U.S. citizen or resident alien for the entire tax year?

    This is complicated. If one of you was a U.S. citizen or resident alien but the other was a nonresident alien for any part of the year, you may qualify for the EIC if your status is “married filing jointly.” If that’s the case, you will be taxed on your “…joint worldwide income.”

  5. Was your income earned only in the United States and/or a U.S. possession?

    If you earned income in a foreign country and you plan to exclude it from your gross income, you cannot claim the EIC. Filing a Form 2555 (Foreign Earned Income) or Form 2555-EZ (Foreign Earned Income Exclusion) disqualifies you.

    2015 Form 1040, lines 66a and 66b (EIC information appears on lines 42a and 42b of the 2015 Form 1040A)

  6. Is your investment income $3,400 or less?

    Simple enough. For the Form 1040, this includes:

    • Interest and dividends,
    • Capital gain net income, and,
    • Royalties and rental income from personal property.
  7. Do you have earned income?

    This means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. But you may be in another situation that would make you eligible for the EIC. For example, nontaxable combat pay, ministers’ housing, and strike benefits provided by a union are considered earned income.

Only Part of the Equation

If you believe that you’re able to claim the Earned Income Credit, or if there are other tax-related topics that you don’t fully understand, we’ll be happy to look at your entire financial scenario. If you’ve filed an extension for 2015, we can work with you to make sure you’re taking all of the deductions and credits that you’ve earned.

As always, tax planning should be a year-round process. Let us know if we can help you start preparing now for next year’s filing.