You may not need to pay a 3.8 percent Medicare tax on your business income if you participate in the business enough that you are not considered a passive investor. Participation includes any work performed as an owner, manager, or employee as long as it is not investor activity. Document your hours with your calendar, appointment books, and emails.
As a general rule, most businesses can only deduct 50% of business meals. There are several exceptions to this rule. One exception is the “Convenience of Employer” rule.
How it works:
To achieve the 100% deduction, you have to serve the meal on your businesses premises, and you have to have provided the meal for “your business convenience”.
- Meals are served to make employees available for emergency calls
- Meals are furnished so that the employee can work through their lunch-break
- There are insufficient eating facilities in the vicinity and you want to keep your employees working instead of driving around looking for food
- Meals are furnished for some other substantial non-compensatory business reason (you are furnishing the meals for a business reason and not simply to give the employee a “bonus”
The Senate Finance Committee passed a tax extenders bill with a bipartisan vote of 23 to 3 that extends over 50 tax breaks for two years.
The bill would extend dozens of tax breaks that expired at the end of last year. Last December, Congress only managed to extend the tax breaks for an extra two weeks through the end of the year and retroactively for the rest of 2014, allowing tax season to proceed this past tax season without new forms needing to be created by the IRS.
The bipartisan tax extenders package includes provisions to assist families, individuals and small businesses. Among the more popular provisions are the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books and supplies, mortgage debt relief, the deduction for mortgage insurance premiums, the deduction for state and local general sales taxes, the above-the-line deduction for higher education expenses, tax-free distributions from individual retirement plan for charitable purposes, and the research and experimentation tax credit.
Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips the IRS wants you to know about travel while serving a charity.
- You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Select Check tool to see if the group is qualified.
- You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can’t deduct the value of your time or services.
- The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.
- You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
- Deductible travel expenses may include:
• Air, rail and bus transportation
• Car expenses (i.e. Mileage to and from the airport)
• Lodging costs
• The cost of meals
• Baggage fees, luggage expenses, passport fees, etc.
To learn more see Publication 526, Charitable Contributions. The booklet is available at IRS.gov
Are you doing some spring cleaning and wondering when you can throw out those old tax documents? Keep in mind, it is the burden of the taxpayer to provide sufficient proof and support for any tax position taken on a tax return. Tax rules offer guidance as to minimum document retention periods. Below are some things to consider when determining whether or not to toss out those tax documents.
- The statute of limitations for most tax returns is 3 years from the date you filed the return.
- There is no period of limitations to assess tax when a return is fraudulent.
- When your income is under reported by more than 25%, the time to assess additional taxes is 6 years from the time the return is filed.
- To file a claim for credit or refund, the period to make the claim is 3 years from the date the original return was filed or 2 years from the date the tax was paid, whichever is later.
You may need to save documents for other legal reasons, such as, insurance claims or transfer of assets in the case of a passing family member. Some documents should be kept indefinitely, such as, the actual tax return, W-2s, life insurance policies, birth certificates, death certificates, Wills, Trust documents, residence or investment property documents.
When in doubt, preserve the documents indefinitely.
Tim, who owns his own business, decided he wanted to take a two-week trip around the US. So he did–and was able to legally deduct every dime that he spent on his vacation. Here’s how he did it.
1. Make all your business appointments before you leave for your trip.
Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible.
You must have at least one business appointment before you leave in order to establish the “prior set business purpose” required by the IRS. Keeping this in mind, before he left for his trip, Tim set up appointments with business colleagues in the various cities that he planned to visit.
Let’s say Tim is a manufacturer of green office products and is looking to expand his business and distribute more of his products. One possible way to establish business contacts–if he doesn’t already have them–is to place advertisements looking for distributors in newspapers in each location he plans to visit. He could then interview those who respond when he gets to the business destination.
Example: Tim wants to vacation in Hawaii. If he places several advertisements for distributors, or contacts some of his downline distributors to perform a presentation, then the IRS would accept his trip for business.
Tip: It would be vital for Tim to document this business purpose by keeping a copy of the advertisement and all correspondence along with noting what appointments he will have in his diary.
2. Make Sure your Trip is All “Business Travel.”
In order to deduct all of your on-the-road business expenses, you must be traveling on business. The IRS states that travel expenses are 100 percent deductible as long as your trip is business related and you are traveling away from your regular place of business longer than an ordinary day’s work and you need to sleep or rest to meet the demands of your work while away from home.
Example: Tim wanted to go to a regional meeting in Boston, which is only a one-hour drive from his home. If he were to sleep in the hotel where the meeting will be held (in order to avoid possible automobile and traffic problems), his overnight stay qualifies as business travel in the eyes of the IRS.
Tip: Remember: You don’t need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status.
3. Be sure to deduct all of your on-the-road-expenses for each day you’re away.
For every day you are on business travel, you can deduct 100 percent of lodging, tips, car rentals, and 50 percent of your food. Tim spends three days meeting with potential distributors. If he spends $50 a day for food, he can deduct 50 percent of this amount, or $25.
Tip: The IRS doesn’t require receipts for travel expense under $75 per expense–except for lodging.
Example: If Tim pays $6 for drinks on the plane, $6.95 for breakfast, $12 for lunch, $50 for dinner, he does not need receipts for anything since each item was under $75.
Tip: He would, however, need to document these items in your diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation includes amount, date, place of meeting, and business reason for the expense.
Example: If, however, Tim stays in the Bates Motel and spends $22 on lodging, will he need a receipt? The answer is yes. You need receipts for all paid lodging.
Tip: Not only are your on-the-road expenses deductible from your trip, but also all laundry, shoe shines, manicures, and dry-cleaning costs for clothes worn on the trip. Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry cleaning receipt and have your clothing dry cleaned within a day or two of getting home.
4. Sandwich weekends between business days.
If you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend.
Example: Tim makes business appointments in Florida on Friday and one on the following Monday. Even though he has no business on Saturday and Sunday, he may deduct on-the-road business expenses incurred during the weekend.
5. Make the majority of your trip days count as business days.
The IRS says that you can deduct transportation expenses if business is the primary purpose of the trip. A majority of days in the trip must be for business activities; otherwise, you cannot make any transportation deductions.
Example: Tim spends six days in San Diego. He leaves early on Thursday morning. He had a seminar on Friday and meets with distributors on Monday and flies home on Tuesday, taking the last flight of the day home after playing a complete round of golf. How many days are considered business days?
All of them. Thursday is a business day since it includes traveling – even if the rest of the day is spent at the beach. Friday is a business day because he had a seminar. Monday is a business day because he met with prospects and distributors in pre-arranged appointments. Saturday and Sunday are sandwiched between business days, so they count, and Tuesday is a travel day.
Since Tim accrued six business days, he could spend another five days having fun and still deduct all his transportation to San Diego. The reason is that the majority of the days were business days (six out of eleven). However, he can only deduct six days’ worth of lodging, dry cleaning, shoe shines, and tips. The important point is that Tim would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible.
To make sure that you can legally deduct your vacation when you combine it with business, call the office before you plan your trip.
An Estate Plan includes several elements. Most common are a will, assignment of a power of attorney, and a living will. Take an inventory of your assets. This would include items such as investments, real estate, business interests, retirement savings, and insurance policies. Determine who you want to inherit your assets, who you want handling your financial affairs if you are unable, and who do you want making medical decisions for you if you become unable to make them yourself.
There are several tools to help minimize the tax on your estate and to your heirs. For some, a trust may be a great tool. There are options for gift giving to individuals and charities.
Regardless of your net worth, make sure you have an estate plan in place.
Due to the Affordable Care Act, you will see some changes to your tax return. This is the first year that you will be asked to answer basic questions regarding your health insurance. A majority of taxpayers, approximately 75%, will only need to check a box indicating that they had health coverage in 2014. The remaining taxpayers have health coverage through the health insurance marketplaces or decided not to enroll for coverage.
Those with coverage through the marketplace will receive a Form 1095-A which will be used to reconcile their premium cost and the financial assistance they received. Any adjustments will be reflected on their tax returns. Individuals that can afford health insurance and chose not to will pay a fee. Others that can’t afford coverage or meet other conditions, can receive an exemption.
Job-related education expenses may be able to be deducted as an itemized deduction on your individual return. The expenses must be for education that maintains or improves your job skills or is required by your employer or by law to keep your salary, status, or job.
The education cannot qualify you for a new trade or business or be taken to meet the minimal educational requirements of your current trade or business. Undergraduate degree costs do not qualify because they are usually incurred to meet the minimum educational requirements. Costs of obtaining a graduate degree usually qualify if the education area is related to your current job.
Expenses that can be deducted include tuition, books, supplies, lab fees, and transportation and travel costs.
No, this is NOT a scam. There has been a tremendous increase in the number of victims affected by identity theft and tax fraud. Most taxpayers do not know they are a victim until they submit a tax return and discover that someone else has already submitted a return using their name and social security number. In an effort to fight identity theft, the Indiana Department of Revenue has implemented a new identity protection program. This program went into effect during the 2014 tax season and will continue through the next season.
Taxpayers that have irregularities in their information will be asked to confirm their identities through the Identity Confirmation Quiz. At this time, only 5 percent of Indiana taxpayers have been selected. Selected taxpayers will receive an official letter from the Department of Revenue with instructions for completing the quiz. The quiz is 4 questions and can be taken on a secure website in 2 minutes or less.
Before 1/1/2014, small businesses had tremendous flexibility in how they compensated their employees with health insurance coverage. Most small businesses didn’t want to establish a group health insurance plan and so would reimburse some or all employees for the employee’s individual health insurance premiums.
Various provisions of the tax code allowed small businesses to 1.) pick and choose which employees they wanted to compensate in this manner (i.e., discriminate), and 2.)reimburse the employee for their health insurance premiums on a pre-tax basis (i.e., the employer could give the employee money and the employee wouldn’t be taxed on it).
An IRS Notice issued at the end of 2013 put an end to this. The discrimination rules have tightened up and you can no longer reimburse employees for their individual health insurance premiums on a pre-tax basis.
Starting 1/1/2014, the only way for an employer to help pay for some of the employee’s health insurance premiums in a manner that doesn’t create taxable compensation to the employee is to establish a group health insurance plan under the employer and then pay for some or all of the employee’s group health insurance premiums.
Gifting allows flexibility to shift income or deductions between individuals. I will briefly mention 2 gifting strategies:
- Presume that you are don’t have enough itemized deductions to itemize, and are in a low tax bracket. If you want to make a donation to a charity but can’t benefit from the deduction, then gift the funds to a friend who can benefit from the deduction. The friend can make the donation to the charity and utilize the deduction. In order for the gift to be legitimate, you can have no control over the money once you make the gift to your friend. If the friend decides not to donate it, there’s nothing you can do – except leave that friend off of your Christmas card list.
- Presume that you want to gift money to your child to use as a down-payment on their house. Instead of gifting cash, you can gift appreciated securities to your child. The child will sell the appreciated securities and be taxed on the gain at their lower tax bracket. As the stock market continues to heat up, this may be a timely strategy to get some gains off of your plate.
Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years. Some of these changes include the following:
Special Tax-Free Charitable Distributions for Certain IRA Owners
This provision, currently scheduled to expire at the end of 2013, offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, first available in 2006, can be used for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be transferred directly by the IRA trustee to the eligible charity. Distributed amounts may be excluded from the IRA owner’s income – resulting in lower taxable income for the IRA owner. However, if the IRA owner excludes the distribution from income, no deduction, such as a charitable contribution deduction on Schedule A, may be taken for the distributed amount.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Charitable Contributions of Clothing and Household Items
To be tax-deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.
Donors must get a written acknowledgement from the charity for all gifts worth $250 or more that includes, among other things, a description of the items contributed. Household items include furniture, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.
I ran across this blog from the Tax Foundation. No matter what your political views are, this blog post is worth a read.
http://taxfoundation.org/blog (scroll down to “High Implicit Marginal Tax Rates Make Life Difficult for the Poor)