Tax

As a business owner, you are entitled to deduct certain expenses on your tax return such as those relating to entertaining clients. Entertainment is considered any activity that provides entertainment, amusement, or recreation. It may also include meeting the personal, living, or family needs of individuals including providing meals, a hotel suite, or a car to customers or their families.

A meal that you provide to a customer or client may also be considered a form of entertainment. The meal may be part of other entertainment or stand alone. Meal expenses are defined as the cost of food, beverages, taxes, and tips for the meal. To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided, and you cannot deduct a meal as both a travel and entertainment expense.

Limits and Restrictions

Entertainment expenses are generally deductible at 50 percent. Entertainment costs, taxes, tips, cover charges, room rentals, maids, and waiters are all subject to the 50 percent limit on entertainment deductions.

Entertainment expenses are also subject to certain limits and restrictions such as whether they qualify as “ordinary and necessary” and not “lavish or extravagant.” They must also be directly related to or associated with, your business and you must keep detailed records substantiating your expenses (more on this below). Furthermore, the person you entertained must be a business associate; that is, someone who could reasonably be expected to be a customer or conduct business with you such as an employee, client, or professional advisor.

If it is customary to entertain a business associate with his or her spouse and your spouse also attends, entertainment expenses for both spouses are deductible, thanks to something called the “closely connected rule.” For more information about this topic, please contact the office.

Note: If you are an employee who is reimbursed in full by your employer different tax rules apply (e.g. you are not subject to the deduction limits).

Location must be Conducive to Business

Your Home

Entertainment expenses are only deductible when they take place in a location conducive to business. A nightclub or theater is not considered a place conducive to business, but your home is. For example, if you hold a small (less than 12 people) party for clients and business associates at your home during the summer it may be deductible as long as you discussed business with your guests. The amount of time that business was discussed is not significant.

Year-end parties for employees, as well as sales seminars and presentations held at your home, are generally 100 percent deductible provided costs for food and refreshments are reasonable and not lavish.

Entertainment Facilities

Out-of-pocket expenses for food and beverages, catering, gas, and fishing bait provided at facilities you own or are a member of such as a yacht, hunting lodge, fishing camp, swimming pool, and tennis court are deductible subject to entertainment expense limitation of 50 percent. However, you may not deduct expenses related to the depreciation and upkeep of the facility or for rent and utilities.

Note: Dues paid to country clubs, social, or golf and athletic clubs are not deductible.

Skybox

If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally can’t deduct more than the price of a nonluxury box seat ticket. You can, however, count each game as one event. Deduction for those seats is then subject to the 50 percent entertainment expense limit. If the cost of food and beverages are on a separate receipt, you are allowed to deduct those expenses (as long as they are reasonable) in addition to the amounts allowable for the skybox, subject of course, to the requirements and limits that apply.

Expenses must be “Directly Related” or “Associated With”

Expenses are directly related if you can show that there was more than a general expectation of gaining some business benefit, rather than simply goodwill. In addition, you must show that you conducted business during the entertainment and that the active conduct of business was your main purpose.

Even if you cannot show that the entertainment was “directly related” you may still be able to deduct the expenses as long as you can prove the entertainment was “associated with” your business. To meet this test, you must have had a clear business purpose when you took on the expense, and the entertainment must directly precede or come after a substantial business discussion.

Substantiating your Expenses

Tax law requires you to keep records that will prove the business purpose and amounts of your business entertainment as well as other business expenses. The most frequent reason that the IRS disallows entertainment expenses is the failure to show the place and business purpose of an item. Therefore it is paramount that you keep excellent records.

To substantiate entertainment expenses you must show the following:

• The amount of each separate expense.
• The date, time, place, and type of entertainment (e.g. dinner).
• The business purpose and nature of any business discussion that took place.
• The business relationship and the name, title, and occupation of the person or people you entertained.

Don’t Miss Out

Tax law is complicated, and this article only touches on a few of the deductions for entertainment expenses you might be entitled to. If you have any questions about entertainment expenses or need assistance setting up a recordkeeping system to document your business-related activities, don’t hesitate to call.

• By Leon Clinton
• August 11, 2017

Every year, hurricanes, tornadoes, floods, wildfires, and other natural disasters affect people throughout the US. The bad news is that recovery efforts after natural disasters can be costly. For instance, when hurricanes strike they not only cause wind damage but can cause widespread flooding. Many homeowners are not covered for damage due to flooding because most standard insurance policies do not cover flood damage. Fortunately, tax relief is available–but only if you meet certain conditions. For business owners and self-employed individuals who may owe estimated taxes, for example, the IRS typically delays filing deadlines for taxpayers who reside or have a business in the disaster area.

Deducting Casualty Losses: Tips for Homeowners

Fortunately, personal casualty losses are deductible on your tax return as long as the property is located in a federally declared disaster zone (please call the office if you are not sure). You must also meet the following four conditions:

Note: Some of the casualty loss rules for business or income property are different than the rules for property held for personal use.

1. The loss was caused by a sudden, unexplained, or unusual event. 
Natural disasters such as flooding, hurricanes, tornadoes, and wildfires all qualify as sudden, unexplained, or unusual events.

2. The damages were not covered by insurance.

You can only claim a deduction for casualty losses that are not covered or reimbursed by your insurance company. Keep in mind that timing is important. If you submit a claim to your insurance company late in the year, then your claim might not be processed before it is time to prepare your taxes. One solution is to file for a 6-month extension on your taxes. If you have any questions about this, please call the office.

3. The dollar amount of you losses were greater than the reductions required by the IRS.

To claim casualty losses on your tax forms, the IRS requires several “reductions,” the first of which is referred to as the $100 loss limit and requires taxpayers to subtract $100 from the total loss amount.

Next, you need to reduce the loss amount by 10 percent of your adjusted gross income (AGI). Here is an example: Let’s say your AGI is $35,000 and your insurance company paid for all of the losses except $5,800 that you incurred as a result of tornado damage. First, you would first subtract $100 and then reduce that amount by $3500. The amount you could deduct as a loss would be $2,200.

4. You must itemize.

To claim a deduction for the loss, you must itemize your taxes. If you normally don’t itemize but have a large casualty loss, you can calculate your taxes both ways to figure out which method gives you the lowest tax bill. Please call if you need help figuring out which method is best for your particular circumstances.

Two options for deducting casualty losses on your tax returns.

You can deduct the losses in the year in which they occurred or claim them for the prior year’s return. For example, if you were affected by a natural disaster this year, you can claim your losses on your 2017 tax return or amend your 2016 tax return and deduct your losses. If you choose to deduct losses on your 2016 tax return, then you have one year from the date the tax return was due to file it.

Tip: Do not consider the loss of future profits or income due to the casualty as you figure your loss.

Figuring Amount of Loss

Figure the amount of your loss using the following steps:

• Determine what your adjusted basis in the property was before the casualty occurred. For property you buy, your basis is usually its cost to you. For property you acquire in some other way, such as inheriting it or getting it as a gift, you must figure your basis in another way. Please call the office for more information.
• Determine the decrease in fair market value (FMV) of the property as a result of the casualty. FMV is the price at which you could sell your property to a willing buyer. The decrease in FMV is the difference between the property’s FMV immediately before and immediately after the casualty.
• Subtract any insurance or other reimbursements that you received or expect to receive from the smaller of those two amounts.

Tax Relief for Small Business Owners

Individuals, as well as businesses affected by severe storms, tornadoes, straight-line winds, and flooding in Arkansas and Missouri with an estimated income tax payment originally due on or after April 26, 2017, and before Aug. 31, 2017, will not be subject to penalties for failure to pay estimated tax installments as long as such payments are paid on or before Aug. 31, 2017.

If you have been affected by a natural disaster, please call the office immediately and receive assistance figuring out when your tax payments are due.

Have you been affected by a natural disaster this year? Are you wondering if you qualify for tax relief? Help is just a phone call away.

• By Leon Clinton
• August 8, 2017

Two types of IRAs are available to fund your retirement: Traditional IRAs and Roth IRAs. While both are subject to many of the same rules there are several important differences. It’s important to understand these differences because the type of individual retirement account (IRA) you choose can significantly impact your financial future and that of your family.

Who Can Contribute to an IRA?

Any person with income from wages or self-employment can contribute to an IRA (either traditional or Roth)–including children as long as they meet the income conditions. Individuals can contribute up to $5,500 in 2017. A catch-up contribution of $1,000 is allowed for anyone over the age of 50, for a total contribution of $6,500. Contributions are also allowed for stay-at-home spouses (up to $5,500 in 2017) as long as the couple’s wages or self-employment earnings total at least $11,000.

Note: You cannot contribute to a traditional IRA if you are age 70 1/2 or older even if you (or your spouse, if filing jointly) have taxable compensation. You can, however, make contributions to your Roth IRA after you reach age 70 1/2.

Income Limits

A traditional IRA does not have income limits; however, contributions to a Roth IRA might be limited based on your filing status and income.

For example, in 2017, if you file a joint return with your spouse, you cannot contribute to a Roth IRA if your income (AGI or adjusted gross income) is more than $196,000. However, you may be able to contribute a reduced amount if your income is greater than $186,000 but less than $196,000. For income below $186,000, you may contribute up to $5,500 ($6,500 if age 50 or older) or your taxable compensation for the year if your compensation was less than this dollar limit. To figure the reduced amount you can contribute, use the worksheet in Publication 590-A, Contributions to Individual Retirement Accounts (IRAs). Please call if you need assistance figuring this out this amount.

Tax Treatment

Taxable Income

Contributions to a traditional IRA are made pre-tax. As such, they lower your taxable income, which could enable you to take advantage of tax breaks you might not otherwise qualify for with a higher income.

Contributions to Roth IRAs are made after-tax (i.e. you’ve already paid the tax) and do not lower your pre-tax income. Unlike a traditional IRA, however, you will owe no tax on income from withdrawals made during your retirement.

Withdrawals before Age 59 1/2

Withdrawals from a traditional IRA that are made before the age of 59 1/2 are subject to an early withdrawal penalty. There are, however, several exemptions that allow you to use the funds but waive the penalty. These include: Using IRA funds to purchase your first home (up to $10,000) and using funds to offset qualified higher education expenses, health insurance premiums while unemployed, and unreimbursed medical expenses in excess of 10 percent AGI.

Withdrawals from Roth IRAs may be taken out penalty and tax-free before age 59 1/2 as long as they are contributions (not earnings). Withdrawals that are earnings are subject to the same 10 percent penalty tax as traditional IRAs. There is an exception for qualified first-time home-buyers: A maximum of $10,000 of Roth IRA earnings may be withdrawn penalty-free to pay for qualified first-time home-buyer expenses as long as at least five tax years have passed since your initial contribution.

Withdrawals after Age 59 1/2

Once you reach age 59 1/2, you may begin taking distributions. While you are not required to take distributions at this age, you must start taking distributions by April 1 following the year in which you turn age 70 1/2 and by December 31 of later years. With a traditional IRA, any deductible contributions and earnings that are withdrawn (typically referred to as distributions when you retire) are considered taxable income. Income from Roth IRA distributions is generally tax-free and unlike a traditional IRA, there is no age requirement for distributions from a Roth IRA.

Questions about IRAs? Don’t hesitate to call.

• By Leon Clinton
• August 5, 2017