Tax

Tax law allows you to deduct two types of travel expenses related to your business, local and what the IRS calls “away from home.”

1. 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).
2. 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.

Entertainment Expenses

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.

• By Leon Clinton
• July 30, 2014

July 10
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.

July 15
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.

July 31
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.

• By Leon Clinton
• July 19, 2014

Are you taking care of an elderly parent or relative? According to the U.S. Census Bureau, there were 43.1 million people age 65 and older in the United States in 2012, nearly 15 percent of the total population.

Whether it’s driving to doctor appointments, paying for nursing home care or medical expenses, or handling their personal finances, dealing with an elderly parent or relative can be emotionally and financially draining, especially when you are taking care of your own family as well.

Fortunately, there is some good news: You may be able to claim your elderly relative as a dependent come tax time, as long as you meet certain criteria.

Here’s what you should know about claiming an elderly parent or relative as a dependent.

Who qualifies as a dependent?
The IRS defines a dependent as a qualifying child or relative. A qualifying relative can be your mother, father, grandparent, stepmother, stepfather, mother-in-law, or father-in-law, for example, and can be any age.

There are four tests that must be met in order for a person to be your qualifying relative: not a qualifying child test, member of household or relationship test, gross income test, and support test.

Not a Qualifying Child
Your parent (or relative) cannot be claimed as a qualifying child on anyone else’s tax return.

Residency

He or she must be U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico; however, a parent or relative doesn’t have to live with you in order to qualify as a dependent.

If your qualifying parent or relative does live with you however, you may be able to deduct a percentage of your mortgage, utilities and other expenses when you figure out the amount of money you contribute to his or her support.

Income
To qualify as a dependent, income cannot exceed the personal exemption amount, which in 2014 is $3,950. In addition, your parent or relative, if married, cannot file a joint tax return with his or her spouse unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid.

Support

You must provide more than half of a parent’s total support for the year such as costs for food, housing, medical care, transportation and other necessities.

Claiming the Dependent Care Credit
You may be able to claim the child and dependent care credit if you paid work-related expenses for the care of a qualifying individual. The credit is generally a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. Work-related expenses qualifying for the credit are those paid for the care of a qualifying individual to enable you to work or actively look for work.

In addition, expenses you paid for the care of a disabled dependent may also qualify for a medical deduction (see next section). If this is the case, you must choose to take either the itemized deduction or the dependent care credit. You cannot take both.

Claiming the Medical Deduction
If you claim the deduction for medical expenses, you still must provide more than half your parent’s support; however, your parent doesn’t have to meet the income test.

The deduction is limited to medical expenses that exceed 10 percent of your adjusted gross income (7.5 percent if either you or your spouse was born before January 2, 1949), and you can include your own unreimbursed medical expenses when calculating the total amount. If, for example, your parent is in a nursing home or assisted-living facility. Any medical expenses you paid on behalf of your parent are counted toward the 10 percent figure. Food or other amenities however, are not considered medical expenses.

What if you share caregiving responsibilities?
If you share caregiving responsibilities with a sibling or other relative, only one of you–the one proving more than 50 percent of the support–can claim the dependent. Be sure to discuss who is going to claim the dependent in advance to avoid running into trouble with the IRS if both of you claim the dependent on your respective tax returns.

Sometimes, however, neither caregiver pays more than 50 percent. In that case you’ll need to fill out IRS Form 2120, Multiple Support Declaration, as long as you and your sibling both provide at least 10 percent of the support towards taking care of your parent.

The tax rules for claiming an elderly parent or relative are complex. If you have any questions, please give us a call. We’re here to help you.

• By Leon Clinton
• June 11, 2014