Grossbach Zaino & Associates, CPA's, PC


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Business Auto Deductions

Do you drive your car for business purposes? The costs of operating and maintaining your vehicle are potentially deductible. Here are some guidelines.

Two Methods

The IRS provides two basic methods for computing deductions for the business use of an automobile.

Actual expense method. With the actual expense method, you deduct the actual costs of operation, including licenses, registration fees, garage rent, repairs, gas, oil, tolls, and insurance. Additionally, you may claim depreciation deductions (and/or elect expensing under Section 179). If the car is leased, you deduct your lease payments rather than depreciation. (Certain limits apply.)

Standard mileage rate. Alternatively, you may choose to use an IRS-provided standard mileage rate. With this method, you multiply the number of business miles you drive during the year by the applicable rate (57.5¢ per mile for 2015). When you use the standard mileage rate, you don’t separately deduct expenses such as gasoline, oil, insurance, repairs and maintenance, depreciation, or lease payments. However, business-related parking fees and tolls are separately deductible.

Which Should You Use?

Generally, you will want to use the method that produces the largest deduction. If your vehicle is costly to own and operate, the actual expense method may be more advantageous. Conversely, if your vehicle is fuel efficient and/or inexpensive, the simpler standard mileage rate method may be a better choice.

With either method, the IRS requires that you keep records that substantiate your business use of the car: the date, place, business purpose, and number of miles you travel. When you use the actual expense method, you’ll also need records substantiating the amount and date of car-related expenditures. You can avoid having to retain receipts by using the standard mileage rate.

If you decide to use the standard mileage rate for a car you own, you may switch to deducting your actual business-related car expenses in a later year. However, you won’t be able to claim accelerated depreciation deductions for the car. With a leased car, you have less flexibility. If you choose the standard mileage rate the first year, you must use it for the entire lease period.

Personal and Business Use

If you use your car for both personal and business purposes, you must keep track of your mileage for each purpose. To figure the percentage of qualified business use, you divide the business mileage by the total mileage driven. Then multiply that percentage by your total expenses.


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’Tis the Season

At the end of the year, companies often celebrate the holidays by having office parties or giving gifts to their employees. The following are some general guidelines as to what is taxable and what is not.

 

Gifts. Employers can give their employees merchandise of nominal value — hams and turkeys, for example — with no negative tax consequences. Such items are de minimis fringe benefits that don’t have to be included in the taxable compensation of the recipients if making a general distribution is seen as a means of promoting goodwill.

 

Parties. In most situations, the tax law limits a company’s deduction for business meal and entertainment expenses to 50% of the expenses. However, like the holiday gifts just described, an occasional party given for employees and their guests is also considered a de minimis fringe benefit. The 50% deduction limitation does not apply.

 

Achievement awards. Employers sometimes use a holiday get-together as an occasion to hand out achievement awards to employees in recognition of length of service or safety. Again, the full cost of such awards is deductible — and their value need not be included in the employees’ compensation — if various tax law requirements are met. In general, the cost of all awards made to one employee during the year may not exceed $400. A higher $1,600 limit applies if the awards are made under a written plan or program that doesn’t discriminate in favor of highly compensated employees as to eligibility or benefits.


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Deducting Meal and Entertainment Expenses

A lot of business gets done outside of the office — over lunch, on the golf course, etc. The tax law allows deductions for business meal and entertainment expenses only if specific requirements are met. Even then, deductions are generally limited to 50% of the cost.

General Rules

Meal and entertainment expenses can qualify for the 50% tax deduction if they are directly related to business. Example: You have a dinner meeting with your customer to discuss the schedule for a new project. Because the purpose of the meeting is to talk about the project — a revenue generating activity for your firm — the meal is directly related to your business.

What if you don’t “talk business” while you are entertaining a customer, client, or prospect? The expense may still qualify for a deduction if a substantial, bona fide business discussion takes place before or after (on the same day as) the meal or entertainment activity. Example: You and your client meet at your office to discuss a business matter. Afterward, you treat the client to lunch and a ball game. In this case, 50% of your expenses are potentially deductible because they are associated with the active conduct of your business.

To support your deduction, you should have records of the time, place, and business purpose of the activity; who attended and their business relationship; and the amount spent.

When the 50% Limit Does Not Apply

In some cases, meal and entertainment expenses are fully deductible. Expenses that may qualify for a 100% deduction include:

  • The cost of occasional recreational and social activities primarily for the benefit of non-highly compensated employees, such as an annual summer picnic
  • Amounts treated as employee compensation (for example, the cost of an all-expenses-paid vacation for your company’s top-grossing salesperson)
  • Amounts paid for tickets to charitable sporting events, such as a golf fundraiser

Taxpayers must meet various requirements to qualify for these deductions.


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Writing Off Bad Debts

In any economic environment, businesses typically have a percentage of customers who don’t pay their invoices. Here are some tax guidelines.

Cut Your Loss

If a customer or client owes your business money you can’t collect, you might be able to claim a bad debt deduction on your business return. You must be able to show the debt is partially or totally worthless. This may be the case if you have taken reasonable steps to collect a debt and there is no longer any possibility you will receive payment. Business bad debts typically arise from credit sales to customers.

Timing Is Critical

The tax law doesn’t allow a deduction for any part of a debt after the year in which it becomes totally worthless. To ensure you don’t miss out on bad debt deductions this year, review your records carefully to pinpoint any potentially worthless receivables you may still be carrying on the books. Make sure you carefully document your failed collection efforts in case the IRS challenges the bad debt deduction.

Note that bad debt deductions generally aren’t available to businesses that use the cash method of accounting. To deduct a bad debt, you must have previously included the amount in your income. Since cash-method taxpayers don’t report income until payment is received, no deduction is allowed for uncollectible amounts, even if the money is owed to you for services you performed.


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Three Steps to Lower Taxes for the Self-employed

When you are self-employed, your business profits are taxed to you at federal rates as high as 39.6%. Add self-employment taxes, which in 2015 will amount to 15.3% of the first $118,500 of your net self-employment earnings plus 2.9% of any earnings over that amount. Then there’s an additional 0.9% Medicare surtax on earnings in excess of $200,000 ($250,000 if married filing jointly). At tax rates like these, it pays to take steps to reduce your tax burden.

Step One: Deduct Business Expenses

Be sure you have an organized system for recording your expenses. To be deductible, a business expense must be “ordinary” (common and accepted in your trade or business) and “necessary” (helpful and appropriate for your trade or business). Since personal expenses are generally not deductible, it’s smart to have a separate business bank account and use a separate credit card for business purchases.

Step Two: Deduct Health Insurance Premiums

You may qualify to deduct premiums paid for medical, dental, and qualified long-term care insurance coverage for you, your spouse, and your dependents.* The coverage may include children who haven’t reached age 27 by the end of the year, even if you don’t claim them as dependents on your tax return.

Unlike health insurance premiums paid for employees, the self-employed health insurance deduction won’t save you self-employment taxes. However, it will lower your taxable income. You must meet certain requirements to qualify for the deduction.

Step Three: Deduct Retirement Plan Contributions

Funding a retirement plan can also save you significant tax dollars. Within limits, plan contributions will be tax deductible.** Several types of plans may be suitable for you as a self-employed taxpayer, including a simplified employee pension (SEP) plan, a savings incentive match plan (SIMPLE), or a solo (individual) 401(k) plan. Each plan has specific features and requirements that you will want to weigh carefully before making a choice.

* Dollar limits apply to the deduction for long-term care insurance premiums.

** Although deductible for income-tax purposes, contributions to your own retirement plan account do not reduce earnings subject to self-employment taxes.


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Can You Deduct a Good Time?

Wouldn’t it be great to be able to take a tax deduction for your vacation? Combine vacation with a business trip and maybe you can. But, for expenses to be tax deductible, they must meet certain requirements. It’s a good idea to know what those requirements are before you plan your travel.

Add It on

If the primary purpose of your trip is business, you can deduct the cost of your transportation to and from your destination, even when you’ve tacked on a few vacation days. However, with certain exceptions, you’ll be able to deduct food and lodging costs only for days you actually spend on business.

Bring the Crew

While you can’t deduct food, lodging, or airfare for your family, you’re still entitled to your own write-offs for a trip that combines business and pleasure. That includes the single-occupancy rate for lodging on days when you’re conducting business. And, if you travel by car, you can deduct the full cost of transportation, just as you would if you were traveling alone.


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The Early Bird Gets the Tax Savings

At this time of the year, you may be thinking more about raking leaves than reviewing your taxes. After all, your 2015 income-tax return isn’t due to the IRS for several months yet. But waiting too long can rob you of the opportunity to use planning strategies that may help reduce your tax bite. Here are a few you may be able to use.

Paying Less by Saving More

You may be able to lower your tax bill by increasing your pretax contributions to an employer-sponsored retirement plan. Since you don’t pay current taxes on the money you contribute, deferring a greater amount of your pay means less money is withheld for taxes. If you’re age 50 or older and are already contributing the maximum annual amount through salary deferrals, your plan may allow you to make catch-up contributions.

Another strategy is to contribute to a traditional individual retirement account. Contributions made by the April tax-filing deadline may be deductible on your 2015 return. The 2015 contribution limit is $5,500 ($6,500 if you’re age 50 or older). Talk to your tax advisor about the deduction requirements.

Being Charitable

Making donations to your favorite charitable organizations by the end of the year positions you to claim an itemized deduction for charitable contributions. Donating with a credit card or with a check mailed by December 31 allows you to take the deduction on your 2015 return even though you won’t pay your credit card bill or have your check processed until 2016. Verify that the organization qualifies to receive deductible contributions, and keep your receipts and bank/credit card records as proof of your donations. Deduction limits apply.

Losses You Can Use

Until you actually sell an underperforming investment, your “losses” are only on paper. Reviewing your taxable portfolio for investments that haven’t performed the way you expected them to may turn up potential “sell” candidates. A short period of lower values doesn’t necessarily make an investment a poor choice. But an investment that has lost value since you acquired it and consistently underperformed a benchmark may need another look. Selling the investment would give you a capital loss you can claim for tax purposes. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married, filing separately). Any losses you can’t deduct can be carried over for deduction in future years, subject to the same limitations.

Favorable Rates, More Profit

If you’ve been thinking of taking profits on appreciated stock you’ve held longer than one year, favorable capital gain tax rates may make this a good time to sell. Long-term capital gains from the sale of stocks and other securities are currently taxed at 15% for most taxpayers. The exceptions: Gains are taxed at 0% for taxpayers in brackets below 25% and at 20% for taxpayers in the top regular tax bracket (39.6%).

Now remember those losses you incurred by selling your underperforming investments? You can use them to offset your gains from the sale. Never make taxes your only reason for selling an investment. Before you decide, consider how the sale will affect your overall portfolio.

Bunching Expenses

You may be able to exceed the floor amount for medical deductions by scheduling and paying out-of-pocket medical costs before year-end. For 2015, medical expenses are deductible only in the amount that exceeds 10% of adjusted gross income (AGI) or 7.5% of AGI for taxpayers age 65 or older.