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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Business Travel Expenses

Employers and employees who travel for business may deduct certain types of travel expenses. Following are some general guidelines.

 

Business Travel

 

Generally, the round-trip cost of traveling for business is deductible whether the taxpayer stays away from home overnight or not. However, the IRS makes an important distinction between “business transportation” — a broad label that would apply to round-trip travel during the day — and “business travel,” which includes an overnight stay. For qualifying business travel, the taxpayer is allowed to deduct the entire cost of lodging and incidental expenses (as well as 50% of meal expenses).

 

To qualify for business travel status, the business trip must:

 

  • Involve overnight travel

 

  • Be temporary — expected to last one year or less

 

  • Be away from the “tax home” — generally, the taxpayer’s principal place of business

 

Substantiation

 

To deduct travel expenses, employers may want to first consider implementing an “accountable plan.” Generally, an accountable plan requires that the employee adequately account for the business expense and return any unaccounted for advances within a reasonable period of time. Accountable plans benefit both the employee and the employer because expense reimbursements/advances that are properly accounted for are free of income-tax withholding and the employer’s and employee’s shares of FICA taxes.

 

Employees potentially may deduct unreimbursed ordinary and necessary business travel expenses. However, this deduction must be taken as an itemized deduction, and only the amount exceeding 2% of adjusted gross income will be deductible.

 

Employees should be careful to meet the IRS’s substantiation requirements. Generally, employees will be required to retain receipts and keep a logbook recording specific expenses related to business travel.


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New Tax Law Provisions To Note

Last summer’s highway trust fund extension law* includes a few important federal tax provisions that affect business and individual taxpayers.

 

Return due dates

 

The new law accelerates the filing deadline for partnership returns by one month, effective with returns for tax years that begin after December 31, 2015. As a result, the due date for partnership returns will be the fifteenth day of the third month after the end of the partnership’s tax year — March 15 for a partnership with a calendar year.

 

C corporations will have an additional month to file their returns, generally effective with returns for tax years beginning after December 31, 2015. As a result, C corporation returns will be due by the fifteenth day of the fourth month after the end of the tax year (by April 15 for a C corporation with a calendar year). The extended deadline doesn’t take effect until tax years beginning after December 31, 2025, for C corporations with fiscal years ending on June 30.

 

Basis reporting

 

For federal estate-tax purposes, property included in the gross estate is generally valued at its fair market value on the decedent’s date of death. That same fair market value then becomes the property’s income-tax basis in the hands of the person who acquires the property from the decedent.

 

The new law doesn’t change this rule. However, it requires the executor of any estate required to file a federal estate-tax return to furnish an information statement to the IRS and to each person receiving property from the estate. The statement must show the value of the property as reported on the return (and any other information the IRS may require). There are penalties for failure to file and for tax understatements resulting from inconsistencies in basis reporting.

 

Mortgage information returns

 

Under the new law, mortgage lenders must include additional items, such as the amount of principal outstanding at the beginning of the year, on information returns required to be furnished after December 31, 2016.

 

* Surface Transportation and Veterans Health Improvement Act of 2015


Leave a comment

New Tax Law Provisions To Note

Last summer’s highway trust fund extension law* includes a few important federal tax provisions that affect business and individual taxpayers.

 

Return due dates

 

The new law accelerates the filing deadline for partnership returns by one month, effective with returns for tax years that begin after December 31, 2015. As a result, the due date for partnership returns will be the fifteenth day of the third month after the end of the partnership’s tax year — March 15 for a partnership with a calendar year.

 

C corporations will have an additional month to file their returns, generally effective with returns for tax years beginning after December 31, 2015. As a result, C corporation returns will be due by the fifteenth day of the fourth month after the end of the tax year (by April 15 for a C corporation with a calendar year). The extended deadline doesn’t take effect until tax years beginning after December 31, 2025, for C corporations with fiscal years ending on June 30.

 

Basis reporting

 

For federal estate-tax purposes, property included in the gross estate is generally valued at its fair market value on the decedent’s date of death. That same fair market value then becomes the property’s income-tax basis in the hands of the person who acquires the property from the decedent.

 

The new law doesn’t change this rule. However, it requires the executor of any estate required to file a federal estate-tax return to furnish an information statement to the IRS and to each person receiving property from the estate. The statement must show the value of the property as reported on the return (and any other information the IRS may require). There are penalties for failure to file and for tax understatements resulting from inconsistencies in basis reporting.

 

Mortgage information returns

 

Under the new law, mortgage lenders must include additional items, such as the amount of principal outstanding at the beginning of the year, on information returns required to be furnished after December 31, 2016.

 

* Surface Transportation and Veterans Health Improvement Act of 2015


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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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A Plan for Retiring Your Savings

Tax planning is important during your earning years. It’s equally important during your golden years. Having a plan for withdrawing the assets you’ve saved for retirement can help minimize taxes and maximize your financial resources.

Stretch Those Benefits

The general rule is to protect tax benefits for as long as possible by using up assets in taxable accounts before assets in tax-advantaged accounts. The savings you have in traditional individual retirement accounts (IRAs) and qualified retirement plans grow tax deferred. The longer you wait to withdraw from these accounts, the longer they have to benefit from tax-deferred compounding.

Lower Rates Can Help

Selling an appreciated investment in a taxable account will generate a capital gain. To the extent it is practical, plan to liquidate high-basis, long-term (holding period of longer than one year) investments first. The tax rates on long-term capital gains are lower than the rates on short-term gains, which are taxed as ordinary income.

Required Distributions

Once you reach age 70½, you’ll generally have to start taking annual required minimum distributions (RMDs) from your retirement plan accounts and traditional IRAs, even if you don’t need the money. The RMD rules don’t apply to Roth IRA owners, however, so save your Roth assets for last. Roth IRA beneficiaries must take RMDs, but the distributions are generally income-tax free and can be spread out over life expectancy if desired.


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Compensation or Dividend in Disguise?

When your C corporation has a profitable year, do you take more salary or pay yourself a year-end bonus? Since you are pivotal to your company’s success, paying yourself more in the good years only makes sense. Increasing or decreasing your compensation from year to year based on company performance can also help manage your company’s cash flow — and the amount of income taxes it has to pay.

Tax Impact

A corporation may deduct compensation as a business expense if it is reasonable in amount. Distributing profits as salaries and bonuses can help minimize taxable corporate income, although you and other recipients will be taxed individually on the compensation you receive.

You may decide that paying additional compensation is preferable to paying out profits as dividends. Unlike compensation, dividends are not deductible. Result: Corporate profits are taxed twice — once at the corporate level and again to the shareholders who receive the dividends.

A Word of Caution

If the amount of compensation paid to you and other shareholder-employees is deemed to be unreasonable, the IRS could challenge your company’s deduction for the expense, reclassifying the “excessive” amounts as nondeductible dividends.

To reduce the chances of problems with the IRS, consider these strategies:

  • Divide the profits and pay out a portion as bonuses. Leave enough money in the company to generate a small amount of taxable income.
  • When setting bonuses, avoid using ownership percentages to determine the amounts shareholders will receive since that method suggests the payment of dividends.
  • Adopt and follow a formal compensation plan for executives that includes bonus payments based on meeting specified financial goals.

Earmark a portion of company profits for dividends. Individual shareholders will generally pay federal income tax on qualified dividends received in 2015 at a maximum rate of 20%, which is significantly lower than the maximum rate on compensation and other ordinary income