Monday, April 24, 2017

Meals and lodging provided by an employer may be excludable from the employee's income.

In certain circumstances, an employer may provide employees with meals and lodging as part of their employment package.
 
Generally, the value of meals and lodging provided to employees is taxable like many other benefits. However, the Internal Revenue Code provides an exclusion for meals and lodging that are provided "for the convenience of the employer" on the "business premises." For lodging, an additional requirement is that the employee must be required to accept it as a condition of employment.
 
Convenience of the Employer
 
Under the "convenience of the employer" test, the primary reason for providing the meals or lodging must be to benefit the employer, i.e., to enable the employee to do his job. In a special circumstance, meals provided to all employees may be excludable where more than half of the employees fall under the convenience of the employer test. For example, if more than half of a hospital’s employees must be on call at all times, all employees can be furnished a meal in the hospital because keeping them on the premises allows them to satisfy work-related obligations. Similarly, a hotel manager who must be on the premises at all times can be furnished lodging at the location to enable him to perform his duties. However, for the lodging to qualify for the exclusion, the employee's acceptance of the lodging must be a "condition of employment," i.e., the lodging must be necessary for the employee to perform his duties. It is also important to note that the exclusion only applies for meals and lodging which is provided in kind: not for cash allowances for such items.
 
The "convenience of the employer" test and the business premises requirement may be difficult to apply to particular circumstances. With the ever evolving business environment that we work in today, employers will want to review and document all the facts involved in providing meals or lodging to employees.
 
Employer’s Benefit
 
If excludable benefits can be provided to your employees, you should be able to structure an employee benefit package at a reduced cost to take advantage of the employee's tax savings. For example, if an employee spends $1,000 on meals at work he would need to be paid roughly $1,334 in taxable salary to cover this cost (assuming a 25% income tax bracket). But if the $1,000 in meals qualify as excludable under the rules discussed above, the employer can provide the meals directly and offer $1,334 less in salary while maintaining the employee's economic position.
 
From the employee's perspective, the excludable meals should be viewed as a benefit worth more in equivalent salary than their actual value.
 
Summary
 
Employers that can structure employee benefit packages to include excludable meals or lodging, should provide the employees with information on the effective value of the benefit. Keep in mind that these benefits must be for the convenience of the employer and in the case of lodging, included as a condition of employment. Before structuring a compensation package the includes meals and lodging, consult with a qualified tax professional.

Monday, April 17, 2017

Manage Your Own Investments? Here’s How to Deduct Your Investment-Related Expenses.


Many clients, especially retired clients, take an active role in managing their own investments. If you fall in this category, you may be able to deduct the cost of subscriptions to financial periodicals, clerical expenses, etc.

Most taxpayers will deduct such expenses as production-of-income expenses which are deductible only as itemized deductions and thus are subject to the 2% floor on miscellaneous itemized deductions. However if you meet certain criteria, you may be able to these expenses as business expenses in arriving at adjusted gross income.

Deducting Investment Expenses as Businesses Expenses

To deduct investment-related expenses as business expenses, you must be engaged in a trade or business. The Supreme Court held many years ago that an individual investor isn't engaged in a trade or business merely because he or she manages their own securities investments, regardless of the amount of the investments or the extent of the work required.

However, taxpayers that are considered to be traders are able to deduct their investment-related expenses as business expenses. A trader is also entitled to deduct home-office expenses if the home office is used exclusively on a regular basis as his or her principal place of business. 

Since the Supreme Court's decision, there has been extensive litigation on the issue of whether a taxpayer is a trader or investor. The Tax Court has developed a two-part test that must be satisfied in order for a taxpayer to be a trader. Under this two-part test, a taxpayer's investment activities are considered a trade or business only where both of the following are true:

the taxpayer's trading is substantial (i.e., sporadic trading won't be a trade or business), and
the taxpayer seeks to profit from short-term market swings, rather than from long-term holding of investments. 

So, the fact that a taxpayer's investment activities are regular, extensive, and continuous isn't in itself sufficient for determining that a taxpayer is a trader. In order to be considered a trader, a taxpayer must show that he or she buys and sell securities with reasonable frequency in an effort to profit on a short-term basis. Even a taxpayer who made over 1,000 trades a year with trading activities averaging about $16 million annually was held to be an investor because the holding periods for stocks sold averaged about one year.

Summary

For most investors, investment-related expenses are treated as a miscellaneous itemized deduction subject to 2% of AGI. If the investor meets the two-part criteria noted above, the investment-related expenses are treated as a business deduction from AGI.

If you have questions regarding your investment-related expenses, consult a qualified tax professional.

Monday, April 10, 2017

Why SUVs may be a better choice than an automobile used for business?

Other than being comfy and nice to drive, SUVs may be a better choice than a car when it comes to business vehicles.

Limitations Placed on Cars

Cars are subject to more restrictive rules than those that apply to other depreciable assets and are not eligible for bonus and addition write-offs that are afforded to SUVs. This is due to the so-called "luxury auto" rules which artificially cap depreciation and expensing deductions for cars. For example, for an automobile first placed in service in 2016, the maximum depreciation deduction for the first tax year in its recovery period (i.e., 2016) is limited to $3,160; $5,100 for the second tax year; $3,050 for the third tax year; and $1,875 for each succeeding tax year. The effect is generally to extend the number of years it takes to fully depreciate the vehicle.

SUVs

SUVs may come with additional gasoline costs, but they aren’t subject to the same tax rules as cars. The regular annual depreciation and expensing caps for passenger automobiles don't apply to trucks or vans (and that includes SUVs) that are rated at more than 6,000 pounds gross (loaded) vehicle weight. Also you may also be eligible to elect to expense up to $25,000 of the cost of the SUV in the first year and then depreciate the remainder of the cost. These tax benefits are subject to adjustment for non-business use.

Business Use

If business use of the vehicle doesn't exceed 50% of total use, the SUV isn't eligible for the first year expensing and has to be depreciated on a straight-line method over a six-tax-year period.

Summary

Before making the decision to purchase an SUV or car used for business, you should consult with a qualified tax professional.

Monday, April 3, 2017

Read This Before Leasing Property from a Related Party

 
It is very common for corporations to lease property from a shareholder or other related party. In fact, we advise clients to generally not hold real estate inside of corporations, but rather to hold real estate in an LLC with a lease arrangement with their corporations. Holding real estate inside of a corporation can create potential tax traps that are avoided by owning property individually or in an LLC. We’ll discuss this more in a future post.

Generally, transactions with related parties are subject to more scrutiny from tax authorities. This is particularly true in the case of lease agreements. If the IRS finds rent paid to a related party to be "unreasonable," the deduction will be reduced. “Excessive” rent can be recharacterized as a distribution of profits, or a gift, as the case may be. Taking specific steps at the inception of the rental arrangement to support the rental rate and terms will place the related parties in a better position to defend the lease if questioned by the tax authorities.

Establishing fair rental value.

Establish the rent in your transaction in line with rent paid by unrelated parties for property that is comparable to yours. You can contact independent realtors or brokers to get appraisals based on comparable properties. Retain documentation from multiple parties to support the rent rate.

In cases where the fair rental values obtained from independent parties are below the amount you seek to set for your transaction, carefully document why your particular property should be valued higher. Consider the improvements made to the property, special features or location, etc. Rent is often viewed as a combination of a property's value with a reasonable rate of return. You may be able to justify setting a higher rent by showing that rates of return for your particular industry or investments run higher than elsewhere.

Percentage rentals

In some cases rent is set as a percentage of profits. This acceptable technique and can be used to protect against inflation or other risk factors. However, percentage rental agreements can be subject to even higher scrutiny by tax authorities, particularly high income years. Protect yourself against a potential disallowance in such years by documentation to show that the percentage rental arrangement was reasonable when it was established. 

If it's a usual practice to use percentage rentals in your industry, keep your arrangement in line with industry standards. Document this through industry information, independent appraisals and analyses to support that the terms of your transaction are market-based when you initiate the arrangement. 

Formal lease. Be sure that your rental arrangement is set down in a formal written lease and is properly executed. Corporations should also take all appropriate formal action related to the transaction. 

Just because your transaction is with a related party, don’t change any of your standard business practices. From the tax standpoint it's even more important to undertake the proper formalities for these transactions. In several cases, rent paid to a related party has been disallowed because it wasn't required under a formal lease.

Summary

Before entering into a lease agreement with a related party, consult your tax professional and thoroughly document how the rate and terms of the lease were established.

Monday, March 27, 2017

Deducting Business Meals and Entertainment

Business Meals and Entertainment are part of every small business. If you incur business meals and entertainment keep in mind that you’ll need to follow these rules to support the deduction and even then the business meals and entertainment expenses will be limited:

Ordinary and necessary - All business expenses must meet the general deductibility requirement of being "ordinary and necessary" in carrying on the business. Another way to look at it is to ask if the expenses are customary or usual, and appropriate or helpful to the conduct of your business. Thus, if it is reasonable in your business to entertain clients or other business people you should be able to pass this general test.
 
"Directly related" or "associated with" – In addition to being ordinary and necessary, meals and entertainment expenses must be either "directly related to" or "associated with" the business. 

To be directly related, the expense needs to involve an active discussion aimed at getting immediate revenue. These expenses need to have an objective of getting additional business and not just general goodwill. It also requires that you discuss business actively during the event. If the expense takes place in a clear business setting, it is easy to meet the directly related test. But when the discussion takes place at a sporting event, night club or party, it doesn’t meet this test. However the expense may qualify as "associated with" the active conduct of business if the meal or entertainment event precedes or follows (i.e., takes place on the same day as) a substantial and bona fide business discussion. Under these circumstances, the event will be considered associated with the active conduct of the business if its purpose is to get new business or encourage the continuation of a business relationship. For meals, you (or an employee of yours) must be present for the expense to qualify.

Substantiation. There’s an old saying in the accounting field that “if it wasn’t documented, it didn’t happen.” Almost as important as qualifying for the deduction are the requirements for proving that it qualifies. Using a reasonable estimate isn't sufficient to stand up to the IRS. To substantiate the expenses, keep documentation that establishes the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. For expenses of $75 or more, you will also need a copy of the receipt to go along with the documentation. There are several apps that make it easy to meet these requirements from the convenience of your smart phone.
Deduction limitations. Now you have jumped through the first three hurdles just to learn that additional limitations may apply. First, expenses that are "lavish or extravagant" aren't deductible. There’s no hard and fast rule about what is lavish or extravagant, but most of us have enough common sense to understand what would raise additional scrutiny. More importantly, however, once the expenditure qualifies, it is only 50% deductible, reducing the tax benefit.
 
Summary
 
When it comes to business meals and entertainment here’s a quick list to keep in mind:
  • Is it an ordinary and necessary part of our business?
  • Is it directly related or associate with the prospect of obtaining immediate new business?
  • Did I document amount spent, the time and place, the business purpose, and the business relationship of the individuals involved?
  • If the expense was over $75, did I keep the receipt?
  • Could the expenditure be considered as lavish or extravagant?
Answer these questions and document your business meals and entertainment to support the deductions. As always, consult a qualified tax professional with any questions you have regarding your business.

Monday, March 20, 2017

Your Business May Benefit from the Research Tax Credit

Legislation in late 2015, made the Research Tax Credit permanent and not part of the federal tax provisions that were commonly referred to the “extender provisions”.

Basics of the Credit

We are not going to get into many of the specifics of the Research Tax Credit here, but rather just provide you with a quick overview.

Sometimes referred to the Research and Experimentation Tax Credit, this credit can apply to many businesses and industries. It doesn’t require that you have lab and conduct scientific experiments. Many businesses have processes whereby they are modifying and improving existing products and processes and assuming the risk of failure if the improvement is not achieved. While not all businesses are eligible for the credit, it is worth a quick analysis to determine if it does apply and is cost effective to calculate and take the credit. Also, many states have research credits that can be sold to other taxpayers thus, providing the business with a source of capital if the tax credit is not of value to the business. Along these lines, the federal research tax credit may be used in certain situations to offset payroll tax liabilities. This is a big change that can benefit companies, especially those in the startup phase.

The statutory rules for the research tax credit essentially provided for a credit equal to the sum of (1) 20% of the excess of the "qualified research expenses" (QREs) over the greater of (a) 50% of the QREs or (b) an amount based on a formula that takes account of the QREs and gross receipts in certain earlier tax years, (2) 20% of the excess of research payments paid to certain outside organizations over an amount calculated under a complex formula, and (3) 20% of amounts paid or incurred to an energy research consortium for energy research.

The legislation that made the research tax credit permanent also added two features that are especially favorable to small business. First, it provides that beginning in 2016 eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability. Also, beginning in 2016, the new law provides that the credit can be used by certain even smaller businesses against the employer's portion of the Social Security portion of the employer's payroll tax (i.e., FICA) liability.

Summary

The federal research tax credit is now permanent.
Many businesses may not realize that the research credit can be applicable to their business.
Recent legislation allows the credit to be used to offset payroll taxes in certain situations.
Many states offer a research tax credit, some of which can be sold to other taxpayers.
Utilize tax professionals specializing in the research tax credit to determine if your business qualifies and if the process will be cost effective.
Businesses subject to AMT are no longer limited in their utilization of the tax credit.

As we always advise, seek a qualified tax professional to explain and determine if the research tax credit applies to your business.

Monday, March 13, 2017

Paying Taxes By Credit or Debit Card

Cash or check may be soon replaced with Plastic or App in today’s economy. Even the IRS and several states give you the option to pay your tax bill online via credit or debit card today.

Authorized Service Providers

You will find a list of authorized service providers that accept online payments on behalf of the IRS at
https://www.irs.gov/uac/pay-taxes-by-credit-or-debit-card. The companies have their own fee schedules which are listed on link above. They accept American Express, Discover Card, MasterCard, and VISA credit and debit cards. If you file early, you can still wait until April to make the online payment.

Paying With Your Return

Taxpayers may have the option of making credit card payments for the balance due on Form 1040, 1040A, or 1040EZ through tax software or through professional preparers using certain types of tax software. Some tax preparation software provides combined electronic filing and electronic payment for those who want to pay taxes with a credit card. But some tax preparation software may not allow taxpayers to make partial payments. At this time, our software does not offer the option to pay by card.

Various Tax Payments Available

In addition to balances due on individual returns, taxpayers can pay individual estimated taxes; installment payments; payments with extension of time to file (Form 4868); trust fund recovery penalty; and Form 5329 (IRA taxes) through this service. For forms in the 1040 series, credit card payment options begin in January. However, if you don't pay your full tax liability by the due date in April (see below), you probably will be liable for interest and penalties. Certain business and fiduciary tax payments can also be made using the above methods.

Advantages and Disadvantages

One advantage of using the credit card method, aside from the obvious one of being able to delay paying your tax liability, is that if you participate in any credit card incentive program, such as airline mileage or certain reward programs, you will earn points by charging your taxes. A disadvantage is the convenience fee charged by service providers (both for credit and debit card transactions). This fee, may be deductible on next year’s return as a miscellaneous itemized deduction.

Summary

Like most businesses today, the federal government and some states accept credit and debit card payments. You will have to determine if the convenience and possible card incentives outweigh the fees associated with paying by credit or debit card.