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.