Daniel Cullinane CPA
25 Plaza 5 25th fl Jersey City NJ phone 732-516-1648 fax 732-516-9778
2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778
Copyright © Daniel Cullinane CPA.
STANDARD MILEAGE RATES
You can use the standard mileage rate in one year, compute your actual expense and depreciation the next year and use the standard mileage rate again the following year. However, to switch to the cents-per-mile method for the same vehicle, you must have used the straight-line method to compute your depreciation. Parking fees and tolls during business use of the car are also deductible.
Note: The IRS periodically sets the standard mileage rate. The rate for 2013 was 56.5 cents per mile. For 2014, the IRS has reduced the standard mileage rate to 56 cents per mile.
USE OF STANDARD MILEAGE RATES
You can claim the standard mileage deduction as long as you don't use more than one passenger car at a time (including pickup trucks or vans) for business.
In addition, you must:
STANDARD RATE FOR ALTERNATING USE OF TWO CARS
If you use more than one car, you can take the standard mileage rate deduction if both cars meet the requirements described above. The rate is applied to the total business miles racked up on both cars.
MILEAGE AND REIMBURSEMENTS
You can use the standard mileage rate deduction regardless of the amount of any car expense allowance or reimbursement you receive from your company or your employer, provided your income reflects the allowance or the reimbursement.
DEDUCTIBLE NONBUSINESS CAR EXPENSES
If you itemize your deductions, you can write off certain car expenses even though the car is used entirely for personal purposes. You can deduct state and local personal property taxes(including that portion of the car license fee treated as a property tax) and certain casualty and theft losses. I you use the car for personal travel only part of the time, your itemized deductions can include only the amounts that you don't claim as business travel or transportation expenses. (Fines for violation of traffic laws or other laws and regulations aren't deductible.)
BIGGER DEDUCTIONS FOR "HEAVY" SUVs
If you choose to deduct actual expense rather than use the standard mileage allowance, you should be aware of a potentially huge tax advantage for owning owning "heavy" SUVs, vans and pickups. As long as these vehicles have a manufacturer's gross vehicle weight rating (GVWR) above 6,000 pounds, they're considered "trucks" for tax purpose. Tip: The GVWR number can usually be found located on the inside edge of the driver's side door.
When these "heavy" vehicles are used more than 50% for business, they can be depreciated much more rapidly than other passenger vehicles.
In fact, you can probably deduct a large percentage of the cost of a heave SUV used in your business in Year One, thanks to the Section 179 first-year depreciation allowance.
This valuable break allows your to deduct immediately up to $25,000 as long as the SUV is up and running by year-end. The SUV can be new or pre-owned. The tax results are the same foe new and used vehicles (except in years when additional first-year bonus depreciation was allowed for new vehicles, such as 2011-2013).
In fact, the tax law allows you to claim two first-year depreciation write-offs for your SUV: (1) a Section 179 deduction of up to $25,000 and (2) regular first-year depreciation on the depreciable cost left after the Section 179 deduction.
EVEN BETTER: BUYING A HEAVY NON-SUV
A larger $500,000 Section 179 deduction for tax years beginning in 2013 is available for heavy business vehicles (those with GVWRs above 6,000 pounds) that aren't considered SUV's under the tax law. Both new and used vehicles can qualify for this important exception. Non-SUVs include:
The 1993 tax reform act tightened the lid on deductions for business meals and entertainment. The deductible amount dropped from 80% of the tab to 50%. And meals aren't deductible at all unless business is discussed before, during or after the meal, or the meal is directly related to or associated with the conduct of business.
The same general rules apply to other entertainment expenses. Also, the deduction allowed for the cost of sky boxes or other luxury sports event seats is limited to 50% of the retail cost of top-price tickets.
Also, beware of entertaining business associates or their families at locations the tax code describes as entertainment facilities. These include yachts, hunting lodges, fishing camps, swimming pools and tennis courts. Deductions for the cost of renting or owning such places will be thrown out.
Also on the disallowed list are expenses for renting or owning hotel suites, beach houses, ski lodges or any other housing located in recreational areas.
While the costs of renting or owning these types of entertainment facilities aren't deductible, you can still deduct 50% of the cost of providing business-related meals and entertainment activities at such facilities.
Dues and fees to social, athletic and country clubs ate not deductible. However, the IRS has announced that it will permit deductions for dues paid to public service clubs such as the Elks, Kiwanis, Lions, Moose and Rotary. You also can take a full deduction for dues you pay to professional and civic organizations as long as your membership has a business leagues, trade associations, chambers of commerce, boards of trade and real estate boards. To qualify for such a deduction, you must justify the cost as a business expense. Document the business contacts you make at these meetings and the income that you generate.
At all types of clubs, you can get a 50% deduction for out-of-pocket costs of business meals and entertainment as long you can substantiate a business purpose.
ORDINARY VERSUS LAVISH ENTERTAINMENT EXPENSES
Entertainment expenses are deductible only if they are ordinary and necessary expenses of carrying on a trade or business or for the production or collection of income. Entertainment expenses aren't deductible if they are deemed lavish or extravagant.
But the IRS won't disallow your deductions merely because they exceed a fixed dollar amount or because you picked up the tab in deluxe restaurants, hotels, nightclubs or resorts. An expense will not be considered lavish or extravagant if, based on the facts and circumstances, it was reasonable at the time you incurred it.
ENTERTAINING AT HOME
Your costs for entertaining customers or clients at your home might be ordinary and necessary expenses. But you have to figures out how much it costs to feed yourself and your family at these affairs and then subtract that amount from your deduction.
THE 50% RULE
The 50% deduction limit applies not only to business meals and entertainment . It also applies to taxes and tips, cover charges at nightclubs, party - room rentals,servers to help with parties and parking at theaters or sports events. Transportation to and from the business meal or entertainment is not subject to the 50% rule. In general, the 50% limit is imposed after applying the limitations that disallow lavish and extravagant expense but before the application of the 2% floor for certain miscellaneous itemized deductions, including unreimbursed employee business expenses
In other words, the IRS might trim your meal deduction if the tab was unreasonably high, then allow you to write off one half of the remainder. Then you can deduct the amount that exceeds 2% of your adjusted gross income if you are an employee.
Exceptions to 50% rule: Expenses in the following categories are fully deductible.
Expenses for a sport event to the extent they qualify as business expenses, may be fully deducted if
The exception covers the entire cost of ticket package, including parking and meals. The classic example is a charity golf tournament. Note This favorable exception does not cover tickets to high school or college football games or basketball games or similar school events.
WHO CAN BE ENTERTAINED
In general, you qualify for the deduction only if you are entertaining a business associate, that is, if he or she reasonably could be expected to engage in, or actively conduct, business with you. This includes clients, suppliers, partners, employees or agents, both established or prospective.
In addition, you can deduct 1/2 of the cost of entertaining your associate's closely related companion. Who is a closely related companion? The best examples are a spouse or a colleague who has accompanied your associate from out of town.
IRS regulations are not very precise but they do provide some example of deductible entertainment situations
You can deduct 50% of meal and entertainment expenses only if you fall under one of the three following scenarios.
1 ENTERTAINMENT DIRECTLY RELATED TO TRADE OR BUSINESS.
Entertainment expenses are deductible if they are directly related to the active conduct of your trade or business. An entertainment expenditure meets the directly related test if you can show all of the following
2 ENTERTAINMENT IN A CLEAR BUSINESS SETTING
You are entitled to deductions if your entertain n a clear business setting that furthers your trade or business. This includes:
3 ENTERTAINMENT ASSOCIATED WITH A TRADE OR BUSINESS
Whether a business discussion is substantial depends on the circumstances. You must show that you or your representative actively engaged in a discussion, meeting, negotiation or other bonafide business transaction for the purpose of generating income or some other specific business benefit.
The meeting does not have to last for any specific length of time. However, you must document that the business discussion was substantial in relation to the entertainment. You do not necessarily have to devote more time to business that to entertainment, nor do you necessarily have to discuss business during the entertainment period. Timing is an important element if you want to meet the associated with standards . Obviously , entertainment that occurs on the same day as the business discussion is automatically considered as directly preceding or following it. If the two events do not occur on the same day , the IRS will assess the circumstance of each case
The costs of wining and dining to maintain or create good will generally are deductible under these rules.
YACHTS, VACATION RESORTS & OTHER SPECIAL CIRCUMSTANCES
No deductions are allowed for entertainment facilities. generally the term facility includes any item of real or personal property that you own, rent or use in conjunction or connection with an entertainment activity. Such facilities include yachts, hunting lodge, fishing camps, swimming pools, tennis and bowling alleys. Entertainment facilities also might include airplane and automobiles or hotel suite, apartment and houses in recreation areas. The entertainment facility restrictions do not apply in the following situations:
Business meal and entertainment deductions permitted under other regulations. For example, if you take a customer hunting for a day at a commercial shooting preserve, the expenses of the hunt are deductible as business entertainment provided you meet all the other requirements. These include substantiation, adequate records and the ability to show the expense was ordinary, necessary and directly related or associated with your business. However, if you and your party stay overnight at a hunting lodge on the shooting preserve, the cost of the lodging is not deductible. The meal expenses are deductible.
Payments for tickets to sporting and theatrical events, regardless of whether the tickets are purchase individually , in a series or by the season. You can also deduct one time fees to use seats, lunges, boxes or other similar facilities that provide special viewing areas. These costs generally are subject either to the rules for entertainment expenses or to rules for giving business gifts. Deductions for tickets, before applying the 50% rule are limited to the face amount of the ticket.
DEDUCTIONS FOR SKY BOXES
You can deduct half the cost of a sky box including the cost of renting the box and charges for food beverages and services, if you rent it for only one event. Season sky box rentals are not deductible, although you can srite off one half the cost of season tickets for regular seats. To qualify for a sky box write off you must meeth the directly related or associate with standards for business entertainment.
REDUCED DEDUCTIONS FOR PERSONAL USE OF COMPANY AIRCRAFT
Businesses can deduct only the amount reported as taxable compensation to covered employees for the use of company provided aircraft
MEALS WHILE ON TRAVEL STATUS
Basically if you are away from home overnight on business travel, you can deduct 50% of the cost of your meals. Traveling automatically qualifies meals as as directly related to your trade or business - but only if you dine alone or with a business client or associate, otherwise you can claim a deduction only for your own meal. If neither you or your representative attends the business meal, you can write off the cost of the meal as a business gift. However the deduction is limited to $25 per recipient per year
BUSINESS PROGRAM OR DINNERS
To deduct the cost of meals that are part of a business program. or the price of banquets sponsored byu business or professional associations you do not necessarily have to attend
COMPANY PROVIDED MEALS
The cost of food or beverages you furnish on your business premises primarily for your employees is fully deductible. Also deductible is the cost of maintaining the food and beverage facilities. Legislation in 1998 opened up a new loophole in the area of company provided meals. If your company qualifies, it can provide tax free meals to employees - including the high-paid group of employee -owners and managers - and still deduct 100% of the cost even without operating a company eating facility. The basic qualification is: More than 50% of your employees must receive this benefit for the convenience of the employer. If you pass that test, the on-premises meals- including those provided by a company cafeteria - are considered a de minimis fringe benefit for all employees who receive them
De minmis fringe status means the employees owe no taxes on the value of the meals they receive, while the company still can fully deduct the cost. Usually, workers will satisfy the convenience of the employer test if they can not leave the facility for meal breaks because of business reasons. IRS regulations list three sets of circumstances that satisfy the convenience of the employer test
The first circumstance listed above applies only to a few businesses, like ambulance companies. Howeve, the other two could easily apply to your firm. Is so the company can fully deduct the cost, and none of the employees who receive meals would be taxes on there value
The expense of providing recreational, social or similar activities primarily for the benefit of your employees is fully deductible. You also can deduct the expense of using a facility for recreational, social or similar activities. However, officers, or highly compensated employees are not considered employees in determining whether the activity was primarily for the benefit of employees. you are considered a shareholder or other owner for this test only if you and your family own 10% or more of the business.
DIRECTOR STOCKHOLDER OR EMPLOYEE MEETING
Most of the expenses directly related to business meetings of your firm's employees , partners, stockholders, agents or directors are fully deductible - even if you provide some minor social activities. However you still can deduct only 50% of the meal and entertainment expenses.
TRADE ASSOCIATION MEETINGS
You can deduct expenses directly related to and necessary for business meetings or conventions of exempt organizations, such as business leagues. chambers of commerce real estate boards trade associations and professional associations.
EXPENSES FOR SPOUSES
You might be able to deduct 50% of the cost of entertaining your spouse or the spouse of a business customer if you can show a clear business purpose or social purpose for incurring he expense.
Business acquaintances might take turns picking up entertainment checks at events that have no business purpose. Consequently these expenses have no business purpose and are not deductible
BUSINESS GIFTS AS DEDUCTIBLE EXPENSES
The expenses for ordinary and necessary business gifts are allowed as deductions as long as they do not exceed $25 per year to any single recipient. A gift to the spouse or child your client or customer is considered a gift to that individual. However, if your client's wife has a bonafide business relationship with you, a gift to her will not be considered as made indirectly to her husband unless the is intended for his eventual use.
If you and your spouse give a gift, you are both treated as one taxpayer for the $25 test even if you each have separate businesses relationships with the recipient. A partner is limited to $25.
WHEN THE $25 LIMIT DOES NOT APPLY
The $25 annual limitation on deductible business gifts to any individual does not apply to the following items
EXPENSE ALLOWANCES AND REIMBURSEMENTS
Employee reimbursement and allowances for travel, transportation, entertainment, gifts and other ordinary business expenses in connection with your employment must be reported as income unless the following conditions are met
An employer may make a payment to one employee to cover the actual ordinary and necessary transportation and travel expenses to be incurred by several employees. The employees need not report their respective portions of the direct or indirect payments on their income tax returns provided that
BENEFITS OF ADEQUATE ACCOUNTING
Proper accounting can generate breaks for both the employer and the employee
Make sure you deep an account book, a diary or statement of expenses. Be specific, log each element of an expenditure at or near the time the expenditure occurred. The statement of expenditures must be supported by documentary evidence. You must account for all amounts you receive from your employer during the tax year as advances or reimbursements for travel, entertainment, gifts or any other purpose. You also must account for the amounts you charge to the employer directly or indirectly through credit cards or other means, such as company accounts. Generally you must submit to your employer the same type of records and supporting evidence you would keep on hand to substantiate deductions on your own return
ADEQUATE PER DIEM ACCOUNTING
You might receive a fixed per diem allowance for meals, lodging and incidentals while traveling on buswiness away from home. You meet the adequate accounting requirements if
If these rules are followed, the employer can deduct the per diem amounts ( subject to the 50% rule ) Also the employee receives the per diem reimbursements as tax-free payments. You have potentially three sets of rules from which to choose
Per Diem Method 1: Under this method, you receive a location- specific daily allowance for meals and incidentals in each city you visit on business. You sill must turn in receipts to be reimbursed for your actual lodging costs. Note For cities that are not specifically listed, meals and incidentals allowance is $46 per day.
Per Diem Method 2: Under this method, you are allowed to receive a larger combined allowance for meals and incidentals plus lodging. Then you do not have to keep track of actual expenses. Note: If you are self employed, you can use Method 1 but not Method 2
Per Diem Method 3. This is the so called high-low per diem method. Under method the country is classified as either a high - cost location or not. In high cost zones the 2014 allowance is a flat $251. of that, $65 is deemed to be for meals and incidentals and the rest lodging. Everywhere else the 2014 allowance is a flat $170,$52 for meals. Again, only 50% of the amount for meals and incidentals is deductible.
In summary, self-employed persons can use Method 1 but not the other two. More than a 10% shareholder-employee can not use any of the three per diem methods They must record and turn in their actual business travel expenses.
ALLOWANCES FOR RELATED EMPLOYEES
If you are related to your employer, you can not waive the accounting requirements under any circumstances, and you must substantiate any deductions you claim. You are related to your employer if:
EMPLOYER CONTROLS FOR ADEQUATE ACCOUNTING
Employers must exercise control over amounts paid out to ensure that only ordinary and necessary expenses are incurred One necessary control The expense account must be examined and approved by an individual responsible, directly or indirectly to the employ for a proper audit of the expense account. The person incurring the expense cannot approve his or her own account.
FOREIGN COMBINED BUSINESS/PLEASURE TRIPS
If you travel outside the country primarily for pleasure, you can't deduct business expenses at your destination.
If your trip outside the country is primarily for business but you played a little as well, you might have to allocate your costs between business and personal activities. However, no allocation is required if you meet any of these tests:
LIMITS ON LUXURY WATER TRAVEL
Business trips via ocean liners, cruise ships or other forms of "luxury water transportation" are subject to a per day deduction limitation. The per day deduction on the luxury boat can't exceed two times the highest per diem amount paid by the government for normal business travel within the United States. The highest per diem rate for 2014 is $374 a day (for Manhattan from 9/1 through 12/31).
For a city-by-city list of per diem rates, go online to www.gsa.gov.
This limitation doesn't apply to business travel for those who use luxury water transportation because of an illness or disability that restricts air travel.
The per diem rule doesn't apply to expenses for business-related conventions and seminars held on cruise ships. In such cases, you may be able to rely on the rule that allows deductions for expenses of up to $2,000.
TRAIN TRAVEL VERSUS AIR TRAVEL
In a combined business-pleasure trip, days spent traveling to and from the business destination by a reasonably direct route count as business days. So if you have the time, travel by train or possibly by boat.
COST OF LOCAL TRAVEL
Transportation expenses for local travel conducted for business reasons include the fares charged for traveling by air, rail, bus, subway or taxi and the cost of operating and maintaining a car. But transportation expenses don't include the cost of meals and lodging.
You can write off local transportation expenses that relate directly to the conduct of your trade or business, even if you're not away from home.
Generally, expenses for commuting between your residence and a job in the same metropolitan area aren't deductible. However, there's an important exception if you work at temporary job locations. You can deduct the cost of commuting from your residence to the temporary sites in the following three circumstances:
For purpose of these rules, a temporary work location is one where the assignment is expected to last less than one year. (IRS Revenue Ruling 99-7)
COST OF OPERATING AND MAINTAINING BUSINESS VEHICLES
Deductible car expenses include the cost of gasoline, oil, lubrication, repairs, tires, supplies, garage rent, parking fees, tolls, chauffeur salaries and depreciation. These business expenses are deductible in addition to the itemized deductions for expenses such as interest on loans to purchase the car. Operation and maintenance costs are deductible to the extent you use the car for business.
You also can take depreciation deductions. If business use amounts to 50% or less, instead of the more generous accelerated-depreciation formula, you'll have to use straight-line depreciation. In lieu of these deductions, you can determine deductible costs and depreciation by using the standard mileage rate.
PERSONAL AND BUSINESS USE OF A CAR
If you use your car for both personal and business purposes, you must divide your expenses between business and personal travel unless your personal use is negligible. Total expenses (except parking fees and tolls) are deducted in proportion to business and personal use. Parking fees and tolls for business use are fully deductible. IRS Form 2106, Employee Business Expenses, includes schedules for the computation of automobile expenses and depreciation.