Newsletter

Summer Travel Tax Deductions

The summer travel season is almost upon us. Keep in mind that if your summertime travel is primarily for business or career-related education, then a portion of the trip may be tax-deductible. As long as most of your travel days are for business purposes, you can deduct the cost of travel (airfare, trains, car), hotel, parking, taxi service, meals, and so on.

As defined by the IRS, travel expenses are the Ordinary and Necessary expenses of traveling away from home for your business, profession, or job. An Ordinary expense is one that is common and accepted in your field of trade, business, or profession. A Necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.

The key factor is that your trip must be primarily for business. Days of leisure can be added to a trip and still be considered primarily for business. The more days and time per day spent on business will help substantiate the trip. There are no set rules on how many days and how much time per day need to be spent on business for your trip to be considered business related.

Keep all the documentation for business-related travel, including confirmations of appointments, emails, phone records, registration to conferences, etc. The days spent traveling to and from a business trip are considered part of the trip. This includes the weekend if it is impractical to come home between weekday business meetings. Planning ahead can make this happen.

Traveling with Your Spouse

If a spouse goes with you on a business trip or to a business convention, his or her travel expenses can only be deducted if your spouse

1. is your employee,
2. has a bona fide business purpose for the travel, and
3. would otherwise be allowed to deduct the travel expenses.

To be an employee, your spouse must be on the payroll and payroll taxes must be paid. If your spouse is not an employee and travels with you on vacation, you can still deduct the cost of your room at the single-occupancy-per-day rate, rather than half the rate. Meals could also be deductible. If you are paying for lunch or dinner for a customer or business associate and that person's spouse, the full cost of the meals might qualify under the 50% meal deduction. Let us know if you're unclear on this deduction; we can give you the details.

Example: Bill drives to Boston on business and takes his wife, Joan, with him. Joan is not Bill's employee. Joan occasionally types notes, performs similar services, and accompanies Bill to luncheons and dinners. The performance of these services does not establish that her presence on the trip is necessary for Bill's business. Her expenses are not deductible.

Bill pays $199 a day for a double room. A single room costs $149 a day. He can deduct the total cost of driving his car to and from Boston, but only $149 a day for his hotel room. If he uses public transportation, he can deduct only his fare. Further, if Bill has dinner with a customer and spouse, the meal may be deducted under the 50% meal deduction.

With travel outside of the United States, the transportation for business trips of one week or less may be deducted. However, only a portion of transportation costs for longer trips are deductible.

Example: You live in New York. On May 4 you flew to Paris to attend a business conference that began on May 5. The conference ended at noon on May 14. That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. The primary purpose for the trip was to attend the conference.

If you had not stopped in Dublin, you would have arrived home the evening of May 14. You did not meet any of the exceptions that would allow you to consider your travel entirely for business. May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are non-business days.

You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris.

You cannot deduct your expenses while in Dublin. You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin.

You paid $450 to fly from New York to Paris, $200 to fly from Paris to Dublin, and $500 to fly from Dublin back to New York. Round-trip airfare from New York to Dublin would have been $850.

You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($850 - 7/18 = $331) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($450 + $200 + $500 = $1,150). Your deductible air travel expense is $819 ($1,150 - $331).

What Expenses Are Deductible?

Here's what you can deduct when you travel away from home for business.

Transportation Expenses
You can deduct Transportation Expenses when you travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, additional rules and limits apply.

Taxi, Commuter Bus, Subway, and Airport Limousine Fares
You can deduct the fares for these and other types of transportation that take you between

• the airport or station and your hotel, and
• the hotel and the work location of your customers or clients, your business meeting place, or your temporary work location.

Baggage and Shipping Expenses
You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.

Car Expenses
You can deduct the cost of operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.

Lodging and Meals
You can deduct your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. Additional rules and limits may apply.

Cleaning Clothes
You can deduct the dry cleaning and laundry expenses you incur while away on business.

Telephone
All business calls while on your business trip are deductible. This includes business communication by fax machine or other communication devices.

Tips
You may deduct the tips you pay for any expense listed above.

Other Expenses
You can deduct other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, or Internet access fees.

Ask Us

If you have any questions about business travel this summer, just give us a call or send us an email.

Cut Taxes on the Sale of Your Home

Despite the slumping real estate market, houses are still being sold and there is money to be made. Sellers need to take a close look at the exclusion rules and cost basis of their home to reduce taxable gain on their house.

First, The IRS home sale exclusion rule now allows an exclusion of a gain up to $250,000 for a single taxpayer or $500,000 for a married couple filing jointly. This exclusion can be used over and over during your lifetime, unlike the previous one-time exemption, as long as you meet the following Ownership and Use tests.

During the 5-year period ending on the date of the sale, you must have:

• Owned the house for at least two years - Ownership Test
• Lived in the house as your main home for at least two years - Use Test

Tip: The Ownership and Use periods need not be concurrent. Two years may consist of a full 24 months or 730 days within a 5-year period. Short absences, such as for a summer vacation, count in the period of use. Longer breaks, such as a 1-year sabbatical, do not.

If you own more than one home, you can exclude the gain only on your main home. The IRS uses several factors to determine which home is a principal residence: place of employment, location of family members' main home, mailing address on bills, correspondence, tax returns, driver's license, car registration, voter registration, location of banks you use, and location of recreational clubs and religious organizations you belong to.

Tip: The exclusion can be used over and over during your lifetime, every time you reestablish your primary residence. When you do change homes, let us know your new address so we can ensure the IRS has your current address on file.

Note: Only taxable gain on the sale of your home needs to be reported on your taxes. Further, loss on the sale of your main home cannot be deducted. Ask us for details.

Improvements Increase the Cost Basis

Additionally, when selling your home, consider all improvements made to the home over the years. Improvements will increase the cost basis of the home and thereby reduce the capital gain.

Additions and other improvements that have a useful life of more than one year can be added to the cost basis of your home.

Examples of Improvements
Examples of improvements include: building an addition; finishing a basement; putting in a new fence or swimming pool; paving the driveway; landscaping; or installing new wiring, new plumbing, central air, flooring, insulation, or security system.

Example: The Kellys purchased their primary residence in 1999 for $200,000. They paved the unpaved driveway and added a swimming pool, among other things, for $75,000. The adjusted cost basis of the house is $275,000. The house is then sold in 2008 for $550,000. It costs the Kellys $40,000 in commissions, advertising, and legal fees to sell the house.

These selling expenses are subtracted from the sales price to determine the amount realized. The amount realized in this example is $510,000. That amount is then reduced by the adjusted basis (cost plus improvements) to determine the gain. The gain in this case is $235,000. After considering the exclusion, there is no taxable gain on the sale of this primary residence and, therefore, no reporting of the sale on the Kelly's 2008 personal tax return.

Tip: Home Energy Credit. Homeowners will benefit from extended energy saving credits when making their homes more energy efficient in 2009 and 2010. Projects include energy-efficient windows, doors, heating, and air-conditioning systems. The existing 10% tax credit for energy saving home improvements has been increased to 30% of a cost up to $1,500 and extends through 2010.

Partial Use of the Exclusion Rules

If you do not meet the Ownership and Use tests, you may be allowed to exclude a portion of the gain realized on the sale of your home if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.

Example: If you get divorced after living in your home for approximately 1 1/2 years or 438 days and have a gain of $120,000 on the sale of your home, you can take 60% of the capital gain exclusion, as you lived in the house for 60% of the 2-year exclusion period (438 days divided by 730 days or 60%). Therefore, you would be allowed to deduct $150,000 of the capital gain (60% of $250,000 exclusion). No gain would be reported on this sale.

Recordkeeping

Good recordkeeping is essential for determining the adjusted cost basis of your home. Ordinarily, you must keep records for 3 years after the filing due date. However, keep records proving your home's cost basis for as long as you own your house.

The records you should keep include:

• Proof of the home's purchase price and purchase expenses
• Receipts and other records for all improvements, additions, and other items that affect the home's adjusted cost basis
• Any worksheets or forms you filed to postpone the gain from the sale of a previous home before May 7, 1997

Questions?

Tax considerations can be confusing. If you have any questions on taxes related to the sale of your home, give us a call.

Timing Mistakes That Cost Thousands of Dollars

Sometimes we need to talk here about costly taxpayer mistakes that could have been avoided with professional consultation. Take the recent case of a securities firm owner doing business as an S corporation. An S corporation's income is directly taxable to its owners, and its losses pass through to owners for deduction on their tax returns. S corporations are like partnerships in this respect, and the problem we'll describe arises with partnerships, too.

In the recent case, the S corporation had heavy losses during the year. Its owner filed for bankruptcy on December 3, 29 days too soon.

What do we mean "too soon"? When someone files a bankruptcy petition, their assets, with a few exemptions and exclusions, pass immediately to the bankruptcy "estate," to be used to pay creditors who are, for the most part, unsecured. In this case, the owner's S corporation stock was such an asset passing to the estate. With it went an asset (the law calls it a "tax attribute") of great value: the year's tax-deductible loss.

In the owner's hands, the loss would have been enough to eliminate current tax and generate a big net operating loss. Such a loss can be carried to other years, eliminating or reducing tax in those years.

But the owner didn't own the loss. An S corporation's loss for a year is determined when the year ends. At this year's end, the S corporation stock was owned by the bankruptcy estate. By filing for bankruptcy before the end of the year, the owner gave the bankruptcy estate the loss.

The estate acquired the right to carry the year's loss to other years, including back to a prior year when the owner had profits. With this right, the estate could obtain a refund for the taxes the owner had paid in a previous year, even if the owner had made no claim - and didn't know such a claim existed. Alternatively, the estate can carry the loss to future years to offset income arising during bankruptcy from the owner's assets now held by the estate.

The owner argued that since he had held the stock 11/12ths of the year, he should be entitled to 11/12ths of the year's loss. This is not a bad argument, since the law prorates an S corporation stockholder's share of the corporation's loss on a daily basis throughout the year. But the tax rules for bankruptcy trump those for prorating the loss. When the estate took ownership of the stock on December 3, it received all the rights attached to that stock, including the right to claim all the loss determined at year-end.

Note: The court acknowledged that the owner had made an honest mistake, so no penalties were imposed. That must have been some relief. Still, the mistake squandered tens of thousands of tax dollars.

Tip: Here are two ways the owner could have salvaged the loss and its tax value:

1. Wait until the new year, say January 2, to file for bankruptcy.
2. Sell the S corporation stock, if possible, before the bankruptcy filing. This way the owner could get his share of the year's loss (once determined), prorated for the period he owned the stock - here, about 11/12ths of the year's loss.

Note: The transfer of a debtor's assets to a bankruptcy estate is tax-free and not a sale.

The same fate will befall a partner who files for bankruptcy during a partnership's loss year. His or her partnership interest, and that interest's share of partnership loss, will go to the bankruptcy estate. The estate can carry the loss to other years.

Tip for Partners: As with the S corporation stockholder, waiting until year-end before filing will give the partner his or her share of the partnership's loss for the year. Rules for determining share of loss are trickier than with S corporations, where a partner sells his or her interest before the bankruptcy filing - too tricky to summarize here.

If you're at all unclear on how filing a bankruptcy petition could impact your taxes, let us know. We can advise you on the best course of action.

Are Your Social Security Benefits Taxable?

How much, if any, of your Social Security benefits are taxable? It depends on your total income and marital status. Generally, if Social Security benefits were your only income, your benefits are not taxable and you probably do not need to file a federal income tax return.

If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status. (See below for more on base amounts.)

This quick computation will help you determine whether some of your benefits may be taxable:

• First, add one-half of the total Social Security you received to all your other income, including any tax-exempt interest and other exclusions from income.

• Then, compare this total to the base amount for your filing status.

The 2010 base amounts are:

• $32,000 for married couples filing jointly
• $25,000 for single, head of household, qualifying widow/widower with a dependent child or married individuals filing separately who did not live with their spouses at any time during the year
• $0 for married persons filing separately who lived together during the year

According to the Social Security Administration, less than one-third of all current beneficiaries pay taxes on their benefits.

Call us for additional information on the taxability of Social Security benefits.

Getting the Right Amount of Tax Withheld

In most situations, the tax withheld from your pay will be close to the tax you figure on your return - if you follow these two rules.

• You accurately complete all the Form W-4 worksheets that apply to you.

• You give your employer a new Form W-4 when changes occur.

But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations:

• You are married and both you and your spouse work.

• You have more than one job at a time.

• You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income.

• You will owe additional amounts with your return, such as self-employment tax.

• Your withholding is based on obsolete Form W-4 information for a substantial part of the year.

• Your earnings are more than $130,000 if you are single or $180,000 if you are married.

• You work only part of the year.

• You change the number of your withholding allowances during the year.

If you need help downloading Form W-4 or have questions on how to fill it out properly, give us a call. We're happy to help.

Tips on Tips

Do you work at a hair salon, barber shop, casino, golf course, hotel, or restaurant, or do you drive a taxicab? The tip income you receive as an employee from those services is taxable income.

Here are some tips about tips:

• Tips are taxable. Tips are subject to federal income and Social Security and Medicare taxes, and they may be subject to state income tax as well. The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to federal income tax.

• Include tips on your tax return. In your gross income, you must include all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip-splitting arrangement with fellow employees.

• Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all your tips to your employer. Your employer is required to withhold federal income, Social Security, and Medicare taxes.

• Keep a running daily log of your tip income. Be sure to keep track of your tip income throughout the year. If you'd like a copy of the IRS form that helps you record it, let us know.

Tips can be tricky. Don't hesitate to contact us if you have questions.

Generating Professional Reports with QuickBooks

You probably already run reports in QuickBooks - but are you making full use of the program's reporting tools?

Let's take a look. Reporting changed a lot between QuickBooks 2009 and 2010 in terms of interface, navigation, and access to reports. We'll look at version 2010 since the core reporting mechanisms are similar, and wrap up with a brief summary of the new features in 2010.

Extensive Customization

Open the Reports menu. You can go directly to the Report Center, but since the interfaces are different (and very self-explanatory), we'll work from the menu.

Drop down to Sales, and in the pop-out menu, click Sales by Customer Detail. You'll see a window similar to Figure 1.

Figure 1: You may just be changing the date range when you run reports in QuickBooks. If so, you're missing out on a lot of customization and other features.

Don't like displaying the date/time/basis for each report? Click Hide Header and then Show Header if you want to bring it back.

Is the text in some of your columns - usually Name, Item, and Memo - being truncated (such as "Gutter clean..." in the example above)? Grab the diamond to the right of the column name and drag it to the right with your mouse. It may take some adjusting to make every column header display properly.

Are you exporting a lot of reports to Excel workbooks but never clicking on the Advanced tab in the dialog box? If your reports always look different in Excel and you don't like them, it may be because you're skipping this step. Click the Export button, and the dialog box shown in Figure 2 appears. Click Advanced to see this view.

Figure 2: Before you export a report to an Excel worksheet, click the Advanced tab in the Export Report dialog box. You'll be able to select options that will preserve or ignore the original QuickBooks formatting.

Sophisticated Modifications

To get to the real meat of your modifications, click the Modify Report button. You'll be able to tinker with a number of report elements here, including (and shown in Figure 3):

• Display. What dates should the report cover? Which columns should display? (You'll have plenty to choose from.) Cash or accrual? How do you want to total and sort data? Click Advanced to show all accounts or those in use during the report period, and to display a customer's current balance or the balance as of the report's ending date.
• Filters. QuickBooks builds in powerful filtering capabilities, allowing you to corral a subset of data that contains exactly what you want, down to the words included in the Memo field. Take some time here and read the accompanying help files. A box on the right displays the current filters; you can easily remove any of them or revert to the original configuration.
• Header/footer. Easy stuff. How should the report look? QuickBooks gives you a lot of control over that. You'll simply check or uncheck boxes, and enter information.
• Fonts & Numbers. Easy here, too. You can make choices about the fonts and colors you want your report to contain, and how you want numbers to be displayed.

Figure 3: QuickBooks gives you an enormous amount of control over the format and content of your reports.

Memorization and More

Once you've gone through all the trouble of formatting a report, you'll probably want to save it so you can use it again (the settings are memorized, not the data). QuickBooks makes this easy. With the report open, click Memorize. In the window that opens, type a name for your report (if you want to specify a new one), and check the box next to Save in Memorized Report Group if you want it categorized. To access a memorized report, open the Reports menu and put your mouse on Memorized Reports. From the pop-out menu, select the report you want. You'll still be able to modify it.

The new Report Center in QuickBooks 2010, shown in Figure 4, makes it easier to locate the desired reports quickly. It features a scrolling 3D representation of sample reports in each financial category (list and grid views are also available); you can click on icons in a toolbar to see your own version of the report, change the dates, learn more about it, and tag it as a favorite. Other links let you toggle the view among standard, memorized, favorite, and recently accessed reports.

Figure 4: This "carousel" view of sample reports in QuickBooks 2010 especially helps beginners find the correct report. Grid and list views are also available, as are other tools for locating the right screen.

When you're just running reports for your own edification, you may not do more than select a report and change the date range. But there will likely be many occasions when you're presenting reports to an audience, like bankers or potential customers. QuickBooks's report tools can help you slice and dice your data in myriad ways and make your financials look polished and professional. The ability to export to Excel opens up even more possibilities.

If you need help with this feature, or you have any questions about QuickBooks, don't hesitate to give us a call.

Financial Tips for June 2010

Review Your Insurance Policies
You reviewed your "asset" policies in April. This month, review your life, health, and disability insurance policies. Check with your employee benefits office as to what programs are available. Make certain you have adequate coverage. Call us to determine the appropriate amounts for your age and income.

Lower Your Utility Costs
Review your utility costs for the year. Make certain you are getting the best possible deal where multiple providers are available. For example, obtain competitive quotes for long-distance phone service. For other utilities, review your usage to see if any savings are available. Consider the use of annual "budget" plans with the utilities to even out annual payments.

Analyze Budget vs Actuals
Compare May income and expenditures with your budget. Make adjustments as appropriate to your June expenditures. Make sure you have invested your planned savings amount for May.

Tax Due Dates for June 2010

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