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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
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.
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.
What Expenses Are Deductible?
Here's what you can deduct when you travel away from home for business.
Taxi, Commuter Bus, Subway, and Airport Limousine Fares
Baggage and Shipping Expenses
Lodging and Meals
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:
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
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.
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:
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:
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:
The 2010 base amounts are:
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.
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:
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 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.
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.
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):
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.
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