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Travel Expense Deductions – Business or Pleasure? 01-17-2017

Many business owners combine travel for work with some vacation days. There is absolutely nothing wrong with that, but to be sure you are accounting for it correctly on your tax return, here are some tips:

Business or Pleasure?
Before determining what you can deduct, you need to determine whether the trip is classified as business or pleasure. You should be able to claim business was the primary reason for a domestic trip if business days exceed personal days. So what days count as business days?

  • Travel days, as well as weekends and holidays if they fall between days devoted to business, and it would be impractical to return home.
  • Standby days (days when your physical presence is required), even if you aren’t called upon to work those days.
  • Any other day principally devoted to business activities during normal business hours.
  • Days when you intended to work but couldn’t due to reasons beyond your control (such as local transportation difficulties).

What Can You Deduct?
If you determine that the purpose of your trip was primarily business, you can deduct:

  • Transportation costs to and from the location of your business activity
  • Travel to and from your departure airport, airfare, baggage fees, tips, cabs, etc.
  • Costs for rail travel or driving your personal car.
  • Out-of-pocket expenses for business days once at the destination
  • Lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare.

Documentation
It isn’t enough to get yourself comfortable that your trip was primarily for business. You must be able to prove it to the IRS. If your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take notes to show you attended the sessions.

Here are two recent U.S. Tax Court cases that help illustrate the rules for documenting deductions, and the consequences for failing to do so:

Case 1: Insufficient records
In the first case, the court found that a taxpayer with a consulting business provided no proof to substantiate more than $52,000 in advertising expenses and $12,000 in travel expenses for the two years in question.

The business owner said the travel expenses were incurred ”caring for his business.“ That isn’t enough. ”The taxpayer bears the burden of proving that claimed business expenses were actually incurred and were ordinary and necessary,“ the court stated. In addition, businesses must keep and produce ”records sufficient to enable the IRS to determine the correct tax liability.“ (TC Memo 2016-158)

Case 2: Documents destroyed
In another case, a taxpayer was denied many of the deductions claimed for his company. He traveled frequently for the business, which developed machine parts. In addition to travel, meals, and entertainment, he also claimed printing and consulting deductions.

The taxpayer recorded expenses in a spiral notebook and day planner and kept his records in a leased storage unit. While on a business trip to China, his documents were destroyed after the city where the storage unit was located acquired it by eminent domain.

There’s a way for taxpayers to claim expenses if substantiating documents are lost through circumstances beyond their control (for example, in a fire or flood). However, the court noted that a taxpayer still has to ”undertake a ‘reasonable reconstruction,’ which includes substantiation through secondary evidence.“

The court allowed 40% of the taxpayer’s travel, meals and entertainment expenses, but denied the remainder as well as the consulting and printing expenses. The reason? The taxpayer didn’t reconstruct those expenses through third-party sources or testimony from individuals whom he’d paid. (TC Memo 2016-135)

The Moral? Be Prepared
Keep detailed, accurate records to protect your business deductions, whether for travel or anything else. Record details about expenses as soon as possible after they’re incurred (for example, the date, place, business purpose, etc.). Keep more than just proof of payment. Also keep other documents, such as receipts, credit card slips, and invoices.

If you’re unsure of what you need, check with a CPA.  Contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com!

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Want to save for education? Make 2016 ESA contributions by December 31 12-28-2016

There are many ways to save for a child’s or grandchild’s education. But one has annual contribution limits, and if you don’t make a 2016 contribution by December 31, the opportunity will be lost forever. We’re talking about Coverdell Education Savings Accounts (ESAs).

How ESAs work

With an ESA, you contribute money now that the beneficiary can use later to pay qualified education expenses:

  • Although contributions aren’t deductible, plan assets can grow tax-deferred, and distributions used for qualified education expenses are tax-free.
  • You can contribute until the child reaches age 18 (except beneficiaries with special needs).
  • You remain in control of the account — even after the child is of legal age.
  • You can make rollovers to another qualifying family member.

Not just for college

One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.

Another advantage is that you have more investment options. So ESAs are beneficial if you’d like to have direct control over how and where your contributions are invested.

Annual contribution limits

The annual contribution limit is $2,000 per beneficiary. However, the ability to contribute is phased out based on income.

The limit begins to phase out at a modified adjusted gross income (MAGI) of $190,000 for married filing jointly and $95,000 for other filers. No contribution can be made when MAGI hits $220,000 and $110,000, respectively.

Maximizing ESA savings

Because the annual contribution limit is low, if you want to maximize your ESA savings, it’s important to contribute every year in which you’re eligible. The contribution limit doesn’t carry over from year to year. In other words, if you don’t make a $2,000 contribution in 2016, you can’t add that $2,000 to the 2017 limit and make a $4,000 contribution next year.

However, because the contribution limit applies on a per beneficiary basis, before contributing make sure no one else has contributed to an ESA on behalf of the same beneficiary. If someone else has, you’ll need to reduce your contribution accordingly.

Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com!

© 2016

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There’s still time to benefit on your 2016 tax bill by buying business assets 11-29-2016

In order to take advantage of two important depreciation tax breaks for business assets, you must place the assets in service by the end of the tax year. So you still have time to act for 2016.

Section 179 deduction

The Sec. 179 deduction is valuable because it allows businesses to deduct as depreciation up to 100% of the cost of qualifying assets in year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and leasehold improvements. Beginning in 2016, air conditioning and heating units were added to the list.

The maximum Sec. 179 deduction for 2016 is $500,000. The deduction begins to phase out dollar-for-dollar for 2016 when total asset acquisitions for the tax year exceed $2,010,000.

Real property improvements used to be ineligible. However, an exception that began in 2010 was made permanent for tax years beginning in 2016. Under the exception, you can claim a Sec. 179 deduction of up to $500,000 for certain qualified real property improvement costs.

Note: You can use Sec. 179 to buy an eligible heavy SUV for business use, but the rules are different from buying other assets. Heavy SUVs are subject to a $25,000 deduction limitation.

First-year bonus depreciation

For qualified new assets (including software) that your business places in service in 2016, you can claim 50% first-year bonus depreciation. (Used assets don’t qualify.) This break is available when buying computer systems, software, machinery, equipment, and office furniture.

Additionally, 50% bonus depreciation can be claimed for qualified improvement property, which means any eligible improvement to the interior of a nonresidential building if the improvement is made after the date the building was first placed in service. However, certain improvements aren’t eligible, such as enlarging a building and installing an elevator or escalator.

Contemplate what your business needs now

If you’ve been thinking about buying business assets, consider doing it before year end. This article explains only some of the rules involved with the Sec. 179 and bonus depreciation tax breaks. Contact us for ideas on how you can maximize your depreciation deductions.

© 2016

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SSARS + SaaS Combine to Make Cloud Accounting Possible and Affordable 07-08-2016

This is an exciting time, which is not a phrase usually associated with accounting. Technology is advancing at an amazing pace. Even though your first thought may not be how technology advancements apply to the preparation of your business financials, rest assured it does.

In the past, having a CPA prepare monthly financial statements for a business was cost-prohibitive for many businesses. The reason being, the CPA had to provide a report based on attestation procedures along with the prepared financial statements. This anticipated that someone outside of management might use the financial statements. That obviously adds time, which in turn adds costs.

That, however, has changed.

Thanks in large part to the two acronyms below, accounting services performed by CPAs, specifically the preparation of financial statements, are more accessible to the average business than ever before.

SSARS 21
The first factor leading to a change was “Statement on Standards for Accounting and Review Services (SSARS) number 21.” SSARS is the professional standard CPAs use in preparing financial statements. WIth the issuance of SSARS 21 in 2014 (Section 70 specifically), the report generation and attestation procedures requirements mentioned above were removed in most cases.

As a result, you get only the information that is of value to you, and it is delivered in a timely, cost-efficient manner by your CPA.

SaaS
The second major factor in making CPA-prepared financials a feasible option for more businesses is the proliferation of Software as a Service (SaaS). Per Wikipedia, SaaS is “…a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted.” It’s what people commonly refer to as cloud computing.

The reason SaaS is having such a major impact on accounting is two-fold:

  1. Individual clients can both submit and access information without having to download software. All that is required are login credentials.
  2. Banks and other financial institutions also offer online access to accounts, making it easy for accountants to integrate live data with the general ledgers used for financial  statement preparation.

By having so much readily-available information, CPAs can provide management with virtually real-time access to accurate financial statements. This also enhances internal controls, affording management the peace of mind to concentrate on running the business.

If you aren’t already taking advantage of these advancements, maybe it’s time you did. If you’re tired of administrative functions occupying your time, or you’re still preparing financial statements internally because you think you can’t afford a CPA on staff, there is a better way. And it is more accessible to businesses than ever before.

 

OneSource from Aldridge, Borden & Company is a comprehensive, cloud-based suite of accounting services that can be tailored to each client’s needs, including preparation of business financials. Contact Billy Cox today for more information.

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Tax Savings Opportunity for Exporters and Others 08-25-2015

Exporters and others: Save taxes with an IC-DISC

If your business exports American-made goods or performs architectural or engineering services for foreign construction projects, an interest-charge domestic international sales corporation (IC-DISC) can help slash your tax bill.

An IC-DISC is a “paper” corporation you set up to receive commissions on export sales, up to the greater of 50% of net income or 4% of gross receipts from qualified exports. Your business deducts the commission payments, while distributions received from the IC-DISC are treated as qualified dividends, not capital gains.

Essentially, an IC-DISC allows you to convert ordinary income taxed at rates as high as 39.6% into dividends taxed at 15% or 20%. An IC-DISC also allows you to defer taxes on up to $10 million in commissions held by the IC-DISC by paying a modest interest charge to the IRS.

Think an IC-DISC might be right for you? Contact us for more information.

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Tax Deduction Rules for Business Start-Up Expenses 06-10-2015

If you have started a new business this year or are planning on starting a new business there are some important rules related to the deductibility of certain start-up expenses.  Many taxpayers struggle with the question of when to deduct costs related to starting a business. A recent U.S Tax Court case demonstrates how it can be difficult to differentiate between Section 162 expenses that are deductible in the current year and Section 195 start-up costs that are deductible after the start-up commences business operations. Here's some guidance on deducting start-up expenses with confidence. Continue reading


Test Your Small Business Finance IQ 04-20-2015

Did you know that April is "National Financial Capability Month"?  The Federal Government has designated April as "National Financial Capability Month" in an effort to make Americans more financially literate. Approximately 40 percent of U.S. small business owners consider themselves to be financially illiterate.  Despite this fact, over 80 percent still handle their own business finances, according to a 2014 study conducted by Intuit. Here is a quick nine-question quiz to test your financial literacy.  Some of the answers to the quiz might surprise you. Continue reading


Tax Documents and Related Records: What Should You Keep 04-13-2015

After a few years, tax and other paper records can begin to accumulate and become overwhelming. Many individuals and companies keep records longer than necessary, just in case the IRS, state tax authorities or another regulatory body makes an inquiry.  Here are some record retention guidelines we hope will help prevent you from becoming the subject of an upcoming episode of Hoarders. Continue reading


Are You Prepared to Benefit from the Millennial Market 04-06-2015

How can you market to the "Millennials" to get them to buy your company's products and services? Who are The Millennial generation?  The Millennials includes people born from approximately 1980 to 2000.  They tend to be self-expressive, open-minded, educated, technology-savvy and budget conscious. They are also the most ethnically diverse generation in U.S. history. Here's are some suggestions for how you, as a business owner, can make an impression on the Millennial mindset. Continue reading


Tips for Protecting Your Personal Information Against Online Surveillance 03-30-2015

The internet has provide us many opportunities to change the way we go about our daily lives.  We use the internet to facilitate transactions and the transmission of information on a daily basis.  But with opportunities come risks. In today's Web-based world and with our constant use of the internet, it's critical to know the contents of your "digital dossier" and take steps to minimize the risks that various forms of online surveillance pose to your personal and financial security. Continue reading