Road rules: Deducting business travel expenses

This article was originally published in Hershey Advisors’ monthly Tax and Business Alert.

If you travel for business, you’ll want to ensure that the expenses you incur while doing so are tax deductible. IRS rules are strict, and improperly substantiated deductions can cost you.

Away from home rule

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Generally, ordinary and necessary expenses of traveling away from home for work are deductible. For the expenses to qualify, you must be away from your tax home — your regular place of business — substantially longer than an ordinary day’s work and need to sleep or rest to meet the work demands while away.

You don’t necessarily have to stay away from home overnight to satisfy the rest requirement. If you travel for business purposes throughout the day but return home that night to sleep, you may still be considered “away from home” for tax purposes. In this case, expenses you incur for such trips are still deductible.

Also, the trip must be primarily for business purposes. If your trip involves both business and personal activities, a portion of the travel expenses may be nondeductible personal expenses.

Deductible travel expenses

Most airfare, taxis, rental cars, lodging, meals (with exceptions), tips and business phone calls are tax deductible. But you can’t write off “lavish or extravagant” travel expenses, so be prepared to prove that your patronage of a high-end restaurant or five-star hotel was reasonable under the circumstances.

Generally, only 50% of business-related meal and entertainment expenses are deductible. If your employer reimburses you under an accountable plan (see below), the 50% limit applies to your employer rather than you.

You must substantiate deductions for lodging — and for other travel expenses greater than $75 — with adequate records. These include credit card receipts, canceled checks or bills. Records should indicate the amount, date, place, essential character of the expense and business purpose.

Be accountable

If your employer reimburses your travel expenses, an accountable plan enables the company to deduct the reimbursements, but the reimbursements aren’t included in your income as salary and aren’t subject to FICA and other payroll tax obligations. Although you may still be able to deduct some or all business travel expenses without an accountable plan, such deductions are available only if you itemize and your expenses and other miscellaneous deductions exceed 2% of your adjusted gross income.

For reimbursed expenses to qualify under an accountable plan, you must have paid or incurred them while on company business and reported the expenses to your employer within a reasonable time (usually within 60 days). You also must return any excess reimbursements — usually within 120 days after they were paid or incurred.

Generally, to be reimbursable on a tax-free basis, your travel must meet the “away from home” rule discussed earlier. However, your employer can reimburse local lodging expenses if the lodging is temporary and necessary for you to participate in or be available for a bona fide business meeting or function. The expenses involved must be otherwise deductible by you as a business expense (or be expenses that would otherwise be deductible if you paid them).

Exceptions happen

As with most IRS rules, there are exceptions to which travel expenses you can deduct. If you’re unsure about some expenses, give us a call.

Hoping to grow your business?

This article was originally published in Hershey Advisors’ monthly Tax and Business Alert.

Start with the financing

Let’s say you’ve drafted a strategic growth plan that discusses in detail the new products and markets that you hope will power your company’s future growth. You’ve performed extensive market research and are confident that your offerings will appeal to customers and that you know how to reach them. Unfortunately, if your plan covers only such topics as product development, manufacturing, distribution, sales and marketing, it probably won’t succeed.

To avoid potential cash-flow issues and other financial crises, your strategic plan should specify precisely how you’ll fund your growth initiatives. If your company is sitting on a pile of cash just waiting to be invested, you’re lucky. Most businesses must finance growth with equity or debt.

Equity isn’t necessarily easy

Using your own equity in the business to raise capital can be a good solution. However, selling ownership to outside investors, such as private equity firms and venture capitalists, isn’t always as easy as it sounds. For starters, you’ll need a professional appraisal of your company and you’ll have to find investors who believe in your growth strategy — and ability to execute it.

Equity financing doesn’t need to be repaid. But, depending on how much equity you sell and how successful your company is in reaching its goals, equity can end up being expensive in the long run. For example, you may need to give up some control to investors, which can lead to disputes over major decisions.

Price of debt

Debt financing, on the other hand, does have to be repaid, and will cost you interest. Depending on the size and financial health of your company and the nature of your growth plans, you may be able to qualify for:

  • Term loans,
  • Commercial mortgages,
  • Construction loans,
  • Equipment leases, and
  • Small Business Administration loans.

Banks require borrowers to provide detailed financial information and pledge collateral, possibly including your home and other personal assets. They may also hold you to covenants that, for example, prevent you from borrowing additional money until their loan is repaid.

Reasonable expectations

We stand ready to help you weigh the advantages and drawbacks of the financing options available to your business. We can also help you evaluate your growth assumptions to ensure that your profit expectations are reasonable.

Top Year-End IRA Reminders from IRS

The following is IRS Special Edition Tax Tip 2015-21:

Individual Retirement Accounts, or IRAs, are important vehicles for you to save for retirement. If you have an IRA or plan to start one soon, there are a few key year-end rules that you should know. Here are the top year-end IRA reminders from the IRS:

  • Know the contribution and deduction limits.  You can contribute up to a maximum of $5,500 ($6,500 if you are age 50 or older) to a traditional or Roth IRA. If you file a joint return, you and your spouse can each contribute to an IRA even if only one of you has taxable compensation. You have until April 18, 2016, to make an IRA contribution for 2015. In some cases, you may need to reduce your deduction for your traditional IRA contributions. This rule applies if you or your spouse has a retirement plan at work and your income is above a certain level.
  • Avoid excess contributions.  If you contribute more than the IRA limits for 2015, you are subject to a six percent tax on the excess amount. The tax applies each year that the excess amounts remain in your account. You can avoid the tax if you withdraw the excess amounts from your account by the due date of your 2015 tax return (including extensions).
  • Take required distributions.  If you’re at least age 70½, you must take a required minimum distribution, or RMD, from your traditional IRA. You are not required to take a RMD from your Roth IRA. You normally must take your RMD by Dec. 31, 2015. That deadline is April 1, 2016, if you turned 70½ in 2015. If you have more than one traditional IRA, you figure the RMD separately for each IRA. However, you can withdraw the total amount from one or more of them. If you don’t take your RMD on time you face a 50 percent excise tax on the RMD amount you failed to take out.
  • IRA distributions may affect your premium tax credit. If you take a distribution from your IRA at the end of the year and expect to claim the PTC, you should exercise caution regarding the amount of the distribution.  Taxable distributions increase your household income, which can make you ineligible for the PTC.  You will become ineligible if the increase causes your household income for the year to be above 400 percent of the Federal poverty line for your family size. In this circumstance, you must repay the entire amount of any advance payments of the premium tax credit that were made to your health insurance provider on your behalf.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

Three Tax Considerations during Marketplace Open Enrollment

The following is IRS Tax Tips Issue Revised HCTT-2015-73:

When you apply for assistance to help pay the premiums for health coverage through the Health Insurance Marketplace, the Marketplace will estimate the amount of the premium tax credit that you may be able to claim.  The Marketplace will use information you provide about your family composition, your projected household income, whether those that you are enrolling are eligible for other non-Marketplace coverage, and certain other information to estimate your credit.

Here are three things you should consider during the Health Insurance Marketplace Open Enrollment period:

1. Advance credit payments lower premiums – You can choose to have all, some, or none of your estimated credit paid in advance directly to your insurance company on your behalf to lower what you pay out-of-pocket for your monthly premiums.  These payments are called advance payments of the premium tax credit or advance credit payments.  If you do not get advance credit payments, you will be responsible for paying the full monthly premium.

2. A tax return may be required – If you received the benefit of advance credit payments, you must file a tax return to reconcile the amount of advance credit payments made on your behalf with the amount of your actual premium tax credit.  You must file an income tax return for this purpose even if you are otherwise not required to file a return.

3. Credit can be claimed at tax time – If you choose not to get advance credit payments, or get less than the full amount in advance, you can claim the full benefit of the premium tax credit that you are allowed when you file your tax return. This will increase your refund or lower the amount of tax that you would otherwise owe.

For more information about open season enrollment, which runs through January 31, 2016, visit Healthcare.gov. See our Questions and Answers on IRS.gov/ca for information about the premium tax credit.

Job Search Expenses May be Deductible

This article was originally published in Hershey Advisors’ monthly Tax and Business Alert.

If you are looking for a new job, you may incur some expenses along the way that may be deductible. Here are some key tax facts you should know:

Same occupation. Your expenses must be for a job search in your current line of work, not for a new occupation. However, temporarily working in another field while you are job searching won’t cause your job search expenses to be nondeductible. Also, expenses to look for full-time work in your existing occupation while you’re working part-time or sporadically in the same line of work should be deductible.

Résumé costs. You can deduct the cost of preparing and mailing your résumé.

Travel expenses. If you drive in connection with your search, you can deduct the IRS business mileage allowance. If you travel to look for a new job, you may be able to deduct the cost of the travel to and from the area if the trip is made mainly to look for a new job. If the trip is not mainly to look for a new job, some of your expenses may still be deductible if they are directly related to your search, such as the cost of transportation to and from an interview.

Placement agency. You can deduct some job placement agency fees you pay to look for a job.

First job. You can’t deduct job search expenses if you’re looking for a job for the first time.

Reimbursed costs. You can’t deduct expenses that are reimbursed by a prospective employer or a future or past employer.

Itemized deductions. You usually deduct your job search expenses on Schedule A, “Itemized Deductions.” You’ll claim them as a miscellaneous deduction. You can deduct the total miscellaneous deductions that are more than 2% of your adjusted gross income.

Understanding Your Form 1095-B, Health Coverage

The following is IRS Tax Tips Issue Number HCTT-2015-70:

Form 1095-B, Health Coverage, is used to report certain information to the IRS and to taxpayers about individuals who are covered by minimum essential coverage and therefore aren’t liable for the individual shared responsibility payment.

Minimum essential coverage includes government-sponsored programs, eligible employer-sponsored plans, individual market plans, and other coverage the Department of Health and Human Services designates as minimum essential coverage.

By January 31, 2016, health coverage providers should furnish a copy of Form 1095-B, to you if you are identified as the “responsible individual” on the form.

The “responsible individual” is the person who, based on a relationship to the covered individuals, the primary name on the coverage, or some other circumstances, should receive the statement. Generally, the recipient should be the taxpayer who would be liable for the individual shared responsibility payment for the covered individuals. A recipient may be a parent if only minor children are covered individuals, a primary subscriber for insured coverage, an employee or former employee in the case of employer-sponsored coverage, a uniformed services sponsor for TRICARE, or another individual who should receive the statement. Health coverage providers may, but aren’t required to, furnish a statement to more than one recipient.

The Form 1095-B sent to you may include  only the last four digits of your social security number or taxpayer identification number, replacing the first five digits with asterisks or Xs. In general, statements must be sent on paper by mail or hand delivered, unless you consent to receive the statement in an electronic format.  The consent ensures that you will be able to access the electronic statement. If mailed, the statement must be sent to your last known permanent address, or, if no permanent address is known, to your temporary address.

Additional information about minimum essential coverage and the individual shared responsibility provision is at IRS.gov/aca.

More information:

How Working Impacts Social Security Benefits

This article was originally published in Hershey Advisors’ monthly Tax and Business Alert.

Continuing to work while receiving Social Security benefits may cause the benefit to be reduced below the anticipated amount. If you are under the full retirement age (currently 66), an earnings test determines whether your Social Security retirement benefits will be reduced because you earned more from a job or business than an annual exempt amount.

As a general rule, the earnings test is based on income earned during the year as a whole, without regard to the amount you earned each month. However, in the first year, benefits you receive are not reduced for any month in which you earn less than one-twelfth of the annual exempt amount.

For 2015, Social Security beneficiaries under the full benefit retirement age who have earnings in excess of the annual exempt amount are subject to a $1 reduction in benefits for each $2 earned over the exempt amount ($15,720 in 2015) for each year before the year during which they reach the full benefit retirement age. However, in the year beneficiaries reach their full benefit retirement age, earnings above a different annual exempt amount ($41,880 in 2015) are subject to a $1 reduction in benefits for each $3 earned over the exempt amount. Social Security benefits are not affected by earned income beginning with the month the beneficiary reaches full benefit retirement age.