Archive for Tax Deductible Expenses
Act now! According to the IRS IRA owners age 70½ or older have until Thursday, Jan. 31 2013 to make a direct transfer, or alternatively, if they received IRA distributions during December 2012, to contribute, in cash, part or all of the amounts received to an eligible charity.
The American Taxpayer Relief Act of 2012, extended for 2012 and 2013 the provision authorizing qualified charitable distributions (QCDs)—otherwise taxable distributions from an IRA owned by someone, 70½ or older, paid directly to an eligible charitable organization. Each year, the IRA owner can exclude from gross income up to $100,000 of these QCDs.
The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable and no deduction is available for the transfer. QCDs are counted in determining whether the IRA owner has met his or her IRA required minimum distributions for the year.
For tax-year 2012 only, IRA owners can choose to report QCDs made in January 2013 as if they occurred in 2012. In addition, IRA owners who received IRA distributions during December 2012 can contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 QCDs.
QCDs are reported on Form 1040 Line 15. The full amount of the QCD is shown on Line 15a. Do not enter any of these amounts on Line 15b but write “QCD” next to that line.
Form 1040 – IRA owners must report 2012 QCDs made in January 2013 on their 2012 Form 1040 by:
including the full amount of the 2012 QCD (even if in excess of $100,000) on line 15a; and
not including any amount on line 15b, but writing “QCD” next to line 15b.
A 2012 QCD made in January 2013 must also be reported on the IRA owner’s 2013 Form 1040. These reporting requirements will be reflected in the 2013 Instructions for Form 1040.
Form 1099-R – IRA trustees must report distributions as follows:
Distributions made in 2012 are reported on a 2012 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc; and
Distributions made in 2013, including any 2012 QCDs made in January 2013, are reported via 2013 Form 1099-R.
IRA owners must file a 2012 Form 8606, Nondeductible IRAs, with their 2012 Form 1040 if:
the 2012 QCD was from a traditional IRA, there was basis in the IRA owner’s traditional IRA(s), and the IRA owner received a distribution from a traditional IRA in 2012, other than the 2012 QCD; or
the 2012 QCD was from a Roth IRA.
If a 2012 Form 8606 must be filed, the instructions to the form will describe how to report any 2012 QCD made in January 2013.
I am not a big fan of this deduction for a wide variety of reasons but mostly because there can be a substantial administrative burden associated with recapturing depreciation expense taken in previous tax years upon the sale of one’s home in the current tax year.
The secret to this deduction though in my opinion – like most all deductions – is to have accountable substantiating documentation in support of each report-able entry. This of course requires maintaining good record keeping habits on a regular and consistent basis which most small or home office business owners aren’t necessarily equipped to afford.
To figure your home office deduction and report the deduction use IRS IRS Form 8829, Expenses for Business Use of Your Home. You may also find it helpful to review the Instructions for IRS Form 8829. This post is a brief overview of IRS Publication 587, also titled – Business Use of Your Home.
According to the IRS when claiming a business deduction for your home part of it must be used exclusively and regularly as your principal place of business, or as a place to meet or deal with patients, clients or customers in the normal course of your business, or in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.
The amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses. There are special rules for qualified daycare providers and for persons storing business inventory or product samples. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.
People living in a federally declared disaster area are entitled to a wide variety of tax benefits. Around the Nation provides IRS news specific to local areas, primarily disaster relief or tax provisions that affect certain states.
2012 federally declared disaster areas issued by the department of Homeland Security can be useful if you are uncertain or require specific verification.
Also of interest might be FEMA’s declared disasters by year and state, particularly if you are eligible to file an amended federal tax return.
As I understand the Cohan rule under the IRS’ Guidelines For Determining Noncompliance, taxpayers are allowed a deduction for an estimated amount of expenses when it is clear the taxpayer is entitled to a deduction but is unable to establish the exact amount of the deduction. Specifically the IRS states on their web site the following. “The “Cohan Rule,” as it is known, originated in the decision of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). In Cohan, the court made an exception to the rule requiring taxpayers to substantiate their business expenses. George M. Cohan, the famous entertainer, was disallowed a deduction for travel and business expenses because he was unable to substantiate any of the expenses. The judge wrote that “absolute certainty in such matters is usually impossible and is not necessary, the Board should make as close an approximation as it can.” In general, the Tax Court has interpreted this ruling to mean that in certain situations “best estimates” are acceptable in order to approximate expenses. The Cohan Rule is a discretionary standard and can be used to support a reasonable estimate of compliance requirements.”
This worked well for the taxpayers in Armando Sandoval Lua v. Commissioner TC Memo 2011-19 in that the taxpayers provided sufficient evidence demonstrating additional compensation expense was incurred for additional services provided even though it was in the form of cash.
Tool and Equipment Plans generally require employees to provide their own tools. Some plans purport to receive tax-favored treatment as “accountable plans” under the definition of adjusted gross income in Internal Revenue Code § 62(c). If you are expected to use your own tools and equipment on the job and get reimbursed be very careful in understanding the definition of an “accountable plan” because the Internal Revenue Service has established a compliance team to address significant concerns with certain Employee Tool and Equipment Plans that purport to receive tax-favored treatment as accountable plans. It’s all spelled out in the Alert. Here’s the facts as I understand.
1. According to ILM 201120021 a reimbursement or other expense allowance arrangement that pays an amount regardless of whether an expense is paid or incurred or reasonably expected to be paid or incurred by the employee in performing services for the employer violates the business connection requirement of an accountable plan under Treas. Reg. § 1.62-2(d)(3)(i). Accordingly, payments made under the arrangement are treated as made under a nonaccountable plan. Amounts treated as paid under a nonaccountable plan must be included in the employee’s gross income for the taxable year, are subject to withholding and payment of employment taxes, and must be reported as wages or other compensation on the employee’s Form W-2.
2. The IRS’ Chief Counsel issued the following Advice – ILM 200745018 concluding that an employer’s tool reimbursement plan does not satisfy the requirements of an accountable plan.
3. IRS Revenue Ruling 2005-52 holds that tool allowances paid to employees are not paid under an accountable plan because the substantiation and return of excess requirements are not met.
4. A Coordinated Issue Paper Revised on July 2,2008 concludes that Employee Tool and Equipment Plans under which amounts are paid to employees for the use of their tools and equipment, do not meet the accountable plan requirements.
5. An IRS Private Letter Ruling (200930029) states that an employer’s expense reimbursement plan satisfies the business connection, substantiation, and return of excess requirements of an accountable plan. Payments made under the Plan were allowed exclusion from the Technician’s income and not considered wages subject to the withholding and payment of employment taxes because the Plan only reimbursed covered costs that the Technician substantiated.
If you are an employer that requires your employees to provide their own tools you may want to review and understand this private letter ruling and only provide reimbursement for tool expense upon written substantiation (aka receipt). It is best practice to understand the nuances of accountable and nonaccountable tool and equipment plans. A blanket payment made to an employee on a regular and consistent basis is usually considered income subject to employment tax regardless of what it is called.
Treasury Regulation 1.274-5 allows for a deduction without complete documentation if you can show that you have ‘substantially complied’ with adequate adequate record keeping requirements.
This statute is code for … be nice to your examiner.
Basically the practice of disallowing amounts claimed because there is no documentary evidence available to establish precise amounts beyond a reasonable doubt ignores commonly recognized business practice as well as the fact that proof may be established by credible oral testimony. As such close approximations of items not fully supported by documentary proof can frequently be established through reliable secondary sources and collateral evidence.
It is always best practice to inform the examiner what has been reconstructed in that it builds credibility. It’s also best to demonstrate that your expenditures are reasonable in relation to income, and that if questioned you can prove that your other financial affairs are in order. The bottom line is that tax records can be and routinely are reconstructed to serve as substantiation if under examination.
However if you are a hot head and freak out on your examiner or demonstrate any other behavior that may lead an examiner to not give you the benefit of the doubt as to the efficacy of collateral evidence you may as well just take your matter to appeals and start the process over. When it comes to reconstruction of evidence it seems to all be about demonstrating and maintaining personal credibility as a law abiding human being. If you are not that then I suggest saving all of your receipts.
IRS Notice 2011-82 makes available the ability for taxpayers to pass along their unused estate & gift tax exclusion amounts to their surviving spouse if an estate tax return is filed. This new portability election allows estates of married taxpayers to pass along the unused part of their exclusion amount ($5 million cap in 2011) to their surviving spouse,which in theory should eliminate the need to do silly things like re-title property etc.
It is expected that most estates of people who are married will want to make the portability election, including people who are not required to file an estate tax return for some other reason. The only way to make the election is by properly and timely filing an estate tax return on Form 706. As bizarre as this seems, there are no special boxes to check or statements needed to make the election. The estate tax return is due nine months after the date of death. Estates unable to meet this deadline can request an automatic six-month filing extension by filing Form 4768. Estates of those who died before 2011 are not eligible to make this election. Stay tuned in further regulation on the matter.
The Affordable Care Act increased the amount of the Adoption Tax Credit and made it fully refundable, which means it can increase the amount of your refund or decrease the amount of your tax liability in the immediate tax year. Additionally:
The adoption tax credit, which is as much as $13,170, offsets qualified adoption expenses making adoption possible for some families who could not otherwise afford it. Taxpayers who adopt a child in 2010 or 2011 may qualify if you adopted or attempted to adopt a child and paid qualified expenses relating to the adoption.
Taxpayers with modified adjusted gross income of more than $182,520 in 2010 may not qualify for the full amount and it phases out completely at $222,520. The IRS may make inflation adjustments for 2011 to this phase-out amount as well as to the maximum credit amount.
You may be able to claim the credit even if the adoption does not become final. If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.
Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child who is under 18 years old, or physically or mentally incapable of caring for himself or herself. These expenses may include adoption fees, court costs, attorney fees and travel expenses.
To claim the credit, you must file a paper tax return and IRS Form 8839, Qualified Adoption Expenses, and you must attach documents supporting the adoption. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children. You can still use IRS Free File to prepare your return, but it must be printed and mailed to the IRS with all required documentation.
Failure to include required documents will delay processing of your return.