Category Archives: Blog

Tips For Deducting Travel Expenses

As you likely know by now, your travel meals continue under tax reform as tax-deductible meals subject to the 50 percent cut.

 

And tax reform did not change the rules that apply to your other travel expense deductions.

 

One beauty of being in business for yourself is the ability to pick your travel destinations and also deduct your travel expenses. For example, you can travel to exotic locations using the seven-day travel rule and/or attend conventions and seminars in boondoggle areas.

 

From these examples, you can understand why the IRS might want to see proof of your business purpose for any trips, should it examine them.

 

With deductions for lodging, a meal, or other travel expenses, the rules governing receipts, business reasons, and canceled checks are the same for corporations, proprietorships, individuals, and employees. The entity claiming the tax deduction must keep timely records that prove the four elements listed below:

 

  1. Amount. The amount of each expenditure for traveling away from home, such as the costs of transportation, lodging, and meals.
  2. Time. Your dates of departure and return, and the number of days on business.
  3. Place. Your travel destination described by city or town.
  4. Business purpose. Your business reason for the travel, or the nature of the business benefit derived or expected to be derived.

 

When in tax-deductible travel status, you need a receipt, a paid bill, or similar documentary evidence to prove

 

  • every expenditure for lodging, and
  • every other travel expenditure of $75 or more, except transportation, for which no receipt is required if one is not readily available.

 

The receipt you need is a document that establishes the amount, date, place, and essential character of the expenditure.

 

Hotel example. A hotel receipt is sufficient to support expenditures for business travel if the receipt contains

 

  • the name of the hotel,
  • the location of the hotel,
  • the date, and
  • separate amounts for charges such as lodging, meals, and telephone.

 

Restaurant example. A restaurant receipt is sufficient to support an expenditure for a business meal if it contains the

 

  • name and location of the restaurant,
  • date and amount of the expenditure, and
  • number of people served, plus an indication of any charges for an item other than meals and beverages, if such charges were made.

 

You can’t simply use your credit card statement as a receipt. Like a canceled check, it proves only that you paid the money, not what you purchased. To prove the travel expenditure, you need both the receipt (proof of purchase) and the canceled check or credit card statement (proof of payment).

 

In a nutshell, a travel expense is an expense of getting to and from the business destination and an expense of sustaining life while at the business destination. Here are some examples from the IRS:

 

  • Costs of traveling by airplane, train, bus, or car between your home and your overnight business destination
  • Costs of traveling by ship (subject to the luxury water travel rules and cruise ship rules)
  • Costs of renting a car or taking a taxi, commuter bus, or airport limo from the airport to the hotel and to work destinations, including restaurants for meals
  • Costs for baggage and shipping of business items needed at your travel destination
  • Costs for lodging and meals (meal costs include tips to waiters and waitresses)
  • Costs for dry cleaning and laundry
  • Costs for telephone, computer, Internet, fax, and other communication devices needed for business
  • Tips to bellmen, maids, skycaps, and others

 

The travel deduction rules are the same whether you operate your business as a corporation or a proprietorship, with one important exception. When you operate as a corporation during the tax years 2018 through 2025, you must either

 

  • have the corporation reimburse you for the expenses, or
  • have the corporation pay the expenses.

 

There are many intricacies to travel deduction rules. To ensure you are deducting business travel properly let Lothamer Tax Resolution help guide you.

 

 

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

 

 

Avoid becoming an IRS target if your business produced loses this past year

If you operate what you think is a business, but that business loses money, it may not be a business at all under the tax code.

 

Such a money-losing activity can look like a tax shelter to the IRS, and that substantially increases your chances of an IRS audit.

 

The tax code contains a business loss safe harbor that’s known as a presumption of profit. You meet this safe harbor when your activity produces a profit in three of five years (two of seven for breeding, training, showing, or racing horses).

 

When you meet the safe harbor, you are presumed a business unless the IRS establishes to the contrary.

 

We know this for-profit tax code section as the hobby loss section. But you can see that this tax code section creates trouble for much more than what you would consider a simple hobby.

 

Here’s an example of how badly the recent tax reform under the Tax Cuts and Jobs Act can treat a business that loses money.

 

Example. Henry has an activity that fails the business test and loses money. Last year, he had $70,000 of income and $100,000 of expenses. Under pre-tax-reform law, Henry could claim the hobby-related business deductions up to the amount of his income. So Henry deducted $70,000 (subject to some minor adjustments) and reported close to zero taxable income.

 

Not this year. Tax reform is going to make Henry suffer. With the same facts, Henry’s business deductions are zero. His taxable income is $70,000.

 

Think about that. Henry lost $30,000 ($70,000 – $100,000) in real money. He now pays taxes on $70,000 of phantom income.

 

What can Henry do to make this problem go away? He has two choices.

  • First, he could create a “for profit” business defense in the hope that he would defeat the IRS in an audit.
  • Alternatively, he could stop the taxation on his phantom income by operating his activity as a C corporation.

 

If you would like to discuss either or both of these possibilities, please allow Lothamer to guide you through avoiding a tax problem with the IRS.

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

5 Tax Home Tips

The fact that your personal home is not your tax home is one income tax issue.

 

Here’s another: business travel is different from business transportation.

 

Your tax deductions, tax strategies, and tax records hinge on the following federal income tax–defined terms:

 

  1. Personal home
  2. Tax home
  3. Business travel
  4. Business transportation

 

I know you don’t have an issue with your work deductions at the moment, but I want to make sure you are aware of what could happen if you moved your business location or personal home.

 

Meanings

Personal home This is where you live.
Tax home This is where you maintain your principal place of work.
Business travel You are in tax-deductible travel status when you travel away from your tax home overnight or long enough to require sleep.
Business transportation You deduct business transportation as a cost of going to and from tax-deductible business destinations, whether in town or out of town, on overnight business travel.

Five Good Things to Know

 

  1. Have your personal home within 50 miles of your tax home.
  2. When you have your personal home within 50 miles of your tax home, claim the home-office deduction under the administrative office rules so you can eliminate commuting to your outside-the-home office.
  3. Deduct overnight business travel when you travel on business outside the area of your tax home.
  4. If you have more than one business, the business on which you spend the most time and make the most money is the principal business. It’s the location of your tax home. Overnight travel outside the tax-home area of the principal business to a secondary business is deductible. For example, if you have your principal office in Worcester, Massachusetts, you can deduct your overnight travel to your second business in New York City.
  5. If you have one business with multiple offices in different cities, the office where you spend the most time, do the most important things, and make the most money is your tax home. When you travel away from this office overnight to a secondary office, you are in business travel status.

If you have questions regarding your tax home verse your personal home, let Lothamer Tax Resolution help you.

 

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

 

Planning Your Tax Deductible Business Life

You can plan your tax-deductible business life to avoid cold winters and hot summers.

 

Spend a moment examining the following four short paragraphs that contain the basic facts from the Andrews case.

 

For six months of the year, from May through October, Edward Andrews lived in Lynnfield, Massachusetts, where he owned and operated Andrews Gunite Co., Inc., a successful pool construction business.

 

During the other six months, Mr. Andrews lived in Lighthouse Point, Florida, where he owned and operated a sole proprietorship engaged in successful horse racing and breeding operations. In addition, he, his brother, and his son owned a successful Florida-based pool construction corporation from which Mr. Andrews took no salary, but where he did assist in its operations.

 

Instead of renting hotel rooms while in Florida, Mr. Andrews purchased a home, claimed 100 percent business use of the Florida home, and depreciated the house and furniture as business expenses on his Schedule C for his horse racing and breeding business.

 

Mr. Andrews then allocated his other travel expenses and costs of owning and operating this house in Florida on his individual in-come tax return as:

 

  • personal deductions on his Schedule A for a portion of the mortgage interest and taxes,
  • business deductions on his Schedule C for the horse racing and breeding business, and employee business expenses on IRS Form 2106 for the pool construction business.

 

(Tax reform under the Tax Cuts and Jobs Act eliminates employee business expense deductions for tax years 2018 through 2025— so Mr. Andrews would change his strategy to obtaining expense reimbursements from the pool business.)

 

Just as Mr. Andrews did, you can tax plan your life to spend your winters in one state and your summers in a different state.

 

In this scenario, your tax-deductible home takes the place of your staying in hotels. The other home is likely your principal residence located near your tax home.

 

Your travel expenses between the homes are deductible because you do business in both places. You also deduct your meals and other living costs while at the deductible travel destination.

 

You can have separate businesses in each state or a branch business in the second state.

 

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

Section 179 Deduction Rules of the Tax Cuts and Jobs Act

The recent tax reform, known as the Tax Cuts and Jobs Act (TCJA), added some good benefits to your real estate rentals. Both residential and commercial properties obtained a number of new tax breaks with respect to Section 179 deductions and bonus depreciation. The new breaks make it easier for you to plan your business income for the year.

Liberalized Section 179 Deduction Rules for Nonresidential Buildings and Property Used to Furnish Lodging

For qualifying property placed in service in tax years beginning in 2018, the TCJA increases the maximum Section 179 deduction to $1 million (up from $510,000 for tax years beginning in 2017).

 

As you probably know, the Section 179 deduction privilege allows you to deduct the entire cost of eligible property in Year 1.

 

For real estate owners, eligible Section 179 property includes any improvement to an interior portion of a nonresidential building if the improvement is placed in service after the date the building was placed in service.

 

The TCJA also expands the definition of eligible property to include expenditures for nonresidential building roofs, HVAC equipment, fire protection and alarm systems, and security systems.

 

Finally, the TCJA expands the definition of Section 179 eligible property to include depreciable tangible personal property used predominantly to furnish lodging. Examples of such property include beds and other furniture, appliances, and other equipment used in the living quarters of a lodging facility such as an apartment house, dormitory, or other facility where sleeping accommodations are provided and rented out.

 

Warning: Section 179 deductions cannot create or increase an overall tax loss from business activities. So you may need plenty of positive business taxable income to take full advantage of the Section 179 deduction privilege.

100 Percent First-Year Bonus Depreciation for Qualified Real Property Expenditures

For qualified property placed in service between September 28, 2017, and December 31, 2022, the TCJA increases the first-year bonus depreciation percentage to 100 percent (up from 50 percent).

 

Unlike the old 50 percent deduction, which was for new property only, the new 100 percent deduction is allowed for both new and used qualified property.

 

 

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

Tax Law for Income From Hobbies

The tax law has mistreated hobbies for a long time. But the most recent tax reform brings the grim reaper to the party, and it’s not pleasant.

 

This means you need to focus on making your activity a business and not a hobby.

 

Under both prior law and the new law after the recent tax reform, your activity is either a business (for profit) or a hobby (not for profit). With the hobby classification, tax law makes you suffer.

 

Your taxable gross income includes income from any source unless there’s a specific exclusion, and there’s none for hobby income. Thus, tax law taxes your hobby income.

 

Don’t think that you need a hobby to have what is called hobby income. In an article in Tax Notes titled “Potential Pitfalls for Direct Sellers,” author Monika Turek states that there are 15.2 million direct sellers who fall into the tax law–defined hobby category.

 

Direct sellers include distributors for companies such as Amway, Herbalife, and Mary Kay. For sure, many of the 15.2 million are going to feel cheated by the recent tax reform.

 

At the other end of the spectrum, you find many hobby-loss tax cases that involve doctors or lawyers who like racehorses or ranching. They too will feel cheated.

 

Under the recent tax reform, the law taxes your hobby income and gives you a zero deduction for any business expenses of producing that income. That’s about as draconian as the law can get.

 

The only out is to establish your activity as a business. This may or may not be possible, but it is certainly something to look at during 2018.

 

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

Deducting Mortgage Interest Under The New Tax Reform

The recent tax reform contains two big changes to how much you can deduct in mortgage interest for tax years 2018 through 2025:

  1. During this seven-year period, you may not deduct any interest on prior or current home equity debt, with certain exceptions.
  2. Also during this seven-year period, the maximum amount you may treat as acquisition debt for homes purchased after December 15, 2017, is $750,000.

Exception alert. Your home equity loan may include acquisition or home-improvement debt, and that debt continues as deductible under the recent tax reform rules.

Example. Billy took out a $90,000 home equity loan in 2015. He used $50,000 to remodel portions of his home and used the remaining $40,000 for his daughter’s college tuition. Billy’s total home mortgages never exceeded $1.1 million. Under the new law, Billy may deduct 5/9 of his home equity loan interest in 2018.

Acquisition debt. When you buy your main home or a second home and take out mortgages secured by those homes, your mortgages are called acquisition debt. You can add acquisition debt when you improve your main or second home, and that new debt is secured by the home you improved.

Refinancing alert. Your acquisition debt does not increase when you refinance unless you use the new monies to improve the home.

Example. Tom bought a home in 2010 and took out a $250,000 mortgage that he secured with the home. In 2018, Tom has paid down his mortgage to $215,000, and his home has increased in value to $400,000. Tom refinances the home and takes out a new mortgage in the amount of $300,000, secured by the home.

If Tom uses none of the new money to improve his home, his mortgage interest deduction in 2018 is based on the $215,000 of mortgage principal that remained as of the date of his refinancing.

To put this in perspective, your original acquisition debt never increases on that original home. To increase your debt eligible for the home mortgage interest deduction, you need to use the new debt to improve the home.

Ceilings. Because of tax reform, you now have two possible 2018 ceilings on your home mortgages that are eligible for the mortgage interest deductions.

$1.1 million. For indebtedness incurred before December 15, 2017, you may not deduct interest on more than $1.1 million in mortgages ($1 million in acquisition debt and $100,000 in home equity debt used for acquisition or improvements). The original $1.1 million ceiling is grandfathered for acquisition and improvement loans in existence before December 15, 2017.

Example. Sam took out his mortgages during 2013. Sam faces the $1.1 million ceiling in 2018.

$750,000. For home mortgage indebtedness incurred on or after December 15, 2017, you may deduct interest on no more than $750,000 of home mortgages.

Example. Jim took out his mortgage in 2018. He faces the $750,000 ceiling.

Exception. If you entered into a written, binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and you complete the purchase before April 1, 2018, you fall into the $1.1 million ceiling category.

As you can see these are pretty large changes that impact how much you can deduct in mortgage interest.

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

How to Beat an IRS Penalty

You hate IRS penalties, right? Everyone does!

There are a lot of strategies we can use on your behalf to potentially defeat an IRS penalty.

Thanks to the courts, though, we now have a brand-new way to beat an IRS penalty. It’s Section 6751(b) of the Internal Revenue Code.

This provision can get you out of a penalty – even if you are truly liable for it under the law – if the IRS didn’t follow proper legal procedures before assessing it.

Code Section 6751(b) says that the IRS cannot assess a penalty unless an IRS supervisor or higher-level official designated by the Treasury secretary personally approved the determination in writing.

If the IRS does not follow this administrative requirement, then the IRS erroneously assessed the penalty, and we can have it abated for you.

This provision does not apply to

  • individual and C corporation late-filing and late-payment penalties,
  • individual and C corporation estimated tax payment penalties, or

any other penalty automatically calculated through electronic means.

This abatement also does not apply to FBAR penalties. Title 31 of the United States Code authorizes FBAR penalties, and the penalty abatement provision we’re talking about covers only Title 26 penalties (i.e., penalties under the Internal Revenue Code).

Some of the penalties that Section 6751(b) applies to include:

  • Accuracy-related penalties
  • Civil fraud penalties
  • Daily delinquency penalties (e.g., Form 990)
  • Information return penalties (e.g., Form 1099, Form W-2)
  • International information return penalties (e.g., Form 8938, Form 5471)
  • Partnership and S corporation late-filing penalties
  • Tax return preparer penalties
  • Trust fund recovery penalties
  • Valuation penalties

If you need us to help you with figuring out if these penalties could impact your back taxes,  give Lothamer a call.

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

 

 

Tax Implications of Accepting Bitcoins as Payment

Are you considering accepting bitcoins as payment? If so, you should know the tax implications of accepting bitcoins in your business and the major pros and cons of doing so. I’m going to use an example to explain this.

Example. Carol is a freelance consultant. In exchange for her $1,500 invoice to a client, she receives 1.5 bitcoins. The bitcoin exchange rate at that time is $1,000 per bitcoin. Her payment processor charges 0.8 percent, up to a maximum of $8 per bitcoin transaction.

Two years later, Carol buys a $1,000 computer using 0.5 bitcoins. The exchange rate at the time is $2,000 per bitcoin.

Initial receipt. Carol receives property worth $1,500 in exchange for her services. The $1,500 value of the bitcoins is ordinary income to Carol (and subject to self-employment tax, since she received it in her trade or business).

Carol’s adjusted basis in the bitcoins received is the fair market value of $1,500 plus the $8 transaction fee, or $1,508. Because bitcoins are a capital asset (property), the transaction fee is added to its capital basis.

Computer purchase. Carol exchanged 0.5 bitcoins for the computer. Carol’s gain or loss on the transaction is the fair market value of the property received less her adjusted basis in the bitcoins.

Carol received a computer valued at $1,000 and gave up bitcoins with an adjusted basis of $503 (one-third of $1,508). Carol has a taxable gain of $497 and an adjusted basis of $1,005 in her remaining bitcoins.

The $497 gain is a tax-favored, long-term capital gain to Carol because she held the bitcoin property for more than a year.

Pros and Cons

Pro: Capital losses deductible. If you recognize a loss on a bitcoin transaction, then it is deductible from your other income, subject to the limitations applicable to capital losses. And if you are a noncorporate taxpayer, then you can carry forward any losses that you can’t use in the current year.

Pro: Taxable capital gains. Your bitcoins can appreciate in value, causing you to both gain extra income and pay taxes on that income. If you recognize a gain on a bitcoin transaction, then you have a short- or long-term capital gain on which you have to pay taxes. You may also have to pay the 3.8 percent net investment income tax on this gain. In cash transactions, you don’t have the possibility for profit or the complications of paying taxes.

Pro: Lower transaction fees. Stripe, a large third-party payment processor, processes bitcoin transactions for 0.8 percent of the gross amount, up to a maximum of $8 per transaction, compared with 2.9 percent plus $0.30 for credit card transactions (with no maximum).

If you receive a $2,000 payment for services rendered, your potential transaction costs are

  • $8.00 for a bitcoin transaction, and
  • $53.80 for a credit card payment.

Con: Basis tracking. Cash is cash and requires no special tracking. With bitcoin, you need to track the adjusted basis in your bitcoins and account for basis changes due to fractional sales.

Con: Liquidity. Once you get bitcoins, you may find it difficult to find others to transact with to use your bitcoins for goods and/or services.

You now have the big picture of how transacting business with bitcoins works.

 

Jesse Lothamer J.D., C.P.A., E.A.

Lothamer Tax Resolution

Winning Strategies For Small Business Owners

The new 2018 Section 199A tax deduction that you can claim on your IRS Form 1040 is a big deal. There are many rules (all new, of course), but your odds as a business owner of benefiting from this new deduction are excellent.

Rejoice if you operate your business as a sole proprietorship, partnership, or S corporation, because your 2018 income from these businesses can qualify for some or all of the new 20 percent deduction.

You also can qualify for the new 20 percent 2018 tax deduction on the income you receive from your real estate investments, publicly traded partnerships, and real estate investment trusts (REITs), and qualified cooperatives.

Basic Look

When can you as a business owner qualify for this new 20 percent tax deduction with almost no complications?

To qualify for the 20 percent with almost no complications, you need two things: First, you need qualified business income from one of the sources above to which you can apply the 20 percent. Second, to avoid complications, you need “defined taxable in-come” of

  • $315,000 or less if married filing a joint return, or $157,500 or less if filing as a single taxpayer.

Example. You are single and operate your business as a proprietorship. It produces $150,000 of qualified business income. Your other income and deductions result in defined taxable income of $153,000. You qualify for a deduction of $30,000 ($150,000 x 20 percent).

If you operate your business as a partnership or S corporation and you have the qualified business income and defined taxable in-come numbers above, you qualify for the same $30,000 deduction. The same is true if your income comes from a rental property, real estate investment trust, or limited partnership.

Some unfriendly rules apply to what Section 199A calls a specified service trade or business, such as operating as a law or ac-counting firm. But if the doctor, lawyer, actor, or accountant has defined taxable income less than the thresholds above, he or she qualifies for the full 20 percent deduction on his or her qualified business income.

In other words, if you were a lawyer with the same facts as in the example above, you would qualify for the $30,000 deduction.

Once you are above the thresholds and phaseouts ($50,000 single, $100,000 married filing jointly), you can qualify for the Section 199A deduction only when

  • you are not in the out-of-favor group (accountant, doctor, lawyer, etc.), and your qualified business pays W-2 wages and/or has property.

As you can see, there’s much to this new 2018 tax deduction.

Jesse Lothamer J.D., C.P.A., E.A.