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Answers to Your Tax Questions

Individuals

What are some of the most significant changes in the new tax reform law for individuals?

The new tax reform law, commonly called the "Tax Cuts and Jobs Act" (TCJA), is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.

Below are highlights of some of the most significant changes affecting individual taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.

Individuals

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025.
  • Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately) — through 2025.
  • Elimination of personal exemptions — through 2025.
  • Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit — through 2025.
  • Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018.
  • Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018.
  • New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers) — through 2025.
  • Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions — through 2025.
  • Elimination of the deduction for interest on home equity debt — through 2025.
  • Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters) — through 2025.
  • Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses) — through 2025.
  • Elimination of the AGI-based reduction of certain itemized deductions — through 2025.
  • Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances) — through 2025.
  • Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year.
  • AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers — through 2025.
  • Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing) — through 2025.

More to consider

This is just a brief overview of some of the most significant TCJA provisions. There are additional rules and limits that apply, and the law includes many additional provisions. Contact your tax advisor to learn more about how these and other tax law changes will affect you in 2018 and beyond.

How can I turn my photography hobby into a business and deduct my expenses?

There's a fine line between businesses and hobbies under the federal tax code. If you're an employee during the workweek and a photographer at night and on weekends — you may think of that side activity as a business and hope to deduct any losses on your personal tax return. But the IRS may disagree and reclassify the money-losing activity as a hobby.

In general, the hobby loss rules aren't taxpayer friendly. But there's a silver lining: If you heed the rules, there's a good chance you can win the argument and establish that you have a business rather than a hobby. Here's some guidance, along with a recent example of a taxpayer who ran afoul of the rules.

The rules for hobby losses

If you operate an unincorporated for-profit business activity that generates a net tax loss for the year (deductible expenses in excess of revenue), you can generally deduct the full amount of the loss on your federal income tax return. That means the loss can be used to offset income from other sources and reduce your federal income tax bill.

On the other hand, the tax results are less favorable if your money-losing side activity is classified as a hobby, which essentially means an activity that lacks a profit motive. In that case, you must report all the revenue on your tax return, but your allowable deductions from the activity are limited to that revenue. In other words, you can never have an overall tax loss from an activity that's treated as a hobby, even if you lose tons of money.

In addition, you must treat your total allowable hobby expenses (limited to income) as a miscellaneous itemized deduction item. That means you get no write-off unless you itemize. Even if you do itemize, the write-off for miscellaneous deduction items is limited to the excess of those items over 2% of your adjusted gross income (AGI). The higher your AGI is, the less you'll be allowed to deduct. High-income taxpayers can find their allowable hobby activity deductions limited to little or nothing.

Finally, if you're subject to the alternative minimum tax (AMT), your hobby expenses are completely disallowed when calculating your AMT liability.

Why is the hobby loss issue an IRS audit target? After applying all of the tax-law restrictions, your money-losing hobby can add to your taxable income. That's because you must include all the income on your return while your allowable deductions may be close to zero.

The IRS "safe harbor" rules

So how can you determine whether your money-losing side activity is a hobby or a business? There are two safe harbors that automatically qualify an activity as a for-profit business:

1. The activity produces positive taxable income (revenues in excess of deductions) for at least three out of every five years.

2. You're engaged in a horse racing, breeding, training or showing activity, and it produces positive taxable income in two out of every seven years.

Taxpayers who can plan ahead to qualify for these safe harbors earn the right to deduct their losses in unprofitable years.

Can you prove you intend to make a profit?

If you can't qualify for one of these safe harbors, you may still be able to treat the activity as a for-profit business and deduct the losses. How? You must demonstrate an honest intent to make a profit with factors that include:

  • You conduct the activity in a business-like manner by keeping good records and searching for profit-making strategies.
  • You have expertise in the activity or hire expert advisors.
  • You spend enough time to justify that the activity is a business, not just a hobby,
  • You've been successful in other similar ventures, suggesting that you have business acumen.
  • The assets used in the activity are expected to appreciate in value. (For example, the IRS will almost never claim that owning rental real estate is a hobby even when tax losses are incurred for many years).

Courts will also consider the history and magnitude of income and losses from the activity. In general, occasional large profits hold more weight than more frequent small profits, and losses caused by unusual events or bad luck are more justifiable than ongoing losses that only a hobbyist would be willing to accept.

Another consideration is your financial status — if you earn a large income or most of your income from a full-time job or another business you own, an unprofitable side activity is more likely to be considered a hobby.

The degree of personal pleasure you derive from the activity is also a factor.

Stay on the right side

Business losses are fully deductible while hobby losses aren't. So, taxpayers will prefer to have their side activities classified as businesses. Over the years, courts have concluded that a number of pleasurable activities could be classified as for-profit businesses rather than hobbies, based on the facts and circumstances of each case. Your tax advisor can help you create documentation to prove that you're on the right side of this issue.

What is the 2017 tax impact of owning a vacation home?

A vacation home can be a place to relax and recharge with family and friends. It also will impact your 2017 taxes, especially if you rent the home to others when you're not using it. The rules are complex, so you should consult your tax advisor for details, but here's a brief overview:

Personal use onlyIf you use the vacation home strictly for personal enjoyment, you typically can deduct your mortgage interest and 100% of your property taxes, just as you do with your principal residence. In most cases, the interest deduction is limited to the interest paid on up to $1 million ($500,000 if married filing separately) in mortgage debt for both homes. For 2017, you also may be able to deduct up to $100,000 ($50,000 if married filing separately) in home equity debt for both properties. (Note: For 2018-2025, the new Tax Cuts and Jobs Act suspends the deduction for interest on home equity debt: After December 31, 2017, taxpayers can't claim deductions for such interest.)

Rent out for fewer than 15 days. In this case, you typically won't have to report the income and can deduct the same expenses you could deduct if you didn't rent out the home, such as property tax and mortgage interest. However, you won't be able to deduct expenses associated specifically with the rental, such as advertising and cleaning.

Rent out for 15 or more days and use it 15 or more days or at least 10% of the days you rent it out, whichever is greater. The home will still be considered a personal residence but you must report rental income on your tax return. You typically will need to allocate expenses between rental and personal use, based on the number of days your home is used for each purpose. Expenses attributable to rental use — such as utilities, repairs, insurance and depreciation — can be deducted up to the rental income you earned, although you may be able to carry any excess deductions to future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property taxes.

Rent out for 15 or more days and use the home for fewer than 15 days or 10% of the days it's rented, whichever is greater. The home will be considered a rental property. You must report the income and can deduct rental expenses. If deductible expenses exceed the revenue you brought in, you can deduct the loss, subject to the complex real estate activity rules. You won't be able to deduct the portion of mortgage interest attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction. 

Are my 2017 work-related education expenses deductible?

Even though the job market has improved, many people continue to view higher education as a means to gain a competitive edge. If in 2017, you headed back to the classroom to improve your marketability, you may be wondering whether the expense qualifies for any tax breaks when you file your 2017 tax return. 

Depending on your income level and other factors, you might qualify for education-specific tax breaks (such as the American Opportunity credit or Lifetime Learning credit). Here, however, we'll focus on deducting the cost of education as a business expense on your 2017 tax return.

What's deductible?

If you're employed, qualifying education costs may be deducted on Schedule A as unreimbursed employee expenses. These are considered miscellaneous itemized deductions that are deductible only to the extent that the total of such deductions exceeds 2% of your adjusted gross income. If you're self-employed, education expenses may be deducted on Schedule C.

It's important to remember that education expenses are deductible as a miscellaneous itemized deduction only if they qualify as ordinary and necessary business expenses. So if you're currently unemployed (with one exception, discussed below) — or otherwise not actively engaged in a trade or business — these expenses aren't deductible.

Under IRS regulations, you can deduct the cost of education that:

  • Maintains or improves skills required in your employment or other trade or business, or
  • Meets legal or employer requirements for retaining your employment, compensation or job status.

What types of expenses might you deduct? For starters, the cost of courses that review new developments in your field or the cost of courses needed to meet continuing professional education (CPE) requirements. Even courses that lead to a degree can be deductible, provided they otherwise satisfy regulatory requirements.

Education expenses that fall into one of the above categories aren't automatically deductible, however. The education must also relate directly to your trade or business and the expenses must be reasonable, not "lavish or extravagant." For example, expenses may be considered extravagant if you travel to an exotic location for education or if you stay in a five-star hotel. Also, education expenses aren't deductible if you're entitled to reimbursement from your employer (whether you apply for it or not).

What's not deductible?

IRS regulations specifically exclude expenses for the following types of education, which are considered to be personal and, therefore, aren't deductible:

  • Education required to meet the minimum requirements for your employment or other trade or business, and
  • Education that qualifies you for a new trade or business.

Suppose, for example, that a college instructor with a bachelor's degree must obtain a graduate degree to continue to hold her position on the faculty. Graduate courses are required to meet the minimum requirements for the job and, therefore, aren't deductible. On the other hand, a high school teacher required only to have a bachelor's degree can deduct the cost of graduate courses (provided the other criteria for deductibility are met).

Education that qualifies you for a new trade or business isn't deductible, regardless of whether you actually intend to enter that new trade or business. So, for example, if you're a corporate executive who attends law school at night, you can't deduct the expense even if you have no intention of practicing law and the courses help you improve his skills in his current job.

What if you're unemployed?

As noted above, education expenses are deductible only if they qualify as business expenses. If you're unemployed, it's difficult to meet this requirement because you aren't actively engaged in a trade or business.

There's an exception, however, for temporary absences from work. The IRS generally considers anything more than one year to be permanent or "indefinite," but this time frame isn't set in stone. The key is to show that you were previously involved in a trade or business, that you're actively seeking to return to it (rather than a new trade or business), and that the absence is temporary rather than indefinite.

School yourself

The rules regarding deductibility of work-related education expenses are confusing. Before you file your 2017 tax return, it's a good idea to consult your tax advisor to find out whether your expenses are deductible and, if so, to ensure that you've substantiated them properly.

How do I know if I’m required to make estimated tax payments?

It depends on what you do for a living and what type of income you receive. If you have income from sources such as self-employment, interest, dividends, alimony, rent, prizes, awards or the sales of assets, then you may have to pay estimated tax.

Payments are spaced through the year into four periods or due dates. Generally, the due dates are April 15, June 15, September 15 and January 15. (But if the deadline falls on a weekend, the due date is pushed out to the next business day.)

As a general rule, you must pay estimated taxes if both of these statements apply:

  • You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and credits, and
  • You expect your withholding and credits to be less than the smaller of 90% of your taxes for the year or 100% of the tax on your previous year's return. There are special rules for farmers, fishermen, certain household employers and certain higher-income taxpayers.

If you're a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. Form 1040ES, "Estimated Tax for Individuals," provides what you need to pay estimated taxes. This includes instructions, worksheets, schedules and payment vouchers.

The easiest way to pay estimated taxes, however, is electronically through the Electronic Federal Tax Payment System. You can also pay estimated taxes by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

Check with your tax advisor to ensure you're paying the correct amount to the federal government and to find out about any state estimated payments you may owe.

If I provide monetary support to relatives, should I give a gift or a loan?

An intrafamily loan rather than a gift can be attractive if you're not ready to part with your wealth — for example, because you're concerned about having enough money to fund your retirement or you feel that your children aren't ready to handle the responsibility. Intrafamily loans allow you to provide family members with financial support while hanging on to your "nest egg" and encouraging your children to be financially responsible.

Charge interest

When you lend money to family members, it's important to charge interest at the applicable federal rate (AFR) or higher. Otherwise you'll trigger unintended income and gift tax consequences.

The key to transferring wealth with an intrafamily loan is the borrower's ability to take advantage of investment opportunities that offer relatively high returns. In other words, the borrower essentially receives the "spread" between the investment returns and the loan interest being paid — free of gift and estate taxes.

Average AFRs, which are adjusted monthly, have been low, perhaps making it easier for a borrower's investments to outperform the interest rate on a loan. AFRs vary depending on whether the loan is short term (three years or less), midterm (more than three years but not more than nine years) or long term (more than nine years). They also vary depending on how frequently interest is compounded.

Keep in mind that the loan balance is still included in your taxable estate. Even if you die before the loan is paid off, the borrower generally must repay the loan to your estate, although an intrafamily loan can be structured to provide that the loan will be forgiven if you die before it's paid off.

Understand the risks

The biggest risk, of course, is that the invested funds will fail to outperform the AFR. If that happens, your child (or other borrower) will have to use his or her own funds to pay some or all of the interest — and, if he or she experiences a loss on the investment, even some of the principal. In other words, instead of transferring wealth to your child, your child will transfer wealth to you. As noted above, however, low AFRs help minimize this risk.

There's also a risk that the IRS will challenge the loan as a disguised gift, potentially triggering gift tax liability or using up some of your lifetime exemption. To avoid this result, you must treat the transaction as a legitimate loan. That means documenting the loan with a promissory note and adhering to its payment and enforcement terms. So, for example, if your child is unable to make a payment, you should make a genuine effort to collect the funds from the child.

Avoid the temptation to make no-interest loans to family members (or loans with interest below the AFR). If you do, you'll be subject to income tax (with certain exceptions for smaller loans) on imputed interest — that is, the excess of the AFR over the interest you actually collect. So, you'll be taxed on interest that you didn't receive. In addition, the imputed interest will be treated as a taxable gift made by you to the borrower.

An important decision

Determining how best to transfer your wealth to loved ones takes much thought. Whether making an intrafamily loan is the right strategy for your situation — or giving gifts makes more sense — is a question you must consider before taking action. Discuss your options with your tax and estate planning advisors.

I want to donate my used vehicle to a local charity. What are the considerations?

Charitable gifts allow you to benefit organizations you care about while enjoying a tax deduction (if you itemize). Cash is the easiest gift, but sometimes it's more advantageous to donate other assets — and sometimes it's not. Take vehicle donations: If you donate your vehicle to charity, the value of your deduction can vary greatly depending on what the charity does with it.

You can deduct the vehicle's fair market value (FMV) if the charity:

  • Uses the vehicle for a significant charitable purpose (such as delivering meals-on-wheels to the elderly),
  • Sells the vehicle for substantially less than FMV in furtherance of a charitable purpose (such as a bargain sale to a low-income person needing transportation), or
  • Makes material improvements to the vehicle. (This, according to the IRS, is an improvement that "significantly increases" the vehicle's value. The IRS doesn't provide specifics, other than saying that "cleaning, minor repairs and routine maintenance" don't qualify.)

But in most other circumstances, if the vehicle you're donating is valued at more than $500 and the charity sells it, your deduction is limited to the amount of the sales proceeds.

To qualify for a donation deduction, you also must obtain from the charity a written acknowledgment (with a copy to the IRS) that:

  • Certifies whether the charity sold the vehicle or retained it for use for a charitable purpose,
  • Includes your name and tax identification number, as well as the vehicle identification number, and
  • Reports, if applicable, details concerning the sale of the vehicle within 30 days of the sale.

As with any donation of more than $75, the charity also must disclose whether it provided you any goods or services in relation to the vehicle donation, making a good-faith estimate of the value of any goods and services provided. You must then reduce your deduction by that value.

Do I need professional appraisals of my noncash gifts?

When you make a substantial noncash gift, a professional appraisal can reduce the chances that the IRS will challenge your gift tax return, thus decreasing the possibility of unplanned tax liability.

Three-year statute of limitations

If you make a substantial noncash gift — either outright or in trust — IRS regulations provide for a three-year statute of limitations during which the IRS can challenge the value you report on your gift tax return. After the three-year period expires, you can enjoy the peace of mind that comes with knowing that your estate plan will work as you intended.

There's one catch, though: The statute of limitations doesn't begin until your gift is "adequately disclosed" on a gift tax return. Under IRS regulations, to adequately disclose a gift, you must provide a detailed description of the nature of the gift, the relationship of the parties to the transaction and the basis for the appraisal. You may also be required to furnish certain financial statements or other financial data and documents.

The regulations also provide that you can satisfy the adequate disclosure rule's information requirements by submitting an appraisal report by a qualified, independent appraiser that includes details about the property, the transaction and the appraisal process. In most cases, this is the most effective way to ensure that you've disclosed gifts adequately and triggered the statute of limitations. Even if a gift's value falls under the $14,000 annual exclusion and thus won't be taxable, it's a good idea to file a gift tax return to get the statute of limitations running.

Misstatement penalties can add up

Insufficient appraisals expose you to the risk that the IRS will revalue property and assess additional taxes down the road. They can also result in significant penalties if the IRS finds that the value of property was substantially or grossly misstated.

In this context, a "substantial" misstatement occurs when you report a value that is 65% or less of the "correct" value. A "gross" misstatement occurs when you report a value that is 40% or less of the correct value. The penalty for a substantial misstatement is 20% of the amount by which your taxes are underpaid. Gross misstatements result in a 40% penalty.

Appraise your assets

To reduce the chances of triggering an IRS review of your gift tax return, have a qualified appraiser value your substantial noncash gifts at the time of the transaction. A variety of other estate planning strategies also require having accurate, supportable and well-documented appraisals of assets.

Can I protect life insurance proceeds from tax?

Yes. Life insurance proceeds generally are income-tax-free to your beneficiaries, but if you own the policy at your death, the proceeds may be subject to estate taxes. One of the best ways to keep life insurance out of your taxable estate is to place the policy in an irrevocable life insurance trust (ILIT).

Why now?

Contributing a life insurance policy to an ILIT constitutes a taxable gift to the trust beneficiaries of the policy's fair market value (which generally approximates its cash value). Making the gift now allows you to take advantage of the record-high gift tax exemption.

The exemption stands at $5.49 million for 2017 (up from $5.45 million for 2016). And while under current tax law, the exemption is to continue to be indexed for inflation going forward, it's possible that Congress could pass legislation in the future that reduces it or even repeals the estate tax.

Keep in mind that future ILIT contributions to cover premium payments will be taxable gifts. You may, however, be able to apply your annual gift tax exclusion (currently, $14,000 or $28,000 for married couples splitting gifts) to reduce or eliminate the tax — provided the ILIT is structured appropriately and certain other requirements are met. Alternatively, if you can afford it, you might take advantage of the $5.49 million exemption to "front-load" the ILIT with cash to fund future premium payments.

Giving up ownership

To remove a life insurance policy from your taxable estate, simply transferring the policy to an ILIT isn't enough. You must also relinquish all "incidents of ownership," such as the power to change or add beneficiaries; to assign, surrender or cancel the policy; to borrow against the policy's cash value; or to pledge the policy as security for a loan. If you retain any incidents of ownership, the insurance proceeds will still be included in your estate and may be subject to estate taxes, depending on the size of your estate and your available estate tax exemption.

Also, be aware of the "three-year rule," under which the proceeds are pulled back into your taxable estate if you die within three years after transferring an existing policy to an ILIT. In light of this rule, the safest strategy is to establish the ILIT first and have it acquire an insurance policy on your life. But if you already own a policy, the sooner you transfer it to an ILIT, the greater the chances that you'll successfully remove it from your estate.

Maintaining flexibility

An ILIT offers significant tax benefits, but it also has some major limitations. As mentioned, after you transfer a policy to the trust, you can no longer change or add beneficiaries; assign, surrender or cancel the policy; or borrow against or withdraw from the policy's cash value. In addition, you're not allowed to alter the trust's terms or act as trustee.

Nevertheless, there are some techniques available to build flexibility into an ILIT. For example, you can design the trust to:

  • Adapt to changing circumstances,
  • Provide that children or grandchildren born after you establish the trust be automatically added as beneficiaries, and
  • Give the trustee the power to remove beneficiaries under certain circumstances (such as removing your daughter-in-law if she divorces your son).

You can also establish conditions for distributing funds from the ILIT. For example, you might instruct the trustee to withhold funds from a beneficiary who drops out of school or develops a substance abuse problem.

Another strategy is to appoint a "trust protector." A trust protector is a sort of super-trustee who has the power to remove the trustee, amend the trust or take other actions to ensure the ILIT achieves your objectives in light of changing laws or circumstances.

And with careful planning, it's possible to still tap your policy's cash value under certain circumstances. For example, you can design the ILIT so it permits the trustee to borrow against or withdraw from the policy's cash value and distribute the funds to your spouse or other beneficiaries for their support. (Bear in mind, the cash value in a life insurance policy is accessed through policy loans, which accrue interest at the current rate, and withdrawals. Loans and withdrawals will decrease the cash surrender value and death benefit.)

Creating wealth

Life insurance is a powerful estate planning tool. It creates an instant source of wealth and liquidity to meet your family's financial needs after you're gone. To shield proceeds from estate taxes, consider transferring your policy to an ILIT. And, if possible, complete the transfer this year to minimize gift taxes on the policy's current value.

Businesses

What are some of the most significant changes in the new tax reform law for businesses?

The new tax reform law, commonly called the "Tax Cuts and Jobs Act" (TCJA), is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.

Below are highlights of some of the most significant changes affecting business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.

Businesses

  • Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%.
  • Repeal of the 20% corporate AMT.
  • New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025.
  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023.
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million.
  • Other enhancements to depreciation-related deductions.
  • New disallowance of deductions for net interest expense in excess of 30% of the business's adjusted taxable income (exceptions apply).
  • New limits on net operating loss (NOL) deductions.
  • Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers' deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers.
  • New rule limiting like-kind exchanges to real property that is not held primarily for sale
  • New tax credit for employer-paid family and medical leave — through 2019
  • New limitations on excessive employee compensation.
  • New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation.

More to consider

This is just a brief overview of some of the most significant TCJA provisions. There are additional rules and limits that apply, and the law includes many additional provisions. Contact your tax advisor to learn more about how these and other tax law changes will affect your business in 2018 and beyond.

What are the tax implications of business travel?

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

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, get in touch with your tax advisor.

What documents does my business have to keep and what recordkeeping system?

There's no one way to keep records. In fact, the IRS states on its website that "you may choose any recordkeeping system suited to your business that clearly shows your income and expenses."However, it's important to keep thorough and accurate records. If you have incomplete or no records and get audited by the IRS, it can cost you valuable deductions.

According to the IRS, here are some of the types of records you should keep:

ItemDescriptionExamples
Gross receiptsThe income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts.Cash register tapes; deposit information (cash and credit sales); receipt books; invoices; and Forms 1099-MISC.
PurchasesItems you buy and resell to customers. For manufacturers or producers, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Supporting documents should show the amount paid and that the amount was for purchases.Canceled checks or other documents that identify payee, amount, and proof of payment/ electronic funds transferred; cash register tape receipts; credit card receipts/ statements; and invoices.
ExpensesThe costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense.Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred; cash register tapes; account statements; credit card receipts and statements; invoices; and petty cash slips for small cash payments.
Travel, transportation, entertainment, and gift expensesIf you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.Same as above
Assets

The property, such as machinery and furniture, that you own and use in your business.

You must keep records to verify certain information about your business assets.

You need records to compute the annual depreciation and the gain or loss when you sell the assets.

Purchase and sales invoices; real estate closing statements; and canceled checks or other documents that identify payee, amount, and proof of payment/ electronic funds transferred.

Documents should show: When/ how you acquired the assets; purchase price; cost of any improvements; deductions taken for Section 179 and depreciation; deductions taken for casualty losses; how you used the asset; when/ how you disposed of it; selling price; and sale expenses.

There are also specific employment tax records you must keep. Keep all records of employment for at least four years.

Don't leave the important matter of documentation to chance. You can prepare and maintain tax return records that will stand up to close scrutiny from the IRS. For more information about tax recordkeeping, consult with your tax adviser.

How can business owners help fund retirement with an ESOP?

Most business owners have much of their wealth tied up in their companies. If you're in the same boat, how can you convert some of that wealth into cash to help pay for your retirement? Many C corporation owners have found that an Employee Stock Ownership Plan (ESOP) — a qualified retirement plan, similar to a profit sharing or 401(k) plan — can help pave the way to a comfortable future.

The nuts and bolts

The main difference between an ESOP and other types of retirement plans is that, instead of investing in a variety of stocks, bonds and mutual funds, an ESOP invests primarily in the employer's own stock. So, how does it work?

The employer makes tax-deductible contributions to the ESOP, which the plan uses to acquire stock from the company or its owners. Essentially, by establishing an ESOP, you're creating a buyer for your shares.

At the same time, you provide a powerful incentive for employees, who now have an opportunity to share in the company's growth on a tax-deferred basis. When employees retire or otherwise qualify for distributions from the plan, they can receive benefits in the form of stock or cash.

Like other qualified plans, ESOPs are strictly regulated. They must cover all full-time employees who meet certain age and service requirements, and they're subject to annual contribution limits (generally 25% of covered compensation), among other conditions.

ESOPs are also subject to rules that don't apply to other types of plans. For example, an ESOP must obtain an independent appraisal of the company's stock when the plan is established and at least annually thereafter. Also, participants who receive distributions in stock must be given the right to sell their shares back to the company for fair market value. This requirement creates a substantial repurchase liability that the company must prepare for.

The financial advantages

An ESOP provides several tax benefits. If the ESOP acquires at least 30% of your company, you can defer the gain on the sale of your shares indefinitely by reinvesting the proceeds in qualified replacement property within one year after the sale — an advantage over an outright sale. Qualified replacement property includes most securities issued by domestic operating companies.

ESOPs are unique among qualified retirement plans because they permit a company to finance the buyout with borrowed funds. A "leveraged" ESOP essentially permits your company to deduct the interest and the principal on loans used to make ESOP contributions — a tax benefit that can do wonders for cash flow. Your company can also deduct certain dividends paid on ESOP shares. Interest and dividend payments don't count against contribution limits.

The right to keep control

Another advantage of ESOPs over sales or other exit strategies is that they allow you to cash out without giving up control over the business. Even if you transfer a controlling interest to an ESOP, most day-to-day decisions will be made by the ESOP's trustee, who can be a company officer.

However, ESOP participants may have the right to vote their shares on certain major decisions, such as a merger, dissolution or sale of substantially all of your company's assets.

Work with your advisors

An ESOP has many advantages if you wish to exit from your C corporation. It not only allows you to defer your gain indefinitely by reinvesting the proceeds in qualified replacement property, but it also allows your company to deduct the interest and the principal on loans used to make ESOP contributions. If you're thinking about retirement, an ESOP might just be the vehicle to get you there. But be sure to work closely with your tax, legal and benefits advisors, because ESOPs are extremely technical.

What are the 2018 deductible mileage rates for business driving and other purposes?

For 2018, the standard mileage rates are as follows.

 

  • 54.5 cents per mile for business miles (up from 53.5 cents for 2017). 
  • 18 cents per mile driven for medical or moving purposes (up from 17 cents for 2017).
  • 14 cents per mile driven in service of charitable organizations (unchanged from 2017).

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study.

A taxpayer cannot use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

What are the current IRS interest rates for tax underpayments and overpayments?

Here are the current interest rates.

IRS interest rates1st quarter of 2018 (and the 4th quarter of 2017)
Tax overpayments4%
(3% for corporations; 1.5% for the portion of corporate overpayments exceeding $10,000)
Tax underpayments4%
(6% for large corporate underpayments)

Not-for-Profit Organizations

How can our organization arrange corporate sponsorships and avoid paying UBIT?

The Tax Code requires exempt organizations to pay UBIT on income from activities that are not related to its missions. But payments other than "qualified sponsorship payments" are not automatically subject to UBIT.

The rules include revenue from such events as football bowl games, symphony performances and public broadcasting productions. They also address whether Internet links on your organization's website constitute a non-taxable acknowledgment or a taxable advertisement.

Here are a few examples from the IRS regulations that help shed light on whether or not your group is liable for UBIT:

1. A university enters into a multi-year contract with a sports drink company who then becomes the exclusive provider of sports drinks for the university's athletic department and concessions. As part of the contract, the university agrees to perform various services, such as guaranteeing that coaches make promotional appearances on behalf of the company, assisting the company in developing marketing plans, and participating in joint promotional opportunities.

According to the IRS: The university's activities are likely to constitute a "regularly carried-on trade or business." Any revenue is likely to be subject to UBIT because the activities are unlikely to be substantially related to the university's exempt purposes. Furthermore, the income received for those services cannot be excluded as a royalty.

2. A tax exempt organization posts a list of its sponsors on its website, including their Internet addresses, which appear as a hyperlink to the sponsor's website. 

According to the IRS: The sponsor's website address constitutes a non-taxable acknowledgment, not advertising, even though it appears as a hyperlink. 

3. A charity maintains a website that contains a hyperlink to a sponsor's website. When visitors go to the sponsor's site, they see an endorsement by the charity for the sponsor's product. The charity approved the endorsement before it was posted on the sponsor's website.

According to the IRS: The endorsement is taxable advertising. 

4. A national charity dedicated to promoting health organizes a campaign to inform the public about potential cures for a serious disease. As part of the campaign, the charity sends representatives to health fairs around the country to answer questions about the disease and inform the public about developments in the search for a cure. 

A pharmaceutical company makes a payment to the charity to finance its booth at a health fair. The charity places a sign in the booth displaying the company's name and slogan, Better Research, Better Health, which is an established part of the firm's identity. The charity also grants the company a license to use its logo in marketing products to health care providers around the country. The fair market value of the license exceeds two percent of the total payment received from the company.

According to the IRS: The charity's display of the pharmaceutical company's name and slogan constitutes a non-taxable acknowledgment of the sponsorship. However, the license granted to the pharmaceutical company to use the charity's logo is a substantial return benefit because it has a fair market value of more than two percent of the payment and the portion of proceeds attributed to it are subject to UBIT.

The tax treatment of corporate sponsorship deals is complex. Consult with your tax advisor before entering into any transactions to ensure the most tax-wise outcome.

More Information

Tax calendar

093016_Thinkstock_487049286_thmb_KK.jpgThis calendar contains upcoming federal tax due dates for individuals, employers, businesses, employees who work for tips and not-for-profit organizations.
More

Tax calendar

Some upcoming tax due dates

DateBusinessIndividualAction required
February 12, 2018 X

Individuals

Employees who work for tips. If you received $20 or more in tips during January, report them to your employer.

February 15, 2018 X

Business, not-for-profit, employers

Social Security, Medicare and withheld income tax.  If the monthly deposit rule applies, deposit the tax for payments made in January.

February 15, 2018  X

Business, not-for-profit, employers

Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments made in January.

March 12, 2018   X

Individuals

Employees who work for tips. If you received $20 or more in tips during February, report them to your employer.

March 15, 2018  X

Business, not-for-profit, employers

Partnerships, S corporations,corporations file a 2017 calendar year income tax return.

March 15, 2018  X

Business, not-for-profit, employers

Corporations deposit the first installment of estimated income tax for 2018.

March 15, 2018 X

Business, not-for-profit, employers

Social Security, Medicare and withheld income tax.  If the monthly deposit rule applies, deposit the tax for payments made in February.

March 15, 2018 X

Business, not-for-profit, employers

Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments made in February.

  • The information in this Tax Guide is for general guidance only, and does not constitute legal advice, tax advice, accounting services, investment advice, or professional consulting. The information should not and may not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making decisions or taking actions, consult a professional adviser who has been provided with all pertinent facts relevant in your particular situation. Tax articles in this Guide are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer.

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-  Mark W.

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"The team at Huth Thompson takes an interest in our business and is a valuable contributor to our ongoing success. I truly appreciate having a local firm of talented personable professionals that I can count on to provide timely and accurate support to our operational strategic needs."

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"The individuals we work with at Huth Thompson LLP from the front desk, to the accountants, administrative services and tax advisors are top notch and very professional. I would highly recommend Huth Thompson LLP to anyone seeking the services they have to offer."

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"I refer all of my family and friends to Huth Thompson. Their accountants' knowledge and customer service is unmatched. They're always going the extra mile and I appreciate that. If you have a business they also have a great business solutions services department with bookkeeping, payroll, QB, and tax planning all wrapped up into one package. It's a great cost effective way of running your business." 

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"Huth Thompson is at the top of their field! They are knowledgeable and you can be sure they are on top of new regulations, providing the best accounting and tax services. I have and will continue to refer them to my colleagues."

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