Our regularly updated newsletter provides timely articles to help you achieve your financial goals.
The summer travel season is almost upon us. While you look forward to lazing on the beach, visiting the theme parks, and enjoying ice cream cones, also consider ways to fit some business in to your trips.
The idea is to take advantage of tax deductions for which you become eligible when you devote part of your trip to business. As long as most of your travel days are for business purposes, you can deduct the cost of travel (airplanes, trains, cars, etc.) and for hotels, parking, taxi service, meals, and so on.
As defined by the IRS, travel expenses are the Ordinary and Necessary expenses of traveling away from home for your business, profession, or job. An Ordinary expense is one that is common and accepted in your field of trade, business, or profession. A Necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.
The key factor is that your trip must be primarily for business. Days of leisure can be added to a trip and still be considered primarily for business. The more days and time per day spent on business will help substantiate the trip. There are no set rules on how many days and how much time per day need to be spent on business for your trip to be considered business related.
Keep all the documentation for business-related travel, including confirmations of appointments, emails, phone records, registration to conferences, etc. The days spent traveling to and from a business trip are considered part of the trip. This includes the weekend if it is impractical to come home between weekday business meetings. Planning ahead can make this happen.
Traveling with Your Spouse
If a spouse goes with you on a business trip or to a business convention, his or her travel expenses can only be deducted if your spouse
To be an employee, your spouse must be on the payroll and payroll taxes must be paid. If your spouse is not an employee and travels with you on vacation, you can still deduct the cost of your room at the single-occupancy-per-day rate, rather than half the rate. Meals could also be deductible. If you are paying for lunch or dinner for a customer or business associate and that person's spouse, the full cost of the meals might qualify under the 50% meal deduction. Let us know if you're unclear on this deduction; we can give you the details.
Example: Bill drives to Boston on business and takes his wife, Joan, with him. Joan is not Bill's employee. Joan occasionally types notes, performs similar services, and accompanies Bill to luncheons and dinners. The performance of these services does not establish that her presence on the trip is necessary for Bill's business. Her expenses are not deductible.
Bill pays $199 a day for a double room. A single room costs $149 a day. He can deduct the total cost of driving his car to and from Boston, but only $149 a day for his hotel room. If he uses public transportation, he can deduct only his fare. Further, if Bill has dinner with a customer and spouse, the meal may be deducted under the 50% meal deduction.
With travel outside of the United States, the transportation for business trips of one week or less may be deducted. However, only a portion of transportation costs for longer trips is deductible.
Example: You live in New York. On May 4 you flew to Paris to attend a business conference that began on May 5. The conference ended at noon on May 14. That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. The primary purpose for the trip was to attend the conference.
If you had not stopped in Dublin, you would have arrived home the evening of May 14. You did not meet any of the exceptions that would allow you to consider your travel entirely for business. May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are non-business days.
You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris.
You cannot deduct your expenses while in Dublin. You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin.
You paid $450 to fly from New York to Paris, $200 to fly from Paris to Dublin, and $500 to fly from Dublin back to New York. Round-trip airfare from New York to Dublin would have been $850.
You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($850 - 7/18 = $331) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($450 + $200 + $500 = $1,150). Your deductible air travel expense is $819 ($1,150 - $331).
What Expenses Are Deductible?
Here's what you can deduct when you travel away from home for business.
You can deduct Transportation Expenses when you travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, additional rules and limits apply.
Taxi, Commuter Bus, Subway, and Airport Limousine Fares
You can deduct the fares for these and other types of transportation that take you between
Baggage and Shipping Expenses
You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.
You can deduct the cost of operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.
Lodging and Meals
You can deduct your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. Additional rules and limits may apply.
You can deduct the dry cleaning and laundry expenses you incur while away on business.
All business calls while on your business trip are deductible. This includes business communication by fax machine or other communication devices.
You may deduct the tips you pay for any expense listed above.
You can deduct other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, or Internet access fees.
If you have any questions about how to grab some tax deductions from your summer travels this year, just give us a call or send us an email.
Sell Your Home But Keep the Profits
With the real estate market looking up in many areas, money is out there to be made. Sellers, it's time to take a close look at the exclusion rules and cost basis of your home to reduce your taxable gain.
The IRS home sale exclusion rule now allows an exclusion of a gain up to $250,000 for a single taxpayer or $500,000 for a married couple filing jointly. This exclusion can be used over and over during your lifetime, unlike the previous one-time exemption, as long as you meet the following Ownership and Use tests.
During the 5-year period ending on the date of the sale, you must have:
Tip: The Ownership and Use periods need not be concurrent. Two years may consist of a full 24 months or 730 days within a 5-year period. Short absences, such as for a summer vacation, count in the period of use. Longer breaks, such as a 1-year sabbatical, do not.
If you own more than one home, you can exclude the gain only on your main home. The IRS uses several factors to determine which home is a principal residence: place of employment, location of family members' main home, mailing address on bills, correspondence, tax returns, driver's license, car registration, voter registration, location of banks you use, and location of recreational clubs and religious organizations you belong to.
Tip: As we said, the exclusion can be used repeatedly, every time you reestablish your primary residence. When you do change homes, let us know your new address so we can ensure the IRS has your current address on file.
Note: Only taxable gain on the sale of your home needs to be reported on your taxes. Further, loss on the sale of your main home cannot be deducted. Ask us for details.
Improvements Increase the Cost Basis
Additionally, when selling your home, consider all improvements made to the home over the years. Improvements will increase the cost basis of the home and thereby reduce the capital gain.
Additions and other improvements that have a useful life of more than one year can be added to the cost basis of your home.
Examples of Improvements
Examples of improvements include: building an addition; finishing a basement; putting in a new fence or swimming pool; paving the driveway; landscaping; or installing new wiring, new plumbing, central air, flooring, insulation, or security system.
Example: The Kellys purchased their primary residence in 1999 for $200,000. They paved the unpaved driveway and added a swimming pool, among other things, for $75,000. The adjusted cost basis of the house is $275,000. The house is then sold in 2011 for $550,000. It costs the Kellys $40,000 in commissions, advertising, and legal fees to sell the house.
These selling expenses are subtracted from the sales price to determine the amount realized. The amount realized in this example is $510,000. That amount is then reduced by the adjusted basis (cost plus improvements) to determine the gain. The gain in this case is $235,000. After considering the exclusion, there is no taxable gain on the sale of this primary residence and, therefore, no reporting of the sale on the Kelly's 2011 personal tax return.
Tip: Home Energy Credit. Home energy-efficiency tax credits were extended into 2011 at reduced limits and with modifications. A tax credit of 10% of cost up to $500 is available for projects including energy-efficient heating and air-conditioning systems, roofing, and insulation. Further limitations do exist for certain items. For example, for the replacement of windows and skylights, the credit is 10% of cost, capped at $200. But you can still take advantage of tax credits at 30% of cost for alternative energy projects, including geothermal and solar projects and wind turbines. Please contact us for further information on these credits.
Partial Use of the Exclusion Rules
If you do not meet the Ownership and Use tests, you may be allowed to exclude a portion of the gain realized on the sale of your home if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.
Example: If you get divorced after living in your home for approximately 1 1/2 years or 438 days and have a gain of $120,000 on the sale of your home, you can take 60% of the capital gain exclusion, as you lived in the house for 60% of the 2-year exclusion period (438 days divided by 730 days, or 60%). Therefore, you would be allowed to deduct $150,000 of the capital gain (60% of the $250,000 exclusion). You would NOT need to report any gain on this sale.
Good recordkeeping is essential for determining the adjusted cost basis of your home. Ordinarily, you must keep records for 3 years after the filing due date. However, keep records proving your home's cost basis for as long as you own your house.
The records you should keep include:
Tax considerations can be confusing. If you have any questions on taxes related to the sale of your home, give us a call.
The Best Financial Tool for Business Owners
If there were a tool that helped you create crystal-clear plans . . . that provided you with continual feedback on how well your plan was working . . . that told you exactly what's working and what isn't, allowing you to consistently make smart business decisions to keep your business on track for success - wouldn't you want to take advantage of it?
Well, there is such a tool. It's called the Budget vs. Actual report.
Clarifying Your Plan
Clarity is power. The clearer you are with your business goals, the more likely you are to achieve them.
Creating a budget forces you to drill down in to the details of your goals. It prods you to think about how one business decision affects all other aspects of the company's operations.
Example: Say you want to grow your sales by 15% this year. Does that mean you need to hire another salesperson? When will the business start to see new sales from this person? Do you need to set up an office for them? New phone line? Buy them a computer? Do you need to do more advertising? How much more will you spend? When will you see the return on your advertising expenditure?
You see, a budget is really a planning tool that makes you clarify your dreams. And planning is the first step in making your dreams real.
Navigating the Ship
Once you've clarified your goals, you start making business decisions to help you reach your desired outcome. Some of those decisions will be great and give you better than expected results. And some decisions will give you poor results.
This is where the Budget vs Actual shines.
When you compare your budgeted sales and expenses to your actual results, you see exactly how far you are off your plan. Sometimes you need to adjust your plan (budget) and sometimes you need to focus more attention to the areas of your business that are not performing as well as you planned.
Either way, you are gleaning valuable insights into your business.
It's like sailing a boat. You are off-course most of the time - but having a clear goal and making many adjustments helps you reach your destination.
Just Do It
Nike knows the power of the phrase "Just Do It." We often know what we need to do but don't take the necessary action.
It may seem like a huge hassle to create a budget and then create a Budget vs. Actual report every month. But as with any new skill, although it's hard at first, it does get easier.
Let us help you. We can guide you through the budgeting process. We can ask you questions that help you gain clarity.
You'll feel energized after it's done. You may even have fun.
So "just do it." Give us a call and we'll help you turn your dreams into reality.
Getting Withholdings Right This Tax Year
In most situations, the tax withheld from your pay will be close to the tax you figure on your return - if you follow these two rules.
But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations:
If you need help downloading Form W-4 or have questions on how to fill it out properly, give us a call. We're happy to help.
Tips on Tips
Do you work at a hair salon, barber shop, casino, golf course, hotel, or restaurant, or do you drive a taxicab? The tip income you receive as an employee from those services is taxable income.
Here are some tips about tips:
Tips can be tricky. Don't hesitate to contact us if you have questions.
Are Your Social Security Benefits Taxable?
How much, if any, of your Social Security benefits are taxable? It depends on your total income and marital status. Generally, if Social Security benefits are your only income, your benefits are not taxable and you probably do not need to file a federal income tax return.
If you receive income from other sources in addition to Social Security and your modified adjusted gross income is not more than the base amount for your filing status, then your benefits will also not be taxed. (See below for more on base amounts.)
This quick computation will help you determine whether some of your benefits are taxable:
The 2011 base amounts are:
According to the Social Security Administration, less than one-third of all current beneficiaries pay taxes on their benefits.
Call us for additional information on the taxability of Social Security benefits.
Six Tips for Paying Estimated Taxes
Estimated tax is a method used to pay tax on income that is not subject to withholding. Depending on what you do for a living and what type of income you receive, you may need to pay estimated taxes during the year.
These six tips from the IRS will provide you with a quick look at estimated taxes and how to pay them...
Take our advice and don't ignore your estimated tax payments. And please call us with any questions.
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