Tax and Accounting Resources

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Forms & Checklists

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Frequently Asked Questions

When is a Meal Tax Deductible?
UPDATED: December 16, 2010 :: 12:37 PM

The burden of proving that a business meal is a business expense, is on the taxpayer claiming the deduction (see \"What\'s New\" in this website for information on how to substantiate your tax deductions).

Usually, meals are a personal expense. A meal can be a business expense when you can show that the meals are directly related to or associated with the active conduct of your business, or when the meal is taken for the benefit of the employer, such as office parties and meetings. This means that there must be a business discussion aimed at getting revenue or reducing expenses and that the meal must be during, immediately prior to, or following the business discussion, or in the second case, a meal is necessary for a business purpose for the benefit of the empoyer.

For example, if you are self-employed, you may deduct the cost of a meal taken with a prospective or current client, provided you discuss your current or future business relationship. However, a self-employed taxpayer could not deduct the routine cost of lunch for employees, for example, a work crew or office staff. A business owner should not deduct the cost of meals taken with a friend or peer, even if office issues were discussed (discussion must concern the active conduct of your business).

Many taxpayers take these rules casually and risk scrutiny by the Internal Revenue Service, so, 1) make sure your are entitled to your meal deductions, and, 2) substantiate and document them.

Do You Have Evidence to Support Your Deduction?
UPDATED: April 03, 2006 :: 06:57 PM

The IRS requires taxpayers to provide adequate records of the amounts and payment of deductible expenses, and to show that the expenses were related to a business. For a wage earner, "business expenses" are an itemized deduction. If you a business owner, business expenses are claimed on the business return (Schedule C for self-employed); while Corporations, LLCs, and other entities report business expenses on the particular business tax return required.

Whatever business form you are using, the requirements are the same for substantiation: 1) the expenses must be evidenced by receipts and/or canceled checks, and 2) there must be a business purpose for the expenses. A business may deduct "ordinary and necessary business expenses", and should be ready to produce receipts with matching records of business meetings or other business purpose. An expense is considered "ordinary" if it is frequently incurred in the particular trade or business. In order to qualify as "necessary", the expense must be appropriate or helpful to the business.

What can happen if you don?t have enough substantiation for a deduction? One taxpayer's entire deduction for business expenses incurred to rent rooms for financial planning seminars was disallowed due to failure to provide evidence of any kind to substantiate the costs. A daily journal was not sufficient evidence. Attendance, lists, attendee testimony or brochures might have permitted at least a partial deduction.

Business Vs. Hobby
UPDATED: July 02, 2011 :: 10:06 AM

A recent tax court decision allowed losses from a breeding business the IRS claimed was a hobby. (the business ran losses for 7 years). The taxpayer proved the business was actually for profit by keeping precise records and taking courses related to the business. The owner spent long hours delivering foals and his wife complained he smelled of horses when he got home!

The IRS will presume you are in business for profit unless you incur losses in 3 out of 5 tax years. However, mitigating factors are considered, such as training you have had, and time spent in the business. If the IRS determines that your business is a hobby, you will be required to report all of the income, and claim the deductions as miscellaneous deductions instead of deducting them directly against income. For many taxpayers, the deductions would then be either totally or partially lost.

How to avoid this problem? Keep thorough and business-like books, use a separate checking account and charge card for the business, obtain insurance, registration, licensing relevant to the business activity, maintain a \"qualified home office\", and have a second phone line, make periodic changes in operations to improve the profit making ability of the business.

Many people have an impression that losing money from a business in 3 of 5 years makes your business into a hobby. Not so. You would simply lose the presumption that you are in a business rather than a hobby.
The Home Office Deduction
UPDATED: April 03, 2006 :: 08:42 PM

This deduction has been available to workers maintaining an office at home if the office is used as a "principal place of business", and serves as a place to meet with clients, customers, etc. in the normal course of business, or if located in a separate structure. New law (effective for tax years after 12/31/98) expands the "principal place of business" test to included administrative or management duties where such duties are not substantially carried out at any other fixed location.

Kinds of expenses available to deduct via the home office deduction:

  • Mortgage interest and real estate tax
  • Depreciation
  • Repairs and maintenance
  • Home owners Insurance
  • Utilities
  • Other direct expenses (structural improvements, furnishings, etc.)

Employees who rent home office space from their own businesses should pay a proportionate share of utilities, etc. directly from the business (the home office deduction does not apply in these situations). Avoid writing checks to yourself in reimbursement of these expenses, to avoid a possible presumption of income.

Legal Deductions
UPDATED: April 03, 2006 :: 07:00 PM

Questions come up periodically about what kinds of legal fees are tax deductible. The general rule is that you can deduct legal fees incurred in connection with your business, the production or collection of income, and the management and maintenance of income-producing investments. You may not deduct legal costs you incur in relation to your personal affairs.The following lists may aid your understanding in this area:

Examples of deductible legal fees:

  • Employment related litigation
  • Legal fees in connection with tax advice or preparation
  • Ex-spouse suing to increase alimony payments or collect back alimony owed

Examples of non deductible legal fees:

  • Fees connected with setting up a trust for the benefit of children
  • Divorce or separation proceedings
  • Ex-spouse seeking to reduce alimony owed to a former spouse (the court said a reduction in payment was not the same as a production of income)

Note: Legal fees are not currently deductible if they are incurred in connection with a capital outlay (for example, to defend title to real estate). However, the costs may be amortized, or recovered when you sell the property.

IRA Deductions for Dependents
UPDATED: July 31, 2015 :: 05:49 PM

When a dependent enters the work force, he or she sometimes needs to file a return and pay tax on earned income (wages and other compensation), as well as unearned income (most often interest and dividends on investments made on their behalf by parents).

Contributing to an child\'s IRA would shelter some of this income from tax, as well as promote the savings principle and time value of money for your child, and provide a tax-free savings vehicle.

Tax Effects of the Uniform Transfers to Minors Act
UPDATED: April 03, 2006 :: 07:02 PM

One tax-planning strategy to reduce taxes is to place assets such as cash and other investments into a child's bank or brokerage account so that the income is attributed (and therefore taxed) to the minor. In certain cases, this can be a substantial benefit if the child is in a lower tax bracket than the parents.

Remember, though, that once placed into a child's name under the Uniform Transfers to Minors Act, the assets belong to the child. This can produce unexpected results. For example, if the child applies for financial aid for college, the amount of aid may be reduced because of the student?s assets. Also, you may want to have more control over when and how much of the money is spent. Know your objectives when using UTMA. Another alternative for spreading income to a lower tax bracket may be a child's trust.

Taxability of Gifts
UPDATED: July 02, 2011 :: 10:03 AM

A common inquiry to accountants is about gifts -- when money of any proportion is received, whether by gift or inheritance, a common concern is that the money will be taxed.

The simple receipt of a gift is not a taxable event for the receiver. If there is a tax issue, it will be with the donor (or estate). The amount of tax will depend on the amount of the gift and the total lifetime gifts and estate of the donor. Unlimited gifts of $13,000 per year per recipient are not taxed or reportable to the IRS.

Effective gift and estate planning is best done with guidance from an attorney and a Certified Public Accountant.
I\'m self employed. How do I pay myself and my taxes?
UPDATED: December 26, 2013 :: 04:53 PM

As a self employed taxpayer, you do not need to issue yourself a Form W-2. Instead, you may simply draw out and use the cash generated from your business. The term used for such use of cash is \"distributions\", or \"draws\". It is important to note that distributions to owners do not represent a tax deduction (many small business people make the mistake of recording distributions of cash as expenses in their bookkeeping systems). If you make this mistake, you will be understating your business net income and possibly underestimating your tax liability.

It is also important to know that a self employed taxpayer needs to make quarterly estimated tax payments to the Internal Revenue Service, and to the state that the business is located in. These estimated payments are the equivalent of both the employer\'s share of payroll taxes, and an employee\'s share of payroll taxes, which are withheld from paychecks as an employee. The self employed taxpayer pays both employer and employee\'s share of FICA and Medicare taxes, in addition to bracketed Federal and State taxes. Many self employed taxpayers need a tax professional to help project their taxes and pay in a suitable amount of tax through quarterly estimated payments.

What kinds of business expenses can I deduct?
UPDATED: December 26, 2013 :: 04:54 PM

162 Trade or business expenses.

In general: There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including

  • (1) a reasonable allowance for salaries or other compensation for personal services actually rendered;
  • (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business

The above is taken directly from Internal Revenue Code (be advised this is not the complete Section 162). However, the main point is made that a small business may deduct ordinary and necessary business expenses.

Different businesses have differing necessary expenses. For example, a horse breeding business could deduct feed and care of horses, while a restaurant could never deduct such expenses. Your deductible expenses should be related to your business, and you should keep receipts and other documentation for those expenses.

Even though Section 162 allows ordinary and necessary expenses, there may be restrictions stemming from other Code sections that limit your deduction. For example business meals and entertainment usually produce only a 50% deduction for a taxpayer???s business. Also, car expenses and depreciation can be limited.

Can a person claim a girlfriend as a wife if they have a child or do they have to be married?
UPDATED: April 29, 2006 :: 10:36 PM

You are considered married if you are living together in a common law marriage that is recognized in the state where you now live or in the state where the common law marriage began. If you are considered married, then you may file as married filing jointly and claim two personal exemptions on a joint return (assuming that neither of you are qualifying dependents on another individual's return).

If you are not considered married, then you would have to file as single unless you qualify as head of household. You may not claim your girlfriend as your dependent if your relationship violates local law.

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