Q: I understand that the tax law has changed, and I tried to do some tax planning before the end of the year. Even so, as I gather all of my information together to file my 2014 tax returns, I have genuine concerns about some of the changes. What are some of the significant changes I should be aware of for 2014, and how will this affect my tax bill?
A: You should really commend yourself for doing some year-end tax planning. As we get into the holidays, this often slips through the cracks and we find ourselves in the New Year with tax issues we could have fixed had we addressed them sooner.
Tax planning in 2015 is as essential as ever. With significant tax-related provisions of the Affordable Care Act (ACA) affecting many taxpayers not to mention continued uncertainty about tax reform tax planning is more complicated yet more important than ever. To save the most, you need to understand how recent tax legislation affects you and take advantage of every tax break you're entitled to.
It's important to remember that, even though many tax law provisions are now "permanent," this simply means that they dont have expiration dates. With tax reform still on its agenda, Congress may make some major changes in the future so don't count on the tax regime remaining the same indefinitely. Here are some key provisions that you need to be aware of, and steps you can take to reduce your personal and business tax liability. This should not replace discussing your specific situation with your tax advisor. The tax law is very nuanced, and each taxpayers situation is different, so the law affects everyone differently.
- Maximizing deductible expenses for a given year typically allows you to minimize your income tax but not always. If you're subject to the alternative minimum tax (AMT) this year, you may be better off deferring your expenses if you can. In some circumstances, accelerating or deferring income where possible might save, or at least defer, tax. No matter what your situation, plan carefully to find the best timing strategies for you.
- 2014 may be another good year for families to save taxes. Most of the child and education-related tax breaks on the table the last several years, are available once again to parents or in some cases grandparents or the students themselves. Make sure that you and your family are taking advantage of the credits, deductions and other tax-saving opportunities that apply to you.
- Tax planning could be a challenge for businesses this year. In addition, some significant tax-related changes under the ACA require attention.
- Small businesses with fewer than 25 full-time equivalent employees and average annual wages of less than $50,000 for 2014 might enjoy a larger health care coverage credit in 2014. The maximum credit has increased to 50% of group health premiums paid by an employer provided it contributes at least 50% of the total premium or of a benchmark premium. The credit can now be taken for only two years, which must be consecutive years. But even if you contributed it for tax years before 2014, you can still claim credit for two years beginning in 2014 or later. Beginning in 2014, the ACA requires you to purchase Small Business Health Options Programs (SHOP) coverage to qualify for the credit. However, the Treasury Department announced that employers without access to SHOP coverage will be eligible for the credit as long as they provide coverage that meets the guidelines of a SHOP plan.
- The ACA's play-or-pay provision which took effect January 1, 2015 affects large employers with at least 100 full time employees or the equivalent. The threshold is scheduled to drop to 50 beginning in 2016.
- The IRS has issued final regulations for tangible property repairs versus improvements. This affects businesses that have made repairs or improvements to tangible property such as buildings, machinery, equipment and vehicles. The costs incurred to acquire, produce or improve tangible property must be depreciated. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted. The final IRS regulations make distinguishing between repairs and improvements simpler, so check with your tax professional.
- Home related breaks include deductions such as property tax, mortgage interest, home equity debt interest and home office, as well as exclusions such as rental income, home sale gain or loss, and debt forgiveness.
- If your medical expenses exceeded 10% of your Adjusted Gross Income (AGI), you can deduct the excess. Eligible expenses include health insurance premiums, long term care insurance premiums, medical and dental services, prescription drugs and mileage.
- If you're thinking about timing income, consider the additional 0.9% Medicare tax. Under the ACA, since 2013 taxpayers have had to pay this tax on FICA wages and self-employment income exceeding a specific amount. You may be able to implement income timing strategies to avoid or minimize the tax.
- Itemized deductions in lieu of state and local sales tax income taxes have been extended for 2014.
- Now that estate, gift and generation-skipping transfer (GST) tax exemptions and rates no longer are scheduled to expire, estate planning may be a little easier. Plus, because the exemptions are at record-high levels, far fewer taxpayers need to worry about being subject to these taxes. But Congress could still pass legislation at any time making estate tax law changes and not necessarily for the better. So whether or not you'd be subject to estate taxes under the current exemptions, it's a good idea to consider whether you can seize opportunities to potentially lock in savings today. Those same opportunities may not be available in the future.
Of course there isn't space here to touch on all of the available tax-saving opportunities. Feel free to review our web Tax Planning Guide or request a paper copy and note the strategies and tax law provisions that apply to your situation or that you would like to know more about. Then call your tax professional with any questions you may have about these or other tax matters.
Q: What is the Standard Mileage Rate for 2014?
A: The IRS has announced a one half cent decrease in the standard mileage rates that taxpayers will use for calculating business, medical and moving expenses in 2014. The new rate for business expenses is 56 cents. The mileage rate for medical travel and moving expenses is 23.5 cents. The 0.5 cent reduction does not apply to the 14 cent per mile rate allowed for travel related to charitable work.
Be sure to consult your tax professional to ensure you are calculating the expenses accurately, and are entitled to take the deduction.
Q: Tell me about the Tax Relief Act of 2010!
A: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed into law Dec. 17, extends and expands a wide variety of valuable tax breaks and includes tax provisions affecting individuals and businesses. Here's a brief summary of the most important provisions.
Individual tax provisions
- New two-percentage-point payroll tax cut for 2011
- Extension of the lower ordinary income tax rates for all tax brackets through 2012
- Extension of marriage penalty relief through 2012
- Extension of the elimination of itemized deduction and personal exemption phaseouts through 2012
- Extension of the deduction for state and local sales taxes in lieu of state and local income taxes through 2011
- Extension of the increased alternative minimum tax (AMT) exemptions through 2011
- Extension of the ability to offset AMT liability with certain nonrefundable personal credits through 2011
- Extension of the lower long-term capital gains rates through 2012
- Extension of the lower qualified dividend tax rates through 2012
- Extension of the 100% gain exclusion on certain qualified small business stock to stock acquired through 2011
Children and education:
- Extension of the $1,000 child credit and other enhancements of the credit through 2012
- Extension of the higher adoption credit and income exclusion for employer-provided adoption assistance through 2012
- Extension of the higher dependent care credit through 2012
- Extension of the American Opportunity education credit through 2012
- Extension of the above-the-line tuition and fees deduction through 2011
- Extension of the income exclusion for employer-provided education assistance through 2012
- Extension of the enhancements to the student loan interest deduction through 2012
- Extension of the $2,000 Coverdell Education Savings Account contribution limit and other enhancements through 2012
- Extension of the ability to exclude from income direct contributions from IRAs to qualified charities (up to $100,000 annually) through 2011
- Extension of the ability to take a larger deduction for donations of long-term capital gains real property for conservation purposes through 2011
- Reinstatement of the estate tax for 2010 with a top rate of 35% and a $5 million exemption (compared to 45% and $3.5 million for 2009)
- Option for estates of taxpayers who died in 2010 to elect to follow the pre-Tax Relief act regime - no estate tax but limits on step-up in basis for transferred assets
- Reinstatement of the generation-skipping transfer (GST) tax for 2010 at a 0% rate with a $5 million exemption (compared to 45% and $3.5 million for 2009)
- Decrease in the top estate and gift tax rates and the GST tax rate to 35% for 2011 and 2012
- Increase in the estate, GST and gift tax exemptions to $5 million for 2011, indexed for inflation in 2012
- Ability of the estate of a taxpayer who dies in 2011 or 2012 to elect to allow the surviving spouse to use the deceased's unused estate tax exemption
Business tax provisions
- Increase in bonus depreciation to 100%, generally for assets placed in service after Sept. 8, 2010, and before Jan. 1, 2012
- Extension of 50% bonus depreciation, generally for assets placed in service Jan. 1, 2012, through Dec. 31, 2012
- Increase in the Sec. 179 expensing limit to $125,000 (indexed for inflation) for 2012
- Increase in the Sec. 179 expensing phaseout threshold to $500,000 (indexed for inflation) for 2012
- Extension of accelerated depreciation for qualified leasehold-improvement, restaurant and retail-improvement property through 2011
- Extension of the research credit through 2011
- Extension of the Work Opportunity credit through 2011
- Extension of the enhanced deduction for food inventory donations through 2011
- Extension of the enhanced deduction for donations of book inventory to public schools through 2011
- Extension of the enhanced deduction for computer inventory donations for educational purposes through 2011
Just the tip of the iceberg
As you can see, the Tax Relief act includes numerous provisions, and we've only touched on some of them here. Many breaks are subject to a variety of rules and limitations, so its important to discuss them with your tax advisor to determine exactly how they'll affect you.
Q: With Income Tax Time just around the corner, how do I substantiate my entertainment expenses?
A: Entertainment and recreation have always played an important role in business. And while the IRS and courts pore over tax deductions for these activities, they also recognize that businesspeople conduct legitimate business over lunch or on the golf course.
The scrutiny isn't surprising. After all, entertainment is an area that's ripe for abuse. But if you follow the rules, you can successfully mix business and pleasure without giving up the tax benefits.
Supporting your entertainment expenses
Generally, your company can deduct "ordinary and necessary" business expenses. But the tax code imposes additional requirements on entertainment expenses.
To support an entertainment expense deduction, you must be able to show:
- The expense is directly related to or associated with the active conduct of your business - an expense may be "associated" with your company if the entertainment directly precedes or follows a "substantial and bona fide business discussion"
- The deduction is adequately substantiated by records (or other evidence) that establish the amount, time, place and business purpose of the expense, as well as the business relationship of the parties involved
- You had "more than a general expectation" of gaining a business benefit from the entertainment
- You engaged in some business activity, other than the entertainment, such as a meeting, negotiation, discussion or other bona fide business transaction
- The "principal character or aspect" of the combined business and entertainment was business
- The expense was attributable to you, your employees or others involved in conducting business
Keep in mind, Businesses are generally limited to deducting 50% of otherwise allowable meal and entertainment (M&E) expenses, but there are several exceptions, such as expenses:
- Treated as compensation to employees
- Excludible from employees' income as de minimis fringe benefits
- Paid or incurred under a reimbursement or similar arrangement in connection with the performance of services
- For employee recreational or social activities - for example, picnics and holiday parties
Unfortunately, separately identifying and reporting items that are 100% deductible can be complicated and time consuming. But if you spend a great deal on M&E expenses, it may pay to do so. Fortunately, the IRS now allows statistical sampling methods to be used to estimate the portion of M&E expenses that are fully deductible, which can ease the accounting burden.
Hunting - and fishing - for tax deductions
The case of Townsend Industries Inc. v. United States provides some important lessons for businesses deducting entertainment expenses. In this case, the Eighth U.S. Circuit Court of Appeals reversed a district court and held that the cost of a company's annual fishing trip was both deductible as a business expense and excludible from employee compensation as a working-condition fringe benefit.
Townsend was an Iowa-based manufacturer of printing equipment. Each summer the company gathered all its independent sales representatives for a two-day meeting at its headquarters. Following the meeting, Townsend sponsored a four-day, expense-paid fishing trip for its sales reps and factory employees at an upscale Ontario resort. Employees were encouraged, but not required, to attend. Although business discussions were conducted on an ongoing basis and one dinner meeting was held, workers were generally free to do as they pleased during the trip.
The IRS challenged Townsend's treatment of the trip expenses, contending they constituted wages that were subject to employment and income taxes. The district court agreed, finding: 1) the "fishing trips were not an ordinary and necessary business expense in light of the lax attendance policy for the trip," 2) there was "a disconnect between the sales meeting and the fishing trip," and 3) the company had no more than a general expectation to derive uncertain future benefits from the trips.
The court also found Townsend failed to meet substantiation requirements, citing the company's lack of contemporaneous, written records - details on why the expense is business related - and its reliance instead on employee testimony.
The Eighth Circuit disagreed, ruling that, despite the lack of contemporaneous records, trial testimony clearly established the fishing trips had a legitimate business purpose. Even though the trips were voluntary, employees "felt an obligation to attend, and some felt it was part of their job." Moreover, there was "extensive trial testimony" regarding specific business issues discussed and problems solved during the trips.
Although Townsend confirms the deductibility of travel and entertainment expenses that serve legitimate business purposes, the case also highlights the importance of substantiating these expenses with detailed, contemporaneous records. Even though the employer in Townsend ultimately prevailed without this information, the litigation cost was great.
Tax considerations not the only concern
In the current environment, companies also need to keep in mind that, even if an entertainment expense passes muster as a business deduction, it may not leave a good impression with others. While public companies may receive the greatest scrutiny, even private companies can harm their reputation in the community if it appears they're spending excessive amounts on unnecessary entertainment, especially if it benefits only the owners or other top management.
So before incurring entertainment expenses, consider both their potential deductibility and whether they could have any other negative impact on your business. And if you determine an expense is worthwhile, be sure to substantiate it.
Q: Can I still get a homebuyer credit?
A: Just before an important deadline was set to expire, the House and Senate extended the homebuyer tax credit for certain taxpayers. Previously, the credit was available to qualified taxpayers for purchases made before May 1, 2010 - or July 1 if a binding contract was in place before May 1. Congress has extended the July 1 deadline to Oct. 1, 2010.
It's important to note that the May 1 deadline was not extended - for a taxpayer to benefit from the credit, a binding contract still must have been in place before that date. The extension simply gives taxpayers with such a contract in place more time to complete the closing.
The maximum credit is $8,000 ($4,000 for married filing separately) for "first-time" homebuyers and $6,500 ($3,250 for married filing separately) for "long-time" homeowners. The credit starts to phase out for joint filers with modified adjusted gross incomes (MAGIs) exceeding $225,000 ($125,000 for single filers). It's completely eliminated for joint filers with MAGIs exceeding $245,000 ($145,000 for single filers).
Additional rules apply regarding who is eligible and what their maximum credit is, so it's important to consult your tax advisor to determine how the credit may apply to you.
Please E-mail us if there is a particular tax question that you would like us to answer.