David M.Green Bookkeeping and Tax Service -

Recent Posts

Business and Pleasure Travel Tax Deductions
What are the Tax Implications of Filing for Bankruptcy
Hiring an Independent Contractor Overseas
IRS Tax Tip: Vacation Home Rentals
Sample Calculation of ACA Tax Penalty
powered by

My Blog

Business and Pleasure Travel Tax Deductions

Let Uncle Sam help pay for your business trip. When you tack on personal vacation days to the beginning or end of a business trip, your out-of-pocket costs could be minimal since much of the business portion of your travel could be tax deductible.

Ordinary, Necessary Expenses

The IRS has no problem with business owners deducting legitimate expenses. As long as the travel benefits or advances your business, you can write off ordinary and necessary expenses.

What's considered ordinary and necessary? That depends, says the IRS, on the facts and your circumstances. In general, an ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business.

Under these standards, deductible travel expenses typically include hotels, meals, entertainment and round-trip travel to meet with existing or potential out-of-town clients.

Convention and seminar costs also could be deductible as long as the conferences specifically relate to your business or profession or help improve your career skills. That's why so many professional groups hold conventions in vacation spots like Orlando, Florida, or Las Vegas.

Getting There

Traveling to a business meeting obviously is work-related and the IRS doesn't really care whether you get there a few days early or hang around for a bit after your business is concluded.

Since you had to travel anyway, you can deduct the cost of your transportation as a business expense when you file your company's taxes. This applies to both auto travel as well as airfare.

In fact, when you fly for business purposes and extend your stay to get a reduced fare by, for example, spending a Saturday night at your destination, the associated stay-over costs usually are deductible, too, even though you have no business meetings that extra day.

The cost of travel by bus, train or auto, either your own car or one you rent, also is deductible. But don't try to slip in the price of airfare if you got your ticket via frequent flier miles.

Timing is Everything

Be sure, though, that you don't extend your personal stay too long. In order to deduct your transportation costs, your trip must be primarily for business. You do get to count your travel days as business, but carefully calculate the overall work-to-pleasure ratio.

If you spend three days getting to and meeting with clients, but bookend the travel with five extra days for sightseeing, the IRS will consider your trip more for fun and disallow your travel deductions.

Lodging Costs

Your hotel costs while conducting business also are deductible. Here, too, you need to differentiate between the portion of your stay that was personal.

For the extra days you stay to enjoy a location's recreational offerings, you cannot deduct those hotel charges.

Don't try to get cute here. The IRS frowns on counting a full day as business if you simply schedule a quick breakfast meeting with a client and then spend the other 23 hours on your own. In this case, that night's lodging will come out of your own pocket, not as a deduction on your tax return.

Dining Out

Speaking of eating, closing a deal over a meal is a time-honored business practice, but the IRS only helps out so much here.

Generally, you can only deduct 50 percent of your business-related meal costs. That limit also applies to your individual meals on business travel.

As for that breakfast business meeting, it isn't a total tax loss. Even though it isn't likely to get you the full day for lodging deduction purposes, you can include the morning meal's cost -- subject to the 50 percent limit -- with your client as a deductible expense.

Miscellaneous Expenses

When collecting your travel, hotel and meal receipts, be sure to note other miscellaneous expenses, too. Many of these work-related costs also are deductible.

You can write off taxi fares to and from the airport (or other transportation hubs, such as a train or bus station), as well as local fares from the airport to your hotel. And don't forget the cab costs from your hotel to your business meetings (and back).

If you shipped work material to your meeting destination, that expense is deductible. So are the extra charges you incur for business calls while on your trip, as well as Internet connection fees.

If your trip lasts longer than you planned, dry cleaning and laundry fees paid to make you look presentable also are deductible.

What are the Tax Implications of Filing for Bankruptcy

Here are the criteria that the IRS outlines for determining whether or not your tax is dischargeable:

All tax returns that represent the outstanding debt must have been filed with the IRS, the liability cannot stem from a Substitute Filed Return (SFR) prepared by the IRS;

There must not have been fraud or willful evasion involved with the f...iling of any of the tax returns eligible for discharge;

It must be an income tax liability. The trust fund portion of payroll tax liabilities (the withholdings from an employee’s pay) can never be discharged in bankruptcy. Nor can civil penalties associated with failure to file and pay payroll taxes be discharged.

Timing is critical. More than one bankruptcy case has been blown out of the water because these IRS guidelines were not met:

The return was due at least three years ago. The taxes must be from a tax return that was due (including all valid extensions) at least three years before you filed for bankruptcy. For example, if your 2009 income tax return were filed for which extensions to file the return expired on Oct. 15, 2010, the tax return due date test will be satisfied if the bankruptcy petition is filed after Oct. 15, 2013.

You filed the return at least two years ago. Not everyone files on time. You must have filed the tax return at least two years before filing for bankruptcy. To avoid additional objections from the taxing authority, you must make sure the return is signed and mailed or electronically filed, and sufficiently complete to be deemed a tax return. Using the above example, if extensions to file the 2009 return expired on Oct. 15, 2010, you filed the return on April 15, 2012, and you filed for bankruptcy on Oct. 15, 2013, you won't be able to discharge the debts. You will have satisfied the tax return due date test, but not the tax return filing date test. In this scenario, you must wait until two years after April 15, 2012, or until April 15, 2014, to file for bankruptcy.

The taxes were assessed at least 240 days ago. The IRS must have assessed the tax (processed the return and entered the liability in its records) against you at least 240 days before you filed for bankruptcy. Make sure you know the exact assessment date. You can get this information by contacting the IRS.

For individuals, the most common type of bankruptcy is a Chapter 13. The IRS states that before you consider filing a Chapter 13 here are some things you should know:
You must file all required tax returns for tax periods ending within four years of your bankruptcy filing;
During your bankruptcy you must continue to file, or get an extension of time to file, all required returns;
During your bankruptcy case you should pay all current taxes as they come due;
Failure to file returns and/or pay current taxes during your bankruptcy may result in your case being dismissed.

Some people are under the misconception that discharged taxes and other debt in a bankruptcy are considered cancellation of debt and therefore taxable. The good news is that they are not taxable income. The IRS will not kick you when you’re down. There is an exclusion for this type of cancellation of debt.

Hiring an Independent Contractor Overseas

The US side of the tax reporting of an overseas contractor is relatively straightforward if:

The worker is not a US citizen or resident alien,

All of the work will occur in the foreign country,

And the worker will not spend any time in the US. 

In this scenario, the organization must have the worker document citizenship and residence by completing Form W-8BEN, which should be kept on file, similar to a W-9. The foreign worker does not need a SSN, EIN, or ITIN in order to complete the form. A foreign citizen, who earns US source income, may be subject to nonresident alien (NRA) withholding, which varies according the type of income and any applicable treaty rates. But payment for personal services is sourced according to where the work is performed. If all of the work is done overseas, then the income is foreign sourced, which is not taxable by the US, and NRA withholding is not required. There is no further tax reporting required.

The foreign side of the transaction may not be quite so straightforward. Just as in the US, the first thing to consider is the local definition of an independent contractor. In the US, the IRS considers a list of 20 factors in determining if a worker is an independent contractor or a de facto employee. The same is true overseas, where each country has its own set of labor laws designed to protect local workers.

When considering hiring an overseas independent contractor, always get advice on the specific criteria for an independent worker in the foreign country. Consider using a professional firm that specializes in contracting local workers. Confirm that the firm will handle all of the local paperwork for the worker, and not act merely as a paying agent.

IRS Tax Tip: Vacation Home Rentals

If you rent a home to others, you usually must report the rental income on your tax return. But you may not have to report the income if the rental period is short and you also use the property as your home. In most cases, you can deduct the costs of renting your property. However, your deduction may be limited if you also use the property as your home. Here is some basic tax information that you should know if you rent out a vacation home:

•Vacation Home. A vacation home can be a house, apartment, condominium, mobile home, boat or similar property.

•Schedule E. You usually report rental income and rental expenses on Schedule E, Supplemental Income and Loss. Your rental income may also be subject to Net Investment Income Tax.

•Used as a Home. If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).

•Divide Expenses. If you personally use your property and also rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. To figure how to divide your costs, you must compare the number of days for each type of use with the total days of use.

•Personal Use. Personal use may include use by your family. It may also include use by any other property owners or their family. Use by anyone who pays less than a fair rental price is also personal use.

•Schedule A. Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.

•Rented Less than 15 Days. If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income.

Sample Calculation of ACA Tax Penalty

Single Individual no dependent
Household Income- $40,000/filing threshold =$10,150

Payment Calculation
Percentage of Income
1% X $29,850= $298.50
Flat Dollar-$95
($298.50 is>$95)
So in this example the 1% of Income is greater than the flat dollar amount for adult $95.00. The tax penalty for no health insurance would be $298.50

For Most Truckers, Highway Use Tax Return Due Sept. 2

The Internal Revenue Service today reminded truckers and other owners of heavy highway vehicles that in most cases, their next federal highway use tax return is due on Tuesday, Sept. 2, 2014.

This year’s Sept. 2 due date, pushed back two days because the normal Aug. 31 deadline falls on a Sunday, generally applies to Form 2290 and the accompanying tax payment for the tax year that begins on July 1, 2014, and ends on June 30, 2015. Returns must be filed and tax payments made by Sept. 2 for vehicles used on the road during July. For vehicles first used after July, the deadline is the last day of the month following the month of first use.

How Can I Deduct my Home Equity Line of Credit?

Loans that are secured by your main home or a second home qualify for the home mortgage interest deduction. Mortgages include a mortgage to buy your home, a second mortgage, a line of credit or a home equity loan.

Well, the IRS has some limitations on the amount you can deduct, and it depends on several factors such as the date of the mortgage, the amount of the mortgage and how you use the proceeds.

The IRS has three categories of mortgages that qualify for a tax deduction:

Grandfathered debt: This has nothing to do with your grandfather, or your grandmother for that matter, but really refers to all mortgages that were taken out before Oct. 13, 1987.

Home acquisition debt: This category includes mortgages taken out after Oct. 13, 1987, that were used to buy, build or improve your home. Throughout the year, these mortgages, plus the "grandfathered debt" mortgage, must total $1 million or less for them to qualify as a deduction. However, if you are married filing separately, the limit is $500,000.

Home equity debt: This category includes mortgages taken out after Oct. 13, 1987, that were not used to buy, build or improve your home. But these mortgages qualify only if throughout the year they totaled $100,000 or less ($50,000 or less if married filing separately). Additionally, they must not have totaled more than the fair market value of your home, reduced by "grandfathered debt" and "home acquisition debt."

The good news is that if your mortgage interest meets these criteria, then it is deductible. If it does not, then there is a work sheet in Part II of IRS Publication 936 that can be used to calculate your deduction.

Back-to-School Tax Credits

Are you, your spouse or a dependent heading off to college? If so, here’s a quick tip from the IRS: some of the costs you pay for higher education can save you money at tax time. Here are several important facts you should know about education tax credits:

American Opportunity Tax Credit. The AOTC can be up to $2,500 annually for an eligible student. This credit a...t owe any taxes.

•Lifetime Learning Credit. With the LLC, you may be able to claim a tax credit of up to $2,000 on your federal tax return. There is no limit on the number of years you can claim this credit for an eligible student.

•One credit per student. You can claim only one type of education credit per student on your federal tax return each year. If more than one student qualifies for a credit in the same year, you can claim a different credit for each student. For example, you can claim the AOTC for one student and claim the LLC for the other student.

•Qualified expenses. You may include qualified expenses to figure your credit. This may include amounts you pay for tuition, fees and other related expenses for an eligible student. Refer to IRS.gov for more about the additional rules that apply to each credit.

•Eligible educational institutions. Eligible schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify.

•Form 1098-T. In most cases, you should receive Form 1098-T, Tuition Statement, from your school. This form reports your qualified expenses to the IRS and to you. You may notice that the amount shown on the form is different than the amount you actually paid. That’s because some of your related costs may not appear on Form 1098-T. For example, the cost of your textbooks may not appear on the form, but you still may be able to claim your textbook costs as part of the credit. Remember, you can only claim an education credit for the qualified expenses that you paid in that same tax year.

•Nonresident alien. If you are in the U.S. on an F-1 student visa, you usually file your federal tax return as a nonresident alien. You can’t claim an education credit if you were a nonresident alien for any part of the tax year unless you elect to be treated as a resident alien for federal tax purposes. To learn more about these rules see Publication 519, U.S. Tax Guide for Aliens.

•Income limits. These credits are subject to income limitations and may be reduced or eliminated, based on your income.

IRS Repeats Warning about Phone Scams

The Internal Revenue Service and the Treasury Inspector General for Tax Administration continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS.

Based on the 90,000 complaints that TIGTA has received through its telephone hotline, to date, TIGTA has identified appro...ximately 1,100 victims who have lost an estimated $5 million from these scams.

"There are clear warning signs about these scams, which continue at high levels throughout the nation,” said IRS Commissioner John Koskinen. “Taxpayers should remember their first contact with the IRS will not be a call from out of the blue, but through official correspondence sent through the mail. A big red flag for these scams are angry, threatening calls from people who say they are from the IRS and urging immediate payment. This is not how we operate. People should hang up immediately and contact TIGTA or the IRS.”

Additionally, it is important for taxpayers to know that the IRS:
•Never asks for credit card, debit card or prepaid card information over the telephone.
•Never insists that taxpayers use a specific payment method to pay tax obligations
•Never requests immediate payment over the telephone and will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior notification of IRS enforcement action involving IRS tax liens or levies.

Potential phone scam victims may be told that they owe money that must be paid immediately to the IRS or they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.

Other characteristics of these scams include:
•Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
•Scammers may be able to recite the last four digits of a victim’s Social Security number.
•Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
•Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
•Victims hear background noise of other calls being conducted to mimic a call site.
•After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:
•If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
•If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to TIGTA at 1.800.366.4484.
•If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts. Recipients should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to phishing@irs.gov.

Do You Owe Taxes on Sale of Late Family Member Items?

You can disregard the original purchase price when determining if there is a gain or loss on the sale of your deceased family member furniture, artwork and decorative items because your "basis" for determining gain or loss is going to be the fair market value of the items at the date of their death.

As you now know, executors have many duties... to take care of for an estate. Unless the will specifies who gets what, the decisions regarding what to do with all of the personal belongings are especially difficult. Many items may have a very insignificant value dollar-wise, but the memories associated with them are truly priceless. And then there may be some more valuable items, such as the artwork, that need to be appraised.

Let's go through what your choices are now that it is time to make decisions. You can have an estate sale, divide the belongings among family members or donate items to charity -- or some combination of the three.

For example, take that living room sofa that was originally purchased for $3,500 10 years ago that was worth $500 when your family member died. If you sell it for $500, then there is no taxable gain or deductible loss. If you give it away to a qualified charitable organization, then you can claim the fair market value as a charitable deduction.