Planning 2012: Travel and Entertainment Review

Although the computer age and modern telecommunications have reduced the need for in-person contact, it is still sometimes necessary for businesses to send employees out of town on business, or to entertain clients and customers. How travel and entertainment expenses are handled can have an impact on your net income, your paperwork burden, and on the tax results for you and your employees.

If you require employees to substantiate travel or entertainment expenses that are bona-fide business deductions, partial or complete advances or reimbursements are not treated as compensation income to the employee, and the advance or reimbursement is not subject to social security taxes or to income tax withholding. However, only 50 percent of any business-related meal or entertainment expense is deductible by the company, including costs of meals consumed by employees while they are traveling.

To ensure that the reimbursement is not subject to payroll and withholding taxes, the business must maintain a fairly detailed recordkeeping system. For travel, employees must submit a written statement of the time, place, destination and business purpose of the trip and the amount of expenses incurred by category (e.g., travel, meals, lodging). For meals or entertainment, the employee must submit a written statement showing time, place and cost of the event, who was entertained, and the business purpose of the meal or entertainment (if the event follows or precedes a business discussion, additional recordkeeping is required). Finally, the employee must keep and turn in to the employer documentary evidence such as receipts for all lodging expenses, and for other travel and entertainment expenses over $75.

Because the recordkeeping can be onerous, the law provides some shortcuts, depending on the type and frequency of the travel and entertainment expenses. For example, the paperwork burden and the cost of travel expenses can be decreased by giving employees who travel for business purposes a flat daily allowance, a per diem, which varies by destination, to cover meals, lodging and incidental expenses. If the daily allowances do not exceed IRS-determined maximums, they are payroll and income tax free with a minimum of paperwork; all that is required is a record of the time, place and business purpose of the travel. To-the-penny accounting of expenses and corroborating receipts is not necessary.

One simple way to cut out paperwork while boosting company tax deductions is to give employees a flat allowance for anticipated travel and entertainment, and not require these expenses to be substantiated. The allowance is fully deductible as compensation (assuming the employees' compensation packages are reasonable), and there is minimal paperwork required. The allowance, however, is subject to payroll and income tax withholding, and the company may not be able to determine what their actual travel and entertainment expenses are for budgeting purposes. In addition, there are unfavorable tax consequences for the employee, even if the travel and entertainment expenses are deducted on their own returns.

Travel and entertainment expenses are particularly susceptible to challenge by the IRS. However, in some instances, businesses may fail to deduct qualifying travel and entertainment expenses, or may be deducting these expenses improperly. We can perform a confidential review of your company's travel and entertainment expenses to ensure compliance with the complex rules that govern these deductions. Please call us to arrange an appointment at your earliest convenience.

Planning 2012: Tax Strategies for Dependent Children

Raising a family can be both challenging and rewarding. As a parent, you worry about your children receiving quality child care, paying medical expenses, or saving for college. You want to do what is right for your family, but there are so many factors to consider, including how your choices will impact your family’s overall tax burden. We can assist you in understanding your options and in taking full advantage of the credits and deductions that you are entitled to as a parent.

For instance, you may be able to take a child and dependent care credit if your child is under the age of 13 at the end of the year. However, not all expenses qualify, and some expenses may qualify for both the dependent care credit and the deduction for medical expense, depending on your circumstances. In addition, if your employer offers a flexible spending plan, you might consider whether or not participating in the plan saves you more money than claiming the credit. If you are divorced, the issues can be more complicated. Who is entitled to an exemption for your child and how does claiming the exemption impact other tax benefits for a dependent?

Even if child care is not a concern of yours, these examples illustrate how complex family tax planning can be. There are many other tax considerations, such as the benefits and pitfalls of shifting income to minor children in light of the kiddie tax; determining what expenses qualify for the education credits and deductions and who can claim them; the eligibility requirements for the earned income credit; or the impact of the alternative minimum tax. We can help you see the bigger picture and develop a plan that both meets your needs and saves you money. Please call our office at your earliest convenience to make an appointment for a full review of your tax situation.

2012 Planning: Tax Solutions for S Corporations

An S corporation, such as yours, is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to your shareholders and taxed at their individual tax rates. However, unlike a C corporation, an S corporation’s income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important for you to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing your overall tax plan.

In addition, some S corporation income and expense items are subject to special rules and separate identification for tax purposes. Examples of separately stated items that could affect a shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.

These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.

Other key points to consider when developing your comprehensive tax strategy include:

• the availability of the Code Sec. 179 deduction at the corporate and shareholder level;
• reporting requirements for the domestic production activities deduction;
• the tax treatment of fringe benefits;
• below-market loans between shareholders and S corporations; and
• IRS scrutiny of distributions to shareholders who have not received compensation.

We can assist you in identifying and maximizing the potential tax savings. Please call our office at your earliest convenience to arrange an appointment.

Check 21 -- Proving Tax Deductions Without Cancelled Checks

By now you must have noticed the growing trend towards remote deposit of checks. Owing to the increasing sophistication of smartphones, you can now photograph a check written out to you and digitally send it to your bank for deposit. All this and more became possible after the Check Clearing for the 21st Century Act (Check 21) became effective in 2004. What it meant for most consumers then is that most banks discontinued the practice of retaining a paper version or copy of your checks. Check 21 allowed banks to truncate each of your checks, create a new electronic negotiable instrument called a substitute check, and then destroy the originals.

This industry change has important tax consequences for taxpayers who previously used checks to substantiate their expenses or charitable contributions. But the bottom line is that Check 21 allows you to use a substitute check as proof of payment because it is legally the same as the original check. The IRS, therefore, must accept your substitute check as proof of payment.

Banking online

Many of you may have switched to online banking. If so the IRS will accept image statements of substitute checks as proof of payment. If, however, an IRS auditor is suspicious that the image statement is not genuine, you may still be requested to order the actual substitute check from your bank. This will be a rare instance, however, and will likely occur only if you are audited. As an additional precaution, we suggest that you download and print out your bank statements at the end of the year. That way, even if you are audited several years from now, you'll have a record that's easy to access.

If you still rely on paper bank statements and paper copies of your checks, keep them in good order. The IRS will still accept bank statements that contain images of cancelled checks and/or substitute checks. To be used as proof, an account statement must show check number, amount, payee's name, and the date the check was posted. In order to keep track of your payments more easily for tax purposes, you should also continue to or begin to maintain a careful check register. That way, you'll know on which bank statement to look if you are ever audited.

Please do not hesitate to call this office if you have any further concerns about Check 21.

Selling Your Home

Planning 2012: Maximizing Itemized Deductions

Successful tax planning includes a review of your available deductions and the impact of your filing status on your option to itemize. It is important that all of the technical requirements for your deductions are met. In addition, certain items are deductible only to the extent they exceed a percentage threshold. By reducing your adjusted gross income, you increase the amount of itemized deductions you can claim, because the floor limitation amounts are reduced accordingly.

A strategy commonly used in year-end individual tax planning is to determine the best timing for claiming itemized deductions. Generally, it is beneficial for taxpayers to defer income and accelerate expenses. This strategy may enable you to itemize your deductions if you claimed the standard deduction in the past. This year, there is more uncertainty due to the sunset of various tax incentives originally provided by EGTRRA and regularly extended by other tax acts.

Unless they are retroactively extended by Congress, the following provisions are not available for 2012:

• Itemized deduction for state and local general sales taxes in lieu of state and local income taxes
• Mortgage insurance premium deduction
• Above-the-line deduction for certain out-of-pocket classroom expenses
• Above-the-line deduction for qualified tuition and related expenses
• Alternative minimum tax (AMT) patch
• Nonrefundable tax credit offset of entire regular and AMT tax liability
• Tax-free IRA distributions to charity

Tax planning for higher-income taxpayers is more complicated. Generally, you must reduce your otherwise allowable itemized deductions if your adjusted gross income exceeds a specified threshold amount. Although the phase-out of itemized deductions and personal exemptions for higher-income taxpayers is eliminated through 2012, the phase-out limits are set to return in 2013.

The failure to take the alternative minimum tax (AMT) into account may also jeopardize your tax planning strategy, as the AMT continues to negate many itemized deductions. The AMT exemptions amounts have been increased through the 2011 tax year, but uncertainty exists for 2012 and later years.

You may benefit from planning strategies designed to take advantage of the current tax laws. Maximizing your itemized deductions is an important aspect, but there are other issues that you may need to consider in light of your overall tax scenario. We hope to provide you with planning options that enable you to achieve the greatest tax savings possible. Please contact our office at your earliest convenience to make an appointment to discuss your tax planning options.

** ALERT ** IRS E-MAIL SCAM

ALERT - SCAM

We have seen this e-mail being sent to many clients. It is a phishing scam which will lead you a .doc which could affect your computer. I would advise you to delete the e-mail. Please see the information below directly from the Internal Revenue Service.

Report Phishing

The IRS does not initiate contact with taxpayers by email or any social media tools to request personal or financial information What is phishing?Phishing is a scam typically carried out by unsolicited email and/or websites that pose as legitimate sites and lure unsuspecting victims to provide personal and financial information. All unsolicited email claiming to be from either the IRS or any other IRS-related components such as the Office of Professional Responsibility or EFTPS, should be reported to phishing@irs.gov. However, if you have experienced monetary losses due to an IRS-related incident please file a complaint with the Federal Trade Commission through their Complaint Assistant to make that information available to investigators. What to do if you receive a suspicious IRS-related communication If Then You receive an email claiming to be from the IRS that contains a request for personal information … Do not reply. Do not open any attachments. Attachments may contain malicious code that will infect your computer. Do not click on any links.If you clicked on links in a suspicious email or phishing website and entered confidential information, visit our identity protection page. Forward the email as-is, to us at phishing@irs.gov. After you forward the email and/or header information to us, delete the original email message you received. Note:Please forward the full original email to us at phishing@irs.gov. Do not forward scanned images of printed emails as that strips the email of valuable information only available in the electronic copy. You discover a website on the Internet that claims to be the IRS but you suspect it is bogus … ... send the URL of the suspicious site to phishing@irs.gov. Please add in the subject line of the email, 'Suspicious website'. You receive a phone call or paper letter via mail from an individual claiming to be the IRS but you suspect they are not an IRS employee … Phone call: Ask for a call back number and employee badge number. Contact the IRS to determine if the caller is an IRS employee with a legitimate need to contact you. If you determine the person calling you is an IRS employee with a legitimate need to contact you, call them back. Letter or notice via paper mail: Contact the IRS to determine if the mail is a legitimate IRS letter. If it is a legitimate IRS letter, reply if needed. If caller or party that sent the paper letter is not legitimate, contact the Treasury Inspector General for Tax Administration at 1.800.366.4484. You receive an unsolicited e-mail or fax, involving a stock or share purchase … ... and you are a U.S. citizen located in the United States or its territories or a U.S. citizen living abroad. Complete the appropriate complaint form with the U.S. Securities and Exchange Commission. Forward email to phishing@irs.gov. Please add in the subject line of the email, 'Stock'. If you are a victim of monetary or identity theft, you may submit a complaint through the FTC Complaint Assistant. ... and you are not a U.S. citizen and reside outside the United States. Complete the appropriate complaint form with the U.S. Securities and Exchange Commission. Contact your securities regulator and file a complaint. Forward email to phishing@irs.gov. Please add in the subject line of the e-mail, 'Stock'. If you are a victim of monetary or identity theft, you may report your complaint to econsumer.gov. You receive an unsolicited fax (such as Form W8-BEN) claiming to be from the IRS, requesting personal information … Contact the IRS to determine if the fax is from the IRS. If you learn the fax is not from the IRS, please send us the information via email at phishing@irs.gov. In the subject line of the email, please type the word ‘FAX’. You have a tax-related question ... Note: Do not submit tax-related questions to phishing@irs.gov. If you have a tax-related question, unrelated to phishing or identity theft, please contact the IRS. How to identify phishing email scams claiming to be from the IRS and bogus IRS websites Sample of phishing emails First sample of an actual IRS-related phishing e-mail - PDF Second sample of an actual IRS-related phishing e-mail - PDF Is it a phishing website posing as the IRS? - PDF Sample of FAX scam Sample of recent fax scam requesting EIN - PDF Are you a victim of Identity Theft? Contact the Federal Trade Commission Visit the IRS Identity Theft resource page 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 does not ... ... request detailed personal information through email.... send any communication requesting your PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts. What to do if you receive a suspicious email message that does not claim to be from the IRS If Then You receive a suspicious phishing email not claiming to be from the IRS ... Forward the email as-is to reportphishing@antiphishing.org. You receive an email you suspect contains malicious code or a malicious attachment and you HAVE clicked on the link or downloaded the attachment … Visit OnGuardOnline.gov to learn what to do if you suspect you have malware on your computer. You receive an email you suspect contains malicious code or a malicious attachment and you HAVE NOT clicked on the link or downloaded the attachment … Forward the email to your Internet Service Provider’s abuse department and/or to spam@uce.gov. Additional related resources The IRS uses new and social media tools to share the latest information on tax changes, initiatives, products and services. The IRS also issues customer satisfaction surveys to capture taxpayer and tax practitioner opinions and suggestions for improving our products and services. Are you having trouble downloading a PDF?