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Archives for September 2018

What is Deductible when Your Trip is for Both Business and Fun

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Business owners who travel out of town on business sometimes like to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic Travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities. Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, are deductible.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

Foreign Travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

  • The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
  • Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
  • The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip.

For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

As this brief overview suggests, with smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.

The Tax Implications of a Company Car

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When an employer provides a company vehicle to an employee, the employee must generally include the market value of her personal use of the vehicle in her income.  The employer can generally take a payroll deduction for the actual costs, including depreciation, of providing the vehicle to the employee.

If the personal use of the vehicle is de minimis (of such small value that accounting for it would be impractical), the employee will not have to include the value of her personal use in income.  However, personal use of more than one day per month is not considered de minimis, so this exception is of little value.

Determining How Much to Include in the Employee’s Income

Under the general valuation rule, the value of the company vehicle that is included in the employee’s income is what it would cost the employee to lease a comparable vehicle for the same period the vehicle is available to her.  Generally, a cents-per-mile value cannot be used unless a comparable vehicle is available for lease to the employee on a cents-per-mile basis.

There are also three special valuation rules (each having different requirements).

  • The Annual Lease Value Method
  • The Commuting Value Method
  • The Cents-per-Mile Method

The Annual Lease Value Method (ALV)

The ALV is based on IRS tables and is based on the market value of the vehicle on the first date it is available to the employee.  The vehicle’s purchase price can be used as the market value if the vehicle was purchased in an arm’s length transaction.  If the employer leases the vehicle, the employer can use the MSRP plus sales tax less 8% of this sum as the market value.

Example: ABC Corp leases a Ford Focus.  The MSRP for the car is $23,000.  After sales tax, the cost is $24,380.  ABC Corp can reduce this sum by 8% to determine a market value of $22,429 to look up in the ALV tables.  Based on the ALV tables, the employee will have to include $6,100 as income for her personal use of the car with a market value of $22,429.

The ALV includes maintenance and insurance, but does not include gas.  If the employer pays for gas, the value of the gas will have to be included in income in addition to the ALV amount.

The Commuting Value Method

This method may be used if four requirements are met:

  • The auto must be owned or leased by the employer and provided to the employee to use in the employer’s business
  • The employer requires, because of business reasons, the employee to commute in the vehicle (e.g., the employee is on 24 hour call)
  • The employer must have a written policy that forbids the employee (or certain family members) from using the vehicle for personal reasons other than commuting or de minimis personal use
  • The employee required to use the vehicle must not be a controlling owner of the employer

If these requirements are met, the personal use value of the company car will be $3 per round trip ($1.50 per one way commute).

The Cents-Per-Mile Method

This method may be limited because it cannot be used when the value of the vehicle when it first becomes available to the employee exceeds $15,600 for a passenger vehicle and $17,600 for a truck or van.  In addition, this rule may be used only for vehicles that are expected to be used in the employer’s business throughout the year, or for vehicles that are actually driven at least 10,000 miles in that year and used primarily for business by employees.  If the vehicle qualifies under this method, the standard mileage rate (54.5 cents in 2018) may be used to determine the personal use value of the vehicle.

Requirements of All Special Use Valuation Methods

To use any of the three special valuation rules, one of the following conditions must exist:

  • The employer treats the value of the vehicle as wages for reporting purposes before the extended due date of its tax return for the year the benefit is provided
  • The employee includes the value of the benefit in income before the extended due date of her tax return for the year the benefit is provided
  • The employee is not in control of the employer
  • The employer demonstrates a good faith effort to treat the benefit correctly

Payroll Tax Implications

The employer must report and withhold income and employment taxes on the value of personal use of a company car.  However, there are two elections available to the employer:

  • The employer can elect to treat the personal use value as paid at any time during the year.  Thus, the employer can treat the entire personal use value as being provided on December 31 of each year to delay the due dates of the income withholding and payroll taxes
  • An employer can elect not to withholding income taxes (the employee will have to pay income tax estimates on her own).  However, the employer is still responsible for employment taxes.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

 

The Basics of the New Section 199A and How It Affects the Self-Employed

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Affectionately being referred to as the Pass-Through Deduction, the new tax law will allow partnerships, LLCs, S corporations and sole proprietorships (in other words, pass-throughs) to deduct up to 20% of their Qualified Business Income under revised provisions of IRC § 199A.

How is the Pass-Through Deduction Calculated?

The Pass-Through Deduction usually will be whichever is smaller between 20% of the household’s Qualified Business Income or 20% of the household’s taxable ordinary income. For example, assume a self-employed plumber has $50,000 of Qualified Business Income in 2018, with no other sources of income. If the plumber is a single filer he may claim a $12,000 standard deduction, resulting in $38,000 in taxable income. Therefore, 20% of the plumber’s Qualified Business Income is $10,000 ($50,000 x 20%), while 20% of his taxable income is $7,600 ($38,000 x 20%). The plumber may claim a $7,600 Pass-Through Deduction, the smaller of the two amounts.

What is Qualified Business Income?

In general, Qualified Business Income is net income that is received from a Qualified Trade or Business. However, there are some exclusions, the most common of which are capital gains, dividend and interest income. Additionally, any guaranteed payments or “reasonable compensation” paid to owners must be excluded.

What is a Qualified Trade or Business?

In general, a Qualified Trade or Business is any trade or business that is not a “Specified Service Trade or Business” or the trade or business of performing services as an employee.

The IRS Defines a Specified Service Trade or Business as:

  • any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners,
  • any banking, insurance, financing, leasing, investing, or similar business,
  • any farming business (including the business of raising or harvesting trees),
  • any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A,
  • any business of operating a hotel, motel, restaurant, or similar business, and
  • any business which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

Income Based Exception for Specified Service Trade or Business Owners

An income-based exception exists for owners of a Specified Service Trade or Business which will allow them to take the Pass-Through Deduction as long as their income is below a certain amount. For 2018, that amount is $207,500 (or $415,000, for MFJ) to be eligible for a partial deduction and $157,500 (or $315,000, for MFJ) to be eligible for the full deduction. Therefore, even if a taxpayer owns a Specified Service Trade or Business if her income is below $157,500 (or $315,000, for MFJ) for the year she may still take the full 20% pass-through deduction. While, if her income is greater than $157,500 (or $315,000, for MFJ) but below $207,500 (or $415,000, for MFJ), she may take a partial deduction.

Phase Out Provisions and other Requirements for Certain Taxpayers

The New Pass-Through Deduction is very complex. While we have discussed the basics here, the new law contains numerous nuances. For example, for taxpayers who have income greater than $207,500 (or $415,000 for MFJ) the deduction must be calculated in a different manner. It is advised that you speak with a tax professional to determine your specific eligibility for the new Pass-Through Deduction.

Business Start-Up Costs – What’s Deductible?

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Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

  • No deduction is available until the business becomes active.
  • Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
  • Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.

Example: Gina spent $20,000 on start-up costs before her new business began on July 1, 2018. In 2018, she may deduct $5,000 and the portion of the remaining $15,000 allocable to July through December of 2018 ($15,000/180 × 6 = $500), a total of $5,500. The remaining $14,500 may be deducted ratably over the remaining 174 months.

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.