2018 Client Business Meals Update

Here’s the updated strategy on deducting business meals with your clients or customers: deduct your client and business meals as if tax reform never took place. At first glance it appeared that the new tax law that went into effect on January 1, 2018 would disallow business meal deductions along with entertainment. Looking deeper it appears that was not their intent.

Wow. Is this aggressive? Not if:
• the IRS comes out with regulations that follow a model set by the American Institute of CPAs, or
• the Joint Committee on Taxation in its explanation of the Tax Cuts and Jobs Act (TCJA) states that client and business meals continue as deductions, or
• lawmakers enact a new tax code section that authorizes client and business meal deductions.

How big is the “if” in the if? We have some insights that say business meals will be deductible for all of 2018. Of course, nothing is certain except the current uncertainty.

Let’s put it this way: if you do what you need to do to deduct the meals, then you are in a position to claim the business meals deduction when one of the above happens. So, make sure you have your 2018 business meals documented as follows:

• The name of the person you had the meal with.
• The name of the restaurant where you had the meal.
• A short description of the business discussed.
• If the meal costs $75 or more, keep the receipt that shows the name of the restaurant, number of people at the table, and itemized list of food and drink consumed.

If you want to discuss the business meals deduction with me, don’t hesitate to call.

Note that meals associated with customer or client entertainment (eg, eating while at the theater or baseball game) are NOT deductible due to the new tax law in 2018. Business deductions for entertainment are gone-period.

Sincerely,
Bob (805) 264-3305

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How to Help Your Adult Child Buy a Home – the Tax-Friendly Way

I was asked about a parent helping a child buy a home, and that triggered the following five thoughts.

 

  1. Gift. You and your spouse can each gift $14,000 to your child and to the child’s spouse for a down payment. This gives you a tax-free gift of $56,000 using the gift exclusion, and your child and his or her spouse have $56,000 for the down payment.
  The gifts should be in four separate checks.

 

  1. Lend the money. If you lend money to your child to purchase a home, the child can deduct the mortgage interest that he or she pays you.
  You can create a really favorable interest rate for your child. Simply charge your child interest equal to the applicable federal rate. The rate for a long-term loan with monthly payments beginning in December 2016 was 2.24 percent a month.

 

  1. Create equitable ownership. Perhaps your child cannot qualify for a loan but can make the mortgage payments. So you buy the home and take out the mortgage in your name, and your child makes the payments.
  Your child can deduct the mortgage interest if he or she can show that he or she is the equitable owner. Equitable ownership and legal ownership are two different concepts under the law.   This can get complicated, so if this approach appeals to you, please call me and I’ll walk you through it.

 

  1. Joint ownership. For tax deduction purposes, this is easy to make work. Your child can deduct the full amount of the mortgage interest that the child actually pays, even though the child is only a partial owner of the home.
 

  1. Shared equity. If you prefer a more businesslike arrangement in helping your child achieve home ownership, the shared equity program could be the ticket. Under this arrangement, you create a rent-to-own program with your child.
 

I’m happy to guide you through any of the possibilities for helping your child buy that home.

  Sincerely,

  Bob 

Robert W Craig, EA Tax Services
(805) 264-3305

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When it comes to tax advice, be careful whom you trust…

There is some remarkably bad and wrong and hazardous-to-your-health information out there that—despite being repeatedly debunked—just will not go away. Some of those ideas are clearly erroneous, but others can snag even very bright people.

  Consider the case of Carter White Rae, a dentist in Michigan. He followed some bad advice and ended up with a bill from the government for over half a million dollars—plus a 45-month jail sentence.

  Remember: You may be a logical person, but tax law is not always logical. Even if something makes sense to you—or sounds like it’s the way the law should work—it may still be completely wrong.

  That’s why you have me in your corner. And that’s why you should ask me before you take an action that seems too good to be true.

  The most dangerous tax strategies are the ones that lead you to believe you do not have to pay any tax at all. Known in IRS lingo as “tax protestor” arguments, they claim that by virtue of little-known quirks in the law or because of never-correctly-ratified amendments, you can somehow sidestep all U.S. tax requirements.

  No matter how intricate those arguments can be, they all suffer from the same problem: The IRS and courts reject them. The government has already ruled against them, and if you use one of those arguments, the government will eventually catch up with you and demand its money. It’s a question of when, not if.

  Take It from the IRS  

The IRS was nice enough to compile a list of arguments that it has heard before and will categorically reject:

 

  1. The filing of a tax return or the payment of federal income tax is voluntary.
  2. Taxpayers can reduce their federal tax liability by filing a “zero return” that reports zero income and zero tax liability.
  3. Compensation received for personal services isn’t income.
  4. Military retirement pay isn’t income.
  5. Only foreign-source income is taxable.
  6. The IRS isn’t a U.S. agency.
  7. The taxpayer isn’t a citizen and therefore isn’t subject to federal income taxes.
  8. The taxpayer isn’t a “person” under the tax law and therefore isn’t subject to federal income taxes.
  9. Various constitutional amendments permit the taxpayer to avoid taxes.
  10. Form 1040’s instructions and regulations don’t have an OMB control number as required by the federal Paperwork Reduction Act.
 

Penalties and Prison  

The IRS believes that tax protestor claims are “frivolous” and will have no mercy on you if you rely on one to avoid paying taxes. The courts tend to agree and uphold those penalties—and sometimes impose prison time as well.   Whenever you “willfully attempt to evade or defeat” your taxes, you’re looking at fines of up to $100,000 ($500,000 for corporations) and prison time of up to five years. That’s on top of having to pay the taxes due, the prosecution’s costs, and any other penalties.  

How to Spot Bad Strategies

  With tax law as complicated as it is, how are you supposed to tell the difference between a legitimate tax reduction strategy and a baseless idea that will get you in trouble?

  The main problem with tax protestor arguments is that they claim to let you ignore the plain language of the law—simply by saying that the IRS isn’t legitimate or that you aren’t subject to the rules.

  Real tax strategies work within the law, finding deductions or ways to reduce your income that the tax code or IRS have explicitly blessed—rather than going around the law or ignoring it.

  Sincerely,

  Bob

Robert W Craig, EA Tax Services

431 2ndStreet, Suite 3

Solvang CA 93463

(805) 264-3305

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starting a business

Starting a Business

Start-up Expenses

Many people don’t think about start-up expenses as potentially deductible. Others think they are deductible just like day to day business operating expenses.

Start-up expenses can be thought of as “thinking about getting into business expenses” and your “getting your business started expenses.”

A key concept is that you must be ‘open for business’ to deduct your ordinary and necessary business expenses. When are you considered open for business?

When the Open Sign is out and customers can come in. When your website is up and running, surfers can find you and can buy from you and you can deliver. When you are ready, willing and able to transact business, sell products and services.

What about pre-opening expenses? Before I opened I…

• Traveled to meet with and learn from others in the business
• Went to lunch, dinner, movies, and played golf with friends and business people to research the viability of the business concept
• Took classes to learn about the business
• Spent money analyzing the market
• Bought books and magazines to find information about the market
• Used my car to make prospecting and other calls to get started
• Advertising for the opening of the new business
• Paid salaries and wages for employees I had to train
• Travel and other costs for securing prospective distributors, suppliers or customers
• Fees for lawyers, accountants, and consultants

Good news, these expenses usually qualify as start-up expenses. In the tax law there is a provision to deduct these expenses. Under old, old law you had to amortize these over 60 months. Then lawmakers gave us a special $5,000 write-off that taxpayers had to know to make a special election on their tax return for. Then they took away the requirement to have to make a special election, we could just write them off on our taxes.

With a 2010 tax change we can now write off up to $10,000 of start-up costs on our tax returns. If your expenses are more than the $10,000, the balance can be written off over 180 months. If your start-up costs are more than $60,000, the $10,000 deduction is reduced dollar for dollar until it’s zero. That is, if your start-up costs were $66,000 you’d only get to deduct $4,000 the first year and amortize the balance of $62,000 over 180 months.

A word of caution here. If you do not qualify to be in business or the law prohibits you from starting the business, you are not in business. A suspended insurance broker could not deduct his expenses. Also the expenses you are trying to deduct cannot qualify you to start your business as a minimum requirement to enter the field.

Example: Mr. Duecaster, a high school teacher, tried to deduct his law school tuition and other costs as start-up expenses for his law practice. Wrong! The court ruled that he gets no deduction for the educational expenses because the education was necessary to qualify him to practice law, not start a business. The law school expenses were personal.

That being said, there have been cases where graduate school expenses were deemed deductible. Advanced stuff so if you think it applies, get professional assistance.

For a handy little handout on start a business, click here: Starting a Business

This can get a bit tricky, so don’t hesitate to call me when thinking about starting a business.

Thank you,

Bob

(805) 264-3305

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Year End Tax Planning Update for Individuals

November 18, 2014

Year End Tax Planning Update for Individuals

From:  Robert W. Craig, E.A. Tax Services

Dear Client or Subscriber,

It’s that time of year where we should think about preparing an estimate of your current year tax liability and see if we can reduce that liability.

There are several things to consider when doing year-end tax planning: taking advantage of expiring tax provisions, deferring income into next year, or accelerating income into the current year (and doing the opposite with expenses). The proper strategy depends on whether or not you anticipate a significant change in income or expenses next year.

With respect to expiring provisions, many taxpayer-favorable provisions expired at the end of 2013. Congressional gridlock has prevented these provisions, known as the “tax extenders,” from being enacted into law for 2014. Earlier this year, the Senate Finance Committee passed the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Bill of 2014, which would extend a number of these expired provisions to 2014 and 2015. Many believe that Congress is just waiting until after the November elections to move forward on this Bill. Alternatively, any movement on the Bill may not come until 2015. Congress has been known to pass legislation in a tax year after the year to which the legislation applies and make that legislation retroactive. The Bill includes the following items which may impact your total tax for 2014:

(1) Deduction for expenses of elementary and secondary school teachers – This provision allows teachers and other school professionals a $250 above-the-line tax deduction in 2014 and 2015 for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.

(2) Mortgage debt forgiveness – Under this provision, up to $2 million of forgiven mortgage debt is eligible to be excluded from income ($1 million if married filing separately) through tax year 2015.

(3) Increased exclusion from income for employer-provided mass transit and parking benefits – This provision would increase, for 2014 and 2015, the monthly exclusion from income for employer-provided transit and vanpool benefits from $130 to $250, so that it would be the same as the exclusion for employer-provided parking benefits. The provision also modifies the definition of qualified bicycle commuting reimbursement to include expenses associated with the use of a bike sharing program.

(4) Deduction for mortgage interest premiums – Under this provision, for 2014 and 2015, taxpayers would be able to deduct the cost of mortgage insurance on a qualified personal residence. The deduction would be phased-out ratably by 10 percent for each $1,000 by which adjusted gross income (AGI) exceeds $100,000. Thus, the deduction would be unavailable for a taxpayer with an AGI in excess of $110,000.

(5) Deduction for state and local general sales taxes – This provision would extend for two years the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes.

(6) Special rules for contributions of capital gain real property made for conservation purposes – This provision would extend for two years the increased contribution limits and carry-forward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.

(7) Above-the-line deduction for higher education expenses – This provision would extend an above-the-line tax deduction for qualified higher education expenses. The maximum deduction, for 2014 and 2015, would be $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns).

(8) Tax-free distributions from individual retirement plan for charitable purposes – This provision would allow an individual retirement arrangement (IRA) owner who is age 70-1/2 or older generally to exclude from gross income up to $100,000 for 2014 and 2015 in distributions made directly from the IRA to certain public charities.

Income Subject to Top Tax Rate

For 2014, the amount of income subject to the top tax rate of 39.6 percent increased from the 2013 amounts to $457,600 (married filing jointly), $406,750 (single individuals), $432,200 (head of household) and $228,800 (married filing separately).

Net Investment Income Tax

The net investment income tax is a 3.8 percent tax on net investment income that took effect in 2013. Besides applying to investment income, the tax also applies to income from trades or businesses of the taxpayer that are passive activities. An activity is not generally considered passive if the taxpayer materially participates. If you are engaged in an activity which may be considered passive and thus has the potential to trigger the net investment income tax, we should evaluate the seven factors that determine material participation to see if your business can escape the net investment income tax.

Affordable Care Act (‘Obamacare’)

Beginning in the 2014 tax year, most individual taxpayers will be required to obtain health insurance, either through their employer or independently on a health insurance exchange marketplace, or risk facing a tax penalty. In 2014 the penalty is either $95 per adult ($47.50 per child) or 1% of income, whichever is higher. In some situations, the amounts of these penalties will increase in 2015. If you or your family members do not have health insurance, it may make sense for us to evaluate your options by comparing the amount of the potential penalties with the cost of obtaining coverage.

Alternative Minimum Tax

If you are subject to the alternative minimum tax (AMT), your deductions may be limited. Thus, if we anticipate that you will be subject to the AMT, we need to consider the timing of deductible expenses that may be limited under the AMT.

IRA Considerations

In 2014, the waiting-period rule on IRA rollovers changed, and not to your benefit. While the rule used to be that the one-year waiting period between rollovers applied on an IRA-by-IRA basis, the courts and IRS determined that it applies on an aggregate basis instead. This means that you cannot make a tax-free IRA-to-IRA rollover if you’ve made such a rollover involving any of your IRAs in the preceding one-year period. This new rule applies beginning in 2015. However, the rule does not affect your ability to transfer funds from one IRA trustee directly to another, because such a “trustee-to-trustee transfer” is not a rollover and, therefore, is not subject to the one-waiting period.

Self-directed IRAs have become increasingly popular in recent years because they allow an IRA owner to have more control over the type of investments that will be held in the IRA. This higher degree of flexibility in choosing IRA investments allows the IRA owner to invest in assets with greater wealth-building potential. However, the large amount of money held in self-directed IRAs makes them attractive targets for fraud promoters. Thus, self-directed IRA can be costly if not properly managed. In addition, because of the types of investments taxpayers with self-directed IRAs are able to make, taxpayers have a greater risk of running afoul of the prohibited transaction rules. The prohibited transaction rules impose an excise tax on certain transactions – such as sales of property, the lending of money or extension of credit, or the furnishing of goods, services, or facilities – between an IRA and a disqualified person. If you have a self-directed IRA, we need to review the specifics of your arrangement.

Self-Employed Considerations

If you are self-employed and your business has shown losses for the past several years, there is a danger that the IRS will consider your business a hobby and disallow deductions in excess of revenue. If you are in this situation, there are certain steps we can take to mitigate this potential. For example, we can ensure there is appropriate documentation as to the business-like manner in which the business is carried on, including the adoption of new techniques or the abandonment of unprofitable methods.

The IRS has issued new rules on the capitalization and expensing of tangible property used in a trade or business. If tangible property is a part of your business, these rules will most likely impact your current year taxes and may require certain actions by year end. For example, if you acquired numerous small dollar items, a de minimis safe harbor rule may apply to allow you to deduct all items below a certain threshold. Or, if you incurred significant repair and maintenance costs for heavy machinery, a routine maintenance safe harbor may be used to increase current deductions.

Estate/Gift Tax Considerations

Annual Exclusion

There is still time to reduce your estate by gifting amounts to relatives or friends, free of the gift tax that normally applies. For 2014, you can gift up to $14,000 to each donee without having to file a gift tax return.

Charitable Remainder Trusts

If you are in the top tax bracket, have appreciated assets that would be subject to capital gains tax if sold, and would like to make a significant gift to a favorite charity while reducing estate or gift taxes, you may want to think about utilizing a charitable remainder trust (CRT). A CRT, which has an income interest part and a remainder interest part, can allow you to sell appreciated assets tax free, while providing you with a current income tax deduction that can offset all forms of income in addition to providing a charity with a substantial donation. Please let me know if you would like more information on this option.

Other Steps to Consider Before the End of the Year

The following are some of the additional actions we should review before year end to see if they make sense in your situation. The focus should not be entirely on tax savings. These strategies should be adopted only if they make sense in the context of your total financial picture.

Accelerating Income into 2014

Depending on your projected income for 2015, it may make sense to accelerate income into 2014 if you expect 2015 income to be significantly higher. Options for accelerating income include:

(1) harvesting gains from your investment portfolio;

(2) if you own a traditional IRA or a SEP IRA, converting it into a Roth IRA and recognizing the conversion income this year;

(3) taking IRA distributions this year rather than next year;

(4) selling stocks or other assets with taxable gains this year;

(5) if you are self employed with receivables on hand, trying to get clients or customers to pay before year end; and

(6) settling lawsuits or insurance claims that will generate income this year.

Deferring Income into 2015

There are also scenarios (for example, if you think that your income will decrease substantially next year) in which it might make sense to defer income into the 2015 tax year or later years. Some options for deferring income include:

(1) if you are due a year-end bonus, asking your employer to pay the bonus in January 2015;

(2) if you are considering selling assets that will generate a gain, postponing the sale until 2015;

(3) delaying the exercise of any stock options you may have;

(4) if you are selling property, considering an installment sale;

(5) consider parking investments in deferred annuities;

(6) establishing an IRA, if you are within certain income requirements; and

(7) if your employer has a 401(k) plan, consider putting the maximum salary allowed into it before year end.

Deferring Deductions into 2015

If you anticipate a substantial increase in taxable income, we may want to explore deferring deductions into 2015 by looking at the following:

(1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments, until next year; and

(2) postponing the sale of any loss-generating property.

Accelerating Deductions into 2014

If you expect your income to decrease next year, accelerating deductions into the current we can into the current year to offset the higher income this year. Some options include:

(1) consider prepaying your property taxes in December;

(2) consider making your January mortgage payment in December;

(3) if you owe state income taxes, consider making up any shortfall in December rather than waiting until your return is due;

(4) since medical expenses are deductible only to the extent they exceed 10 percent (7.5 percent if you or your spouse are 65 before the end of the year) of your adjusted gross income (AGI), if you have large medical bills not covered by insurance, bunching them into one year may help overcome this threshold;

(5) making any large charitable contributions in 2014, rather than 2015;

(6) selling some or all of your loss stocks; and

(7) if you qualify for a health savings account, consider setting one up and making the maximum contribution allowable.

Life Events

Certain life events can also affect your tax situation. If you’ve gotten married or divorced, had a birth or death in the family, lost or changed jobs, retired during the year, we need to discuss the tax implications of these events.

Miscellaneous Items

Finally, these are some additional miscellaneous items to consider:

(1) If you have a health flexible spending account with a balance, remember to spend it before year end (unless your employer allows you to go until March 15, 2015, in which case you’ll have until then).

(2) If you own a vacation home that you rented out, we need to look at the number of days it was used for business versus pleasure to see if there is anything we can do to maximize tax savings with respect to that property. For example, if you spent less than 14 days at the home, it may make sense to spend a few more days and have the house qualify as a second residence, with the interest being deductible. For a rental home, rental expenses, including interest, are limited to rental income.

(3) We should also consider if there is any income that could be shifted to a child so that the income is paid at the child’s rate.

(4) If you have any foreign assets, there are reporting and filing requirements with respect to those assets. Noncompliance carries stiff penalties.

Please call me at your convenience so we can set up an appointment and estimate your tax liability for the year and discuss any questions you may have.

Sincerely,

Bob

Robert W. Craig, E.A. Tax Services            Telephone   (805) 264-3305

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Tax Audits on the Rise!

Tax Audits On The Rise

This is a long post but it is a very important topic, so please read the whole thing. And do feel free to pass it along to anyone you think may be interested.

Do you know how many tax return audits are based on “random selection”? The answer is about 50%. Like the spin of the wheel regardless of what may be on your return, a taxpayer may be audited.

That leaves the other 50% of returns audited being chosen based on IRS so-called “test scores.” The IRS has what is called a “discriminant function system” (DIF) which computers score the return for the potential for change in tax. It also uses a related “unreported income DIF” which scores the potential for collecting tax on unreported income.

That is, the higher the score the more likely the return is to be audited. There additional ways to be audited like computer matching of forms like W-2s, 1099’s, 1098’s, related return programs, and tax shelter watches.

Due to budget constraints, failed computer systems, lack of training, and other things, IRS audits have been very low for many, many years. This has given taxpayers and even many tax preparers the warm fuzzy feeling that they just ain’t looking at returns. The IRS has picked up on this.

Well, read the papers, listen to the news. Our federal and state governments are in bad financial shape, and they’re all looking for ways to collect additional revenue, and they are making it a top priority to after every dollar of potential tax. The main way to do this is with encouraging compliance in complying with the tax laws. One big way to do this is putting teeth in auditing tax returns, and they are doing this.

Not only with more audits, but also training auditors to be much more diligent in requiring documents, logs, and proof of everything on the returns.

I’m not telling you all this to scare you. No, this is just a gentle reminder to keep great records. And this article will give you some tips to keep these records. This accomplishes a number of things.

Audit Survival Tactics
One, if you are audited you have everything you need to prove that your return is correct. Two, by keeping great records you can be sure you pay the least tax possible. Also, the time and money saved during the audit process is greatly reduced if you prepare for the audit beeore filing your tax return.

How do you do this? Save your receipts for all items you are putting on your tax return. This includes medical, dental, eyeglasses, property tax, DMV, mortgage and other deductible interest, charitable contributions, employee business expenses. If you are in business for yourself, save everything.

If addition to your receipts, the IRS wants you to prove that you actually paid the receipt. This is done with cancelled checks, bank statements, and credit card statements. Save all these. No if’s, and’s, or butt’s.

Charitable Contributions
For most taxpayers filing Schedule A (the long form) a big area to shore up is with charitable contributions. Do not donate cash if you want to deduct the expense. Write a check or pay with a credit card, and get receipts from the organization. Actually, when you donate $250 or more in any one day you are required to have written substantiation from the organization. This means that even if you have proof of payment, they can disallow the deduction if you don’t get this written substantiation.

Non-Cash Charities
For non-cash charitable donations like clothes, furniture, household goods to organizations like Goodwill, Salvation Army, churches, etc you must adhere to special rules.

With a few exceptions we get to deduct the fair market value of items we donate to qualified charitable organizations. What is fair market value? Depending on the item the valuation could be, thrift shop value, comparable sales, Kelly Blue Book for vehicles, stock quotes, appraisals or any reasonable method to determine value. Written appraisals are required for property exceeding $5,000.

Now, with these non-cash items and the values claimed, step into the IRS shoes and think what proof they’d want to see. Take pictures, make lists with values and the method used to determine value and anything else you can get as proof. Oh yeah, and don’t forget the written receipt.

A free service by Turbotax can be found at www.itsdeductible.com that tracks and itemizes items donated and has suggested values. These values are not bulletproof in an audit so use judgement when using this service.

Employee Business Expenses
If you are required by your job as an employee to spend money in order to you your job (vehicle expenses, meals and entertainment, travel, supplies, telephone, etc) you really need to keep excellent records as this is a very targeted area.

Tip: The best way to handle this is really to have your employer set up an accountable plan. You keep documents, logs, etc as required by the employer and turn these in to the employer monthly and the employer reimburses you dollar for dollar. This way the reimbursement does not go on your W-2 and you don’t have to deal with deducting them on your tax return, lowering audit risk and you’re fully reimbursed.

Caution: A flat reimbursement amount, say $500 per month is not a substantiated accountable plan! In this situation, the $500 checks are thrown and taxed on your W-2 and you must try to deduct the expenses on your tax return.

No matter which method you use you still need to keep great records. Same as above; receipts, cancelled checks, credit card statements and…

Mileage Logs. You absolutely must keep mileage logs. I know, I know, I hate it too but, the IRS auditors are really grilled on reviewing taxpayers mileage logs, and they are assessing whether the logs were kept as you traveled, not put together for just for the audit. If you deduct vehicle expenses and are selected for audit, they will audit your mileage.

A good way is to keep an appointment book showing who you saw, where you went, when you went, why you went. You can make the mileage entries in your appointment book/daily planner. Do this as you go along daily. It takes a lot of time trying to reconstruct the log two years later. Not keeping these logs are now considered the “mortal sin” in an audit. They can disallow all of your mileage without the log!

The principles here apply to self-employed taxpayers, corporate shareholders, partners in partnerships as well. Remember corporate shareholders are considered employees of their corporation, so see the accountable plan described above and implement the plan. I can help set these up if you need help.

Travel, Meals, & Entertainment. This is another area where you can be sure that, if you are selected for audit, the auditor will check your records on travel, meals, and entertainment.

They even have more and stricter rules for substantiation. You must be able to prove what is called the who, what, when, where, why and how for each expen- diture. It’s not enough just to produce a restaurant receipt and the credit card statement. You must show that it is indeed an allowable deduction per the tax code.

Show why and the days you were out of town on business, who you took out to breakfast, lunch or dinner, why you took them out, what was discussed, the result of the meeting, the where and when are usually on the receipts you keep.

If you are in business and are not out of town on business you cannot deduct meals and entertainment while working unless you meet with a customer, client, vendor, or someone with a related business purpose.

This substantiation can also be put into your appointment book/daily planner along with the mileage log. Set up a good filing system to organize receipts, cancelled checks and credit card statements.

In conclusion, ignoring your tax records is a major mistake. Reconstruction the records after the fact takes a tremendous amount of time. And the fact of doing this one or two years later makes it even more difficult trying to jog the memory.

If we don’t have the 10 minutes to do this daily, where are we going to find the three weeks trying to put it all together in the event of an audit.

There are no short cuts. The IRS will not accept just cancelled checks, or just credit card statements as bulletproof documentation. If there’s one or two missing and everything else is documented, it’s probably no problem. Also, if we have great documentation and show this, the auditor will most likely lose interest in pursuing a fruitless search for errors which will certainly shorten the audit.

Thank you for reading this and feel free to call me with any questions you may have.

Bob
(805) 264-3305

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