Business Consulting and Advisory

Keep These DOs And DON’Ts In Mind When Deducting Business Meal And Vehicle Expenses

Alex 06/02/2023

If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.

Facts of the case

In the case, a married couple claimed $13,596 in car and truck expenses, supported only by mileage logs that weren’t kept contemporaneously and were made using estimates rather than odometer readings. The court disallowed the entire deduction, stating that “subsequently prepared mileage records do not have the same high degree of credibility as those made at or near the time the vehicle was used and supported by documentary evidence.”

The court noted that it appeared the taxpayers attempted to deduct their commuting costs. However, it stated that “expenses a taxpayer incurs traveling between his or her home and place of business generally constitute commuting expenses, which … are nondeductible.”

A taxpayer isn’t relieved of the obligation to substantiate business mileage, even if he or she opts to use the standard mileage rate (65.5 cents per business mile in 2023), rather than keep track of actual expenses.

The court also ruled the couple wasn’t entitled to deduct $5,233 of travel, meal and entertainment expenses because they didn’t meet the strict substantiation requirements of the tax code. (TC Memo 2022-113)

Stay on the right track

This case is an example of why it’s critical to maintain meticulous records to support business expenses for vehicle and meal deductions. Here’s a list of “DOs and DON’Ts” to help meet the strict IRS and tax law substantiation requirements for these items:

DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees who you reimburse for meals and auto expenses, make sure they’re complying with all the rules.

DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event or soon after. Require employees to submit monthly expense reports.

DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account shouldn’t be used for personal expenses.

DON’T be surprised if the IRS asks you to prove your deductions. Vehicle and meal expenses are a magnet for attention. Be prepared for a challenge.

With organization and guidance from us, your tax records can stand up to inspection from the IRS. There may be ways to substantiate your deductions that you haven’t thought of, and there may be a way to estimate certain deductions (called “the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster.

Q&As

What are some common mistakes that people make when claiming deductions for business meals or auto expenses?

Some common mistakes people make when claiming deductions for business meals or auto expenses include failing to keep accurate records of the expenses, claiming personal expenses as business expenses, and failing to meet the IRS requirements for deducting these expenses.

How do I keep accurate records of my business meals and auto expenses to comply with IRS requirements?

To help meet IRS substantiation requirements for business meal and auto expenses, include the date, amount, location, and purpose of the expense. For auto expenses, you should maintain a logbook that tracks your mileage and includes details such as the date, starting and ending locations, purpose of the trip, and total miles driven. It may also be helpful to keep receipts or other documentation to support your expenses.

Why does claiming deductions for business meals or auto expenses attract IRS attention?

Deducting business meal or auto expenses can attract IRS attention because these expenses are often over-reported or inaccurately reported. The IRS has specific rules and limitations for deducting these expenses, and if they are not properly documented or supported, it can trigger an audit. Additionally, some taxpayers may try to deduct personal expenses as business expenses, which is a red flag for the IRS. It is important to keep accurate records and follow all IRS guidelines when deducting business meal or auto expenses to avoid any potential issues with the IRS.

The IRS Has Just Announced 2024 Amounts For Health Savings Accounts

Alex 05/30/2023

The IRS recently released guidance providing the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs).

HSA fundamentals

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high-deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contributions to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year

In Revenue Procedure 2023-23, the IRS released the 2024 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. This is up from $3,850 and $7,750, respectively, in 2023.

There is an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024 (and 2023).

High-deductible health plan defined. For calendar year 2024, an HDHP will be a health plan with an annual deductible that isn’t less than $1,600 for self-only coverage or $3,200 for family coverage (up from $1,500 and $3,000, respectively, in 2023). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $8,050 for self-only coverage or $16,100 for family coverage (up from $7,500 and $15,000, respectively, in 2023).

Advantages of HSAs

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Contact your employee benefits and tax advisors if you have questions about HSAs at your business.

FAQS

Who can qualify as a beneficiary of an HSA?

To qualify as a beneficiary of an HSA (Health Savings Account), the individual must be an eligible individual who is covered by a high-deductible health plan (HDHP) and not enrolled in Medicare. The beneficiary can be the account holder’s spouse or any tax dependent, as defined by the IRS.

What are the 2024 HDHP annual contribution limitations?

For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. There is an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024 (and 2023).

What qualifies as a High-Deductible Health Plan in 2024?

In 2024, a High-Deductible Health Plan (HDHP) is defined as a plan with an annual deductible of at least $1,600 for an individual and $3,200 for a family. The maximum out-of-pocket expenses for an HDHP in 2024 will be $8,050 for an individual and $16,100 for a family.

What are some advantages of Health Savings Accounts (HSAs)?

Health Savings Accounts (HSAs) offer several advantages, including tax-free contributions and withdrawals, the ability to save for future healthcare expenses, and the flexibility to choose how and when to use HSA funds. HSAs also allow individuals to carry over unused funds from year to year and can be used in combination with high-deductible health insurance plans.

If You’re Hiring Independent Contractors, Make Sure They’re Properly Handled

Alex 05/23/2023

Many businesses use independent contractors to help keep their costs down — especially in these times of staff shortages and inflationary pressures. If you’re among them, be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold federal income and payroll taxes and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also provide the worker with fringe benefits if it makes them available to other employees. In addition, there may be state tax obligations.

On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more).

No One Definition

Who’s an “employee?” Unfortunately, there’s no uniform definition of the term.

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors.

Note: Section 530 doesn’t apply to certain types of workers.

You Can Ask The IRS But Think Twice

Be aware that you can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, you should also be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit.

It may be better to properly set up a relationship with workers to treat them as independent contractors so that your business complies with the tax rules.

Workers who want an official determination of their status can also file Form SS-8. Dissatisfied independent contractors may do so because they feel entitled to employee benefits and want to eliminate their self-employment tax liabilities.

If a worker files Form SS-8, the IRS will notify the business with a letter. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

How do I determine if someone is an employee or an independent contractor?

There is no uniform definition of the term “employee,” but the IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Various other factors, including the worker’s level of autonomy and independence and the nature of the work being performed, are also considered. The IRS provides guidance on this issue, including a set of criteria known as the “Common Law Rules,” which help employers determine whether a worker is an employee or an independent contractor.

What is the risk of asking the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee?

Asking the IRS to rule on worker classification may trigger an audit and potential tax liabilities for the employer. The IRS may also require back payment of employment taxes, penalties, and interest. The IRS has a history of classifying workers as employees rather than independent contractors. Businesses should consult with us before filing Form SS-8 to avoid these issues.

What are some tax-related differences between employees and independent contractors?

There are several tax-related differences between employees and independent contractors. For example, businesses are obligated to withhold taxes from employees’ paychecks. For independent contractors, businesses are only required to issue form 1099-NEC (if compensation for the year was $600 or more) and are not obligated to withhold taxes.

These are the basic tax rules. Contact us if you’d like to discuss how to classify workers at your business. We can help make sure that your workers are properly classified.

Use The Tax Code To Make Business Losses Less Painful

Alex 05/15/2023

Whether you’re operating a new company or an established business, losses can happen. The federal tax code may help soften the blow by allowing businesses to apply losses to offset taxable income in future years, subject to certain limitations.

Qualifying for a deduction

The net operating loss (NOL) deduction addresses the tax inequities that can exist between businesses with stable income and those with fluctuating income. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:

Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
Casualty and theft losses from a federally declared disaster, or
Rental property (Schedule E).

The following generally aren’t allowed when determining your NOL:

Capital losses that exceed capital gains,
The exclusion for gains from the sale or exchange of qualified small business stock,
Nonbusiness deductions that exceed nonbusiness income,
The NOL deduction itself, and
The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.

Limitations

The Tax Cuts and Jobs Act (TCJA) made significant changes to the NOL rules. Previously, taxpayers could carry back NOLs for two years, and carry forward the losses 20 years. They also could apply NOLs against 100% of their taxable income.

The TCJA limits the NOL deduction to 80% of taxable income for the year and eliminates the carryback of NOLs (except for certain farming losses). However, it does allow NOLs to be carried forward indefinitely.

A COVID-19 relief law temporarily loosened the TCJA restrictions. It allowed NOLs arising in 2018, 2019 or 2020 to be carried back five years and removed the taxable income limitation for years beginning before 2021. As a result, NOLs could completely offset income. However, these provisions have expired.

If your NOL carryforward is more than your taxable income for the year to which you carry it, you may have an NOL carryover. The carryover will be the excess of the NOL deduction over your modified taxable income for the carryforward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.

Excess business losses

The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships or S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2023, that threshold is $289,000 ($578,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years beginning before January 1, 2029. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Planning ahead

The tax rules regarding business losses are complex, especially when accounting for how NOLs can interact with other potential tax breaks. We can help you chart the best course forward.

FAQS

How do I know if I qualify for a NOL deduction?

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income, as long as the deductions are related to your business, rental property, or casualty/theft losses from a federally declared disaster.

What are some limitations to the NOL deduction?

The following are a few limitations to the NOL deduction: the amount of NOL that can be deducted in a given year is limited to 80% of taxable income, NOLs can only be carried back for two years and carried forward for up to 20 years, and certain types of income—such as capital gains and dividends—may not be offset by NOLs.

What is the “excess business loss” NOL limitation?

The excess business loss limitation limits the amount of business losses that can be deducted from other sources of income, such as wages or investment income. The limitation applies to non-corporate taxpayers, such as sole proprietors and partners in partnerships. For 2023, the threshold is $289,000 ($578,000 if married filing jointly).

Education Benefits Help Attract, Retain And Motivate Your Employees

Alex 05/08/2023

One popular fringe benefit is an education assistance program that allows employees to continue learning and perhaps earn a degree with financial assistance from their employers. One way to attract, retain and motivate employees is to provide education fringe benefits so that team members can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer under a “qualified educational assistance program.”

For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by individuals pursuing programs leading to a business, medical, law or other advanced academic or professional degrees.

More requirements

The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals (including their spouses or dependents) who own 5% or more of the business.

No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.

Job-related education

If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying the $5,250 exclusion, an employer can satisfy an employee’s educational expenses on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:

Maintain or improve skills required for the employee’s then-current job, or
Comply with certain express employer-imposed conditions for continued employment.

“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.

Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.

Assistance with student loans

In addition to education assistance, some employers offer student loan repayment assistance as a recruitment and retention tool. Starting next year, employers can help more. Under the SECURE 2.0 law, an employer will be able to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.” The result of this provision is that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers. This will take effect in 2024.

Keep These DOs And DON’Ts In Mind When Deducting Business Meal And Vehicle Expenses

Q&As

The IRS Has Just Announced 2024 Amounts For Health Savings Accounts

FAQS

If You’re Hiring Independent Contractors, Make Sure They’re Properly Handled

Use The Tax Code To Make Business Losses Less Painful

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