Be Confused No More by Business Travel, Meals and Entertainment

Many of our clients and small business owners constantly struggle with separating their business lives from their personal lives. They ponder what is a deductible expense and what is not, and this is particularly true in the areas of business travel, meals, and entertainment. Over the next several blogs, we’ll discuss many topics as it relates to this matter. There are many regulations that govern this area of tax law, but one simple rule can always be of assistance to you if you ever find yourself questioning an expense: Contact your CPA! Without sounding too much like an advocate for our profession, in many cases, a simple phone call can save you time, money, and be a huge source of stress relief.

Business Meals and Entertainment:

Taxpayers often mix business with pleasure when they entertain—or have a business lunch or dinner with—a business associate or client. Or, if not pleasure, there is at the very least an element of personal consumption involved in what is often a necessary part of doing business. Either way, the meal or entertainment expense results in deductions, as long as it:

• is directly related to or associated with the active conduct of the taxpayer's trade or business, and
• isn't lavish and extravagant under the circumstances (as regulated by IRS Code)

The “directly related to” or “associated with” tests don't apply to expenses directly related to bona fide business meetings of a taxpayer's employees, shareholders, agents or directors, provided the meeting is held principally for discussion of trade or business. They also do not apply to expenses for entertainment directly related to and necessary for attendance at bona fide business meetings or conventions of organizations such as business leagues, chambers of commerce, and real estate boards.

Deductions for otherwise qualifying business meal and entertainment expenses are generally limited to 50% of cost. In effect, the disallowed portion of the expense reflects the fact that business meals and entertainment inherently involve an element of personal benefit.

Both business meals and business entertainment are generally treated the same for deduction purposes with the exception of one important difference: A business meal is not deductible unless the taxpayer (or an employee) is present when the meal is furnished. By contrast, a taxpayer can deduct 50% of the cost of an entertainment event under the “associated with” rule even if he does not attend the entertainment event.

What is Entertainment?

Entertainment covers “any activity of a type generally considered to constitute entertainment, amusement, or recreation,” including activities such as entertainment at nightclubs, cocktail lounges, theaters, country clubs, golf or athletic clubs, sporting events, and hunting. However, there are certain entertainment facility and club dues that fall into a nondeductible category. An objective test is used to determine whether an expense is “entertainment” or another type of business expenditure.

Business entertainment rules apply to the entertainment of any “business associate,” a term that is defined broadly by the regulations. It includes a person “with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer's trade or business, such as the taxpayer's customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”

Join us again for our next blog where we continue to look at the many details that are involved in this area of your business and tax picture. Specifically, we’ll look into the application of deduction limits and reimbursement situations and those meals and entertainment expenses that might be exempted from said limits.

Until then, tax season is upon us, so get your documents in order and get them to your CPA and stay ahead of the curve!

brad@mcarthurco.com
704.544.8429

Extended and Delayed -- IRS Deadlines

2010 INDIVIDUAL FEDERAL INCOME TAX RETURNS DUE APRIL 18, 2011 –

The IRS has announced that individual taxpayers, nationwide, will have until Monday, April 18, 2011 to file their 2010 returns and pay any taxes due. Taxpayers get the extra time because Emancipation Day, a holiday in the District of Columbia, is observed this year on Friday, April 15th. By law, D.C. holidays impact tax deadlines in the same way that federal holidays do. The April 18th deadline applies to any return or payment normally due on April 15th. IRS says that April 18, 2011 is also the deadline for requesting a tax-filing extension and for making 2010 IRA contributions.

Caution! States may or may not follow this rule. Please check with your state department of revenue. State returns may still be due by April 15, 2011.

CERTAIN INDIVIDUAL RETURNS MAY NOT BE FILED UNTIL FEBRUARY –

The IRS says it will need to reprogram its processing systems for three provisions that were extended in the Tax Relief Act of 2010. Therefore, individuals claiming the following items will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid to late February. IRS says individuals will need to wait to file if they are within any of the following three categories:

1) individuals claiming itemized deductions on Schedule A
2) individuals claiming the Higher Education Tuition and Fees Deduction
3) individuals claiming the Educator Expense Deduction

This delay affects both paper filers and electronic filers.

In addition, IRS says certain forms cannot be e-filed at this time. In an IRS QuickAlert, dated January 7, 2011, the IRS says it may be until mid or late February before the following returns may be filed electronically:

• Schedule A, Itemized Deductions
• Form 3800, General Business Credit
• Form 4684, Casualties and Thefts
• Form 5405, First-Time Homebuyer Credit and Repayment of the Credit (Page 2)
• Form 6478, Alcohol and Cellulosic Biofuel Fuels Credit
• Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit
• Form 8859, District of Columbia First-Time Homebuyer Credit
• Form 8910, Alternative Motor Vehicle Credit
• Form 8917, Tuition and Fees Deduction
• Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit
• Entries for Educator Expenses (Form 1040, line 23 and Form 1040A, line 16) or Tuition and Fees (Form 1040, line 34 and Form 1040A, line 19)

The IRS says it will announce when these forms are available for e-file and when the Form 1040 and Form 1040A changes are implemented.

The AMT Trap (and temporary relief)

This blog will expound upon regarding two key provisions in the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” The provisions extend partial relief to individual taxpayers from the Alternative Minimum Tax, or AMT. Earlier temporary measures to deal with the unintended creep of the AMT's reach expired at the end of 2009, meaning that more than 20 million additional taxpayers would have faced paying the tax on their 2010 tax returns without the new relief.

• A Brief overview of the AMT
The AMT is a second tax system which does not permit several of the deductions found under the regular tax system. For example, your property tax deduction. Taxpayers who may be subject to the AMT must calculate their tax liability under the regular federal tax system AND under the AMT system by taking into account certain “preferences” and “adjustments.” If their liability is found to be greater under the AMT system, that's what they owe the federal government. AMT was originally enacted to make sure that wealthy Americans did not escape paying taxes; however, it has started to apply to more middle-income taxpayers.

In recent years, Congress has provided a measure of relief from the AMT by raising the AMT “exemption amounts”— allowances that reduce the amount of Alternative Minimum Taxable Income (AMTI), reducing or eliminating AMT liability. For 2010, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000 for those married filing jointly. This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills for many of them.

• New law provides temporary relief
To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again relied on a temporary “patch” to the problem. Under the new law, for tax years beginning in 2010, the AMT exemption amounts are increased to: (1) $72,450 in the case of married individuals filing a joint return and surviving spouses; (2) $47,450 in the case of unmarried individuals other than surviving spouses; and (3) $36,225 in the case of married individuals filing a separate return. For tax years beginning in 2011, the AMT exemption amounts are increased to: (1) $74,450 in the case of married individuals filing a joint return and surviving spouses; (2) $48,450 in the case of unmarried individuals other than surviving spouses; and (3) $37,225 in the case of married individuals filing a separate return.

• Personal credits may be used to offset AMT through 2011
Another provision in the new law provides AMT relief for taxpayers claiming personal tax credits. The tax liability limitation rules generally provide that certain nonrefundable personal credits (including the dependent care credit and the elderly and disabled credit) are allowed only to the extent that a taxpayer has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against the AMT. Temporary provisions have been enacted which permit such credits to offset the AMT liability.

If a permanent fix is not put into place before 2012, these extensions are once again set to lapse and the AMT trap will have a much further reach into Americans' pockets. I hope this information is helpful. If you would like more details about this or any other aspect of the new law, please give us a call.

brad@mcarthurco.com
704.544.8426