Traveling for business again? What can you deduct?

As we continue to come out of the COVID-19 pandemic, you may be traveling again for business. Under tax law, there are several rules for deducting the cost of your out-of-town business travel within the United States. These rules apply if the business conducted out of town reasonably requires an overnight stay.

Note that under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses through 2025 on their own tax returns. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.

However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Here are some of the rules that come into play.

Transportation and meals

The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. The Consolidated Appropriations Act includes a provision that removes the 50% limit on deducting eligible business meals for 2021 and 2022. In addition, the law allows a 100% deduction for food and beverages provided by a restaurant. Takeout and delivery meals provided by a restaurant are also fully deductible.

Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”

Personal entertainment costs on the trip aren’t deductible, but business-related costs such as dry cleaning, phone calls, and computer rentals can be written off.

Combining business and pleasure

Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for five days of business meetings and stay on for an additional vacation period. However, only the cost of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.

On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is “primarily” business, the travel cost can be deducted in its entirety, and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn't the sole factor).

If the trip doesn’t involve the actual conduct of business but is to attend a convention, seminar, etc., the IRS may carefully check the meetings' nature to make sure they aren’t vacations in disguise. Retain all material helpful in establishing the business or professional nature of this travel.

Other expenses

The rules for deducting a spouse's costs who accompany you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.

Finally, note that personal expenses you incur at home resulting from making the trip aren’t deductible. For example, the cost of boarding a pet while you’re away isn’t deductible. Contact us if you have questions about your small business deductions.

© 2021


Don’t assume your profitable company has strong cash flow

Most of us are taught from a young age never to assume anything. Why? Well, when you assume you make an … you probably know how the rest of the expression goes.

Many business owners make a dangerous assumption that if their companies are profitable, their cash flow must also be strong. But this isn’t always the case. Taking a closer look at the accounting involved can explain.

Investing in the business

What are profits, really? In accounting terms, they’re closely related to taxable income. Reported at the bottom of your company’s income statement, profits are essentially the result of revenue less the cost of goods sold and other operating expenses incurred in the accounting period.

Generally Accepted Accounting Principles (GAAP) require companies to “match” costs and expenses to the period in which revenue is recognized. Under accrual-basis accounting, it doesn’t necessarily matter when you receive payments from customers or pay expenses.

For example, inventory sitting in a warehouse or retail store can’t be deducted — even though it may have been long paid for (or financed). The expense hits your income statement only when an item is sold or used. Your inventory account contains many cash outflows that are waiting to be expensed.

Other working capital accounts — such as accounts receivable, accrued expenses, and trade payables — also represent a difference between the timing of cash flows. As your business grows and strives to increase future sales, you invest more in working capital, which temporarily depletes cash.

However, the reverse also may be true. That is, a mature business may be a “cash cow” that generates ample dollars, despite reporting lackluster profits.

Accounting for expenses

The difference between profits and cash flow doesn’t begin and end with working capital. Your income statement also includes depreciation and amortization, which are non-cash expenses. And it excludes changes in fixed assets, bank financing, and owners’ capital accounts, which affect cash on hand.

Suppose your company uses tax depreciation schedules for book purposes. Let say, in 2020; you bought new equipment to take advantage of the expanded Section 179 and bonus depreciation allowances. Then you deducted the purchase price of these items from profits in 2020. However, because these purchases were financed with debt, the actual cash outflows from the investments in 2020 were minimal.

In 2021, your business will make loan payments to reduce the amount of cash in your checking account. But your profits will be hit with only the interest expense (not the amount of principal that’s being repaid). Plus, there will be no “basis” left in the 2020 purchases to depreciate in 2021. These circumstances will artificially boost profits in 2021 without a proportionate increase in cash.

Keeping your eye on the ball

It’s dangerous to assume that your cash position is strong—cash flow warrants careful monitoring just because you're turning a profit. Our firm can help you generate accurate financial statements and glean the most important insights from them.

© 2021


Tax-favored ways to build up a college fund

If you’re a parent with a college-bound child, you may be concerned about being able to fund future tuition and other higher education costs. You want to take maximum advantage of tax benefits to minimize your expenses. Here are some possible options.

Savings bonds

Series EE U.S. savings bonds offer two tax-saving opportunities for eligible families when used to finance college:

  • You don’t have to report the interest on the bonds for federal tax purposes until the bonds are cashed in, and
  • Interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified education expenses.

To qualify for the tax exemption for college use, you must purchase the bonds in your name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees, and certain other expenses — not room and board. If only part of the proceeds is used for qualified expenses, only that part of the interest is exempt.

The exemption is phased out if your adjusted gross income (AGI) exceeds certain amounts.

529 plans

A qualified tuition program (also known as a 529 plan) allows you to buy tuition credits for a child or make contributions to an account set up to meet a child’s future higher education expenses. State governments or private education institutions establish qualified tuition programs.

Contributions aren’t deductible. The contributions are treated as taxable gifts to the child, but they’re eligible for the annual gift tax exclusion ($15,000 for 2021). A donor who contributes more than the annual exclusion limit for the year can elect to treat the gift as if it were spread out over a five-year period.

The earnings on the contributions accumulate tax-free until college costs are paid from the funds. Distributions from 529 plans are tax-free to the extent the funds are used to pay “qualified higher education expenses.” Distributions of earnings that aren’t used for qualified expenses will be subject to income tax plus a 10% penalty tax.

Coverdell education savings accounts (ESAs)

You can establish a Coverdell ESA and contribute up to $2,000 annually for each child under age 18.

The right to make contributions begins to phase out once your AGI is over a certain amount. If the income limitation is a problem, a child can contribute to his or her own account.

Although the contributions aren’t deductible, income in the account isn’t taxed, and distributions are tax-free if used on qualified education expenses. If the child doesn’t attend college, the money must be withdrawn when he or she turns 30, and any earnings will be subject to tax and penalty. But unused funds can be transferred tax-free to a Coverdell ESA of another member of the child’s family who hasn’t reached age 30. (Some ESA requirements don’t apply to individuals with special needs.)

Plan ahead

These are just some of the tax-favored ways to build up a college fund for your children. Once your child is in college, you may qualify for tax breaks such as the American Opportunity Tax Credit or the Lifetime Learning Credit. Contact us if you’d like to discuss any of the options.

© 2021


2021 Q3 tax calendar: Key deadlines for businesses and other employers

Here are some key tax-related deadlines affecting businesses and other employers during the third quarter of 2021. Keep in mind that this list isn’t all-inclusive, so that additional deadlines may apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Monday, August 2

  • Employers report income tax withholding and FICA taxes for the second quarter of 2021 (Form 941) and pay any tax due.
  • Employers file a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

Tuesday, August 10

  • Employers report income tax withholding and FICA taxes for the second quarter of 2021 (Form 941) if you deposited all associated taxes that were due in full and on time.

Wednesday, September 15

  • Individuals pay the third installment of 2021 estimated taxes if not paying income tax through withholding (Form 1040-ES).
  • If a calendar-year corporation, pay the third installment of 2021 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic extension:
    • File a 2020 income tax return (Form the 1120S, Form 1065, or Form 1065-B) and pay any tax, interest, and penalties due.
    • Make contributions for 2020 to certain employer-sponsored retirement plans.

© 2021


Pondering the possibility of a company retreat

As vaccination levels rise and major U.S. population centers fully reopen, business owners may find themselves pondering an intriguing thought: Should we have a company retreat this year?

Although there are still health risks to consider, your employees may love the idea of attending an in-person event after so many months of video calls, emails, and instant messages. The challenge to you is planning a safe, productive, and enjoyable retreat — and that doesn’t unreasonably disrupt company operations.

Mixing business with fun

First, nail down your primary objectives well in advance. Determine and prioritize a list of the important issues you want to address but include only the top two or three on the final agenda. Otherwise, you risk rushing through some items without adequate time for discussion and formalized action plans.

Suppose one of the objectives is to include time for socializing or recreational activities, great. Mixing business with fun keeps people energized. However, if staff see the retreat as merely time away from the office to party and golf, don’t expect to complete many work-related agenda items. One way to find the right mix is to consider scheduling work sessions for the morning and more fun, team-building exercises later in the day.

Craft a flexible budget

Next, work on the budget. Determining available resources early in the planning process will help you set limits for variable costs such as location, accommodations, food, transportation, speakers, and entertainment.

Instead of insisting on certain days for the retreat, select a range of possible dates. Doing so widens site selection and makes it easier to negotiate favorable hotel and travel rates. Keep your budget as flexible as possible, building in a 5% to 10% safety cushion. Always expect unforeseen, last-minute expenses.

The good news is that the hospitality industry is generally trying to rebound from the pandemic's challenging downturn. So, you may be able to find some special deals offered to “draw out” companies that haven’t held a retreat in a while.

Also, if you wish to minimize the health risks, you might want to focus on venues with outdoor facilities, such as farms or golf resorts. You could hold sessions mostly outdoors (weather permitting, of course), where it’s very safe.

Reunite and reenergize

Holding a company retreat this year may be a great way to reunite and reenergize your workforce. As convenient and practical as video meeting technology may be, there’s nothing quite like seeing each other in person. We can help you assess the costs and establish a reasonable budget that supports an enjoyable, productive, and cost-effective retreat.

© 2021


Recordkeeping DOs and DON’Ts for business meal and vehicle expenses

If you’re claiming deductions for business meals or auto expenses, expect the IRS to review them closely. 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, the taxpayer ran a notary and paralegal business. As a result, she deducted business meals and vehicle expenses that she allegedly incurred in connection with her business.

The deductions were denied by the IRS and the court. Tax law “establishes higher substantiation requirements” for these and certain other expenses, the court noted. No deduction is generally allowed “unless the taxpayer substantiates the amount, time and place, business purpose, and business relationship to the taxpayer of the person receiving the benefit” for each expense with adequate records or sufficient evidence.

The taxpayer, in this case, didn’t provide adequate records or other sufficient evidence to prove the business purpose of her meal expenses. Instead, she gave vague testimony that she deducted expenses for meals where she “talked strategies” with people who “wanted her to do some work.” The court found this was insufficient to show the connection between the meals and her business.

When it came to the taxpayer’s vehicle expense deductions, she failed to offer credible evidence showing where she drove her vehicle, the purpose of each trip, and her business relationship to the places visited. She also conceded that she used her car for both business and personal activities. (TC Memo 2021-50)

Best practices for business expenses

This case is an example of why it’s critical to maintain meticulous records to support business expenses for meals and vehicle 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 comply with all the rules.

DON’T reconstruct expense logs at year-end or wait until you receive a notice from the IRS. Instead, 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. Meal and auto expenses are a magnet for attention. So be prepared for a challenge.

With organization and guidance from us, your tax records can stand up to scrutiny 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 (“the Cohan rule”) if your records are lost due to a fire, theft, flood, or another disaster.

© 2021


Plan ahead for the 3.8% Net Investment Income Tax

High-income taxpayers face a 3.8% net investment income tax (NIIT) that’s imposed in addition to regular income tax. Fortunately, there are some steps you may be able to take to reduce its impact.

The NIIT applies to you only if modified adjusted gross income (MAGI) exceeds:

  • $250,000 for married taxpayers filing jointly and surviving spouses,
  • $125,000 for married taxpayers filing separately,
  • $200,000 for unmarried taxpayers and heads of household.

The amount subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold ($250,000, $200,000, or $125,000) that applies to you.

Net investment income includes interest, dividend, annuity, royalty, and rental income, unless those items were derived in the ordinary course of an active trade or business. In addition, other gross income from a trade or business that’s a passive activity is subject to the NIIT, as is income from a business trading in financial instruments or commodities.

There are many types of income that are exempt from the NIIT. For example, tax-exempt interest and the excluded gain from the sale of your main home aren’t subject to the tax. Distributions from qualified retirement plans aren’t subject to the NIIT. Wages and self-employment income also aren’t subject to the NIIT, though they may be subject to a different Medicare surtax.

It’s important to remember the NIIT applies only if you have net investment income and your MAGI exceeds the applicable thresholds above. But by following strategies, you may be able to minimize net investment income.

Investment choices 

If your income is high enough to trigger the NIIT, shifting some income investments to tax-exempt bonds could result in less exposure to the tax. Tax-exempt bonds lower your MAGI and avoid the NIIT.

Dividend-paying stocks are taxed more heavily as a result of the NIIT. The maximum income tax rate on qualified dividends is 20%, but the rate becomes 23.8% with the NIIT.

As a result, you may want to consider rebalancing your investment portfolio to emphasize growth stocks over dividend-paying stocks. While the capital gain from these investments will be included in net investment income, there are two potential benefits: 1) the tax will be deferred because the capital gain won’t be subject to the NIIT until the stock is sold and 2) capital gains can be offset by capital losses, which isn’t the case with dividends.

Qualified plans 

Because distributions from qualified retirement plans are exempt from the NIIT, upper-income taxpayers with some control over their situations (such as small business owners) might want to make greater use of qualified plans.

These are only a couple of strategies you may be able to employ. You also may be able to make moves related to charitable donations, passive activities and rental income that may allow you to minimize the NIIT. If you’re subject to the tax, you should include it in your tax planning. Consult with us for tax-planning strategies.

© 2021


Retiring soon? 4 tax issues you may face

If you’re getting ready to retire, you’ll soon experience changes in your lifestyle and income sources that may have numerous tax implications.

Here’s a brief rundown of four tax and financial issues you may deal with when you retire:

Taking required minimum distributions. This is the minimum amount you must withdraw from your retirement accounts. You generally must start taking withdrawals from your IRA, SEP, SIMPLE and other retirement plan accounts when you reach age 72 (70½ before January 1, 2020). Roth IRAs don’t require withdrawals until after the death of the owner.

You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from Roth accounts).

Selling your principal residence. Many retirees want to downsize to smaller homes. If you’re one of them and you have a gain from the sale of your principal residence, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return, you may be able to exclude up to $500,000.

To claim the exclusion, you must meet certain requirements. During a five-year period ending on the date of the sale, you must have owned the home and lived in it as your main home for at least two years.

If you’re thinking of selling your home, make sure you’ve identified all items that should be included in its basis, which can save you tax.

Engaging in new work activities. After retirement, many people continue to work as consultants or start new businesses. Here are some tax-related questions to ask:

  • Should the business be a sole proprietorship, S corporation, C corporation, partnership or limited liability company?
  • Are you familiar with how to elect to amortize start-up expenditures and make payroll tax deposits?
  • What expenses can you deduct and can you claim home office deductions?
  • How should you finance the business?

Taking Social Security benefits. If you continue to work, it may have an impact on your Social Security benefits. If you retire before reaching full Social Security retirement age (65 years of age for people born before 1938, rising to 67 years of age for people born after 1959) and the sum of your wages plus self-employment income is over the Social Security annual exempt amount ($18,960 for 2021), you must give back $1 of Social Security benefits for each $2 of excess earnings.

If you reach full retirement age this year, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($50,520 in 2021) until the month you reach full retirement age. Then, your earnings will no longer affect the amount of your monthly benefits, no matter how much you earn.

Speaking of Social Security, you may have to pay federal (and possibly state) tax on your benefits. Depending on how much income you have from other sources, you may have to report up to 85% of your benefits as income on your tax return and pay the resulting federal income tax.

Many decisions

As you can see, tax planning is still important after you retire. We can help maximize the tax breaks you’re entitled to so you can keep more of your hard-earned money.

© 2021


The long and short of succession planning

For many business owners, putting together a succession plan may seem like an overwhelming task. It might even seem unnecessary for those who are relatively young and have no intention of giving up ownership anytime soon.

But if the past year or so have taught us anything, it’s that anything can happen. Owners who’ve built up considerable “sweat equity” in their companies shouldn’t risk liquidation or seeing the business end up in someone else’s hands only because there’s no succession plan in place.

Variations on a theme

To help you get your arms around the concept of succession planning, you can look at it from three different perspectives:

1. The long view. If you have many years to work with, use this gift of time to identify one or more talented individuals who share your values and have the aptitude to successfully run the company. This is especially important for keeping a family-owned business in the family.

As soon as you’ve identified a successor, and he or she is ready, you can begin mentoring the incoming leader to competently run the company and preserve your legacy. Meanwhile, you can carefully identify how to best fund your retirement and structure your estate plan.

2. An imminent horizon. Many business owners wake up one day and realize that they’re almost ready to retire, or move on to another professional endeavor, but they’ve spent little or no time putting together a succession plan. In such a case, you may still be able to choose and train a successor. However, you’ll likely also want to explore alternatives such as selling the company to a competitor or other buyer. Sometimes even liquidation is the optimal move financially.

In any case, the objective here is less about maintaining the strategic direction of the company and more about ensuring you receive an equitable payout for your ownership share. If you’re a co-owner, a buy-sell agreement is highly advisable. It’s also critical to set a firm departure date and work with a qualified team of advisors.

3. A sudden emergency. The COVID-19 pandemic has brought renewed attention to emergency succession planning. True to its name, this approach emphasizes enabling the business to maintain operations immediately after an unforeseen event causes the owner’s death or disability.

If your company doesn’t yet have an emergency succession plan, you should probably create one before you move on to a longer-term plan. Name someone who can take on a credible leadership role if you become seriously ill or injured. Formulate a plan for communicating and delegating duties during a crisis. Make sure everyone knows about the emergency succession plan and how it will affect day-to-day operations, if executed.

Create the future

As with any important task, the more time you give yourself to create a succession plan, the fewer mistakes or oversights you’re likely to make. Our firm can help you create or refine a plan that suits your financial needs, personal wishes and vision for the future of your company.

© 2021


Hiring your minor children this summer? Reap tax and nontax benefits

Hiring your minor children this summer? Reap tax and nontax benefits

If you’re a business owner and you hire your children this summer, you can obtain tax breaks and other nontax benefits. The kids can gain on-the-job experience, spend time with you, save for college and learn how to manage money. And you may be able to:

  • Shift your high-taxed income into tax-free or low-taxed income,
  • Realize payroll tax savings (depending on the child’s age and how your business is organized), and
  • Enable retirement plan contributions for the children.

A legitimate job

If you hire your child, you get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill, your self-employment tax bill (if applicable), and your state income tax bill (if applicable). However, in order for your business to deduct the wages as a business expense, the work performed by the child must be legitimate and the child’s salary must be reasonable.

For example, let’s say you operate as a sole proprietor and you’re in the 37% tax bracket. You hire your 16-year-old daughter to help with office work on a full-time basis during the summer and part-time into the fall. Your daughter earns $10,000 during 2021 and doesn’t have any other earnings.

You save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter, who can use her 2021 $12,550 standard deduction to completely shelter her earnings.

Your family’s taxes are cut even if your daughter’s earnings exceed her standard deduction. Why? The unsheltered earnings will be taxed to the daughter beginning at a rate of 10%, instead of being taxed at your higher rate.

How payroll taxes might be saved

If your business isn’t incorporated, your child’s wages are exempt from Social Security, Medicare and FUTA taxes if certain conditions are met. Your child must be under age 18 for this to apply (or under age 21 in the case of the FUTA tax exemption). Contact us for how this works.

Be aware that there’s no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes nonparent partners. And payments for the services of your child are subject to income tax withholding, regardless of age, no matter what type of entity you operate.

Begin saving for retirement

Your business also may be able to provide your child with retirement benefits, depending on the type of plan you have and how it defines qualifying employees. And because your child has earnings from his or her job, he can contribute to a traditional IRA or Roth IRA and begin to build a nest egg. For the 2021 tax year, a working child can contribute the lesser of his or her earned income, or $6,000, to an IRA or a Roth.

Keep accurate records 

As you can see, hiring your child can be a tax-smart idea. Be sure to keep the same records as you would for other employees to substantiate the hours worked and duties performed (such as timesheets and job descriptions). Issue your child a Form W-2. Contact us if you have questions about how these rules apply to your situation.

© 2021