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Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Our offices are closed tomorrow 1/7/25 from 8am – 1pm for a firm event. Thank you.
Now that the final quarter of 2014 has begun, many businesses and individuals are turning their attention to year end tax planning. This year, however, uncertainty over dozens of expired or expiring tax provisions complicates the planning process, particularly for business owners.
Fifty-seven provisions expired at the end of 2013 and six more are scheduled to expire at the end of 2014. Congress may extend many of these provisions (in some cases retroactively to the beginning of 2014), but that likely won’t happen until after the midterm elections on Nov. 4 — and perhaps not for a month or more after that date. In the meantime, there are many year end tax planning strategies for businesses and individuals that are available now. Others won’t take shape until after Congress acts.
Year end tax planning for businesses often focuses on acquiring equipment, machinery, vehicles or other qualifying assets to take advantage of enhanced depreciation tax breaks. Unfortunately, the following breaks were among those that expired at the end of 2013:
Enhanced expensing election. Before 2014, Section 179 permitted businesses to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets. The deduction was phased out, on a dollar-for-dollar basis, to the extent qualified asset purchases for the year exceeded $2 million. Because Congress failed to extend the enhanced election, these limits have dropped to only $25,000 and $200,000, respectively, for 2014.
Bonus depreciation. Also expiring at the end of 2013, this provision allowed businesses to claim an additional first-year depreciation deduction equal to 50% of qualified asset costs. Bonus depreciation generally was available for new (not used) tangible assets with a recovery period of 20 years or less, as well as for off-the-shelf software. Currently, it’s unavailable for 2014 (with limited exceptions).
Lawmakers are considering bills that would restore enhanced expensing and bonus depreciation retroactively to the beginning of 2014, but probably won’t take any action until late in the year. In the meantime, how should you handle qualified asset purchases?
Keep in mind that, to take advantage of depreciation tax breaks on your 2014 tax return, you’ll need to place assets in service by the end of the year. Paying for them this year isn’t enough.
Other expired tax provisions to keep an eye on include the Work Opportunity credit, Empowerment Zone incentives, the health care coverage credit and a variety of energy-related tax breaks.
Congress is likely to extend the research credit (also commonly referred to as the “research and development” or “research and experimentation” credit), as it has done repeatedly since the credit was first established in 1981. But regardless of whether the research credit is restored, it pays to investigate whether your business is eligible for the credit for previous tax years.
Even if you lack the documentation to support traditional research credits, you may qualify for the alternative simplified credit (ASC). Until recently, the ASC could be claimed only on a timely filed original tax return. But the IRS issued new regulations in June allowing most eligible businesses to claim missed credits for open tax years by filing an amended return.
Many businesses miss out on significant tax savings because they fail to recognize that they’re eligible for the manufacturers’ deduction, also called the “Section 199” or “domestic production activities” deduction. It allows you to deduct up to 9% of your company’s income from “qualified production activities,” limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.
Many business owners assume that the deduction is available only to manufacturers. But it’s also available for certain construction, engineering, architecture, software development and agricultural activities.
As always, consider traditional year end planning strategies, such as deferring income to 2015 and accelerating deductions into 2014. If your business uses the cash method of accounting, you may be able to defer income by delaying invoices until late in the year or accelerate deductions by paying certain expenses in advance.
If your business uses the accrual method of accounting, you may be able to defer the tax on certain advance payments you receive this year. You may also be able to deduct year end bonuses accrued in 2014 even if they aren’t paid until 2015 (provided they’re paid within 2½ months after the end of the tax year).
But deferring income and accelerating deductions isn’t the best strategy in all circumstances. If you expect your business’s marginal tax rate to be higher next year, you may be better off accelerating income into 2014 and deferring deductions to 2015. This strategy will increase your 2014 tax bill, but it can reduce your overall tax liability for the two-year period.
Finally, consider switching your tax accounting method from accrual to cash or vice versa if your business is eligible and doing so will lower your tax bill.
Like businesses, individuals often can reduce their tax bills by deferring income and accelerating deductions. To defer income, for example, you might ask your employer to pay your year end bonus in early 2015. And to accelerate deductions, you might pay certain property taxes early or increase your IRA or qualified retirement plan contributions to the extent that they’ll be deductible. Such contributions also provide some planning flexibility because you can make 2014 contributions to IRAs, and certain other retirement plans, after the end of the year.
Remember that, when you use a credit card to pay expenses or make charitable contributions this year, you can deduct them on your 2014 return even if you don’t pay your bill until next year.
Other year end tax planning strategies to consider include:
Investment planning. If you’ve sold stocks or other investments at a gain this year — or plan to do so — consider offsetting those gains by selling some of your poorly performing investments at a loss.
Reducing capital gains is particularly important if you’re subject to the net investment income tax (NIIT), which applies to taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT is an additional 3.8% tax on the lesser of 1) your net income from capital gains, dividends, taxable interest and certain other sources, or 2) the amount by which your MAGI exceeds the threshold.
In addition to reducing your net investment income by generating capital losses, you may have opportunities to bring your MAGI below the threshold by deferring income or accelerating deductions.
Charitable planning. If you plan to make charitable donations, consider donating highly appreciated stock or other assets rather than cash. This strategy is particularly effective if you own appreciated stock you’d like to sell but you don’t have any losses to offset the gains. Donating stock to charity allows you to dispose of the stock without triggering capital gains taxes, while still claiming a charitable deduction. Then you can take the cash you’d planned to donate and reinvest it in other securities.
Monitoring expired tax breaks. Keep an eye on Congress. If certain expired tax breaks are extended before the end of the year, you may have some last-minute planning opportunities. Expired provisions include tax-free IRA distributions to charity for taxpayers age 70½ and older, the deduction for state and local sales taxes, the above-the-line deduction for qualified tuition and related expenses, and the credit for energy efficient appliances.
Most strategies for reducing your 2014 tax bill must be implemented by the end of the year, so it’s a good idea to start planning now. Uncertainty surrounding the fate of expired tax breaks complicates matters, so contact us today to develop contingency plans for dealing with whatever tax legislation is signed into law.
Effective Oct. 1, IRS Notice 2014-57, 2014–2015 Special Per Diem Rates, updates the per diem rates that can be used for reimbursement of ordinary and normal business expenses incurred while employees travel away from home. It also revises the list of high-cost localities for use in the high-low substantiation method. The per diem rates, which are established by the General Services Administration (GSA), are updated before the end of the federal government’s fiscal year. Some employers elect to use these rates to simplify recordkeeping.
As long as employees properly account for their business-travel expenses, reimbursements are generally tax-free to the employees and deductible by the employer. But keeping track of actual costs can be a logistical nightmare. With the government-approved per diem rates, employees don’t have to keep receipts for all of their travel expenses. So, employees and employers alike often prefer this recordkeeping shortcut.
Here’s how the per diem method works: Assuming that the travel qualifies as a business expense, the employer simply pays the employee the per diem allowance designated for the specific travel destination and deducts the per diem paid. The employee doesn’t have to report the payments on his or her personal tax return but still must substantiate the time, place and business purpose of the travel.
Although the rates are set by the GSA to cover travel by government employees, private employers may also use them for their employees. The rates are updated annually for the following areas:
There are also optional rates for high-cost and low-cost areas. These designations simplify the expense reimbursement process even further by providing two per diem rates, one for high-cost localities and another for low-cost localities.
Airfare and other transportation costs aren’t covered by the per diem rates. What the rates do include are amounts for lodging and amounts for meals and incidental expenses (M&IE). For this purpose, M&IE includes:
Typically, if an employer chooses to use per diem rates, it uses them for all employees who regularly travel on business. An employer may choose to use the per diem rates for the specific travel destinations or for the high- and low-cost areas. However, per diem rates for lodging can’t be used by an employee who owns, either directly or indirectly, more than 10% of the company. Instead, these owners must keep track of the actual amount of those business-travel expenses and retain their receipts. For M&IE, even those who own more than 10% of the company may use the per diem rates.
For fiscal year 2015 — which spans Oct. 1, 2014, through Sept. 30, 2015 —the per diem rate for high-cost areas has risen to $259, an increase of $8 over the prior year. This rate consists of $194 for lodging and $65 for M&EI.
The per diem rate for low-cost areas has increased by only $2. The low-cost per diem rate is now $172, including $120 for lodging and $52 for M&IE.
As usual, the list of cities (and their surrounding areas) included on the list of high-cost areas has been tweaked, and the time periods for which some of the seasonal areas will be included as high-cost areas have been revised. The changes are as follows:
The definition of “incidental travel expenses” has also been modified. To remain consistent with Federal Travel Regulations, incidental expenses now include only fees and tips given to porters, baggage carriers, hotel staff and staff on ships.
Transportation between places of lodging or business and places where meals are taken is no longer included in incidental expenses. In addition, the costs of mailing or filing travel vouchers and paying employer-sponsored charge card billings are specifically excluded. So, employers that use per diem rates may separately reimburse employees for transportation and mailing expenses.
The travel expense updates go into effect on Oct. 1, 2014. During the last three months of calendar 2014, an employer that uses the per diem or high-low method may switch to the new rates or continue with the rates it’s been using for the first nine months of 2014.
But an employer must select one year’s set of rates for this quarter and stick with it; it can’t use 2014 rates for some employees and 2015 rates for others. Likewise, an employer can’t use the 2014 list of high-cost areas for some reimbursements and the 2015 list for others. In addition, if an employer used the high-low substantiation method for the first nine months of the year, it must continue using that method through Dec. 31, 2014.
Because business-travel expenses often attract IRS attention, they require detailed, accurate recordkeeping. The per diem and high-low methods can make recordkeeping less burdensome, but they’re not the best solution for all employers. If you have questions regarding the expense substantiation methods, please give us a call.
– See more at: https://www.skrco.com/blogs/news-and-tax-alerts/2014/10/20/business-travel-per-diem-rates-updated-for-2015#sthash.cW3OJeGS.dpuf
Did you know that Colorado businesses, including banks, financial institutions and business entities of all types, are required to file reports and turn over unclaimed property when the business holds unclaimed property of customers, employees and others?
For all businesses and governmental agencies that are holders of unclaimed property, a Report of Unclaimed Property is due to the Colorado Department of Treasury on November 1, 2014, for the reporting period July 1, 2013 through June 30, 2014. The only exception to this reporting period is for life insurance companies that must report on a calendar year reporting period. If your business does not hold unclaimed property during a particular reporting year, no report is required. However, some businesses may choose to file a report even if no report is required, so that the statute of limitations doesn’t remain open.
With the Report of Unclaimed Property, businesses are required to report unclaimed property which was presumed abandoned during the previous 5-year period. For the report due on November 1, 2014, businesses will report property that was presumed to be abandoned during the period July 1, 2009 through June 30, 2014. Along with the report, businesses must also forward or remit unclaimed property to the State Treasurer. The State Treasurer then acts as the custodian and steward of the property until it is claimed by its rightful owner.
If the term unclaimed property is new to you, here are some facts about unclaimed property: Unclaimed property is generally intangible property held by a business that has remained dormant or unclaimed by the rightful owner of the property for a period of 5 years from the last customer-initiated contact, generally. The dormancy period for payroll, wages and salary checks is one year. An IRA account becomes unclaimed property three years after the distribution date (when the owner becomes 72 and ½ years old) in most cases.
Common examples of unclaimed property include:
| Checking and Savings Accounts | Utility Refunds | Stocks and Bonds |
| Oil and Gas Royalty Payments | Safety Deposit Boxes | Uncashed Insurance Checks |
| Payroll Checks | Mutual Funds | Money Orders |
| Gift Cards and Certificates | Uncashed Dividends | Security Deposits |
| Uncashed Checks | Customer Refund Checks | Credit Balances |
All items of unclaimed property must be reported. However, like kind items with a value of less than $25 each may be reported in the aggregate. For some types of property, the holder can retain 2% or $25, whichever is more. However, this retainage is not applicable to property reported in the aggregate.
Small businesses with annual gross receipts of less than $500,000 do not need to file a Report of Unclaimed Property until the aggregated amount of unclaimed property exceeds $3,500 or any single item is $250 or more. All other businesses most report annually unless they have no unclaimed property for the year. Businesses must maintain records related to unclaimed property reporting for five years from the due date of the report. Failure to file and remit unclaimed property may result in penalties and interest.
Businesses holding unclaimed property in the amount of $50 or more must send written notice to the owner’s last known address stating that property is being held and may be turned over to the State Treasury. This notice must be sent not more than 120 days before filing the unclaimed property report.
All 50 states have unclaimed property laws. You should report unclaimed property to the state of last known address of the owner. If your records do not include a state of last known address for unclaimed property, you should report to your company’s state of incorporation or to the state of domicile if the business is not incorporated.
The Colorado Treasury encourages electronic reporting of unclaimed property. Following is a link to a page that includes instructions to obtain software for unclaimed property reporting. http://www.colorado.gov/treasury/gcp/holderrep.html
Below are links to the Unclaimed Property Reporting Forms for Colorado:
http://www.colorado.gov/treasury/gcp/images/FormA.pdf
http://www.colorado.gov/treasury/gcp/images/FormB.pdf
If your business has unclaimed property, be aware that a failure to file and remit unclaimed property may result in penalties and interest. And keep in mind that your business must maintain records related to unclaimed property reporting for five years from the due date of the report.
For more information regarding unclaimed property, please give us a call at (719) 630-1186 or consult detailed information on the Colorado Treasury website at http://www.colorado.gov/treasury/gcp/
The bumpy economy and volatile markets haven’t made saving for retirement any easier. But, you’ve still got to keep saving for your golden years. And when doing so, everyone needs to abide by certain fundamentals.
Volatile markets aren’t the only danger your retirement nest egg faces. In fact, you could present one of the biggest dangers — if you make early withdrawals from your IRA or take a 401(k) plan loan.
For example, in addition to being subject to income tax, traditional IRA withdrawals before age 59½ will likely be subject to a 10% early withdrawal penalty. A 401(k) loan (if your plan allows) won’t create a tax liability. However, if you default on it, your outstanding balance will be treated as a distribution and trigger any additional tax liabilities and penalties.
Perhaps more important, the amount that can continue to grow tax-deferred — tax-free in the case of a Roth account — will be reduced after a retirement plan withdrawal or loan, which can significantly shrink what you have at retirement.
To avoid having to tap into your retirement plan, maintain a cash reserve. The optimal amount will vary depending on your age, health, available credit and job situation. But generally you should have enough cash on hand to cover three to six months of living expenses.
While market volatility may make you leery of putting more into your retirement plan, for most people it’s advantageous to do so. First, the power of a retirement plan is tax-deferred (or, in the case of Roth accounts, tax-free) growth. The more time funds have to grow, the larger your nest egg can become.
Second, when the value of stocks is low, you can buy more shares for the same amount of money. Assuming retirement is still at least several years away (so there’s ample time for the market to recover), a down market can be a great time to buy.
Third, if your employer offers a match, at minimum you should contribute enough to get the maximum match. If you don’t, it’s essentially like turning down additional compensation.
Examine your investments to see whether the allocation percentages are in harmony with your current risk tolerance and financial objectives. Diversification (which offers not only some protection during market declines, but also higher potential returns over the long run) continues to be a critical investment strategy.
Because retirement plans are subject to annual contribution limits, many people also need to save for retirement outside these tax-advantaged accounts. Consider the tax consequences of investments that create realized capital gains or dividend distributions, because they’ll affect your return on investment. And remember that timing can have a dramatic impact.
For instance, the top long-term capital gains rate of 20% is nearly 20 percentage points lower than the highest ordinary-income tax rate of 39.6% — and it generally applies to the sale of investments held for more than 12 months. Even if you’re not subject to these top rates, paying tax at your long-term capital gains rate rather than your ordinary-income tax rate will provide substantial savings.
If you’re like most Americans, your biggest asset is your ability to earn income. Disability insurance can help you protect that asset.
Although many employers offer short-term disability insurance, you may wish to obtain additional, long-term coverage. In computing the level of coverage to carry, plan so that monthly income (based on disability benefits and your current resources) equals at least 60% of your pretax salary.
Also evaluate whether you have adequate life insurance. The amount needed will depend on your current net worth, the lifestyle you want to provide for your family, and your personal circumstances and desires.
Just about everyone’s retirement needs evolve. But that doesn’t mean retirement planning itself changes drastically. Fundamentals such as these should help you get to where you want to go.
The bumpy economy and volatile markets haven’t made saving for retirement any easier. But, you’ve still got to keep saving for your golden years. And when doing so, everyone needs to abide by certain fundamentals.
Volatile markets aren’t the only danger your retirement nest egg faces. In fact, you could present one of the biggest dangers — if you make early withdrawals from your IRA or take a 401(k) plan loan.
For example, in addition to being subject to income tax, traditional IRA withdrawals before age 59½ will likely be subject to a 10% early withdrawal penalty. A 401(k) loan (if your plan allows) won’t create a tax liability. However, if you default on it, your outstanding balance will be treated as a distribution and trigger any additional tax liabilities and penalties.
Perhaps more important, the amount that can continue to grow tax-deferred — tax-free in the case of a Roth account — will be reduced after a retirement plan withdrawal or loan, which can significantly shrink what you have at retirement.
To avoid having to tap into your retirement plan, maintain a cash reserve. The optimal amount will vary depending on your age, health, available credit and job situation. But generally you should have enough cash on hand to cover three to six months of living expenses.
While market volatility may make you leery of putting more into your retirement plan, for most people it’s advantageous to do so. First, the power of a retirement plan is tax-deferred (or, in the case of Roth accounts, tax-free) growth. The more time funds have to grow, the larger your nest egg can become.
Second, when the value of stocks is low, you can buy more shares for the same amount of money. Assuming retirement is still at least several years away (so there’s ample time for the market to recover), a down market can be a great time to buy.
Third, if your employer offers a match, at minimum you should contribute enough to get the maximum match. If you don’t, it’s essentially like turning down additional compensation.
Examine your investments to see whether the allocation percentages are in harmony with your current risk tolerance and financial objectives. Diversification (which offers not only some protection during market declines, but also higher potential returns over the long run) continues to be a critical investment strategy.
Because retirement plans are subject to annual contribution limits, many people also need to save for retirement outside these tax-advantaged accounts. Consider the tax consequences of investments that create realized capital gains or dividend distributions, because they’ll affect your return on investment. And remember that timing can have a dramatic impact.
For instance, the top long-term capital gains rate of 20% is nearly 20 percentage points lower than the highest ordinary-income tax rate of 39.6% — and it generally applies to the sale of investments held for more than 12 months. Even if you’re not subject to these top rates, paying tax at your long-term capital gains rate rather than your ordinary-income tax rate will provide substantial savings.
If you’re like most Americans, your biggest asset is your ability to earn income. Disability insurance can help you protect that asset.
Although many employers offer short-term disability insurance, you may wish to obtain additional, long-term coverage. In computing the level of coverage to carry, plan so that monthly income (based on disability benefits and your current resources) equals at least 60% of your pretax salary.
Also evaluate whether you have adequate life insurance. The amount needed will depend on your current net worth, the lifestyle you want to provide for your family, and your personal circumstances and desires.
Just about everyone’s retirement needs evolve. But that doesn’t mean retirement planning itself changes drastically. Fundamentals such as these should help you get to where you want to go.
If you donate property to charity, it’s critical that you comply with tax rules for substantiating the value of your gift. If you don’t, the IRS may deny your entire charitable deduction, even if your valuation is spot-on.
To deduct a donation of property (other than publicly traded securities) worth more than $5,000 ($10,000 for closely held stock), you’re required to have the property appraised by a qualified appraiser.
You must also file Form 8283, “Noncash Charitable Contributions,” with your federal tax return and have the appraiser sign the form’s Section B, Part III, “Declaration of Appraiser.” For property worth more than $500,000, you must also attach the appraisal report to your return.
A qualified appraiser is a professional who has earned an appraisal designation from a recognized professional organization or otherwise meets certain minimum education and experience requirements. The appraiser should also have appropriate education and experience in valuing the type of property being appraised. The tax regulations provide detailed requirements for qualified appraisals. Among other things, a qualified appraisal report must:
A prohibited appraisal fee is one that’s based on a percentage of the property’s appraised
value (or a percentage of the allowed deduction), with certain exceptions.
The qualified appraisal requirement is one where form is just as important as substance. If you don’t follow the rules to the letter, you’ll likely lose valuable tax deductions regardless of whether the reported value is accurate. In the case of Mohamed v. Commissioner, a married couple learned this lesson the hard way.
In 2003 and 2004, the couple donated several pieces of real estate to a charitable remainder trust (CRT). The husband, a real estate broker and certified real estate appraiser, “self-appraised” the properties to be worth approximately $18.5 million. At the time, donations greater than $5,000 required an appraisal summary. (The requirement of an appraisal report for donations greater than $500,000 was added later.)
The husband filled out Form 8283 himself, admittedly without reading the instructions. Although he attached statements to the form containing information about the properties and their value, the statements didn’t qualify as appraisal summaries. The couple’s biggest problem, though, was that the husband wasn’t a qualified appraiser, because he was both the donor and — as trustee of the charitable trust — the donee.
Because the couple failed to adequately substantiate their donation, the Tax Court denied them any charitable deduction. After the IRS started its audit, an independent appraiser valued the properties at more than $20 million, but by then it was too late.
If you plan to donate property to charity, discuss the appraisal requirements with your tax advisor. Why? Because, as you can see, just one mistake can wipe out otherwise legitimate tax benefits.
Money can be a sensitive family topic. A recent survey by the American Institute of CPAs found that while more than three in five parents provide an allowance — usually, starting when their children are about 8, and at an average of $65 per month — they’re uncomfortable talking to them about finances. In fact, Mom and Pop are more likely to talk about the importance of courtesy, healthy eating habits and good grades than they are about managing money. Fortunately, parents can take a number of steps to help their kids learn sound money management.
Although it might seem like jumping the gun, even 3- and 4-year-olds can begin grasping concepts such as needs and wants, as well as the idea that most people can’t buy everything they want. So it’s important to start explaining to these tots about the relationship between work and money.
An example: A trip to the grocery store can be a great learning experience. Show your kids how different products cost different amounts, and explain when you feel it’s worth spending more and when a lower-cost version will suffice.
Grade school often is the time when parents introduce allowances as a way to help their children live within a budget. Before handing over the cash, however, talk with your child about the purchases you expect the allowance to cover, such as video games. Otherwise, you may get ongoing “requests” to handle expenses your offspring believes shouldn’t come from his or her allowance.
Also introduce “values” to the discussion. Younger children are quite capable of grasping the concept of using their money and other resources to help those who don’t have as much, and to save for longer-term goals.
Moreover, it’s important to think through the relationship between your child’s allowance and the chores he or she is expected to handle. Some parents view an allowance as strictly a money management tool, and that, as members of the family, the kids should have chores that they’re expected to handle without compensation. Of course, this isn’t to say that a child can’t receive extra payment for handling certain chores that go above and beyond day-to-day tasks.
As your children gain experience handling small amounts of money, ask for their input on their larger financial decisions. Before heading out to buy new school clothes, for example, discuss what items your child needs the most, and whether it makes sense to buy several, less expensive items, or one pricier item.
Given how tuned-in many “tweens” are, discuss with them how advertisements are designed to prompt consumers’ desire for a specific brand or product. As an example, point out that a popular brand of shoes costs significantly more than a store brand, and ask your child if the difference in cost is worth it.
Middle-school years are also a perfect time to open a bank account in your child’s name. Use this opportunity to explain how to record deposits and withdrawals, and provide a simple calculation to demonstrate the compounding effect of interest.
High schoolers can be expected to take on even greater responsibility for their own expenses, including clothes, entertainment, cell phone use and transportation costs, to name a few.
When practical, bring your teenager into the discussion when you’re researching major purchases, such as a new appliance. He or she can read product reviews and descriptions, and compare prices of different models. Of course, make it clear at the outset that you’ll have the final decision.
If you believe your child is ready to handle a credit card, a safe way to start is with a secured credit card. As its name suggests, this line of credit is secured by cash deposited in the account. Once a teen has proven to be capable of handling the line of credit, consider allowing him or her to open a regular credit card. Of course, make sure you review the rules of responsible credit card use and the speed with which interest expense can add up.
Instilling sound money management skills in your children requires discipline, common sense and consistency. The payoff? Kids who can intelligently manage their finances are less likely to expect help from their parents. And that’s a good thing.
You might have heard about the “Taxpayer Bill of Rights” recently released by the IRS. What’s that all about? The current IRS Commissioner, John Koskinen, and the National Taxpayer Advocate, Nina Olson, announced the Taxpayer Bill of Rights at a news conference in Washington, D.C., in June 2014. The new Taxpayer Bill of Rights is intended to better communicate to taxpayers their existing statutory and administrative protections. Like the U.S. Constitution’s Bill of Rights, there are 10 broad provisions in the Taxpayer Bill of Rights. They are:
The IRS acknowledged that as an institution, it needed to do a better job of communicating to taxpayers the rights that do exist for taxpayers and that the IRS respects those rights and has a responsibility to treat taxpayers fairly.
Since many of our clients use a vehicle for both business and personal use, we thought a refresher on this topic would be useful as we approach year-end. It is quite acceptable to use a vehicle for both business and personal use but important to understand the deductibility of expenses associated with the vehicle.
Business use is determined by the number of miles traveled between two business locations. The business use percentage is simply the ratio of total business miles for the year to total miles for the year for the vehicle. As a reminder, commuting miles to and from your normal place of business are not considered to be business miles.
When you use a vehicle for business purposes, the business portion of depreciation and ordinary and necessary vehicle operating expenses are deductible. The tax regulations provide two methods for calculating the business portion of vehicle expenses which can be used by self-employed taxpayers and employees:
(1) the deduction may be computed using the standard mileage rate for the number of business miles driven during the year, or
(2) the business portion of actual vehicle expenses, including depreciation and the Section 179 deduction, may be deducted.
The standard mileage rate varies from year to year and is computed by the IRS to represent the cost of fuel, oil, insurance, repairs and maintenance and depreciation or lease payments for the vehicle. The standard mileage rate method is available regardless of the cost of the vehicle. For 2014, the standard mileage rate is $.56 per mile.
In addition to the standard mileage rate, the costs of business-related parking and tolls are 100 percent deductible. The standard mileage rate can only be used if this method was used to compute the business auto deduction for the first year the vehicle was placed in service and each subsequent year. If the standard mileage rate is used to calculate the vehicle expense deduction for a vehicle, straight-line depreciation must be used if there is a subsequent switch to the actual expense method.
To use the actual expense method, first determine the entire cost of operating the vehicle for the year, including vehicle depreciation and Section 179 expense, if any.
Taxpayers who use a vehicle more than 50% of the time for a qualified business use can deduct Section 179 expense and/or MACRS accelerated and bonus depreciation, as well as other ordinary and necessary expenses. If the vehicle is used less than 50% for qualified business use, straight line depreciation over a 5-year life must be used to compute depreciation on the vehicle and the Section 179 deduction is not available for the vehicle.
The above rules are subject to the limitations on luxury vehicles. Certain trucks, vans and sports utility vehicles with a gross loaded vehicle weight rating exceeding 6,000 pounds are not subject to the luxury auto depreciation limits.*** However, vehicles with a weight rating of 6,000 pounds or less are considered passenger autos and are subject to the luxury vehicle limitations.
To satisfy the more than 50% qualified business use test, only use in a trade or business can be considered. Investment use and other use in other activities conducted for the production of income are not included in the qualified business use test, although total business and investment use can be used for determining the deductible portion of vehicle expenses.
If qualified business use falls below 50% in subsequent years, then depreciation and Section 179 deductions in excess of the straight-line method and deducted in previous years must be recaptured in the year that qualified business use falls below 50%.
Of course, we recommend that you keep excellent vehicle expense documentation and contemporaneous usage records. We have included a vehicle mileage log (see side bar) that we recommend you keep to corroborate auto usage documentation from repair and maintenance records.
If you have questions regarding the information in this article or if you’re interested in special tax deductions related to the purchase of a truck, van or sports utility vehicle in 2014, please give a member of the SKR staff a call to learn more.