Understanding Long Term Care Coverage

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Understanding Long Term Care Coverage

Oct 25, 2017 Posted by deepak No Comments

A long-term care coverage may be expensive but there are possible steps that can be taken so that it would become more flexible and affordable. “Long-term care” is the help people who have chronic illnesses or disabilities or conditions require every day and over extended periods of time. The kind of help that is needed can also vary from assisting simple activities like bathing, eating and dressing to expert care that only nurses and other professionals such as therapists can provide.

Employer-based coverage of health insurance does not cover the daily and extended services for long-term care. Medicare can only cover short stays in nursing homes or limited time at home care but only under extremely strict conditions. In order to cover the potential expenses in long-term coverage for health care, some people opt to buy the long-term insurance.

Policies provide a wide range of coverage options to choose from. Since it is hard to predict the future and how long-term care necessities will be, individuals are strongly advised to buy policies with flexible options. It depends on the policy options that are selected. Long term insurance for medical care can also assist in paying for the ideal care that is necessary, whether the patient is staying at home or in a nursing home or a facility that is assisted-living. The insurance also covers the expenses for care coordination as well as day care of and other extra services. There are even policies that can also assist in paying the costs that are associated to modifying homes in order for the elderly to live safely in it.

Factors to consider

 Health and age. Insurance policies are inexpensive when purchased at a younger age and the individual is of good health. If the individual is older and has already been diagnosed with health conditions that are serious, there is the high possibility of them not getting coverage. If they do, then they are expected to spend more.

 The premiums. The individual must always check whether he or she can pay the premium of the policy – today and tomorrow – without having to go broke. Premiums have the tendency to increase over a long period of time and when the individual’s income unexpectedly goes down, it may be a challenge. There are individuals who find themselves unable to pay the premiums. They should be careful when making this decision because it is possible to lose all hard-earned money that was invested in policies.

 The income. If the individual has difficulty paying the bills and are concerned regarding paying this for the coming years, then spending thousands for a year just for long-term care policies will not make sense. If the income of the individual is low and there are few assets that are needed for the health policies, then they can qualify immediately for Medicaid. Medicaid covers the care in nursing home. In a number of states, it also covers at-home care but a limited amount. The downside is that for individuals to qualify, they must exhaust all of their resources first and meet the requirements for eligibility that Medicaid have posted.

 The support system. The individual can surround himself with friends and family that can offer long-term care especially if he needs it. However, they should think about the possibility of these people’s abilities to help them and how they can help them. Sometimes, some friends and family cannot help as much as the individual would like them to which only results to disappointment.

 Savings and investments. Financial advisers and lawyers specialize in estate planning or elder law and they can advise elderly individuals on ways to save and invest for long-term expenses in care for the future. They can also list the cons and pros and show these to their clients so the latter is knowledgeable before completely purchasing or investing in a care insurance that is long-term.

 The Taxes. The benefits that were paid through the policy of a long-term care are generally not regarded as taxed in the form of income. There are also many policies that are sold today that are considered to be “tax-qualified” when set in federal standards. Therefore, if the individual itemizes the deductions and also have medical costs that exceed 7.5% of the adjusted gross income, then he or she can also deduct the final value of all the premiums obtained from the federal income as well as the taxes. The total amount of the deduction from the federal taxes depends heavily on the age of the individual. A number of states offer tax deductions and credits but limited.

 The Policy Sources for Long-Term Care

 Individual Plans. A number of people opt for long-term care health insurance policies via their insurance agents or their brokers. When they choose to do this, they have to make sure that the person they are working to get this policy has had training when it comes to insurance for long-term health care, as there are many states that require this. They should also check with the insurance departments of their states for the credibility of the person they are dealing with to see if this particular agent or broker has the license to sell health care policies within that state in the first place.

Plans from Employers. There are employers that offer long-term health insurance policies or make these policies available for every individual through group rates that have discounts. There are also group plans that do not have underwriting. This means that these policy holders do not have to meet the medical requirements in order to qualify, at least in the beginning. There are also benefits that are available to various family members who need to pay premiums and also have to pass the medical screenings. There are also cases wherein when the individual leaves the employer or the latter has stopped providing benefits to the former, then the individual can retain the health insurance policy and also receive something similar if they choose to continue paying the premiums.

Plans That Organizations Offer. Professional as well as service organizations that the individual belongs to offer group-rate insurance policies for long term health care to every member. Similar with coverage that are sponsored by employers, individuals must study their options so that they know the possible scenarios if they choose to have their coverage terminated or they choose to leave these organizations that they belong to.

Partnership Programs from the State. If the individual chooses to invest in long-term health care insurance policies that qualify for the partnership programs from the state, he or she can keep a specific amount of the over-all assets and still be regarded eligible for Medicaid. These states also have partnership programs. The individuals have to make sure to check with their insurance agents whether the health policies that they are considering are qualified under these partnership programs of the particular state, if it is associated with Medicaid and how and when they could qualify for this. If they have additional questions re: Medicaid and the State Partnership Program, then they should check with the Health Insurance Policies Assistance Program of their state.

Joint Policies. There are plans that let the individual by single policies to cover more than an individual. The policy is also used by husbands and wives, partners, or a couple of adults that are related to one another. There are usually maximum benefits that apply to every individual that is insured with that particular policy. For example, if a husband and wife has a health care policy that has $100,000 benefit maximum and one of them uses $40,000, then the other would still have $60,000 remaining for him or her. The downside to this is that there is a possibility that one person will deplete the funds that the other one would eventually need in the future.

Long Term Health Care Insurance Coverage and Its Pre-Existing Conditions

 Insurance providers turn down the applicants for pre-existing conditions that they already have. If a company sells health care policies to individuals who already have conditions, the insurers can withhold payment for the healthcare that are related to these specific conditions for some time after the insurance has been sold. Therefore, the individual then has to make sure that the time that the payments have been withheld are reasonable for him or her. If they fail to inform the company of this pre-existing condition, then the insurer may not even pay for the care that is related to the specific condition in the first place.

Covered Services

 There are insurance companies that require their policy holders to turn to services from home care agencies or licensed professionals that are certified. There are others that allow the latter to hire non-licensed and independent providers or even family members. There are some companies that put certain qualifications like licensure if this is available within the state or restrictions on the programs and the facilities that are used. Policy holders must then make sure that they buy policies that cover these facilities, services and programs and these are also available in their locations. Moving to a different location may also make differences in the coverage as well as the kinds of services that are available.

Health care insurance coverage has the following arrangements on long-term care:

Nursing home. These are facilities that provide full-range health care, personal care, rehabilitation care and daily activities 24 hours a day and 7 days a week. It is necessary that individuals cover find out if this policy does not just cover lodging.

Assisted living. This is a resident that is like an apartment. It has units and there are individualized services and personal care available whenever necessary. An example of this is that the patients can have their meals delivered right into their apartment.

 Day Care Services for Adults. This is a program that is not included in the home and it provides social, health and support services for adults in a supervised setting. These are ideal for those who need some help during their stay.

 Home Care. This is an individual or an agency that performs personalized services like grooming, bathing and assistance in housework and chores.

 Home Modification. These are adaptations and renovations done in the home, like installing grab bars or ramps, to make it more livable and accessible.

 Care Coordination. These are services from licensed and trained professionals who assist in locating services, determining needs and arranging the care for policy holders. This policy also includes monitoring the care providers.

 Service Options for Future. If there is a new kind of long-term health care services that has been developed after purchasing the insurance, then there are also some policies that are flexible enough to cover these services as well. This option can be available once the policy has specific language regarding alternative options.

 Amounts and Limits of the Policy Coverage

 Long-term health care coverage also pays for various services (for example, $50 for home care as well as $100 for nursing home care). They can also pay a particular rate for a specific service. Most health care policies have limits to these amounts for the benefits that they receive, like specific total years or the over-all dollar amount. Therefore, when purchasing a health care insurance policy, the individual must select the specific benefit amount as well as the duration that is right to fit the budget as well as the anticipated needs.

In order to figure out how useful policies are to the individual, he or she must compare the total value of the policy and its daily benefits alongside the average cost and value of the health care within the area. They also have to remember that they have to cover the difference. Price of long term health care can increase over a period of time. These benefits can also begin to erode especially if the policy holder does not choose one that protects it from the inflation in that particular policy.

Continuing Care Facilities and the Benefits Received from These

Oct 6, 2017 Posted by deepak No Comments

Continuing care facilities or what is also known as continuing care retirement communities, CCRCs for short, provide the residents the lifetime care that they need. They also assure that the care that the recipient receives is provided in the best way possible which also includes nursing assistance, especially when this is needed. This kind of living arrangement can also be useful specifically to couples who are financially stable and in need of different kinds of care and prefer to maintain their togetherness, even if the usual CCRC resident is a financially and physically independent, highly educated, single 80-year-old female.

Although the CCRCs have already gained a negative reputation during the 1980s due to some closed financial difficulty, the total number of the CCRCs available in the US has reached a high of 1,200 and it even continues to increase every year. There are around 350,000 residents residing in the not-for-profit as well as the for-profit facilities This number is predicted to increase because more and more people are expected to qualify and meet the requirements that are set for the CCRCs. The entrance restrictions do specify a specific minimum age, along with a certain statute of finances and health. CCRCs also look for the candidate who:

  • Has an annual earning of 1.5 to 2 times the monthly fee that they usually charge.
  • Will not cost more financially in their contributions especially when they become a resident.

Entrance lists for the qualified beneficiaries are for years and sometimes months. These are long-term residents in the facilities, therefore, it is suggested that individuals begin looking at care facilities that are long term and continue especially for their loved ones.

Levels of Continuing Care

 Most of the CCRCs offer three different levels of continuing care: these are the ILUs or the independent living units, the skilled nursing care and the assisted living. There are cases wherein the individual progresses through all these levels of care. For example, they require little care at the beginning and then as the days progress, they require more and more attention. There are also cases when the residents need additional care for a certain period and then they return to assisted or independent living over time.

  • At the beginning of these levels, especially the independent living units, the resident can choose to reside in his or her own place or residential unit. There are occupancy units that are for married individuals. The majority of this kind of care are for single individuals so they come in the form of single units like a studio apartment, a one-bedroom. For the residents who are married, two bedroom and larger units are also offered. During their stay, the residential services that the patient can acquire include laundry services, meals, and housekeeping. There’s the acute treatment through physical therapy and skilled nursing and the professionals nearby are there to assist them with their personal needs when needed. Most facilities include gardening areas, recreational facilities, swimming pools, walking trails, tennis courts, golf courses and craft rooms which must be taken advantage of especially when residents will stay there for the long run.
  • The assisted living is also a kind of intermediate level of care for residents that prefer to experience the balance between skilled nursing care along with independent living. It is during this period when residents who have been diagnosed with chronic illnesses and require assistance are attended medically and assisted in their personal tasks such as dressing, eating, and bathing.
  • Finally, the skilled nursing care set-up is offered in most CCRCs through short-term and long-term rehabilitative services and nursing care. These mentioned services are offered on the site and there are some facilities that are near these nursing homes, just in case they do not have this specific kind within the vicinity.

Under almost every circumstance mentioned, the individual that is a resident must reasonably independent and also healthy in order to be admitted to continuing care facilities. The levels of care that the resident requires is assessed initially and there is a process that must be explained in the contract. Usually, a group assesses the individual and also checks in with the family members and medical advisers of the individual. The residents are also re-assessed regularly – especially when their circumstances require them to change their level of continuing care over a period of time.

Here are some services that continuing care facilities:

  • Educational programs
  • Gardening space
  • Laundry services
  • On-site health care and nursing
  • Personal conveniences such as banks, haircutters and library)
  • Security Systems
  • Transportation
  • Processing of Medicare as well as insurance reimbursement forms
  • Organized social and recreational activities
  • Meal services
  • Housekeeping
  • Exercise classes
  • Craft and woodworking activities

 Fees and Payment of Continuing Care Services

 The activities mentioned in the previous part of this article are the reasons why there are continuing care facilities that are more expensive than the rest. All fees indicated must be detailed and clear even if it is just the initial contract for an individual who will be residing in the facility. Before the individual or a loved one, on behalf of the future resident, signs the contract, he or she should seek the advice of his or her financial advisor to check the finances so that it is possible to meet all the terms as stated in the contract through the years, since this is a continuing care facility. Additionally, financial advisors should check the finances of the continuing care facilities as well in order to decide whether it is a practical financial investment to make in the future.

There are three kinds of payments that exist for the continuing care facilities. This also include the plan with the monthly and entry fee as well as plan with the rental fee and the plan that is based on the equity of the

  • The monthly and entry fee plans are widely used the most. It is under this coverage that the resident is required to pay an expensive entry fee upfront and most of the time, this is non-refundable. If it is, then it is refundable but it decreases over time. It can also be partially refundable or completely refundable. The policies that concern most residents are the initial fee for entry because it really varies between the different continuing care facilities out there. It is strongly advised that individuals check the contract so that they can go for the specific facility that they feel worth paying for. On average, the entrance fees for these CCRCs range from $60,000 to as much as $120,000. Therefore, the monthly fees can be as much as $1,000 to $1,6000 and these are also charged in order to cover the expenses that are associated with the units that the residentials live in, the assistance services and the medical care.
  • Rental plans as stated on the contract resort to the monthly fee that comes in the form of rental to cover the services as well as the housing that the residents receive. There are times when health care is not included in these services so it is better to check carefully especially when looking at the said plans.
  • The equity based plans allow the individuals to buy their own residential areas. When they do this, the individuals can gain money all for their appreciation of the resident that they are living in. They can also resell the unit when they are deemed qualified to do so. When this is the case, then the owner’s association is the institution that governs the health care and the residential services, which the residents can purchase aside from the living area that they already are in.

No matter what kind of payment plan that the residents opted for the costs actually vary depending on the age, marital status, gender and location of the facility. Individuals must expect their loved one to pay even more than the average rate if he or she is:

  • Young and secure on the financial aspect and capable of consistently paying the monthly rate for a long period of time.
  • Female because it is believed that they live longer
  • Married because there is a higher possibility that the spouse will eventually become ill and both of them will move to a smaller unit, therefore increase the turnover in the residential area of the resident.
  • Looking for units in the West, South, Northeast regions of the United States.

Individuals are also greatly encouraged to have their lawyers review the contract of the CCRCs before signing this. The document because it is a contract legally binds the resident to the CCRCs for the remainder of his or her life.

The payment contracts of continuing care facilities are prepared in one of these three ways:

  • These are contracts that are quite comprehensive and completely cover the residential services, long-term nursing care, amenities and shelter and not increase the monthly payments that the resident has already signed up for. There is an excepti0on though and that is for the inflation adjustments if the situation calls for it. The set-up of this kind of contract spreads the risk in health on the residents in order for no resident would experience any form of financial ruin. A majority of the CCRCs offer this kind of agreement.

 Modified contract covers the residential services, shelter, and amenities of a specific amount of nursing care. After the period when the stated kind of nursing care has been utilized, then the resident pays for the required services on a monthly or even a daily basis.

 The fee-for-service kind of contract covers residential services, shelter, and amenities, as well as short-term nursing care and emergencies. Residents must then pay these fees in the long run but at a number of daily rates.

The overall fees for each kind of contract decrease for every kind of service provided and it decreases as well. It is very crucial to note the resident that a number of CCRCs are also participants of Medicaid and Medicare and sometimes even both of these programs.

Finding the Right Continuing Care Facility

 Since no federal regulations for the CCRCs get in the way, it is possible for everyone to look for their local or state guidelines. It is also crucial that they check which facilities are accredited by the CCAC or what is called the Continuing Care Accreditation Commission. This is an accrediting body that is independent and is also sponsored by what is called the Association for the Home and Services of Aging Individuals. The accreditation of the CCAC is required to submit all the financial statements that were incurred yearly and must also be renewed every fifth year of the resident in that said facility.

The same with all the residential communities, the loved ones should also sign the continuing care community facility once they have already checked the facilities. When interviewing prospective facilities, it is very important to have a long list of questions to ask. Here are examples of questions that can be asked especially when a loved one is investing in continuing care. These questions must be asked along with the basic questions regarding the facility.

  • Is it accredited by CCAC?
  • What kinds of recreational activities can residents engage in? How often are the activities conducted?
  • Can the residents have pets?
  • How much is the upfront entry fee? Is it refundable?
  • How do you calculate the monthly fees?
  • What kind of health care do you provide to the residents when they are in your facility? How often are the residents reassessed?
  • Do you provide long term or short-term health care?
  • Are there limits on the fees?
  • Will there be changes on the monthly rates? If so, why?

Once the individual has found the right facility for their loved ones and these fit the needs that they require then it is a good investment to let their beloved elderly stay there and be assured that the latter will be taken care of and looked after in the best way possible.

Medical Expenses Deduction – What you can and can not do?

Sep 13, 2017 Posted by Sanjiv No Comments

Medical bills can sure burn a hole on your wallet especially if there are emergencies that come out of nowhere and are not completely covered by one’s insurance. This being said, the IRS allows the taxpayers some relieve, making these expenses somehow tax-deductible. In order for anyone to make the most out of the tax deduction, they must know what is regarded as medical bills and the steps to claim deduction from these.

Deduction from medical bills

The IRS lets tax payers to subtract medical expenses that are qualified and also exceed 10% AGI. The AGI or the adjusted gross income is taxable income and also deducts any adjustments such as contributions and deductions to the traditional interest from student loan and IRA.

Take this for example, a modified AGI that totals $45,000 that has medical costs of $5,475 can be calculated by $45,000 and 0.10 to find out the 10 percent which means $4,500 is deducted to the amount. This then leaves the tax payer a deduction on his medical expenses that amounts to $975. This was calculated by deducting $4,500 from $5,475.

Which medical bills can be deducted?

The IRS lets the tax payer subtract preventative care, vision and dental care and treatment surgeries as medical expenses that qualify. Consultations with psychiatrists and psychologists are also deducted. Appliance like contacts, glasses, hearing aids and false teeth as well as prescription medications are also considered as deductibles.

The IRS allows the tax payer to subtract the expenses for travel when the purpose is medical care. This includes bus fare, parking fees and mileage on cars.

What cannot be deducted?

Medical expenses that is reimbursed, like from the payer’s employer or insurance, is not deductible. This also includes the fact that IRS usually does not allow expenses for cosmetics. The cost for drugs that were not prescribed, with the exception of insulin, as well as purchases primarily for the purpose of general health, like health club bills, toothpaste , diet food or vitamins, nicotine products that are non-prescription or medical bills that were paid for in a previous year cannot be deducted.

How to claim the deduction for medical expenses

To claim the deduction from medical expenses, this must be itemized. Itemizing medical expenses requires the taxpayer does not follow the deduction that is already considered as standard but only the expenses deduction in the situation that it is greater than the former.

Those who choose to itemize must use the Form 1040 when filing their taxes and then attach this to Schedule A. Here, they can also document the total of their medical expenses that they paid for that year on Line 1. The AGI income can be found in Line 2.

Then the 10% of the AGI is placed in Line 3.

Difference between the expenses as well as 10% of the AGI is in Line 4.

The total amount that is listed in Line 4 will then be subtracted to the AGI to reduce the income that is taxable for that year.

If the amount obtained, along with the standard deductions claimed, is lower than the standard deduction, then this should not be itemized.

Maximizing Medical Expense Deduction

If taxpayers spent loads of their hard-earned cash on medical bills, they can write those off but the first requirement is that it should exceed a hefty amount before it is regarded as a deduction.

  • The IRS allows the taxpayer to subtract the costs of medical bills on their tax returns if it is beyond 10% of the AGI. Only the costs that go beyond this amount is deducted.
  • Taxpayers aged 65 and older can use 7.5% from the previous year when claiming the medical expenses that have been itemized.

Which Medical Deductions Are Covered?

The taxpayer’s bills from medical and dental expenses along with his or her spouse and dependents are listed on the tax return. Therefore, these are allowed deductibles. However, medical expenses for parents are not considered due to exemption purposes. Another deductible is that of a dependent that has passed away during the year that they were covered.

Medical Deductions That Are Often-Overlooked:

  1. Travel expenses when going to and returning from locations for medical treatments. The IRS considers this as a deductible and also evaluates the allowance through a standard rate of cents-per-mile. For this income tax year, the rate per mile is 17 cents.
  2. Insurance payments income that has already been taxed. This also covers insurance cost for long-term care, which has certain limits depending on the age of the claimant.
  3. Medical treatments that are uninsured, like eyeglasses, contact lenses, hearing aids, false teeth and even artificial limbs.
  4. Cost of treatment for drug and alcohol abuse.
  5. The cost for corrective vision surgery through laser. This is also tax-deductible. This is often-overlooked and such a shame because taxpayers can have lots of tax deductible from this.
  6. Medical costs as prescribed by physicians. For example, if a doctor prescribes installing a humidifier into the home’s air-conditioning and heating to relieve problems concerning chronic breathing, the device along with the extra costs on electricity for it to operate are partially deductible.
  7. Costs for medical conferences. Expenses on admission and transportation to any medical conference of a chronic illness that is suffered by the tax payer, his or her spouse or dependents can be covered. Lodging costs and meals incurred during the seminar cannot be reduced.
  8. Weight-loss programs. There are some instances that may count as deductible, just like the programs to stop smoking. However, diet programs are also medically necessary. Take this for example, a doctor can recommend a particular regimen to decrease the risks of obesity and hypertension in one’s health.

One can also get a tax break with a flexible account for medical spending. Taxpayers can check for plans they can participate in to increase pay that they can take home.

Special medical needs

The cost for special medical needs can also be written off. These are wheelchair, equipment that lets the deaf person use a phone, devices that produce television captioning and crutches. Service animals specially there for the hearing impaired and the blind and the costs in retrofitting cars with hand controls and spaces to hold wheelchairs can also be written off.

Other Aging-in-place remodels in the home that can be written off:

  • Ramp installation
  • Widening hallways and doors as well as lowering cabinets and counters
  • Adjusting fixtures and electrical outlets
  • Exterior landscaping that can ease the house access

There are home remodeling that can be prescriptions for tax breaks, in the situation that the IRS rules and doctors’ orders are followed.  If needed, adding chairlift can also be used to ascend and descend the stairs all for medical condition. Therefore, this is also considered an expense that is legitimate.

Changes to one’s home in order to make this specially accessible for any handicapped resident are also tax-deductible. Taxpayers must remember that they won’t be able to be considered as deductions from the over-all costs of the tax return. Once there is an improvement, it increases the property’s value, then the amount is deducted from the cost of the project. The difference, then, can count as medical expenses.

Elevators are not deductible. IRS regards this as structural changes that add more to the value of the home and therefore does not necessarily require a medical deduction.

Medical yet not tax-deductible

Cosmetic surgery and health club payments or bills from weight-loss programs are not deductible because these are not medically necessary. Operations for hair transplant and electrolysis treatments are also not deductible. For these procedures, taxpayers can consider financing surgeries that are not medical related and has credit card cash-back.

6 Medical Deductions That Can Be Deducted Without the Taxpayer Itemizing

Calculating medical expenses for deduction is difficult due to the Adjusted Gross Income floor of 10%. If the tax payer is below 65 years of age, it is 7.5%. There are medical expenses that are considered to be deductible despite one not qualifying for deducting the medical expenses in the form of itemized deduction. Deducting expenses can also lower the taxable income and also cut the taxpayer’s taxes. Filing status as well as the number of dependents usually does not affect the deductions.

Listed are the medical deductions that the IRS considers, even without itemizing:

  1. Account Contributions from Health Savings. If the taxpayer contributes any amount to the HSS or the Health Savings Account, then it serves as deduction from the taxable income of the taxpayer. The maximum that is allowed can reach to a maximum of $3,350 for the individual. For families, it is $6,650 per year. If the taxpayer is beyond 55, he or she can contribute an additional $1,000 every year. If the employer contributes to the HSA, this can either be deducted or not deducted in the contributions.
  2. Account Contributions from Flexible Spending. Like the HSAs, when there is an employee-sponsored that can be spent in a flexible manner, which is also known as the FSA, the taxpayer is contributing his income before tax and therefore, reducing his income that is taxable. For income tax year of 2016, the rate was $2,550 for every spouse.
  3. Health Insurance for the Self-Employed. If one is self-employed, he or she can deduct the premiums from the insurance for himself or herself, his or her dependents. The premiums for LTC or long-term care insurance can also be paid for the year.
  4. Work Experiences That Are Related for the Impaired. If the taxpayer is physically as well as mentally disabled and requires services or equipment in order to perform a job, then this can be deducted. Expenses can also include readers, personal assistants and pieces of equipment that are required and necessary for the job. There are expenses that are paid by the taxpayer’s employer and are also considered as reasonable accommodation as it is stated under the ADA or Americans with Disabilities Act.

Personal Physical Injury Damages

If the taxpayer is reimbursed for physical injuries as well as expenses from a legal action, then the tax payer can deduct this amount from the taxes. If they are receiving a settlement and the reimbursement,  there is a tax on the settlements but there are no reimbursements. The taxpayers cannot reduce medical costs that have been covered by reimbursement.

Tax Credit on Health Coverage

The HCTC or the Health Coverage Tax Credit covers the monthly health insurance premium for as much as 72.%%. These are premiums that are paid by taxpayers who are regarded as eligible. These are the requirements for those who wish to claim HCTC:

  • TAA or Trade Adjustment Assistance recipient
  • Recipient of the Reemployment TAA
  • Alternative TAA recipient
  • PBGC or Pension Benefit Guaranty Corporation pension. This is for the payer who covers his own health insurance.
  • Any qualifying members that are listed of the individuals above.

Here is a rundown of the medical expenses you can deduct:

  • Fees to doctors, dentists, psychiatrists, surgeons, chiropractors and other medical professionals.
  • Medical insurance premiums that are beyond the portion of what the employer pays
  • Long term care insurance premiums that are up to certain limits
  • Long term care
  • Inpatient drug treatment and alcohol programs
  • Dentures
  • Ambulance service
  • Modifications to the tax payer’s home for medical care, like wheelchair ramps
  • Weight loss programs for specific diseases that have been diagnosed by a certain physician
  • Fertility treatments like sterilization and pregnancy test kits
  • Nursing supplies like breast pumps
  • Prescription drugs as well as insulin
  • Glasses, hearing aids, contacts and crutches
  • Guide dogs for the deaf or the blind
  • Cosmetic surgery required because of a disease or an accident
  • Removing lead based paint from surfaces that are in poor repair and is within the reach of any child
  • Admission and transportation going to a conference about a chronic condition of the taxpayer or any of the dependents
  • Stop smoking programs, but excluding non-prescriptions drugs such as patches and nicotine gum
  • Psychiatric care

For a complete list of deductible medical expenses, anyone can just check the IRS Publication 502. These deductions are then used when filing out Form 1040 or Schedule A. Writing off medical expenses as deductions can make for a healthier bottom line on anyone’s tax return. Taxpayers should make sure that the only appropriate expenses are included because auditing IRS can be stressful. It is also possible to ask for the assistance of experts so there are no mistakes made in taxation and the appropriate deductibles.

Understanding Adoption Costs and the Deduction Taxpayers Can Claim

Aug 8, 2017 Posted by Sanjiv No Comments

An adoption tax credit is the credit or tax deduction that adoptive parents receive which encourage adoption. It is stated in Section 36C of the Internal Revenue Code of the United States, and it provides credit for “qualified adoption expenses.” These are incurred or paid by taxpayers.

According to IRS, adoption costs and tax credit include qualified adoption expenses to pay for the adoption of an eligible child which also serves as an exclusion for the employer to provide adoption assistance.

Tax Year to Claim Adoption Costs

Domestic adoption expenses can be claimed for the tax credit of the given income tax year as long as both have been paid. Domestic and foreign adoption costs can be claimed in the given tax year when the adoption process is finalized. Domestic adoption expenses are also accepted even during the adoption process. The accumulated adoption expenses for every child are credited on the previous year as long as it has been evaluated and determined fit and suitable for the maximum tax credit.

Qualified Adoption Expenses

As stated in the US tax law regarding adoption costs, the qualified expenses cover fees such as the adoption costs, attorney fees, court costs, traveling expenses (which also includes the cost of meals and lodging while on the road) and other miscellaneous expenses that are related to the taxpayer legally adopting a child that is deemed eligible. The adoption tax credit per child is doubled when two children are adopted in the same year. It is very important to note that this is credit and not deduction. This means there is a higher deduction considering it is the latter. To elaborate more,  the tax credit is a dollar for dollar reduction which means that the deduction from the credit is the total amount per dollar, which makes it a bigger deduction that what would have been subtracted if it were a mere deduction.

If the adopted child is one with special needs, the parents can claim full credit even without documenting the expenses. There are specific factors that determine the qualifications and the benefits of the child with the special needs and they vary from state to state. A qualifying child that has special needs because of a condition or factor may involve any of these:

  • Racial background or ethnicity
  • Age
  • Emotional, physical or medical disabilities
  • Risk of emotional, mental and physical disability due to birth family history
  • A condition that makes it difficult for the child to find a family that can adopt him or her

There are broader and more elaborate definitions of “special needs, ” and these can be used to determine if the child is qualified for the financial assistance from the Federal Government regarding the adoption of youth and children within the US foster care system.  There’s no single definition of what special needs are, but according to the Social Security Act, under Title IV-E, the child or the youth that has special needs must meet both requirements to be qualified for Federal Adoption Assistance:

  1. The child or the youth can no longer be returned to his or her biological parents, for any reason.
  2. It is the best interest of the child or the youth to be placed in a caring environment.

The adoptive parents must document the child with special needs every paper work that they get their hands onto. The documentation includes assistance for the adoption, the subsidy agreement concerning the adoption, and the letter from the state or county that the child welfare agency is situated.

Taxpayers should document all the financial records including the written adoption paperwork, home study paper work, and legal agreements. Most audits concerning adoption tax credit can be completed by correspondence through an audit. The taxpayer and the accountant can communicate with the IRS via fax or mail. Tax audits also occur every three years so records that are concerning adoption expenses should be kept and retained.

Internal adoptions also require more paperwork as well as registration when the child from abroad has been adopted and then starts living in the US. Social Security Numbers and Social Security Cards, as well as passports and birth certificates along with US readoption,  are also required.  Additional documents that are needed for a child to permanently reside in the US are of great importance, and taxpayers must keep this. Readoption is also a means of documenting the child-parent relationship as stated in US law.

Adoption Credit and Adoption Assistance Programs

Tax benefits for adoption can also include the tax credit for a qualified adoption cost that will be paid by the qualified child, as well as the exclusion from the income of the employer that provides the adoption assistance. The adoption costs are non-refundable which means that it is limited to the taxpayer’s liability for that income tax year. The credit in excess of the liability can be carried to the next five years.

Qualified adoption expenses

Expenses for qualified adoption an also include the home study if the child is physically or mentally incapable of attending a traditional school.

Qualified adoption expenses include the costs that are paid by the registered domestic partner of the taxpayer who lives in the same state for same-sex second parent or co-parents. Adoption of same-sex couples has already been defined so that the child they adopt is covered by adoption costs expenses and can, therefore, qualify for the credit.

Income and Dollar Limitations

There are limitations for credit and exclusion per child. The income limit on the adoption cost depends on the MAGI or the modified adjusted gross income. If that amount falls between the specific limit, then the credit of the taxpayer is excluded to the phaseout, whether it be eliminated or reduced.

The dollar limit for the specific income tax year must be reduced based on the amount of the qualified adoption expenses. These are then claimed in the previous years for the adoption effort. When computing for the dollar limitation, the adoption costs that are paid and claimed about the unsuccessful adoption effort should be combined with the qualified adoption costs that are paid in subsequent attempts, whether the adoption was successful or not.

The dollar limitation also applies to both the exclusion as well as the credit that the taxpayer can claim both of these for the adoption costs. However, if the taxpayer can claim the exclusion that is allowed before claiming any credit, then the expenses used for the exclusion that will be reduced from the amount of the adoption costs will be available for the credit. This results to the taxpayer not being able to claim both the credit as well as the exclusion from the adoption tax credit.

When can the Adoption Costs Credit be claimed?

The tax year for which the taxpayer can claim the credit depends on these:

  • Whenever all expenses are paid.
  • Whether the adoption is domestic or foreign.
  • Once the adoption has finalized.

The adoption costs that are allowed for domestic or foreign adoption depends on the timing rules that claim the credit, whether or not these are qualified. It depends entirely on the kind of adoption.

  • Domestic adoption is when the child is a US citizen (whether he is a natural citizen or a resident of the US during the adoption process) is eligible for the process, and all the expenses are paid even before the income tax year ends, and the papers have been finalized. The credit for the income tax year follows the coming years for the payment.
  • Foreign adoption is the adoption of a child that is qualified who is not yet a citizen, nor the resident of the United States. Qualified adoption costs that are paid before and even during the income tax year are allowed and considered as credit for the income tax year when the adoption is finalized.

Once the adoption is finalized and subject to the limitation, the adoption costs that are qualified are paid during and sometimes after the year as credit for the payment, whether the adoption is domestic or foreign.

Adoption of US children who have special needs

If the taxpayer adopts a child that is declared to have special needs by the state, then the taxpayer is eligible for the maximum amount of credit.  The maximum amount is then reduced by qualified adoption expenses for the qualified child in the previous years. The limitation regarding MAGI also applies.

If the taxpayer adopts a child whom the state has determined with special needs, then the employer of the taxpayer has written and qualified adoption assistance. This also makes the taxpayer eligible for the exclusion, even if the taxpayer and the employer have no records of adoption costs.

A child is considered to have special needs, as defined by the adoption costs, if:

  1. The child is a US citizen, or a resident of US during the adoption process started.
  2. A state has already determined that the child should not and cannot be returned to his or her biological parents.
  3. A state has already determined that the child should be put into someone else’s care.
  4. A common mistake is confusing “children with special needs” along with the whole point of having an adoption credit. Foreign children are not considered eligible to benefit from what is regarded as the special needs, simply for the purposes of claiming adoption credit. Even American children who are disabled cannot have special needs so that they can get deductions for the adoption costs. Special needs pertain to the children who are mentally, physically and emotionally disabled.

State Adoption Tax Credits

There are various states that offer additional tax credits regarding adoption to benefit their residents. If taxpayers live in such a state, then they are offered with a state-level adoption tax deduction and credit. Taxpayers can add their tax experts if they are eligible for these.

Adoption Disruption Still Applies for Tax Credit Benefits

Families who have gone through situations wherein an adoption process has been disrupted can still benefit from the tax credit. Families that qualify for these can also deduct the qualifying adoption expenses on the disrupted adoption. Nonetheless, these families have to wait for a whole year to go by even before they can file for the credit. The maximum credit also applies no matter how many adoptions, whether these pushed through or were disrupted, that the family has experienced for that income tax year.

Dependency Tax Exemption

Adoptive parents can also take the similar dependency exemption that is stated on their income taxes that can greatly benefit the adopted children, including children who are placed under their care, even if the adoption is not yet finalized. The exemption also deducts the taxable income. Families must then provide half of the child’s support to make the exemption costs.

Adoption Tax Credit Before Finalized

Each year, adoptive families inquire whether they can still file their taxes and not have their child’s SSN. This is not possible because the SSN is received once the child has been successfully adopted. The adoption attorney of the taxpayer should then apply for the child’s SSN along with the birth certificate that has been amended. This is very crucial for the court hearing especially when it is being finalized. Taxpayers who do not have these just yet must turn to their accountant, tax representatives, or tax experts so that they can apply for a TIN that is temporary which the child needs. Taxpayers can also file for the taxes using that number.

Filing Tax Returns with Adoption Tax Credit

Due to documentation and the increase in requirements, the Affordable Care Act is introduced, and it helps taxpayers claim the necessary Adoption Tax Credit that can be filed under the income tax year and with the help of a professional accountant.

Meal Expenses: How Much Can You Deduct?

May 28, 2017 Posted by Sanjiv No Comments

Treating your customers and employees occasionally is one of the best ways to build your business. Going the extra mile to make them feel valued goes a long way, although you may not see that now. If you worry about the expenses you may incur taking them out for a meal, you shouldn’t because meals are considered a legitimate business tax deduction. In fact, even your own meals can also be deductible. But of course, there are limits on what you can write off.

Meals become a legitimate tax deduction only in these two situations:

  • You are traveling away from your tax home for your business or job and need to stop to get considerable rest somewhere so you can perform your duties well.
  • The meal is related to your business or job.

If you satisfy either of the two situations, then your meal becomes a deductible expense.

Now let us set aside business-related meals and focus on the first situation. The IRS law states that when you are traveling away from your tax home for work–may that be for your job or business—your meal expenses become deductible. Does that mean that you can eat whatever you want while on duty and completely write everything off? The answer is no.

Actually, there are meals that you can completely write off, while there are meals that are only subject to 50% deductions. You can also not eat too lavish or extravagant meals and expect them to be deductible. In that case, you purchase your meal at your own expense.

Too Lavish or Extravagant Meals

 The law states that meals that are too lavish or extravagant are never deductible. But how do you gauge the lavishness or extravagance of a meal?

Simple. As per the IRS Rule 463, “An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances.” Just because you conduct business at a high-end restaurant does not necessarily mean that you are being lavish. In fact, the law won’t disallow your meal expenses just because the meal takes place at a deluxe restaurant or hotel.

If you are treating a potential client you are trying to close a deal with, treating him to a sumptuous meal at a high-end restaurant is reasonable enough. However, if you are only conducting a business meeting with your employees to discuss your Christmas party, treating them to a buffet restaurant doesn’t seem reasonable at all. Again, it depends on the facts and circumstances.

Now it’s clear that you cannot deduct expenses for lavish and extravagant meals. However, that is not the only exception. While lavish meals are totally not subject to deductions, some meals are subject to deductions but only to a certain limit.

50% Limit on Meals

 In the law, there exists this 50% limit when it comes to meals and other entertainment expenses. Determining which of your meal expenses are subject to this limit is necessary to know how much you should write off. You use the following methods to figure your meal expenses:

  • Actual Cost.
  • The Standard Meal Allowance.

Notwithstanding the method that you use, remember that you are allowed to deduct only 50% of the unreimbursed cost of your meals. In case you are reimbursed for the cost, how you apply the limit solely depends on the reimbursement plan of your employer. Is it accountable or non-accountable? On the other hand, if you are totally not reimbursed, the limit applies regardless of what the unreimbursed meal expense is for. That means that whether your meal is for business entertainment or business travel, your unreimbursed meal expense is always subject to the limit.

Now let’s go back to the two methods that you can use to figure your meal expenses–the actual cost and the standard meal allowance.

Actual Cost

 This method is less complicated compared with the other method. You simply use the actual cost of your meals to determine the amount of your expense before reimbursing the cost and applying the 50% limit on deductions. If there is one important thing that you should remember when using this method, it’s that you should always keep your records to prove your expenses.

Standard Meal Allowance

 If you do not want to use the actual cost method, you are free to use this method in figuring your expenses for meals.

Generally, this alternative method lets you make use of a set or fixed amount for your daily meals and incidental expenses (M & IE) instead of backing up your actual costs with records, particularly receipts. Well, of course you can still keep receipts for future reference, but you won’t need them as much as you will need them when you use the actual cost method. Under this method, the set amount hugely depends on where and when you travel.

The standard meal allowance method makes mention of a fixed amount for daily meals and incidental expenses. You may probably ask, what are those incidental expenses?

Incidental Expenses

 According to the IRS Publication 463, incidental expenses refer to the fees and tips that you usually give to baggage carriers, porters, hotel staff and the likes. Since they are only incidental, they are not your main expenses. However, these incidental expenses supplement your main expenses.

While these expenses are only considered supplementary expenses, they do not include the money you spend for laundry, lodging, pressing of clothes, mailing cost and telephone or telegram charges.

Incidental-Expenses-Only

 There are days when you do not get to incur any expense for your meals. If that is the case, then you may use the incidental-expenses-only method in determining the amount of deductions you are entitled to. This method is an optional method that you can use instead of the actual cost method if you want to write off your incidental expenses only. When you use this method, you can deduct $5 a day from your expenses if you did not spend anything for your meals.

You should also note that you cannot use the incidental-expenses-only method just whenever you want, or on any day that you apply the standard meal allowance method in determining your deductions. The proration rules for partial days strictly apply to this method. However, it is not subject to the 50% limit on meal deductions.

But how will you know if your meal allowance is subject to the 50% limit? Well, this limit is a bit tricky so you have to learn the ropes.

50% Limit on Meal Deductions

Say you are not reimbursed after applying the standard meal allowance method for your meal expenses, or you used the same method but are reimbursed under a non-accountable plan. In that case, you are allowed to write off only 50% of you standard meal allowance.

This goes the same way if you are reimbursed under an accountable plan and are writing off expenses that are more than your reimbursements. In that case, you are allowed to deduct only 50% of the excess amount.

Are You Allowed to Use the Standard Meal Allowance Method?

 Whether you are an employer or an employee, you are free to use this method. It also doesn’t matter whether you are recompensed for your traveling expenses or not because either way, you can use the same method. But while the law is somewhat lenient when it comes to the use of the standard meal allowance, you should remember that there is also a limit as to where you can use it.

If you are traveling for investment or other income-generating activities, you can use this method in treating your expenses. If you travel for qualifying educational purposes, that is also acceptable. However, if you travel for charitable or medical purposes, you cannot use this method in figuring the cost of your meals.

Is There Any Standard Rate for the Standard Meal Allowance?

 The standard rate for the standard meal allowance is equivalent to the federal M & IE rate. As of 2016, the standard amount for travels in most of the small localities in the United States is set at $51 per day. This rate does not apply to the country’s major cities and localities, which are considered high-cost areas. In their case, higher standard meal allowances apply.

If you want to know the amount of standard meal allowance in the state you are in, you may visit www.gsa.gov/perdiem for the per diem rates of each state for the current fiscal year. You just have to enter the zip code of the city or state that you want to know the per diem rates of through the dropdown menu.

What if You Travel to More Than One Location in a Day?

 If that is the case, then you have to use the applicable rate in the location where you stayed longer to take a rest or sleep. However, the same rule does not apply if you are working in the transportation sector. Workers in the transportation industry are entitled to special rates and are not covered by the mentioned rate for the standard meal allowance.

But how do you know that you are working in the transportation industry? Take a look at these requirements:

  • Your job directly involves transporting goods or people by plane, bus, train, ship, barge or truck.
  • You are regularly required to travel away from your tax home and in one single trip, you become eligible for different standard meal allowance rates.

Once you confirm that you are actually working in the transportation sector, remember that you are allowed to claim a standard meal allowance of $63 a day for your travels. You become entitled to this special rate so that you no longer need to know the standard meal allowance that applies to each and every area where you stop for sleep. When reporting on your income tax return, make sure that you use this special rate for all your travels and not the regular standard meal allowance rates for each state.

When it comes to the federal government’s fiscal year to use, it’s up to you. Once you visit the GSA website to check out the list of the per diem rates of each city or state, you may either choose the rates from the 2016 fiscal year table or the 2017 table to report your travels, which is crucial in determining your income tax return for one fiscal year. However, you have to be consistent. If you use the 2016 table in reporting one travel, then you must use the same table for all the other travels you are reporting.

What if You Travel Outside the U.S.?

 The Department of Defense has assigned locations which can be considered foreign areas and non-foreign areas. The standard meal allowance rates mentioned above do not apply to these areas.

There are special rates that apply to non-foreign areas like Alaska, Hawaii, Puerto Rico, Guam, the Northern Mariana Islands, U.S. Virginia Islands, American Samoa and Wake Island, as well as to non-foreign areas which are geographically located outside the continental U.S.

If you travel to a non-foreign area outside the U.S. and want to know the per diem rate that apply to your travel location, go to www.defensetravel.dod.mil/site/perdiemCalc.cfm. But if your travel location is a foreign area, you must go to www.state.gov/travel/. Under the Foreign Per Diem Rates, click on Travel Per Diem Allowances for Foreign Areas. You will then see the list of per diem rates in the area that you are looking for.

 Whether you are allowed to use the standard meal allowance, entitled to special rates, travel in the U.S. or outside the U.S., it is always critical that you maintain proper records to substantiate all your meals. Always be on the safe side by making sure that you have something to present to back up your expenses once the need for an audit arises in the future.

Where is Your Tax Home?

May 25, 2017 Posted by Sanjiv 1 Comment

If your job requires you to travel from time to time, some of the expenses that you incur while traveling away from home may be entitled to tax deductions. In this sense, however, home does not necessarily refer to the place where you live but the place where you work. This is what the Internal Revenue Service (IRS) refers to as your tax home.

Determining where your tax home is is the first and most fundamental thing that you need to do if you want to determine if you are really traveling away from home.

Basically, your tax home refers to the general area of your workplace, regardless of where you actually live. So, if you work in New York, your tax home is New York.

Do not be confused if the place where you work is different from the place where you lay your head at night, because your tax home designation has nothing to do with where you live. In fact, you may travel miles from your permanent residence to your workplace every day, but your workplace will still and always be your tax home.

 Why You Need to Determine Your Tax Home

Often, when you attend a cocktail party and are asked where your home is, your answer is your current place of residence. However, that is not necessarily the case if the one asking you is from the IRS.  While their tax home is the same as their personal home for some taxpayers, the story is different for those who frequently travel for work or business. Don’t think that your tax home doesn’t deserve a thought, because it does matter especially for taxpayers like you.

According to the IRS, your travel can be considered deductible if your work or business requires you to be away from home longer than your normal work hours. Given that, it is clear that the key criterion in determining if your travel expenses are deductible is if your travel takes you away from your tax home.

Differentiating your tax home from your personal home is crucial because only those expenses incur while you are away from your tax home are considered by the law as deductible.

Your Tax Home, As Per the IRS

 IRS’ definition of tax home is plain and simple—Your tax home is your regular place of business or post of duty, regardless of where you maintain your family home.

Basically, your tax home covers the general area or the entire city where your business or workplace is located. If your office is somewhere in Cortlandt Street in New York, then your tax home is New York. If you travel to Louisville every week for your business but return to your permanent residence in Nashville on weekends, your tax home is still Louisville even if you call Nashville home.

 Why Your Workplace Must Be Your Tax Home

There is a reason the IRS requires every taxpayer to know their tax home, and there is a reason the tax home designation exists in the IRS law. The purpose of the tax home designation is for the deduction of travel expenses associated with work or business. This explains why in the eyes of the tax-collecting agency, your workplace is your home and not your apartment.

Imagine living miles outside Louisville but working in the city. If there is no tax home designation, then you must also be counting your house in Nashville out as your tax home. If that is the case, then theoretically, you can declare each and every expense you spend in Nashville as a business or work-related expense. The IRS is wise enough not to fall for such tricks.

When You Have More Than One Regular Place of Business

 Some taxpayers find it hard to determine their tax home because they have multiple places of business. Should that be your case, then your tax home must be your main place of business or the place where you conduct majority of your business. So, if you have offices in Nashville, Louisville and Franklin, then you must declare the place where you do most of your work as your tax home. In this case, the IRS expects you to consider the following in determining your tax home:

  • How much is the total time that you normally spend in each workplace?
  • How much work do you usually accomplish in each workplace?
  • How much money do you make in each workplace? Is the income you earn from conducting business there significant or insignificant?

Of the above mentioned criteria, the first one is the most important since the IRS states that the place where you conduct most of your business should be your tax home. Logically, the workplace where you spend most of your time is the same place where you conduct majority of your business.

Take this as an example. You reside in Birmingham since you have a seasonal job there for nine months each year. Annually, you earn around $50,000 from your seasonal job there. For the rest of the year which is equivalent to three months, you work in Atlanta where you earn $20,000. In that case, you may consider Birmingham as your main place of business since you spend most of your time there and you earn most of your significant income there.

When You Do Not Have a Regular or Main Place of Business

 Taxpayers who have more than one regular place of business and those who do not have a regular or main place of business usually have the same dilemma in determining their tax home. According to the IRS, for taxpayers whose nature of work causes them to not have a regular or main place of business, their tax home must be the location of their residence or where they regularly live.

Say you are a freelance web designer and do not have a regular office where you conduct business. Since your job requires you to visit offices of your clients to discuss business with them, and since you do not really have a workplace of your own, then your tax home is your house.

Freelance workers and travel bloggers are perfect examples of taxpayers who do not have a regular workplace, since they do not have a fixed place where they conduct business. In this case, you do most of the work at home so your tax home may be your actual home or your personal residence.

Take a look at these factors which the IRS considers in determining your tax home if you do not have a regular place of business:

  • You at least perform part of your business in the area of your personal residence and use it for lodging while conducting business.
  • There are living expenses in your personal residence that you are compelled to duplicate because your job or business needs you to travel away from home.
  • You do not abandon the area of both your place of lodging and personal residence are located, members of your family live with you in that residence, and you use that home for lodging most of the time.

Remember that you need to meet all the three criteria so you can consider your personal residence as your tax home. If you meet all the three factors, then any travel expense that you may incur away from your personal home can be considered deductible since they meet the “away from home” requirement for business travel deductions.

Unfortunately though, if you only meet one of the three factors, then the IRS can consider you as not having a true tax home so you can write off none of your travel expenses.

For example, your family residence is located in Indianapolis. In that city, you work 15 weeks a year. For the rest of the year, you work for the same employer in Cincinnati, where you dine in expensive restaurants and sleep in a rented apartment. For you, it doesn’t really matter whether you are in Indianapolis or in Cincinnati because your salary is the same whether you are in one city or the other. However, since you conduct most of your business in Cincinnati, that city is considered your tax home. That means that even if your expenses there are bigger than when you are in Indianapolis, you cannot deduct any of your expenses for meals and lodging while you are there. When you return to your family home in Indianapolis, you are away from your tax home so you can deduct the cost of your round trip between Indianapolis and Cincinnati, as well as part of your family’s living expenses for meals and lodging while working in your personal home.

When You Do Not Have a Fixed Workplace and a Fixed Home Address

 In determining your tax home, there is something much worse than having more than one regular workplace or not having a regular workplace at all– Not having a regular place of business or post of duty and no personal residence at the same time.

While determining your tax home is not that easy if you have more than one regular workplace, it becomes easy when you finally determine which among your workplaces is your tax home. And while determining your tax home is not that easy when you do not have a regular workplace, it becomes easy when you have a personal residence which you can call your tax home.

However, things become a bit complicated when you do not have a regular place of business and you do not have a place where you regularly live at the same time. In that case, the IRS considers you as an itinerant.

The IRS law states that the tax home of an itinerant or a transient is wherever he works. If you belong to this category, then you are not entitled to travel expense deductions because no matter where you work, you are never considered to be traveling away from home.

Since as an itinerant, everywhere you work is your tax home, you are never really away from home, which means that you cannot write off any of your travel expenses.

An outside salesman is an example of an itinerant. Say you are an outside salesman whose sales territory covers different states. The main office of your employee is in Memphis but you do not work or conduct any business there. Your work assignments are relatively temporary and you have no idea about the locations of your future assignments. Your sister is renting out a room somewhere in Saint Louis so you stay there for a couple of weekends each year, but you do not conduct any business in that area. You do not pay for your accommodation there either. Since you do not satisfy any of the previously mentioned factors that will make your regular home your tax home, then you are considered an itinerant and therefore have no deductible travel expenses.

 When Traveling is Considered Traveling Away from Your Tax Home

 Regardless of which of the abovementioned categories you fall under, all the said criteria boil down to the fact that determining your tax home is critical in determining your tax liability when traveling. Once you have already identified your tax home, it will become easier for you to know which of your travel expenses you should write off and which you should not.

It is also worth mentioning that these tax home rules are the same whether you are an employee or a self-employed individual, although there are certain instances when the degree to which you can write off your business travel expenses may differ.

For instance, employees can only deduct work-related expenses that they have not reimbursed from their employers, while self-employed individuals can deduct the full amount of their travel expenses as long as they are incurred away from their tax homes. In any case, remember to keep well-organized records like receipts, checks and other documents to support your deduction claims.

Know What Kind of Documents are Needed When Claiming Business Travel Expenses

May 12, 2017 Posted by Sanjiv No Comments

It is clear that taxpayers can deduct regular travel expenses when the trip is entirely business related. Additionally, if the taxpayer is on a domestic business trip and made personal side trips or stayed longer than the business purpose required, then the expenses must be allocated between business and personal. The portion of the trip dedicated to business activities is deductible. Any portion related to personal activities is not deductible.

However, if a trip is primarily for personal activities, such as a vacation, then the only deductible business expenses are those incurred at the destination that is directly related to the trade or business and none of the expenses for traveling to the destination are deductible.

IRS parameters

In general, all trip expenses must be recorded on the travel expense statement including procurement card expenses. If a trip is paid for entirely by procurement card, a travel expense statement must be completed and approved. It is not necessary to enter this travel report in AIS; however, the statement and documentation must be retained in the department. As a best practice, the supplemental procurement card expenses form should be used to detail procurement card activity. If the supplemental form is not completed, all procurement card expenses should be clearly marked on the travel expense statement. Procurement card expenses should be deducted from the total expense using line #22. The original procurement card receipts should be kept in the department or school procurement card files.

Even if the expense is clearly deductible the deduction can be denied if not substantiated. Taxpayers must keep adequate records and documentary evidence. However, the taxpayer can use the per diem method of deducting expenses and still satisfy the substantiation requirements for the amount of the expense. The time, place, and business purpose must still be substantiated through adequate records and documentary evidence. The per diem method can be used by employers, employees and self-employed individuals. Self-employed individuals and employees can only use the per diem method for a meal and incidental expenses, not lodging. Additionally, a taxpayer, whether employer or employee or self-employed can alternate during the year between the per diem method and the actual expense method. The per diem rates for travel can be found at www.gsa.gov/perdiem.

Taxpayers in the transportation industry may use a special per diem rate. A taxpayer eligible for this rate is in the transportation industry if the work directly involves moving people or goods by airplane, barge, bus, ship, train or truck and often requires travel during a single trip to localities with differing rates in the per diem tables. These rates, if chosen, must be used for the entire year.

According to the streamlined guidelines set by the Internal Revenue Services (IRS), there are a couple of documentation that should always be kept, regardless of circumstances or situation, to make sure that you can have an easier time in proving that your trip was primarily for business purposes. While it is best to log in everything, these ones below are the most crucial documentations needed to stake your claim.

Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:

  • Cash register tapes
  • Deposit information (cash and credit sales)
  • Receipt books
  • Invoices
  • Forms 1099-MISC

Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Cash register tape receipts
  • Credit card receipts and statements
  • Invoices

Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense. Documents for expenses include the following:

  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Cash register tapes
  • Account statements
  • Credit card receipts and statements
  • Invoices
  • Petty cash slips for small cash payments

Travel, Transportation, Entertainment, and Gift Expenses. If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.  For additional information, Publication 463 of the IRS document provides more details with regard to Travel, Entertainment, Gift, and Car Expenses.

Assets are the property, such as machinery and furniture that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets should show the following information:

  • When and how you acquired the assets
  • Purchase price
  • Cost of any improvements
  • Section 179 deduction taken
  • Deductions are taken for depreciation
  • Deductions are taken for casualty losses, such as losses resulting from fires or storms
  • How you used the asset
  • When and how you disposed of the asset
  • Selling price
  • Expenses of sale

The following documents may show this information.

  • Purchase and sales invoices
  • Real estate closing statements
  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred

Meals

Amounts paid for food and reasonable restaurant gratuities while traveling away from home are another deduction. The IRS gives taxpayers two methods to calculate meal costs. It publishes daily per diem rates applicable to various geographic areas that you can use without regard to the amount actually spent. Alternatively, you can keep records of all meals and list the total costs paid. Regardless of the method chosen, the total allowable meal expense gets a further 50 percent deduction. Calculate this reduction before applying the 2 percent adjusted gross income limitation.

Instead of keeping records for meal costs, the taxpayer can claim an IRS meal allowance, which is referred to as the M&IE per diem rate (for meals and incidental expenses). The M&IE rate includes tips for service people such as porters, and hotel maids, but does not include the cost of laundry, cleaning, or pressing of clothing, which can be deducted separately with the proper documentation. Self-employed individuals can claim the M&IE allowance, but employees may only claim the allowance if they are not reimbursed under an accountable plan, if their employer is not related to them, and if they do not own more than 10% of the employer’s outstanding stock.

The standard meal allowance for travel within the Conterminous (or Continental) United States (CONUS), meaning locations within the continental United States, is $46 per day, although higher rates may apply to more expensive localities such as major metropolitan areas and resort areas. Outside of the Conterminous United States (OCONUS) rates apply for travel to Alaska, Hawaii, Puerto Rico, United States possessions, and foreign countries. Generally, only 75% of the allowance can be claimed for the 1st and last days of the trip. Workers in the transportation industry who are subject to the Department of Transportation hours of service limits, such as interstate truck drivers and pilots can deduct 80% of their meal costs. CONUS rates can be found by zip code or by city and state.

If meals are not claimed on a particular day but the taxpayer had other incidental costs, then instead of using actual costs, an allowance of $5 per day can be claimed for the incidental expenses, even if the actual expenses were less than that.

Important documentation features

Substantiate is a fancy way to say: the taxpayer has to prove it. Taxpayers must keep evidence of business travel expenses in order to deduct them. The information that must be noted:

  1. The date. The date the expense was incurred will usually be listed on a receipt or credit card slip; appointment books, day planners, and similar documents have the dates pre-printed on each page, so entries on the appropriate page automatically date the expense.
  1. The amount. How much you spent, including tax and tip for meals.
  1. The place. The nature and place of the entertainment or meal will usually be shown by a receipt, or you can record it in an appointment book.
  1. The business purpose. Show that the expense was incurred for your business — for example, to obtain future business, encourage existing business relationships, and so on. What you need to show depends on whether the business conversation occurred before, during, or after entertainment or a meal.
  1. The business relationship. If entertainment or meals are involved, show the business relationship of people at the event — for example, list their names and occupations and any other information needed to establish their business relation to you.

Cautions

Trying to write off your personal vacation as a business expense isn’t worth the risk. “You have to recognize that travel and entertainment is a highly suspect area,” Barbara Weltman, a tax and law expert and the author of JK Lasser’s Small Business Tax Guide, said. “It’s an area that the IRS is on the lookout for because of the potential of crossing the line a little bit and claiming business write-offs for what are really personal expenses. You can assume that if you get audited the IRS is going to look very closely at this area, so you want to make sure you do things right.”

When traveling or entertaining for business purposes, it’s important to document everything.  It’s not enough to just keep receipts, you also need to document who you spoke with, what you spoke about, and how it was related to your business. For travel, the IRS also requires you to keep a written or electronic log, made near the time that you make the expenditure, recording the time, place, amount and business purpose of each expense. This once took the form of expense reports. Increasingly, online programs and even apps, like Tax Tracker, are available for documenting business expenses.

Weltman also suggests creating a paper trail that can be traced if you are audited by the IRS. Take notes on meetings you attend while traveling, keep programs of conferences you attend, sign into conferences, and keep e-mails sent to those you met with during business meetings.

As with all deductible business expenses, you are also expected to keep receipts for travel and entertainment purchases. For meals, make sure that the receipt includes the exact cost of the meal as well as the name and location of the restaurant. Get in the habit of writing down who was present (names and business relationship) and what business was discussed.

For entertainment expenses, document: the amount of each separate expense; the date of the entertainment; the name, address, and type of entertainment; the business reason for the entertainment; and the name, title, and occupation of the people who you entertained.

Whenever business expenses are claimed it is a good idea to keep detailed records and receipts for everything. Business expenses can be charged to a practice credit card, receipts should be obtained from taxi drivers or other modes of transportation, and a detailed copy of the hotel bill should be kept. For the show, meeting or conference, a copy of all charges, as well as a copy of the convention schedule/agenda, can help prove it is relevant to your practice.

 

The safe way to go in all of this is to just diligently record all your business-related travel expenses in a log complete with dates, times, descriptions, locations and amounts. Include your travel expenses, lodging expenses and the costs of your meals. Also include taxis, fees, tips and any other incidental expenses.

No matter how you document your expenses, you are supposed to do it in a timely manner. You don’t need to record the details of every expense on the day you incur it. It is sufficient to record them on a weekly basis. However, if you’re prone to forget details, it’s best to get everything you need in writing within a day or two. Just make sure to keep all supporting paper documentation of the recorded expenses. This way, when you present.

How Important is Recordkeeping in Claiming Your Deductible Business Expenses?

May 4, 2017 Posted by Sanjiv No Comments

What sets a stress-free business owner apart from a stressed-out one during tax time? Records.

Some may think that records are nothing more than pieces of papers, but when it comes to business taxes, records are everything.

Records are more than just papers. Especially in business, these records are so important because they save you from troubles at the end of the year. Even more so, they save you heaps when it comes to business taxes.

You must know that as a business owner, the IRS allows you to claim tax deductions for whatever legitimate expenses you may have had throughout the year. These tax deductions refer to reductions in your business taxes, and the expenses refer to your business’ current operating costs.

Based on the IRS rule, your legitimate business expenses must both be ordinary and necessary to be deductible. But how will you know if your expenses are ordinary and necessary?

  • Ordinary Expense. If an expense is common and accepted in your trade or field of business, then it is considered an ordinary expense. As per the IRS rule, an expense can only be considered as ordinary if “the transaction which gives rise to it is of common or frequent occurrence in the type of business involved.”
  •  Necessary Expense. If an expense is appropriate for your profession or trade, then it is necessary. Remember that your expense does not necessarily have to be indispensable to be necessary, as per the IRS. For example, you had to spend some money to fix a broken window in your business office. That is considered a necessary expense. However, if you spend money to fix a broken window in your home, that is not a necessary expense.

 When tax time comes, remember that you have to be able to prove these two things so that the IRS can honor your expenditures as necessary and ordinary:

  • That your purpose for the expense is bona fide business.
  • That there is a clear and established relationship between your expense and your profession or business.

It is not enough that there is a business purpose behind your expense. You should be able to show that your money was spent for something that was related to your business. For instance, you are a dealer of cosmetic products. The IRS will certainly not question your membership in a cosmetic industry trade group, but it might question your membership in a travel club since it has nothing to do with your trade.

Keeping Records for Your Business Expenses

 While it is good to know that you can have such deductible expenses, remember that you cannot avail of the privilege if you fail to keep good records. Just as how important it is for you to have deductible expenses, you must be able to prove that your expenses are legitimate enough to be considered deductible.

If you want to reduce your business tax bill and deduct your business expenses, you must be organized and meticulous enough to keep each and every record that can document your expenses. The IRS rule states that “business must maintain records sufficient to substantiate the amounts and purposes of deductions claimed.”

But just how do you particularly substantiate your expenses? Which specific details must you be able to present to the IRS to prove that your business expenses are legitimate?

Well, the details that you need to keep records of largely depend on the type of expense. When it comes to business, the rules of IRS on business tax deductions are divided into four categories– travel, entertainment, transportation and gifts.

How to Prove Your Business Expenses

 If you think recordkeeping is just about keeping receipts, then you might want to think again. When it comes to tax deductions, receipts are good proofs but the law does not consider them sufficient. Depending on the type of business expense that you want to be deductible, you should be able to provide the right and complete details to substantiate your claim for deductions.

Take a look at the following business expenses and the details that you need to keep records of under each type of expense, as per the IRS.

  1. Travel Expenses
  • The cost of each separate expense for travel, lodging and meals
  • Other incidental expenses that may be totaled in reasonable categories, including (but not limited to) taxi fares, fees, and tips
  • The dates when you left for the trip and returned from the trip, as well as the number of days spent solely on business
  • The destination or area of your travel. Here, you should be able to provide the specific name of the city or town where you traveled.
  • The particular business purpose for the expense, or the benefit gained from the business travel

 

  1. Entertainment
  • The cost of each separate expense for entertainment
  • Other incidental expenses that may be totaled on a daily basis, such as taxi fares, telephone charges, etc.
  • The date of entertainment
  • The specific name and address or location of the place of entertainment. If the place of entertainment does not make apparent the type of entertainment, you also need to indicate the type of entertainment
  • The particular business purpose for the expense, or the benefit gained from the entertainment
  • The nature of the business activity or discussion. If the entertainment happened directly before or after a business discussion, you need to indicate the following:
  • The date, place, nature and duration of the business discussion, and
  • The identities of the individuals who took part in both the business discussion and the entertainment activity
  • Information about the recipients or participants in the entertainment activity and their relationship to you. Are they your employees? Clients? Business associates? Information about them may include their names, designations, or titles.
  • It is also important to note that if the entertainment was a business meal, you should be able to prove that you or your employee was present during that particular entertainment activity.
  1. Gifts
  •  The cost of the gift
  • The date when the gift was given
  • A description of the gift
  1. Transportation
  •  The cost of each separate expense. If you used a car for transportation, you should be able to include additional details for your car expenses. These details include the cost of the car and any improvements applied to it, the date you started using it for business purposes, the mileage for every business use, and the total miles for the entire year.
  • The date of the expense. For car expenses, the date when the car was used.
  • Your business destination
  • The business purpose for the expense

 

Now that you know the details that you need for each type of business expense, the next question you may have is where to keep such details. Usually, people think of receipts when the subject is recordkeeping when in fact, receipts are just one of the many records you can keep to back up your deductible expenses.

When is your evidence/proof adequate?

 In the IRS law, there is such thing as adequate evidence. The law honors diaries, statements of expenses, logs, account books, trip sheets and other similar records as pieces of adequate documentary evidence. Documentary evidence cannot be considered adequate if it lacks the previously mentioned elements, such as the amount, place, date and all the other essential character of the expense. However, there are certain cases when the need for adequate evidence does not apply.

  • When other than lodging, your expense is less than $75.
  • When you have a transportation expense but there is no receipt readily available for it
  • When you have lodging or meals while traveling away from home and you account the expense to your employer under an accountable plan, and you are provided a per diem that covers your meals and allowance

In preparing your documentary evidence, you should be able to take note of the following:

  • No need to duplicate information. If your receipt already bears all the important information to prove the legitimacy of the expense, then you do not need to record the same information in your account book or other record books. You won’t have any problem with your records as long as your receipts and records complement each other in an organized manner.
  • Keep timely records. To make your records more valuable, record the elements of your business expense near the time of the expense and support it with documentary evidence. Records have greater value when they are prepared at the time of the expense than later, when there is a tendency for you to not accurately recall the expenses anymore.
  • Prove your business expense. When it comes to proving the business purpose behind the expense, the degree of proof depends on the case. In the event that the purpose of your expense is not clear given the surrounding circumstances, then you have to make a written explanation that clearly states your purpose.
  • No need to disclose confidential information. In providing documentary evidence for your business expenses, you do not necessarily have to disclose confidential information relating to your deductible expenses in your diary or account book. Just make sure that you record the information elsewhere, either at the time of the expense or near the time of the expense.

What if You have Incomplete Records?

 If your records aren’t complete to prove your expense, then you must be able to prove the element of your expense through the following:

  • A written or oral statement you personally made. This statement should contain all the specific details about the element.
  • Other supporting evidence sufficient.

 What if Your Records have been Destroyed?

 There are instances when records get destroyed for reasons that are beyond your control, like fire, flood and other phenomena. In such cases, you cannot possibly produce a receipt. However, since the IRS implements strict policies when it comes to presenting records to prove the legitimacy of business expenses, you need to reconstruct your records or expenses.

 Separating and Combining Expenses

 In recordkeeping, there are cases when you need to separate your expenses or combine your expenses.

  • Separating expenses. Generally, each separate payment must be considered a separate expense. An example would be an entertainment expense for a client you treated to a dinner and then a theatrical show. In that case, the cost of the theater passes and the dinner expense must be taken as two separate expenses and must therefore be recorded separately.
  • Combining expenses. In your record, you can make just one entry for reasonable categories such as telephone calls, taxi fares and other incidental travel costs, but your meals should be in a separate category. Tips for services related to the meal can be combined with the meal expense.

How Long Should You Keep Your Records?

 There is no specific timeframe indicated in the law when you should keep your records. However, if you think that your receipts and records might be needed to administer any of the provisions of the Internal Revenue Code, it is best to keep them for as long as possible. Usually, it is safe to keep your records for a span of 3 years from the time you file your income tax return on which you claimed your deductions.

 How about the Records Provided by your Employees for Reimbursement?

 For records reimbursed for expenses, the rule is different. Once the employees have already handed the records and documentation to their employers and have already been reimbursed, there is generally no need for them to keep copies of the records. Just to be sure, however, it is sometimes better to keep such records because there are instances when employees need to prove their expenses, such as in the following conditions:

  • If you claim deductions for expenses that exceed your reimbursements.
  • If your expenses are reimbursed under a non-accountable plan.
  • If your employer does not utilize sufficient accounting procedures to verify the expense accounts.
  • If you are related to your employer as per the Per Diem and Car Allowances section of IRS Publication 463, chapter 6.

Generally, recordkeeping is not as laborious as it sounds. It’s simply all about giving the IRS what they want so you can save yourself from all the troubles that may arise in the future. You may not know when you will need your records again, so just to be on the safe side, keep them indefinitely. They don’t take up much space in your room anyway.

Dining, Drinking, Merrymaking—Know When Your Entertainment Expenses are Deductible

May 1, 2017 Posted by Sanjiv No Comments

Group Of Friends Enjoying Night Out At Rooftop Bar

Business isn’t always about the dull stuff. In fact entertainment is a part and parcel of most businesses, and the good news is that most entertainment expenses are actually deductible.

In every business, pleasing customers is a must. Especially if you are in sales or marketing, entertaining customers is an essential part of your job or business. Entertainment expenses are usually paired with meal expenses, and both of them are commonly considered legitimate business expenses.

While it is good to know that there’s a clear rule on entertainment deductions, the problem with many business owners is that they think that just about any theater pass, event or meal with a client or a potential client may already qualify as a valid deduction when in fact, it is not always the case.

But how will you know if your entertainment expenses count as business?

 When Do Entertainment Expenses Count as Pleasure or Business?

 Before we get down to the actual rules, let’s try to understand them the easy way. The rules involve figures and stipulations which may sound a bit off for you, but essentially, their bottom line is simply this: When it comes to entertainment expenses, it is usually not considered a deductible expense if you are having too much pleasure. Take a look these easy-to-understand rules:

  1. Make business your priority. Always get down to business. Remember that any form of entertainment that you do must in one way or another be related to the conduct of your business, or must at least be associated with a discussion pertaining to your business. Simply put, if we have a dinner together but don’t discuss business stuff such as sales projections or tax strategies, and instead talk about our children and family life, then you are not supposed to expect the amount we spend for our meal as deductible entertainment expense.

Same thing goes for throwing parties. You cannot simply rationalize that you throw a party to build camaraderie with your clients. For the party costs to be deductible, you should be able to conduct business at any time in the course of the party. It can either be before, after or during the party and may include product demonstration or a brief talk.

Aside from soirees, here are other forms of entertainment expenses that you should consider:

  • If you are a business owner, meals for your employees during a busy time are entirely deductible. It is better if you track such costs under a separate category such as “crew meals,” so your tax professional will not apply the 50% rule during tax time.
  • Do not deduct repeated meals with your business partner when you take turns in paying.
  • You can write off your hotel expenses when attending a trade show, but you cannot do it all year round and mark it as an entertainment expense again and again. So, do not try to write off the amount you spend for entertainment facilities, including property taxes, mortgage interest, swimming pool rentals, tennis courts or a vacation in a resort.
  • You also cannot write off dues that you pay to athletic clubs or hotel clubs, including those that offer free meals when you take part in business discussions.
  1. Make sure that the environment is conductive for the conduct of business. Before writing off your entertainment expenses after dining somewhere, you have to make sure that the environment is business-conducive enough to qualify for a deduction. There was an instance before when the IRS had to reject the deduction of passes to a baseball game because the noise at the ballpark obviously did not allow for a good business discussion.
  2.  Mind your guest list. In writing off your entertainment expenses, you must also take your guest list into consideration. If your event is organized for employees and their spouses or is open to the general public, you may write off its total cost. On the other hand, if the event is for your clients or potential clients, or those business associates or contractors who conduct business with you, then you are allowed to write off only 50% of the total cost. In case your guest list consists of employees and their spouses and some clients, then part of your entertainment cost may be allocated as a 100% write-off, while the remainder can be a 50% write-off based on the number of guests who attended in every category.
  3.  Do not be too lavish or extravagant. Going overboard is a big no-no for the Internal Revenue Service (IRS). If you want to increases the chances of your entertainment expenses to be written off, always choose to keep your entertainment or meal simple by making sure that its cost is aligned with the budget of your company. That means that if your company is not that big to pay for lavish parties, then do not bring your clients to first-class accommodations or parties and expect the cost to be written off.
  4.  Document everything. If you want to win your fight against the IRS, then you have to build up your defenses. There are cases when people from the IRS would come knocking on doors to ask you to back up your claims for deductions. In the event that they come knocking onto your door, you have to make sure that you are prepared to defend your deductions. You do that by making sure that you keep every little piece of evidence that you can keep to support your deduction claims, such as the invitation that makes clear your business purpose, photos of your guests during a product presentation, or a video clip. You may also want your guests to sign a guest book so you can prove to the IRS the right allocation of your entertainment expenses between company employees, business associates, clients, etc. Most importantly, keep all your receipts. Based on the IRS rule, however, expenses that cost less than $75 do not necessarily require receipts. In such cases, a simple journal entry in your appointment book that includes the names of attendees, amount spent and location is enough.

So, when are entertainment expenses deductible?

Basically, entertainment expenses that can be written off are those used to entertain clients or potential clients, customers, business partners, employees, and if these expenses are proven to be–

  • “ordinary and necessary” and
  • either directly related or associated.

As per the IRS rules on entertainment expenses, it is a must that the expenses are ordinary and necessary before they can be written off. That means that they should be common, accepted and appropriate for the business. Entertainment expenses can be considered necessary even without being required. Also, they should be able to meet at least one of these tests:

  • Direct Test. This test involves proving or showing that there was a business purpose to the entertainment and that its main objective was to gain profit. You also must be able to show that it was held in a business setting and that it involved a discussion of the business. If for instance, you gathered your employees somewhere to present employee awards, the amount spent for that event can be considered as deductible expense. However, if you only went fishing with them and there was no clear connection between the activity and your business, that cannot be considered as deductible expense.
  • Associated Test. In this test, you must be able to show that the entertainment was tied to your business and happened directly before or after a business-related discussion. An example of this would be having a business discussion with your clients in the office and then inviting them to a game after your meeting. That will pass the associated test since it happened directly after the business discussion. However, if you took the clients days later, then that will not pass this test.

The following are examples of expenses that are not subject to the 50% limit, which means that they are fully deductible:

  • Those spent for events that promote goodwill to the community.
  • Those spent for events whose proceeds go straight to a charitable organization, provided that the charitable organization is IRS certified.
  • Those spent for meal or entertainment that is essential to the business.
  • Those spent for meals of employees at the convenience of the employer or for any occasional event.

Entertainment Expenses vs Advertising & Promotion Expenses

 In case the nature of your business involves entertaining the general public to advertise or promote, your entertainment cost can be entirely written off as a business expense. If you own a children’s clothing store and you hire a clown to entertain at a community event, that is considered more of a promotion than entertainment.

So how do you write off your entertainment expenses?

As mentioned, you should be able to pass either the direct or associated test and prove your business purpose before you can deduct your business entertainment expenses. Aside from the purpose of your business, you should also be able to prove the following:

  • The amount of each expense
  • The date/time and location of the entertainment, and
  • Your relationship with the persons you entertained (are they your employees, business associates, clients, etc.?)

What if you fail to present a proof?

In that case, the IRS will not be able to consider it as a deductible expense and take it off your tax return. This is where record keeping comes in.

Recordkeeping

 When it comes to business expenses, you should be meticulous enough to keep all the necessary records to prove that your entertainment expenses can pass either the direct test or the associated test. The IRS usually finds contemporaneous records best. These records should be able to specify the business purpose of the entertainment event. A simple note stating your purpose will suffice. For instance, you can note on the bill from your caterer that the amount paid was used for the annual holiday party of your company.

 How much of your entertainment expenses are deductible?

In most cases, only 50% of business-related entertainment expenses are deductible. Depending on whether the entertainment expenses are reimbursed, this 50% limit is applicable to employees or their employers, as well as to self-employed individuals or their clients. The limit particularly applies to the expenses you have while–

  • Traveling away from home for business.
  • Entertaining clients at a place conducive for business.
  • Attending a business conference or meeting.

If you attend an event not related to your business while traveling for business, the amount you spend for that entertainment will not be deductible. The same rule applies if you attend an entertainment event while looking for a possible business location or while investigating a business. The entertainment expense in that case is not deductible since you haven’t started the business yet.

Remember also that any lavish or extravagant entertainment in any form is not deductible. Say you want to entertain your clients by buying a yacht, the IRS will not allow you to write off the amount you spent for buying that yacht simply because that is too extravagant.

 What if you are self-employed and is therefore neither an employee nor an employer?

 Based on the IRS law, entertainment expenses of self-employed individuals are not subject to the 50% limit if all of the conditions below are met:

  • The entertainment expenses are tied to your job as an independent contractor
  • You are provided an allowance or are reimbursed for the entertainment expenses related to the work that you perform, and
  • You are able to show enough proof or records of such expenses for your client or customer.

In every business, treating clients or employees to a meal or entertainment is a great way to build your business, and since it is a legitimate part of the business, it is subject to tax deductions. Knowing which of your entertainment expenses are fully deductible, not deductible or subject to the 50% limit is a must if you don’t wish to deal with troubles with the IRS.

A Business Owner’s Guide in Deducting Business Travel Expenses

Apr 2, 2017 Posted by Sanjiv No Comments

You’ve worked hard all year long that you can’t find time for some vacation. You’re worried that your business will suffer when you go away for several days. Or you may be concerned about the expenses that you will incur.

But did you know that as a business owner, you can attend a convention or seminar, squeeze in some days of pleasure, and then deduct certain expenses in your next tax return?

Sure, you won’t be able to deduct the travel expenses of your spouse or children, but with good planning, you’ll be able to get a free ride to and from your destination. You can also write off certain expenses like your lodging, meals, and even the cost of cleaning your clothes.

Think about the possibilities. You can spend a week in the Bahamas for a convention or conference and then deduct your expenses accordingly.

But before you start booking a trip to the Bahamas, it is imperative to get familiar with the rules first.

Writing Off Expenses during a Convention

The IRS is very clear about deducting travel expenses for a business convention— the participation or attendance of the taxpayer to the activity should benefit his or business.  This also applies

Let’s say you own a computer software shop. You attend a three-day IT conference in Puerto Rico, where you were able to meet some clients and bag new deals along the way.

Because the participation in the convention benefited your business, you can write off the expenses related to the said trip.

But if the convention is held for a purpose that isn’t related to your business such as political, investment, or social issues, then you won’t be allowed to deduct your travel expenses.

You can claim travel expenses related to your participation in a convention held within the United States, and other North American territories such as:

  1. Bahamas
  2. Aruba
  3. American Samoa
  4. Baker Island
  5. Bermuda
  6. Micronesia
  7. Canada
  8. Costa Rica
  9. Dominican Republic
  10. Guam
  11. Jamaica
  12. Puerto Rico
  13. S. Virgin Islands
  14. Mexico
  15. Kingman Reef
  16. Barbados
  17. Jarvis Island
  18. Netherlands Antilles
  19. Palau
  20. Saint Lucia
  21. Antigua and Barbuda
  22. Johnston Island
  23. Panama
  24. North Mariana Islands

 

However, there are two things that the IRS will look for in determining whether you can write off your expenses during a conference or convention held outside the US.

Aside from the meeting directly related to your business, the IRS will also determine the reasonableness of the convention or conference being held outside the US.

The following factors will be considered when determining the practicality of a conference or convention held within the North American region:

  1. Purpose of the meeting as well as the activities that took place
  2. Purpose of the sponsoring groups
  3. Homes of the active members of the sponsoring organization or group

Going back to our example, you can argue that the three-day conference held in Puerto Rico is reasonable because most of the active members of the group that sponsored the event are based in Puerto Rico, Mexico, Cuba, and nearby territories.

The IRS will likely call for an audit in case the sponsoring organization and all of the participants in the convention work or live in the United States. Obviously, the tax authorities will feel that the convention isn’t necessary because the participants and the sponsoring group are based in the US.

Here’s a tip–keep the official agenda or program of the convention or workshop which you are participating in. This can prove that your claim is warranted, especially if you can show that the official agenda of the convention is related to your business or trade.

Allowable Deductions

If you are able to satisfy the requirement of the IRS on business travel, particularly participation or attendance in conventions, you will be able to write off the following expenses:

  1. Transportation
  2. Lodging
  3. Baggage and Shipping
  4. Meals
  5. Cleaning
  6. Communication expenses
  7. Others

Most of these expenses are 100% deductible, except for meals.

Transportation covers your travel expenses from your home and business destination. It doesn’t matter if you used your car, took a bus, rode a train, or traveled by airplane. You are legally allowed to claim 100% of your transportation expenses for a legitimate business travel.

Obviously, you can’t claim a free ticket or a free ride as a reward for being a frequent traveler.

In case you had to take a cab or rent a car to shuttle back and forth from your hotel to the place where the convention was held, you can also claim those expenses as tax deductible. The same goes for the taxi or car rental costs for bringing you from the airport or station to your hotel.

If you brought your own car, you can deduct costs of gasoline, toll, and parking.

You can also claim 100% of your lodging expenses during the entire business trip.

You can also claim the costs of laundry and dry cleaning, in case you needed those services while at a convention. Business call expenses may also be written off.

In fact, you may even deduct tips that you pay for the above mentioned services.

Cruise Ship Conventions

You may wonder what deductions you can claim if you attended a convention onboard a cruise ship.

You may claim the same deductions, but you are limited to a ceiling of $2,000 every year if you attended a cruise ship convention.

Moreover, there are certain requirements that you will have to meet if you want to qualify for a tax deduction for a cruise ship convention or similar meeting.

First, the cruise ship where the convention or seminar was held should be registered in the US. This is a tough requirement to meet, as there are only a handful of ocean-worthy ships that are registered in the US.

Thus, you should check first the registry of the ship before signing up for a cruise ship convention. If not, then the expenses you will incur won’t be tax deductible.

Another requirement that you should meet if you are to write off your attendance in a cruise ship convention is that the ship must make all its ports of calls in the US.

Moreover, you are required to show a written statement that details the number of days you spent on the cruise ship, a breakdown of the number of hours spend each day to business activities, and a program of activities of the entire convention.

You will also have to attach a written statement signed by an officer of the group that sponsored the said activity. The statement should detail the daily schedule of business activities of the convention, as well as your hours of attendance at the said activities.

As you can see, it is quite a task for business owners to write off cruise ship conventions. The IRS obviously does not want taxpayers to deduct their vacations in their tax returns.

Foreign Travel

If business travel within the US is closely scrutinized by the IRS, you can expect the same for foreign travel.

Foreign travel spent solely for business is 100% deductible. This means that if you spend 100 percent of your waking time on foreign soil for business-related activities, then you can claim all your travel related expenses.

What if you didn’t spend all your time abroad for business? Can you still make a claim?

Yes, provided you meet any of these exceptions:

  1. You don’t have substantial control over the trip. Employees who were reimbursed for their travel expense allowance as well as those who aren’t related to the employer are allowed to claim their travel expenses under said circumstance.

But since you are the business owner, then it means you can control the timing of your trip. Hence, you won’t be able to write off your travel expenses abroad.

  1. Prove that vacation wasn’t the primary consideration in arranging the trip. Even if you are the business owner who has control over arranging the trip, you can write off your expenses if you can prove that vacation wasn’t the main consideration in the trip.
  1. You were abroad for less than a week. Your trip may be considered solely for business if you were outside the US for 7 days or less. The IRS says you should count the day you return to the US, and not the day that you left the country.
  1. You spent 75 percent of your time for business. You may be outside the country for more than a week, but you can still deduct expenses during your business travel if you can prove that you spent less than 25 percent of your time on personal activities.

For instance, you spent 20 days in Europe. After 15 days of non-stop meetings, you spent four days going around. The final day was then for your travel back to the US.

Since you spent 75 percent of your time in Europe for business activities, you can deduct your business-related expenses during the trip. This includes the cost of round-trip plane fare, and 50 percent of your meal expenses during the 15 days.

Travel Primarily for Personal Reasons

It should be clear by now that you can’t claim deductions for a vacation or personal trip. Yet there are times when you are on vacation and fortunately stumble upon a business opportunity. Can you make a claim on the expenses that you incurred on a business-related activity?

The answer is yes. You can if you can prove that the expenses are directly related to your trade, or even better, can boost your business.

Let’s go back to our example.

You were on a vacation with your family in Miami when you heard of a three day Internet security seminar.  Since you run a computer software business, you felt that attending the seminar can update you on the latest in Internet security. Or that you can get new clients by participating in the said activity.

You can deduct registration fees, transportation costs, and meal expenses that you incurred while you were at the seminar. You can even charge your hotel fees, in case you booked one during the course of the activity.  The same goes for your laundry and dry cleaning expenses.

But can you charge your airfare? No, since you had traveled to Miami primarily for personal reasons.

How to Avoid an Audit

Now that you have an idea on the deductible expenses that you can claim during a legit business travel, you may wonder—how can I avoid getting audited by the IRS?

Here are some tips that you should keep in mind:

  1. Record everything you did during your business travel. The last thing that you want to happen is for the IRS to conduct an audit after you had written off travel expenses you had incurred two years ago. By then, you would likely have forgotten the details of your meetings, or lost hotel bills and receipts.

For example, write down the names of the people you had lunch with at the back of a receipt issued by a restaurant. You should also keep all the hotel receipts you had.  And take photos of your meetings to prove that you indeed had business activities during your trip.

  1. Don’t deduct travel expenses of your spouse. If you brought your significant other with you, then you won’t be able to claim a deduction for her expenses unless she’s your employee or she played an essential role during the business travel. And no, that doesn’t mean taking down notes for you or socializing with your clients.

You must prove that your spouse’s presence during the travel was necessary, like serving as your translator.

  1. Be reasonable. The tax authorities would know if you claim extravagant expenses. So unless you’re treating a client who’s a billionaire, then you probably don’t want to expense a fancy dinner at the Ritz.

So, are you ready to mix business with pleasure on your next travel.