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Business Ttools

Dec 26, 2011 Posted by deepak No Comments

Business Owner

Articles
Benefits and retirement plans
Benefit plans for small businesses
Disability income insurance for the self-employed
Group health insurance: a valued employee benefit
Group term life insurance
Health insurance for the self-employed
Key employee life and disability insurance
Life insurance for the self-employed
Offering group disability insurance
Retirement plans for small businesses
Split dollar insurance plans
Understanding individual 401(k) plans
What employers need to know about workers’ compensation insurance
Insuring a business
Business automobile insurance basics
Business interruption insurance
Business liability insurance basics
Business overhead expense insurance
Commercial general liability
Do you need crime insurance?
Income tax tips: business insurance
Insurance tips for business travelers
Insuring your home business
Professional liability coverage
Properly insuring your business
Should you self-insure your business?
Understanding your business owners policy
Why insure your business?
Starting a business
Advantages and disadvantages of self-employment
Choosing an entity for your business
Funding a business
Hiring your first employee
Qualifying for the home office deduction
Record keeping for your own business
Starting or buying a business
Tax planning for the self-employed
Transferring or selling a business
Funding a buy-sell agreement with disability insurance
Funding a buy-sell agreement with life insurance
Transferring your family business
Decision Tools
Benefits and retirement plans
401(k) plans
Building a retirement plan for your business
Comparison of types of educational assistance
Individual 401(k) Illustration
Business planning basics
2003 numbers
Net worth calculator
Choosing an entity
Choosing a business entity
Comparison of LLCs, LLPs, and professional corporations
How C Corporations, Limited Liability Companies, and Limited Liability Partnerships Protect Personal Assets
Insurance planning
Business life insurance needs
Number of policies needed with a cross purchase plan
Tax planning
Accelerating deductions/postponing income
Accelerating income/postponing deductions
Transferring or selling a business
Business succession planning alternatives
Business succession strategy analyzer
Buy-sell agreement analyzer
Buy-sell planning questionnaire
How cross purchase plans work
How entity purchase plans work
Planning for succession of a business interest
FAQs
Advertising a business
How can I get free publicity for my business?
How do I know where to advertise my business?
What is the best form of advertising?
Employee benefits and other issues
How can I boost the morale of my employees without incurring huge expenses?
How can I find good employees for my business?
What are health reimbursement arrangements?
What are incentive stock options (ISOs)?
What benefits should I offer to my employees?
Home-based businesses
Can I deduct home office expenses?
If I work at home occasionally, am I entitled to a home office deduction?
Incorporating a business
Can I change my business from a C corporation to an S corporation?
Can I change my business from an S corporation to a C corporation?
Should I incorporate my business?
Insurance coverage
A cell phone and laptop computer owned by my company were inside my briefcase when it was stolen. Will my company’s insurance cover the loss?
Can I get disability insurance if I’m self-employed?
I drive my own car on company business. Whose insurance will pay for damages if I get into an accident?
I own a business. Are there any creative ways I can use life insurance in my business?
I use my laptop computer for my home business. Is it covered under my homeowners policy?
I’m an independent contractor. Where can I get health and disability insurance?
I’m thinking about opening a day-care business in my home. Does this raise any insurance issues?
What is errors and omissions insurance?
What is stop-loss insurance?
What kind of insurance coverage do I need for my small business?
Noncompetition agreements
I am buying a business. Can I make the seller sign a noncompetition agreement?
My employer wants me to sign a noncompetition agreement. What is it? Is it legally binding?
Why does the buyer of my business want me to sign a noncompetition agreement?
Partnerships
How does a limited partnership work?
Raising capital
Can I borrow money from my wholly owned business?
How can I raise capital for my business?
Starting a business
Don’t most small businesses fail?
How do I find good advisors such as lawyers and accountants to help with my business?
Is buying a franchise a good way to get into business?
Should I buy an existing business or start from scratch?
Should I buy or lease assets for my business?
What are the stages of business development?
What should I look for in a business location?
Transferring or selling a business
Can I transfer my business through my will?
How can I keep my business in the family?
What are some financing options for selling my business?
What is a buy-sell agreement?
What is a family limited partnership, and will it help reduce estate taxes?
Valuing a business
How can I determine what my business is worth for estate and gift tax purposes?

Why Incorporate Your Business and How to Do It

Jun 28, 2017 Posted by Sanjiv No Comments

Starting a small business is not just about having enough capital, choosing your business location or hiring people. As a business owner in the making, you need to decide how to structure your business. This structure largely depends on your specific needs, business location and the nature of the business itself.

If you have decided that the best structure for your business is an incorporation, you need to learn the ropes of this business structure, including its pros and cons. Of course, the disadvantages are always there, but in most cases, the advantages outweigh these disadvantages. That explains why many business owners choose to incorporate their businesses.

Before you incorporate your business, you need to understand what incorporation really means.

What is Incorporation?

 The term “incorporation” comes from the word “corporate,” which comes from the Latin word “corpus,” which means “body.” In the eyes of the law, a corporation is a body. Just like any legal person, this body has the right to acquire and sell properties, bring lawsuits, contract and be taxed. And yes, it can also commit crimes.

Considering that the law treats corporations as legal bodies, a corporation serves to protect the owner of the business from any personal liability in case of corporate obligations and debts.  The fact that it is created as a legal entity that is separate from the individual who established it and operates it only suggests the business owner is not held liable and accountable for any tax burden that may arise in the duration of the business.

 Why Incorporate Your Business?

As a business owner, you have more than enough reasons to incorporate your business. Incorporating involves myriads of benefits to businesses, and that includes even small businesses. Since incorporation allows your business to become its own legal entity, this move represents a crucial shift in your company’s development.

While incorporating offers several benefits, we cannot totally say that it is the only best option that business owners like you have. There is no single right entity form for your company, so you still need the weigh its advantages and the advantages to see if it is the perfect fit for you. Incorporating is a major decision to make, not only because it does overhaul the structure of your business, but even more so, because incorporating your company and eventually undoing it may be very costly on your end.

Here are some of the reasons why many business owners find incorporating an effective means of carrying on a business:

  • Less Liability. This is one of the most significant advantages of incorporating. When you operate as a sole proprietor, no one and nothing else is liable for the debts of the entity—in this case, your company—except you. If your company does not have sufficient funds to pay its debts, you will eventually see your personal bank account seized or your home foreclosed on.

 The advantage of incorporating is that since your company becomes a legal entity in this structure, you, being the business owner, are no longer liable for the debts of your corporation. That means that if your corporation gets sued, it gets sued but you and your personal assets remain protected. The only thing that’s put at risk here is the amount of  investments in the company.

  • Unlimited Lifespan. When you incorporate, your business gives birth to a separate legal entity, making it different from a general partnership or sole proprietorship where the owners are intertwined with their business. Since it is a legal entity on its own, the corporation has its own bank accounts so it does not get your business finances mixed up with your personal finances.

Also, unlike in sole proprietorships and general partnerships, a corporation has an unlimited life because its existence does not depend on the life of its owners or investors. Even if you or any of the principals in your corporation dies, your corporation goes on indefinitely until it finally meets its objectives, merges with or is acquired by another business, or declares bankruptcy. The corporation lives on unless the new owners state otherwise.

  • Easy Ownership Transfer. When it comes to ownership, one of the advantages of incorporation lies in the transferability of shares. This structure issues shares of ownership which can be easily transferred from one individual to another. Isn’t it good when you can easily sell, transfer or give away to a family member the ownership interest that you have in an incorporated business?

Unlike in sole proprietorships or general partnerships where you are required to cumbersomely retitle the property, come up with new deeds for all the assets that need change in ownership, and burn a hole in your pocket, in corporations, the shares of stock that you hold represent all of your rights and privileges as a business owner. So, if you want to achieve efficient transfer of ownership, you just need to see the back of each stock certificate where you need to endorse and sign over whatever shares that you want to sell or dispose of. Since each share in a corporation is entitled to a portion of the total assets of the company, and since the assets are all under the name of the company, you do not necessarily have to retitle the property to be sold.

  • Ease in Raising Investment Capital. Compared with sole proprietorships and general partnerships, corporations find it so much easier to draw new investors due to its nature. Since corporations are characterized by limited liability and ease in transferring shares, they are more attractive to investors who want shares of stock to be transferred directly to them.

In a nutshell, the advantages of incorporation are:

  • Business owners are free from any liability when it comes to company debts and obligations
  • Transfer of ownership can be easily done by simply transferring securities
  • It is easy to raise capital through the sale of securities
  • Corporations continue to exist even after the death of its owner
  • Corporations can create tax benefits in certain circumstances

On the other hand, the disadvantages of incorporation include the following:

  • The need to attend annual meetings where all directors and owners are required to observe certain formalities
  • Costlier to set up compared with sole proprietorships and partnerships
  • The need for periodic filings with the state

Before you finally decide to incorporate your business, weigh the pros and cons and make sure that the business structure is worth it for your company. It may be ideal in certain situations, but just like in any other business structure, it also has its own share of drawbacks.

You should also consider the fact that once you incorporate, your profits become automatically subject to double taxation—first on the corporate level, and second, when they are paid out to the owners of the corporation. Operating as a corporation involves tax burden, and that is indispensable. As a business owner, being burdened with tax issues is probably the last thing you will ever wish to deal with, especially when you are just starting out.

How to Incorporate Your Business

 Now, if after careful consideration of the pros and cons of incorporation you still find the business structure suitable for your business, the next thing you need to know is how to get started.

As mentioned, a corporation is treated as a legal entity on its own, existing separately from the individuals who created it and take charge of its operations. If there is one good thing about incorporating a business, it’s that even with just one incorporator, a corporation can already be formed. You can do this by simply filing an application for a charter in your state.

As you file the application as the incorporator, you need to prepare to disclose the following details:

  • The purpose of the corporation
  • The incorporators, including their addresses
  • The types and amount of capital stock that the Corporation will be authorized to issue, and
  • The rights and privileges of each stockholder in the corporation

Creating a corporation is not an easy task. You have to familiarize yourself with the ins and outs of incorporation before you get to achieve your goal. While the process of incorporation is a tedious one, it all boils down to these steps:

Step 1. Decide on Your Business Name. Perhaps this is the same for every business, no matter the business structure. The first and most fundamental step in forming a corporation is choosing a name for your business. How do you do it? As you think of a name for your business, you probably find myriads of ideas popping in your head. While you have the freedom to choose the name of your corporation, it is still best if you choose one that something that will make it easier for people to remember your business.

As you come up with an effective business name, you should also avoid duplicates. You can check with the corporate filing of your state or the federal and state trademark registrars to see if the business name that you plan to have is already taken or is still available. Since it is always possible to have a duplicate, it’s better if you come up with an alternate name also in case your first choice is no longer available.

 Step 2. Identify Your Business Location. Once you have already chosen a name for your business and have verified that no other business has used it yet, the next thing you need to do is choose a state that will serve as the official location of your business. Sticking with your home state will make it easier for you to process everything, but remember that your state of residence does not necessarily have to be your place of business.

There are certain factors that you might want to consider in choosing your state for incorporation. These factors include the cost required in the state where you will incorporate, as well as the taxation and corporate laws in a particular state.

Step 3. Choose Your Preferred Type of Corporation. After choosing your business location, the next thing you need to decide on is the type of corporation that you will create. You have the option of incorporating your business as a C corporation, and S corporation or an LLC. It is best if you have a deep understanding of each type so you may know which of them fits your business best. It is also advisable that you seek the professional advice of a reliable tax accountant so you will know the tax implications of each.

 Step 4. Identify the Names of the Company Directors. Every corporation has a set of directors. These directors are the ones responsible in running the corporation and overseeing its operations. Choosing the directors to lead your business is crucial since their management skills will determine the course and future of the corporation.

Step 5. Select the Type of Shares. Choosing the type of shares that your corporation will sell to stockholders is another important step in incorporation. Since corporations are mostly private, the availability of these shares are usually limited to just a handful of individuals, which in this case are the directors.

Step 6. Get a Certificate of Incorporation. You obtain this certificate from the corporate filing office of your state. This document, which you need to fill out, includes the name of your corporation, its purpose, location and all the other information included in the previous steps.

 Submit the Articles of Incorporation. The final step in incorporating a business is the submission of the articles of incorporation, which you prepared in your chosen state of business. You submit the articles of incorporation with the required amount for the registration fee, which usually varies from state to state. If you have a corporate lawyer, he or she can file the paperwork on your behalf. You can also use a third-party service provider as long as you can afford their services.

Once you have already incorporated your business, you have to make it a point that it stays on the right side of the law. Remember that a corporation is a legal entity, so it is liable for any rule or law it may break. Make sure that you follow the rules of incorporation and keep accurate financial records for the corporation, clearly separating its income from that of the owners.

Why You Ought to Think Twice About Ignoring Your Jury Summons

Jun 4, 2017 Posted by Sanjiv No Comments

Each of us has precisely 24 hours per day, regardless of our circumstances in life. We have equal time to do the things we need to do daily, like eat, meet deadlines, rest, and take care of our loved ones, no matter how young, old, wealthy, destitute, successful, or unlucky we are.

That’s why avoiding relatively inconvenient things, like performing jury duty, is so tempting to do. Virtually everybody would rather have as much time as we can set aside to do the things we want to do than force ourselves to make time to do the things we don’t really want to do.

Actually, ignoring a jury summons (or jury dodging) is a huge mistake that can get you into a world of trouble.

What Is a Jury Summons?

 A jury summons is basically a court order to be present at a certain time, at a certain court so a jury can be selected.

How Do I Know If I’m Eligible for Jury Duty?

 In the US, you’re eligible to serve on a jury if:

  • You’re a citizen of the country;
  • At least 18;
  • Understands English;
  • Lives within the jurisdiction of the court that summoned you;
  • Has not been convicted of any felony or malfeasance while holding public office, if you have (unless your civil rights have been restored (e.g., by a pardon));
  • Is under no conservatorship, i.e., a person, official, or institution designated to take control over and protect an invalid’s interests;
  • Is not serving in active military duty;
  • Is not serving on another trial jury or grand jury

You don’t need to meet any educational or skill requirements to serve on a jury. Jurors come from all walks of life and are supposed to be a reflection of their community.

How Are Jurors Selected?

Jurors are randomly selected from various sources, like voter registration, licensed drivers, and identification cardholders records. They make up the panels from which the jury is picked.

The actual jury selection process is referred to as voir dire. After being randomly selected, a group of potential jurors (i.e., a panel) is sent to a courtroom, where they are asked to recite an oath to tell the truth. From the panel, a smaller group is asked to be seated in the jury box for questioning by the judge and attorneys assigned to the case. They ask them questions to determine their qualifications and suitability.

Is There a Way That I May Be Excused from Jury Duty?

The judge may excuse a juror or jurors for various reasons. He, she, or they may:

  • Have immediate family who are related to someone involved in the case (e.g., your spouse was also summoned to serve on the same panel as you);
  • A financial interest in the case;
  • A bias or prejudice;
  • Already made an opinion regarding the case;
  • Suffer undue hardship (e.g., financial or health) or cause the public hardship by serving on the jury

The attorneys may request more jurors to be excused “for cause.” This means they may be excused for a specific reason, such as having a bias. The attorneys may also have a limited number of “peremptory challenges.” This means the attorneys on each side are allowed to ask the particular jurors to be excused without giving any reason why.

Legitimate Reasons You May Be Exempted from Jury Duty

Apart from being excused by the judge or any of the attorneys as well as not being eligible, there are other reasons that you may be free from performing jury duty upon request:

  1. You have legal custody of and is necessarily and personally responsible for a child (or children) aged 16 or younger who require(s) your continuous care during usual court hours (e.g., you’re a mother who is breast-feeding a child).
  2. You’re necessarily and personally responsible for a physically or mentally impaired person who requires your continuous care during usual court hours.
  3. You’re over 70.
  4. You’re an employed, active mariner.
  5. You work for a business, commercial, or agricultural enterprise and your services are so essential to its operations that it will have to stop operating or close down if you temporarily stop working to perform jury duty.

Since some jurors are automatically excused, while others may be excused while the jury is being selected, there is no guaranteeing you’ll serve on the jury if you report for the service.

But you still need to show up. Performing such a service is not only a legal duty, but also a privilege, a basic constitutional right, and a rare opportunity to make a difference by playing a crucial role in the country’s justice system.

If I Get Picked, What Is Going to Be Expected of Me?

If you get chosen, you and the rest of the jurors who were picked will attend a trial of a criminal or civil case and then decide its outcome by reaching a verdict.

All of you will be expected to reach a verdict by weighing the facts and evidence presented to you by the attorneys on both sides. Doing so involves judging the facts and deciding whether the witnesses are credible. You will also be expected to follow all of the judge’s instructions throughout the trial.

None of you are allowed to do any outside research.

The case could involve a civil lawsuit, like

  • A business being sued by a consumer
  • A doctor being accused by a patient of malpractice

If not, the case involves criminal charges, like someone being accused of robbery or murder.

Whether it’s a civil or criminal case, all of you will be asked to keep your minds open throughout the trail as well as avoid making any opinions regarding it until you have weighed all the evidence and facts.

A criminal trial jury consists of 12 jurors. A civil trial jury consists of six jurors.

If you receive a jury summons, you are obligated by law to respond, even if you may not qualify to serve on the jury.

If you cannot appear in court on the date you were summoned, you are allowed to ask for one postponement to the date when you can do so.

Students are allowed to request for a postponement to their next break from school.

To avoid making any mistakes, read your summons carefully to learn how to respond.

If you can appear in court on the date you were summoned but you chose to ignore it, you could be held in contempt of court and imposed a fine or sent to prison.

Here are some examples of the consequences of ignoring a jury summons.

  1. In 2003, Massachusetts fined almost 48,000 jury dodgers $2,000.00 each for missing jury duty, under the state’s then new laws criminalizing repeat offenders.
  2. The Los Angeles (LA) County has fined residents who have “failed” to serve jury duty more than $940,000.00 in total.
  3. New York (NY) County has fined 1,443 people in Manhattan $250.00 each for ignoring their jury summons.
  4. In Phoenix, Arizona, a sheriff’s deputy could show up right at your door if you miss jury duty.
  5. There are many jurisdictions in the country where a written order issued by a judge authorizing the arrest of a person charged with contempt, a crime, or a misdemeanor (i.e., bench warrants) are issued for those who “fail” to appear in court, leading to arrests during such routine temporary detention as traffic stops.
  6. Not even so-called celebrities are exempt from jury duty. In March of 2001, American hip hop recording artist, record producer, songwriter, rapper, and So So Def Recordings CEO Jermaine Dupri Mauldin (a.k.a. Jermaine Dupri, or JD), served a three-day prison sentence in Fayetteville, Georgia, for missing jury duty in March of 1999.
  7. In 2009, nearly ¾ of the population, or as much as 80 percent, shirked their jury duty in some counties, prompting more courts to start cracking down on jury dodgers.

 Incentives for Performing Jury Duty

 While some districts have intensified their efforts to go after jury dodgers, others have chosen to make performing jury duty inviting by offering incentives, including:

  • Affordable parking
  • Restaurant coupons
  • Compensation amounting to roughly $15.00 per day

In 2009, seven states had redesigned their systems to cut down the time jurors spent waiting in the assembly rooms. Also, almost half the states were considering passing legislation that would provide for more compensation for lengthy trials. Of those states, Louisiana, Mississippi, and Oklahoma had passed such legislation already.

3 Most Common Jury Duty Myths Debunked

Since performing jury duty is something not many people really want to do, many have formed faulty ideas about or made outright mistakes in interpreting this service in apparent hopes that, somehow, they could get out if it even if they were eligible.

Here are three of the most common myths about jury duty that we’ve taken the liberty to debunk.

1) Prospective jurors aren’t strictly selected from voter registration records

As we’ve said already, jurors are randomly selected from a variety of sources, not just voter registration records. Yet many believe that potential jurors are picked only out of these.

Voter registration records comprise just one of the several records used by the states to make the lists of prospective jurors that they provide to each of the 159 counties.

In May of 2011, current Georgia Governor John Nathan Deal passed the Jury Reform Bill that ultimately created this state-wide pool of jurors.

Certain departments, like the states’ respective departments of public health and driver services, and the secretaries of the states provide some of the lists that are used to add or remove the names of jurors.

Since voter registration records is just one of the sources of potential jurors, not registering to vote won’t let you avoid performing jury duty.

2) Jurors are not required to serve on the respective juries for both civil and criminal cases.

Again, if you’re picked to perform jury duty, you and rest of the prospective jurors who were chosen will attend a trial for a criminal or civil case and then decide its outcome by reaching a verdict. If you’re already serving on the jury for another trial or a grand jury, you’re not eligible for additional or further service. There’s no such thing.

3) You’re not forbidden from going home during the case.

As a juror, you’re required to keep everything about the proceedings of the case to yourself until the deliberations have been completed and the verdict is made a matter of public record.

First-time jurors assume this means they can’t go home until the case is finished to prevent them from leaking any information as well as avoid any outside influence that could be exerted upon them.

Actually, you’re allowed to go home every day after service, just like you would do after wrapping up your regular work for the day.

However, there are certain occasions where a judge orders sequestration of a jury. Sequestration means jurors are placed in a hotel, aren’t allowed any access to most of the media, and are allowed only limited contact with the outside world for the trial’s duration. This rarely happens and only does with cases that get a lot of media coverage.

While judges don’t always order to sequester a jury in such cases, there are “alternatives” most people don’t know about.

For example, in rare cases, marshals are assigned to jurors to escort them to and from serving on the jury. Doing so ensures their safety and that they return straight home from the trial. Some juries are made anonymous as well in order to keep them safe and prevent any tampering that could occur if outside sources attempt to contact them.

Last Take-Away

While many think jury duty is nothing but a hassle, we all need to regard our jury summons if we ever receive one anyway. More than to avoid getting fined or being sent to jail, jury duty is our right and responsibility that deserves to be treated with respect.

Visiting Your Dream Destination While Winning the Audit: Here’s How You Do It

May 8, 2017 Posted by Sanjiv No Comments

Taking a trip to the destination of your dreams sounds fun, but nothing is more fun that taking a trip while winning the resulting audit at the same time.

Yes, you read it right. Turning your vacation into an honest-to-goodness tax deduction is possible. In fact, you can travel throughout the Mediterranean with no or very little travel costs. The key is by making your trip either a passive or an active business trip. Remember that the only way you can reduce your transportation expenses is by making business the primary purpose of your trip.

As a business owner, you know that taking a vacation doesn’t come easy. Aside from the fact that you don’t have paid vacation leaves, you can’t just entrust your business to someone else while you’re away. However, your advantage is that when it comes to business, you are free to mix pleasure with business. If you do it right, you make it possible for you to enjoy a vacation while reducing your tax bill.

 Why Need to Make Your Trip a Business Trip

 If your purpose is to lower your travel expenses, making your vacation a business trip is a must. This is because it becomes a lot easier to deduct transportation expenses if the purpose of your trip is business.

You should also not forget to count up the number of days allotted for business and for personal activities in your planned trip. As a rule of thumb, make sure that majority of your travel days is spent on business activities. A weekend that is squeezed in between workdays can also be counted as business days. Hence, you can fly to Hawaii on a Thursday and meet a client the following day, stay there for the entire weekend, have meetings again on Monday and Tuesday, and fly back home the following day. That way, you’ve already had seven business days and you can enjoy Hawaii and still expense your transportation costs.

 How to Make Your Vacation Look like a Business Trip

 Now that you know that the key to reducing your travel tax is by writing it off as a business trip, the next thing you have to figure out is how to actually do that. Well, of course you cannot just take off for your dream destination with your business cards and pretend that you are going there for pure business.

Today, for your trip to be considered a business trip, you have to have a prior set business purpose. That is as per the requirements set by the IRS. Simply put, you need to schedule at least one business appointment before leaving for your trip. If you fail to do it, then you will never be able to expense your transportation costs.

There is nothing wrong with deducting part or your entire trip by deducting your travel costs as business expenses. In fact, this is the reason many professional groups host their annual conventions in popular tourist spots. Combining your vacation with business travel is not a bad idea at all, as long as you do it right.

 The IRS Rule on Travel Expenses and Deductions

 If you love the idea of traveling with minimal travel costs, it is necessary that you identify which among your travel expenses are tax-deductible and which are not. Once you have identified that, then you can finally let your tax savings pay for the deductible part of your trip.

Writing off some of your travel expenses may invite scrutiny, but don’t hesitate taking deductions if you think you are entitled to them. However, you have to be careful when it comes to this part and remember the IRS rule. You cannot simply claim that your trip is a business trip just because you have to visit an office somewhere. The IRS made it clear: “The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip.”

Expenses that are Considered Deductible

 You know that in every trip, your transportation costs–taxi fare, airfare, airport parking, etc.)–make up a huge part of your travel expenses. If you are good and careful enough, you can fully offset such costs so long as you meet the criteria set by the IRS. Aside from your transportation costs though, there are other expenses that can be added up, too.

The IRS Pub 463 has laid out the details when it comes to these expenses, but just to give you an idea, here are some of the basic things that you should take note of:

  • For each day that is considered business day, you are allowed to deduct the entire cost for your lodging, car rentals and tips. That means that if your weeklong trip to Hawaii includes five days of business and two days for your personal getaway, then you can legally deduct your hotel bill for all those five business days.
  • For each day that is considered business day, you can deduct 50 percent of the total amount you spent for food.
  • You can also deduct other miscellaneous expenses that are “ordinary and necessary” to your travel, like dry cleaning and baggage fees.
  • The catch is, you cannot deduct the amount spend for your family, in case they joined you in your trip.

 Simple Steps to Follow When Writing Off a Trip

  1.  Choose any place in the U.S. where you want to go.
  2. Decide how you want to write off your trip–as an active or a passive trip.
  3. Find a conference, convention or any event in that destination that is related to your business or profession.
  4. Book the trip.

 Things to Remember if You Want to Write Off Your Trip

 You have to go a long way to be able to write off your trip. The IRS has existing rules stipulating which particular expenses can be written off and which cannot, so it takes a dose of wisdom to avail of tax deductions without a hitch.

  1.  S. Trip vs International Trip. Deductions for business trips within the U.S. differ from deductions for international trips. If your trip is pure business and is just within the U.S., then you can expect your transportation to be fully deducted both ways. However, if your business trip is out of the country, then it has to be at least 75 percent business to be written off your plane ticket. If you go less than 75 percent, then the amount to be deducted will be just the percentage related to business.
  1. The Importance of Traveling via a U.S.-registered cruise. In the event that you are in a business-related cruise, make sure that you are aboard a ship that is registered in the U.S. and not in any other country. However, the rule is that a business-related cruise in a U.S. ship entitles you to only a deduction of up to $2,000 a year, regardless of how long or how frequent your trip is. Also, this has to come with a detailed written statement with tax return.
  1. On Overstaying. If you stay in Hawaii for a full week but the days dedicated for business is just five days, that’s fine. You do not need to work all day and end your staycation as soon as your business is done. Remember that spending a few more days in your destination will not disqualify you for deductions, but you have to ensure that your primary purpose for that trip is business and everything is well-documented.
  1. Family’s Expenses. When it comes to the expenses incurred by your family throughout the trip, the story is different. Unless they are employees in your company too, any of your family members is not entitled to a deduction because you cannot deduct expenses for anyone who is not really part of the business trip.

If you want a way out of this rule, the trick you can do is to find a means through which you can overlap what you have to pay for yourself with what a family member can pay for himself. For example, when you drive him in your car, your deductible transportation also gets him to the destination since both of you are riding the same car. Same trick applies if you share a single hotel room. It is important to note, however, that the costs incurred for the added occupants, the need for a larger room, for instance, are not covered by the deductions.

 

  1.  Miscellaneous Fees. We’ve been talking here of transportation costs like airfare, hotel expenses and food. But how about other fees that you may incur in the course of your travel? Well, it is normal for any trip to rack up some incidental costs, including laundry charges, tips, taxi fares, internet access fees and phone calls. The rule for such fees is simple. If these expenses are related to your business trip in any way, then you are free to write them off. Otherwise, you pay for them.
  2. Meal Deductions. When you go on a business trip with your associates, you are entitled to a deduction of 50 cents per dollar, which means you get to eat out at only half of your total meal cost.
  3. Record-keeping. As previously mentioned, the key to getting as much deductions as possible for your trip is to be careful. Since many business organizations abuse this area of the law, it is highly likely for the IRS to interrogate you when it comes to your deductions. When that time comes, you have to be ready to justify everything. Make sure that you keep all the necessary records, which do not only include the receipts but everything that will prove that you were actually out there for a business trip. Hence, you have to be meticulous in keeping even your itineraries and agendas.
  4.  Extravagant Expenses. You don’t want to be called an abuser of the law, so be reasonable. While you are free to write off some of your expenses since it’s a business trip, the IRS has the power to foul on whatever expenses it may find too extravagant. As the law stipulates, your expenses must be reasonable based on facts and circumstances.

On Documenting Your Trip

 As previously mentioned, you have to document everything so you will have something to present in case the IRS asks you to prove that your trip was actually a business trip. This may sound a bit demanding, but if that’s too big a deal to you, here’s the deal: You don’t really need to keep a pocketful of receipts for expenses smaller than $75.

While the IRS does not require you to keep receipts for a travel expense that’s worth under that amount, that doesn’t necessarily mean that you are already off the hook when it comes to record-keeping. Remember, your goal is to make as much expenses deductible as possible, so be responsible enough to document all your deductible expenses. That means if you stayed at a hotel that’s worth $75, you still ought to have a copy of its receipt so you can expense it.

Tax Strategy

 The only best way for you to avoid trouble when it comes to tax strategy is to be honest. Do not deduct expenses that you are not entitled to and keep all the necessary documents that you will eventually need to back up your claim for deductions. Remember that substantiating your claim is important because if you fail to document your expenses, you are entitled to serious penalties such as losing all the deductions altogether and having to pay additional tax on top of penalties and interest.

The bottom line here is that there are existing rules on travel deductions and you’re not supposed to push these rules. However, there is no reason that you cannot tack on some days of fun when you are out there for business.

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.

Thinking About Becoming An Enrolled Agent ?

Mar 25, 2017 Posted by Sanjiv No Comments

 Do you want to be called a tax expert? Is it your goal to represent taxpayers before the IRS? Do you desire to be respected as a professional?  If so, you should work towards becoming an enrolled agent or EA.

Enrolled agents are specialists who represent the cream of the crop when it comes to taxation. They are the only federally recognized tax practitioners who can represent taxpayers before the Internal Revenue Service.

EAs and CPAs can help taxpayers facing the various tax problems:

  • Tax evasion
  • Tax fraud
  • Tax debt
  • Failure to file/pay tax penalties
  • IRS audit
  • Tax liens
  • Tax levies
  • Unfiled tax returns
  • Appeals
  • Collection issues

There are only less than 50,000 practicing EAs in the United States, according to the National Association of Enrolled Agents (NAEA).

The relatively small number of practicing enrolled agents in the US can be attributed to the expertise necessary to become one, as well as the stringent requirements for maintaining the license.

While it isn’t easy to become an enrolled agent, the rewards are more than worth it, so to speak.  Enrolled agents are highly in demand. They are needed by law and accounting firms.  These professionals can also find employment in banks and investment firms. Some pros also choose to put up their own private practice.

How to Become an Enrolled Agent

 Unlike other professional designations, there is no educational requirement for a person wanting to become an enrolled agent.

However, you must prove your knowledge on tax related matters by either passing the EA exam or working with the IRS for at least five years.

The EA exam is also called the Special Enrollment exam. It consists of three parts, with each one testing your knowledge on taxation.

The first part concerns individual taxpayers, covering sections on income and assets, deduction and credits, taxpayer information, taxation and advice, and returns for individuals.

The second part focuses on business entities with sections on businesses, specialized returns and tax payers, and business financial information. It is widely considered by EAs as the toughest section in the exam.

The third part focuses on representation, practice, and procedure.

Aside from passing the test, you will be subjected to a thorough investigation conducted by the IRS.

Maintaining Certification 

If you successfully passed the exam, you will be federally recognized as an enrolled agent. However, you will need to do the following to maintain your certification:

  1. Renew your Preparer Tax Identification Number (PTIN) annually.
  2. Renew your status as an EA every three years
  3. Undergo 72 hours of continuing education (CE) every three years. There’s a minimum requirement of 16 hours of CE per year, with at least two hours on ethics.  The need to undergo at least two hours of ethics training annually is in line with the Department of Treasury’s Circular 230.

 Joining Professional Organizations

 There are numerous professional organizations of enrolled agents. The NAEA is perhaps the biggest and most prestigious of them.

The Washington, DC-based organization aims to promote the highest level of professionalism, skills, and knowledge among its members. It is also a staunch advocate of taxpayer rights.

Established in 1972 as an offshoot of the Chicago-based National Association of Enrolled Federal Tax Accountants, the NAEA has grown into a large organization with more than 11,000 members.

Those members are demanded to take 30 hours of CE every calendar year, or 14 hours more than the 16 hours set by the IRS. They are then required to report the number of hours of CE they’ve garnered in the past year for renewal of their membership in the upcoming year.

The NAEA lets its members earn missing CE hours in the next calendar year to make up for the less than 30 hours that they accumulated in the previous year.

NAEA Membership Benefits

 While there are other professional groups of enrolled agents, the NAEA is widely considered to be the most prestigious in the country. Aside from completing annual continuing education that surpasses the requirements of the IRS, NAEA members are known to abide by a code of ethics. They also conduct themselves in a very professional manner.

Once you become an enrolled agent, you should aim to join the NAEA. Becoming a member of this organization opens the door to numerous professional benefits such as:

  1. Continuing education. Members of NAEA can participate in seminars, conferences, and conventions that can update their skills and knowledge, and set them up for success. Some of the more common CE topics include ethics, tax preparation, accounting, advanced IRS summons, among others.
  1. Participation in year-long events. NAEA conducts seminars, conventions, and meetings during the entire year. These events provide networking and educational opportunities to its members.

A key event in the NAEA calendar is the NAEA national conference. This is the only annual educational event in the country designed particularly for Circular 230 practitioners looking to focus on client representation before the IRS. The event is anchored by the National Tax Practice Institute.

  1. Enhanced reputation. NAEA works to spread the word about the benefits of hiring an enrolled agent. It taps both traditional media such as print and broadcast and social media to effectively increase the public’s knowledge about enrolled agents, and thereby enhance the potential value of EA to taxpayers. Simply put, the organization strives to make the taxpaying public more appreciative of the value of enrolled agents.
  1. Information sharing. The NAEA offers a tax knowledge base where members can look for answers to some of the more frequently asked questions of tax practitioners.
  1. Marketing tools and membership discounts. The organization offers discounts for office supplies and software that their members can use in their respective offices.

Participating in NAEA Courses

 The NAEA as well as its state affiliates are known to host numerous continuing education (CE) courses. These courses are held all year-round and provide an opportunity for current EAs to hone their skills and keep themselves updated on the latest taxation issues.

Should you become an EA and eventually a member of the NAEA, you can browse the organization’s website, www.naea.org to find and apply for an organization-sanctioned course.

The website features the “Continuing Education” section where you and other EAs associated with the group can learn more about the requirements for continuing education credits.

There’s also the “Calendar” section in the website where NAEA events for the entire year are posted.  The events range from quarterly meetings, annual conventions, and seminars. Attending these events not only provide enrolled agents with the opportunity to earn CE credits, but also get some relaxation in a world-class resort.

For 2017, some of the cities where NAEA courses are scheduled to be held are Orlando, Las Vegas, Denver, and Reno.

Enrolled agents, thus, can improve their skills and knowledge, maintain their certification, and renew their NAEA membership while getting treated to a few days of leisure and vacation.

From a professional standpoint, NAEA courses also provide enrolled agents with the opportunity to network with some of the most dedicated tax professionals and learn from accomplished  tax authorities in the country.

NAEA and its state affiliates, in fact, offer its courses even to non-members.  There are seminars which are open to enrolled agents who are not members of the NAEA and its state affiliates. Signing up for a NAEA course may also benefits like complimentary membership, special member discounts, and access to special publications.

It is also possible to get discounts if a group of enrolled agents participates in a NAEA course. The NAEA and its state affiliates usually give discounts to groups of three or more colleagues who are joining a seminar, convention, or conference.

Enrolled agents can also attend one or two days of multiple-day seminars. The NAEA offers one-day only rates for most of its courses, meaning that EAs don’t have to attend the entire course.

The easiest way to register to any NAEA course is through the Internet. The NAEA website, as well as those of NAEA’s state affiliates, usually have downloadable PDF registration forms which enrolled agents can fill out to signify their participation in a particular course.

How to Save in NAEA Courses Participation

 Truth to be told, participation fees in NAEA courses and events aren’t cheap. The cost of participating in a continuing education course can run to hundreds of dollars. The cost may also be affected by other factors such as the location as well as the number of days of the event.

Yet enrolled agents can deduct the costs of their participation in NAEA courses in their next tax returns. After all, these are considered travel expenses which are defined by the IRS as common and accepted in a trade or business.

Enrolled agents can claim most of the expenses they incur while attending a NAEA organized event or conference. They can write off registration costs, lodging expenses, 50 percent of their meals, and incidental expenses.

Communication-related expenses during a NAEA convention, such as business calls and fax machine fees, may also be written off by enrolled agents. The same goes for other ordinary and necessary expenses related to the business travel like dry cleaning and laundry as well as tips paid for any expenses during the convention.

Transportation expenses can also be written off by enrolled agents who participate in a NAEA course. These include airfare, bus fare, or taxi fare between the enrolled agent’s home and the location of the event.

Since most NAEA events are held in the United States, enrolled agents should have no problems claiming the expenses they incurred in participating in a NAEA continuing education course. However, it is worth mentioning that even conventions held outside the United States may be deducted as a legitimate travel expense.

These include countries such as Aruba, Bermuda, Bahamas, Dominica, Dominican Republic, Costa Rica, Republic of Palau, Panama, Trinidad & Tobago, Jamaica, and Honduras, among others.

Of course, enrolled agents know very well that there are also other factors to be considered in justifying the location of a convention. These include, among others, the residence of the participants, purpose and activities of the convention, and locations of previous events.

Claiming travel expenses in the next tax return isn’t the only way for enrolled agents to save the next time they participate in a NAEA course. They can also seek the assistance of professional EA groups. There are numerous organizations of EAs – and not just the NAEA– that offer scholarship programs to  both current and aspiring enrolled agents.

For example, the California Society of Enrolled Agents offers scholarship to California residents wishing to pursue accounting, finance, and other courses in preparation for the special enrollment preparation.

It also offers scholarship to current EAs in California who wish to take up courses like Tax Court in their desire to broaden their knowledge in the field of taxation.

The NAEA, meanwhile, has its own scholarship program funded by its members. This grant covers the registration expenses of educational programs offered at NAEA conferences.

Joining Online Courses

Enrolled agents may also join online courses or webinars offered by the NAEA.  Online courses are a lot cheaper than seminars, conventions, and other continuing education classes offered by the organization.

Moreover, these courses are suited for enrolled agents who don’t have the time to attend seminars or meetings organized by the NAEA. Participants of online courses can also earn continuing education credits.

There is also a lot of variety in the topics discussed in online courses. Some may be aimed at enhancing the knowledge and skills of enrolled agents such as seminars on tax update, while others may be focused on enabling EAs to improve their practice such as using social media to reach out to more potential customers.

There are a lot of career opportunities awaiting enrolled agents in the United States. Organizations particularly the NAEA are more than willing to help professional growth of EAs. One way to  achieve this is the offering of various NAEA courses such as seminars, conventions, and meetings.  Enrolled agents should be pragmatic enough to grab the opportunity and participate in NAEA courses, whether held in or outside the US.

Ten Recordkeeping Rules and Five Bonus Tips in Claiming Travel Expense

Mar 20, 2017 Posted by Sanjiv No Comments

Good recordkeeping may not be in the list of business secrets of successful entrepreneurs. But for the company’s accountant or bookkeeper, it is very important.  It can significantly reduce the amount of profit that a business will pay tax on. Keeping accurate and organized records make it easier for companies to track their cash flow, save time and trouble in filing their tax returns, and perhaps more important, ensure that they are tax-efficient.

Good recordkeeping is particularly vital for business owners and contractors who go on a business trip.  The Internal Revenue Service (IRS) allows business owners to claim tax deductions for travel-related expenses such as:

  • Lodging
  • 50 percent of the costs of meals
  • Baggage charges
  • Air, rail, and bus fare
  • Cleaning and laundry
  • Taxi fare and car rental
  • Computer rental
  • Public stenographer fees
  • Telephone or fax expenses
  • Tips on qualified expenses

If you are a business owner,  you should understand how good record keeping is vital. Keeping accurate records will back up your tax deduction claims. And it can spell the difference between winning an audit and the IRS possibly digging up your other tax returns.

The following are some of the recordkeeping rules you should keep in mind when you are to claim on a business trip:

  1. You can’t claim tax exemptions for estimated or approximated expenses.

The IRS doesn’t allow businesses to deduct amounts based on approximate or estimate. You cannot guess the amount you spent for your gas or toll fees,  neither for the cost of your meals during the business trip.

It is thus recommended for entrepreneurs or their bookkeepers to keep adequate records proving their business trip -related expenses.

You should be accurate on the amount to be written off. The IRS recommends keeping documentary evidence to prove your expenses, such as receipts, bills, and checks.

 However, documentary evidence isn’t required when the travel related expense is lower than $75.  You don’t also have to present receipt for meals and lodging expenses if you are to claim per diem, or you took public transportation for which a receipt isn’t readily available.

 You should keep timely records.

 The IRS also recommends keeping records of a business travel during or near the time of the trip. It should also be supported with sufficient documentary evidence. This can make the record more believable than a statement prepared at a later date.

 Let’s cite an example. A business owner wrote off more than $20,000 in his tax return, citing that the amount represented the gas expenses he had when he went out of town during several occasions in 2013 to meet several prospective clients.

 Two years after the trip, the IRS decided that it had enough grounds to audit his tax returns. In order to substantiate his claim, he presented a 2013 calendar as well as printouts of driving directions generated by an online web mapping service. The directions also specified the distance supposedly traveled by the business owner from his place to the offices of his clients.

 Despite those documents presented , the IRS will still disallow the claims of the business owner.  For one, the documents presented were prepared two years after the business trip. Therefore, there is a lack of truthful recall on the part of the entrepreneur to justify the said claim even though an online mapping service was used.

 This illustrates the importance of keeping timely records of your business trip. While you don’t have to record information as soon as you get home, you don’t have to wait for months to do so, either.

  1. You must state the business purpose of an expense.

The IRS encourages business owners and employees who are claiming a business travel exemption to provide a written statement indicating the purpose of an expense. You can indicate that a conference you attended is for networking and meeting potential clients.  You can back up your claim by showing the conference program or invitation from the organizer.

However, this may not be needed if the purpose of an expense is obvious given the surrounding circumstances.

The easiest example of this would be a sales representative. Given the job description of the worker, it is understood that he or she is constantly travelling.  Thus there is no need to submit a written statement detailing the business purpose of each and every trip. The sales representative would only have to record the date of each trip, total miles covered, and back up his or her claims with documentary evidence like receipt or record of delivery.

You can also withhold confidential information in stating the purpose of a business travel expense.  You don’t have to be explicit in stating the purpose of a business meeting like mentioning the amount of deals you booked over dinner.

  1. You can’t use credit card statements to claim an expense.

One of the more common mistakes that business owners make when writing off a business trip expense is using their credit card statements. The IRS, though, won’t accept this as documentary evidence.

A credit card statement can be likened to a canceled check. It only shows the costs but not any further evidence to prove that the expenses were for a legitimate and necessary business purpose.

You should present a receipt alongside the credit card statement to substantiate the travel expenditure.

  1. You should provide direct and supporting evidence in case you have incomplete records of an expense.

If you cannot provide complete records to support a tax deduction, you can still write off an expense by furnishing direct evidence in the form of a written or oral statement and supporting evidence. The written or oral statement details the cost, time, place, and date of a business trip expense like meals or transportation. It may be a written statement from you, your associates, and guests. Documentary evidence, on the other hand, may be receipts or paid bills.

In the absence of documentary evidence, you can present adequate evidence to prove the character of the expense. In the case of lodging expense, a hotel receipt can be presented to and admitted by the IRS if it provides essential information such as the name and location of the hotel, the dates of the stay, and separate amounts for lodging, meals, and communication expenses.

 Another example of adequate evidence would be a restaurant receipt. It can be presented to the IRS for meal expenses as long as it indicates the name and location of the restaurant, the number of people who were served, and the date and amount of the expense.

6. You should record expenses separately.

The IRS says that each payment is considered a separate expense.

Let’s say that you took a taxi to go to a restaurant where you met a client. The dinner expense and the taxi fare are two separate expenses. You should, thus, record them separately in your records.

It is also common for businessmen to treat their clients to sports events. If you bought season or series tickets, and then used these for business purposes, then each ticket in the series should be treated as a separate item.

You can divide the total cost of the season tickets by the number of games in the series to get the cost of each ticket.

 7. You can combine items if the expenses are of a similar nature.

You can combine expenses of a similar nature, and record them as a single expense. These expenses should have happened during the course of a single event.

For instance, you don’t have to record each and every drink during a cocktail party as separate expenses. You can record the total expenses for the refreshments as a single expense.

 8. You can record all vehicle/transport expenses and then divide them into business and personal expenses at the end of the fiscal year.

You can claim gas expenses if you used your car during a business trip. It is also possible to record all your expenses during the year, and then divide them into business trip and personal expenses at the end of the year.  However, you should keep an accurate mileage log if you are to claim a tax deduction for your business trip related expenses.

The mileage log should indicate the starting mileage on the odometer at the beginning of the year, as well as its ending mileage at the end of the year. Every time you use your vehicle for a business trip, you should record details such as the date of your travel, your starting point, and destination. You must also write the purpose of your trip, the starting and ending mileage of the vehicle, and other trip-related expenses such as tolls and parking fees. It is important to keep your mileage log updated regularly, so that your records will be precise.

 9. You can claim deductions using your actual expenses, or by using the standard mileage rate.

There are two ways of claiming transportation related expenses during a business trip. You can deduct your actual expenses, or use the standard mileage rate set by the IRS.

The latter is easier to follow, which makes it the more popular option among employees and entrepreneurs. For 2017, the mileage rage is 53.5 cents for every mile. You simply have to multiply the miles that your vehicle has accumulated for business-related expenses.

For example, your car drove 20,000 miles for business trips in 2017. You will then multiple 20,000 by 53.5, giving you a total of $10,700. This is the amount that you can write off in your next tax return.

You may opt to deduct your actual expenses instead of using the standard mileage set by the IRS. However, you should have a thorough record of your gas, parking, and toll expenses. You can also deduct other expenses like repair and maintenance, tires, car washing, car repair, and gas and oil replacement. While this method requires a lot of record keeping, it can save you a lot of money because it usually results in a larger tax deduction.

  1. Keep records and receipts as long as you can.

You may wonder how long should you keep those receipts related to a business trip that you had two years ago. The IRS recommends keeping records as long as you can, as there will always be a possibility that your tax return is audited up to three years from the date that you filed it.

Bonus Tips

While entrepreneurs are entitled to many tax deductions when they go on a business trip, they won’t be able to write off expenses if these are not properly recorded. The last thing you want to have is the IRS auditing your tax returns for making unsubstantiated claims. Here are some tips to keep in mind so that you will have an easier time in recording your expenses while on a business trip:

  1. Scribble down notes on receipts. This is particularly helpful if you are to claim meal expenses. You should list down the names of those who you dined with, and the business purpose of the meeting.
  1. Scan receipts. If you’re the type of person who keeps on losing receipts, you can simply scan or take photos of these essential documentary evidences.
  1. Keep track of your expenses in a daily business journal. You can download a good daily business journal that you can use to record all your expenses during a business trip.
  1. Use debit and credit cards as much as possible. Using cash can be disadvantageous for anyone on a business trip. It is easy to spend but hard to keep track of.  Instead of using cash, simply your debit and credit cards, then reconcile them with your receipts.
  1. Use an app. There are many apps that you can use to track your business travel expenses. These apps can make it a lot easier for you to document your expenses and make an accurate tax claim.

Filing Your Indian Tax Return When You Are Residing in the U.S.

Mar 7, 2017 Posted by Sanjiv 1 Comment

It has often been a question for many Indian citizens living in the U.S. whether they should file their Indian Income Tax Return or not. Actually, taxability in India is predominantly based on your residence, not on your citizenship. Hence, you have to identify your residential status first before you determine if you are liable to file your Indian ITR.

So how do you determine your residential status?

Basically, your residential status depends on the length of time of your physical stay in India within a given financial year. It helps if you check your passport and take note of the immigration stamp dates, including the dates of departure and arrival.

If you meet any of these two criteria, then you are considered an Indian resident for a financial year:

  • You reside in India for at least six (6) months, or 182 days, during the financial year
  • You have stayed in India for at least 60 days or 2 months in the previous financial year

If you do not meet any of the above-mentioned criteria, then you are considered an NRI (non-resident Indian). As such, your Indian income tax largely depends on the income that you earn in India for the entire financial year. On the other hand, if your status is “resident,” then your global income is taxable in India.

If I am living in the U.S., do I still need to file my Indian income tax return?

Yes, but on certain conditions.

Just because you are an NRI does not necessarily mean that your obligation to file your tax returns in India is no longer there. In fact, as July 31st of every year–which is the deadline for filing returns–looms, you must already be gearing up to file your returns if your income in India goes above the basic exemption limit.

Any salary you receive or earn in India, including income from a residential property located in India, income coming from fixed deposits or interest on savings bank account, as well as capital earnings on the transfer of properties in India, are just some of the many examples of income accrued within India. Such incomes are taxable for an NRI. It follows then that any income earned outside the bounds of India is not taxable in India.

It is also important to note that any interest you earn on an NRE account and FCNR account is free of tax, while interest on an NRO account is taxable for an NRI. Simply put, if you are an NRI and you have performed your job in India, your salary income will be taxable in India, regardless of where your salary is credited to your account. On the other hand, if you have worked abroad but have received your salary in India, then your salary will be included in your taxable income in India.

 When does filing my Indian income tax return become mandatory?

The question of whether you should file your Indian income tax return or not is irrespective of your being an NRI or not. If you have lived in the U.S. long enough to be considered an NRI but still have income coming from India, you are required to file your Indian income tax return when your income exceeds the basic exemption limit. As an NRI, filing your income tax return in India is mandatory in the following cases:

  • The total of your taxable income from all sources goes above the basic exemption limit of Rs 2.5 lakh.
  • You have either long term capital gain (LTCG) or short term capital gain (STCG) from selling your investments or assets in India, even if your income goes below the exemption limit.
  • You wish to claim a tax refund, in cases when TDS has already been deducted.

Are there tax deductions available to NRIs?

NRIs are also entitled to tax deductions, just like ordinary Indian residents. Most of the common deductions under the Chapter VIA of the Income Tax Act of India are available whether you are a resident or not, except for those that have to do with maintenance, treatment of disabled dependent, medical treatment of certain diseases for both self and dependents, as well as specified investments like five-year post office deposit, senior citizen savings scheme and investment in Rajiv Gandhi Equity Savings Scheme.

If I am in the U.S., can I also enjoy the benefits of the Double Tax Avoidance Agreement (DTAA)?

 Currently, India has a DTAA with around 90 countries around the world, and one of them is the U.S. As an NRI, one of the first things that you need to determine is whether your income is taxable in India. Then, if you are living in the U.S., you must furnish a tax residency certificate (TRC) issued by the tax authorities in the U.S. Aside from that, you may also have to provide a self-declaration by filling out Form 10F.

Getting relieved under DTAA depends on your type of income. In fact, under the DTAA, certain incomes may be entirely exempted or may be taxed at a lower rate. If under this agreement your income is taxable, then you are required to pay your tax in India and claim credit for your paid tax in the U.S. against the tax liability in your home country.

For you to claim a lower tax rate under the agreement, being an NRI, you must have provided your PAN number earlier on to avoid being charged with higher withholding tax  of 20 percent, as stipulated in Section 206AA. Under rule 37BC issued by the Central Board of Direct Taxes (CBDT), NRIs like you are allowed to furnish alternative information or documents instead of PAN so as to avoid high withholding tax. These include your name, email, address, contact number, TIN and TRC.

But how do I file my Indian income tax return if I reside here in the U.S.?

 If based on the abovementioned standards you have figured that it is mandatory for you to file your Indian income tax return, then make sure to do it in advance to avoid penalties. Just because you reside in the U.S. does not mean you have to go back to India to file your Indian income tax return. Today, there exists a process of electronically filing your returns, allowing you to do your job without having to physically go to India.

Now, take a look at the following tax filing process for NRIs like you.

 Step 1: Choose your method.

NRIs have different methods to choose from when filing tax returns. You may do it yourself online, avail of assisted services, or follow the traditional route of chartered accountant.

Do it online (E-filing)

Today, filing tax returns online is the easiest and most convenient method for NRIs. In fact, the Indian Income Tax office is now making strides towards making this method the most viable option for Indians filing their returns from anywhere around the globe.

You have certain options when it comes to e-filing. First, log on to the income tax website and file your returns there. While this option is free, the whole process may be cumbersome for you and really need to have some technical know-how to go about the process. Under this option, you need to download a certain software to get hold of the appropriate form, fill it out and upload an XML file on the website. If you have a digital signature, affix it on the form and that’s it. Your return is filed. In case, however, that you do not have a digital signature, then you will have to send a signed copy of your ITR-V.

Here are the steps:

  1. Log on to IncomeTaxIndiaeFiling.gov.in and register.
  2. Your user ID is your PAN.
  3. View your Form 26AS. This is your tax credit statement.
  4. Select the financial year.
  5. Download the ITR form that applies to you.
  6. Open the excel utility and fill out Form 16.
  7. Click the “Calculate Tax” tab and check your tax payable amount.
  8. Fill in the details and pay your tax.
  9. Click the “Validate” tab to confirm all the information you have provided.
  10. Generate an XML file and save it to your computer.
  11. Upload the same XML file by clicking on “Upload Return” on the panel.
  12. Sign the file digitally by selecting “Yes” on the pop-up.
  13. Download the acknowledgment form or ITR-V that will be generated by the site. Print it and sign it in blue ink.
  14. Send the form either by ordinary or speed post to the Income Tax Department office in Bangalore, 560 100, Karnataka, India within 120 days of your e-filing.

Your other option for e-filing is logging on to tax-filing service websites. The web is teeming with sites that offer tax filing services, the most popular of which include taxspanner.com and elagaan.com. Compared with the income tax website, such online tax filing service providers offer a more user-friendly experience to NRIs like you, though you have to pay a certain amount of fee for their services. Some of them even have support offices in certain countries.

Tax filing service websites offer various packages, and the one you should choose should depend on the complexity of your Indian income tax return. The first thing to do is to register on the website and follow the process of filing, which is pretty much like the process for Indian residents. For overseas filers like you, you can send your payment via your international credit card. Usually, the regular packages of these sites range between Rs 250 and Rs 750.

Assisted Return Preparation

If you do not want the do-it-yourself method in filing your tax returns online, you may opt for certain websites that offer a mix of offline and online filing services. If you want this method, you can search for websites that offer such services, choose one, and call the nearest office of the service provider of your choice. Once you decide to avail of their services, they will do the entire tax filing process through email. All you have to do is just send them scanned copies of all the required documents and they will do the filing for you. They will also send you a copy of the ITR-V, which you need to sign and send back to their office. They will then be the one to forward the document to the income tax office in Bangalore. Rates of such service providers depend on the complexity of your tax returns.

The best thing about this option is that you have the benefit of getting professional advice from tax consultants. However, not all service providers of this kind offer complete online assistance, so you really have to be careful in choosing your provider. As a rule, the one you should choose must heavily depend on your needs.

Talk to a Tax Consultant in India

Of the three options you have, this one is the most traditional one. If you take this route, you depend on your chartered accountant or tax advisor in India to file your tax return on your behalf. The advantage of choosing this method is that since you already share a long-term tax advisor-client relationship with each other, he has all your necessary tax information and will certainly be able to guide you through the entire process. The only problem you may have if you choose this method is that you have to make sure that the tax advisor of your choice is accessible and tech savvy enough to be relied on.

Step 2: File your tax returns.

To file your tax returns, make sure that you are able to complete the entire process of filing. Should you wish to do it online, choose a website that offers e-filing services and fill in the details on that website. If you opt for assisted services, send your documents to the service provider who will then complete the filing process on your behalf.

Step 3: Sign your returns.

When it comes to this, you have two options. First, you may purchase a digital signature, although that is not a popular option since it is cumbersome for both the filer and the Indian Government. The other potion is to print out the ITR-V, also known as the acknowledgment, sign it and send it to India’s income tax office in Bangalore. Take note, however, that this acknowledgment document can only be sent via regular or speed post. So if you are sending it from the U.S., then it is best to avail of the regular postal service or courier it to anyone you know in India who can send it via post to the tax office.