Making the Most of Your Business Trip Abroad

If you travel outside of the United States and all of your time is spent doing business activities, then you can deduct the entire amount of travel expense. But say you fly to Madrid for a business meeting and you want to swing by and see Barcelona while you’re across the pond, is your travel still deductible?

Generally the rule states that for travel to be fully deductible, it has to be entirely for business purposes. But for every rule, there are exceptions. Here are four exceptions that can make your travel considered “entirely for business,” and thus making it fully deductible.

1. You don’t have substantial control over arranging the trip.
This means you’re an employee and either not related to your employer or not a managing executive. Self-employed individuals usually have substantial control over their own business trips and need to meet one of the other exceptions.

2. You’re out of the country for no more than one week.
Any trip that doesn’t exceed 7 days (including travel days) can be fully deductible. This means that if you leave on a Wednesday and get back anytime before the following Wednesday, then you may deduct the full amount of travel.

3. You spend less than a quarter of the time on personal activities.
This means that if you’re overseas doing business for 10 days and spend 3 extra days sightseeing, then less than 25% (3/13 = 23%) is personal.

4. You don’t take major consideration into the vacation aspect of the trip.
This has a little more grey area than the other three and may be harder to prove. However, even if you do have substantial control over the arranging the trip, if you can establish that a personal vacation was not a major consideration during the planning of the trip, your travel can still be fully deductible.

Travel expenses include airfare, taxi or shuttles, or any other transportation related expenses. Of course, if you buy an additional plane or bus ticket for personal vacation or sightseeing purposes during your trip, those would not be deductible as business expenses. The same goes for other expenses that would normally be deductible; they must apply to a business purpose rather than a personal expense.

For the entire write-up on travel expenses see IRS Publication 453.

By: Anthony Mifsud, CPA

5 Strategies for Reducing/Eliminating Your Estate Tax

As many of you know the estate tax exemptions and rates have been all over the board in recent years. For many Americans, this isn’t an issue. However, when you begin amassing a large enough estate this becomes a huge concern. Historically, passing away with a large enough estate has imposed upwards of 55% tax. For 2014, this rate is at 40% with a $5,340,000 personal lifetime exclusion. Below are 5 strategies you can use now to help mitigate any future tax burden you should incur.

1. Start gifting smaller amounts
There is an annual gift exclusion of up to $14,000 per person per year. Meaning a married couple could collectively gift 28,000 per year per person without eating into any of their lifetime estate tax exclusion.

2. Gift highly appreciable assets now
Gifts of over $14,000 will still need to be reported on the federal Form 709 (and will consequently count against your lifetime limit) but gifting these assets now, instead of waiting, allows the appreciation to build with the recipient instead of counting against your lifetime limit later on.

3. Buy life insurance
Life insurance proceeds are not includible in your taxable estate and are, therefore, a good way of sheltering your net worth. Doing this essentially transforms taxable assets into non-taxable income once a death occurs (assuming the estate is not the beneficiary of the policy and the decedent is not the owner).

4. Use both exemptions
Currently, the tax code allows for the husband and wife to each claim a $5.34 million estate/gift exemption. If elected timely, any unused portion of a spouse’s estate can be transferred to the surviving spouse (called portability).

5. Take advantage of unlimited exemptions
When in doubt, be charitable! The IRS allows you to contribute an unlimited amount to the qualified charities of your choice. So if you are considering donating a portion of your estate and are over the exemption limitation this would be a terrific way of sheltering those dollars from taxation.

Courtney Elgin, CPA

Tax-Free Employee Fringe Benefits

Employer-provided fringe benefits can be an important part of an overall compensation package. Highly valued by employees, benefits are even more prized when they fall under an exception from being taxed. Below is a generalized, non-inclusive listing of some of the most commonly provided tax-free benefits. In most cases, they are not subject to social security or FUTA tax as well.

• Accident or health insurance premiums, including contributions to health savings accounts (HSAs)
• Achievement awards—property given for length of service or safety achievement
• Personal use of a company-provided cell phone provided primarily for business use
• Holiday gifts (non-cash) with a nominal fair market value
• Occasional parties or picnics for employees
• Coffee, doughnuts, or soft drinks provided on the employer’s premises
• Occasional meals or meal money provided to enable the employee to work overtime
• Group term-life insurance (limited)
• Educational assistance up to $ 5,250 under a formal written plan
• Reimbursement of deductible moving expenses
• Employee discounts on property or services you offer to your customers
• Qualified transportation benefits, including transit passes or qualified parking
• Reimbursed job-related expenses incurred by an employee under an accountable plan
• Contributions to qualified retirement plans
• Advice concerning the above retirement plan, and retirement planning in general

Note that cash and cash-equivalent fringe benefits (such as gift cards, prepaid cards, etc), no matter how small, are never excludable. They must always be included in the employee’s payroll amounts.

Many of the above items are tax-exempt only if paid under a formal, written plan which does not discriminate. Also, benefits are often limited for company owners, partners, and highly compensated employees.

If any of the above might be a useful addition to your company’s compensation package, be sure to contact your WVCO tax pro for details in implementing the benefit.

By: George Monger, Senior Manager

Year-end Retirement Planning Tips

There are only a few weeks left to make 401(k) and some other retirement plan contributions that will get you a tax deduction on your 2014 tax return. Retirees also need to be aware of deadline dates for distributions from your various retirement accounts.

You can make a contribution of up to $17,500 to your 401(k) plan in 2014. Workers age 50 and over can contribute an extra $5,500 to their account as a catch-up contribution for a total of $23,000. Income tax isn’t due on the amount deposited in a traditional 401(k) plan until the money is withdrawn. For self-employed workers, a couple good options are a solo 401(k) plan or a simplified employee pension (SEP). With a SEP, you can contribute up to 20% of your net self-employment income for a total limit of $52,000. The SEP contribution can be calculated before filing your taxes to minimize your tax bill. SEP contributions are not due until the due date of your tax return. That means for a 2014 deduction if you file an extension, your contribution would not be due until October 15, 2015.

Another option is an Individual Retirement Account (IRA). These contributions are not required to be made until April 15th to count toward your 2014 taxes and usually can be figured after your tax liability is determined. The IRA contribution limits are $5,500 or an additional $1,000 for people 50 and over for a total contribution of $6,500. Roth IRA’s have the same limits but are not pre-tax and will not decrease your tax bill, however, are also not taxable when distributed.

Retirees who have reached the age of 70 ½ have required minimum distributions from traditional 401(k)’s and IRAs and income tax will be due on each withdrawal. The date for making the distribution is April 1st after you have reached 70 ½ years of age. The penalty for missing a distribution is 50% tax on the amount that should have been distributed. It is best to consult William Vaughan Company or your financial advisor to make sure the amount required is computed correctly and done by the due date.

It’s probably also a good idea to start planning for the 2015 tax year. The amounts for 401(k) contributions will increase by $500 to $18,000 and $6,000 for the catch-up contributions. Increasing your percent contributed each year can make a big difference in the long run, especially if there is an employer match. There are many options when it comes to retirement plans, make sure you are doing what is best for you and in the necessary time frame to achieve the most benefit.

Diane Cook, Accountant

Driving A Lot? Deduct Your Mileage

I recently met with a client who is starting a new investment firm. He asked me how to determine if an expense can be classified at a business expense. He told me he drives to meet with potential partners and was wondering if any of that mileage would be considered a business expense. I told him if you are using your vehicle to meet people or to scope out locations, etc. then absolutely, those situations would fall under the business expense category.

The question then came up of how to track these expenses in order to receive the deduction. I explained there are two different methods, the first being the allowance method and the second, tracking the actual expenses. Each of these methods has a sidenote worthy of mentioning. The allowance method must be elected in the first year the vehicle is used for business purposes. If it is not, it cannot be used.

The allowance method replaces taking a deduction for actual operating costs and depreciation. You can, however, deduct parking fees and tolls that are paid for business purposes. If you use the allowance method, you must keep records of your business trips. These records need to be comprised of the date, customer or client visited, the purpose and the number of miles travelled for business. This can be used for leased vehicles as well. However, it must be used for the entire lease period. The log can be kept electronically or on paper, but must be available at the request of the IRS. The total business miles for the year are then multiplied by the IRS standard mileage rate, $.56 in 2014, and deducted on the tax return.

Actual expenses can be deducted in the first year if the allowance method is not elected, or in any future year. This is only true if the vehicle is not leased. However, electing in a future year forfeits any first-year accelerated depreciation that may be available. Actual expenses must be tracked for items like, gasoline, oil, repairs, license tags, insurance, etc. Depreciation or lease payments can also be deducted. If the vehicle is also used personally, then the total expenses are allocated based on the business use percentage. This percentage is determined based on the total miles driven for the year and the business miles driven for the year.

Deducting automobile expenses can surely save you money on your tax return, just make sure you gather the appropriate documentation the select the right method for your deduction.

To receive a free copy of William Vaughan Company’s mileage log, email Jessica Sloan at sloan@wvco.com

By: Tara West, CPA, CMA

Don’t Leave Health Care Dollars on the Table

Don’t make the mistake of waiting until the end of December to review your finances. You might not have enough time to take full advantage of some money-saving strategies before the ball drops. Here are some healthy yearend moves you may be able to make.

Check your deductibles

Many health insurance plans have an annual deductible. If you’ve already met yours for the year, now’s the time to schedule any elective procedures you’ve been considering. If it doesn’t look like you’re going to meet your deductible this year, then switch gears and push any non-urgent visits into next year. That might help youmeet your deductible in 2015.

Max out your benefits

Be sure to take advantage of any benefits your health plan provides you free of charge. For example, it may cover an annual physical and various screenings.

If your employer sponsors a wellness program, don’t wait until the end of the year to check your status. You may be eligible for additional rewards for doing something as simple as scheduling a screening.

Review your FSA

If you have a health flexible spending account (FSA) through your employer, check your balance. If you have more money in your account than you can spend by the end of the year, see if the plan offers a grace period so employees can spend down their funds. Or the plan may allow employees to carry over a certain amount to the next year. Find out if your employer offers one of these options.

Tax tips

If you usually itemize deductions on your tax return, you may want to brush up on the details about the medical expense deduction. You won’t be able to qualify for it until your expenses are over 10% of your adjusted gross income (7.5% if you or your spouse is 65 or older). If you’re close to reaching the threshold, it may influence the decisions you make about elective procedures. You can only deduct unreimbursed medical expenses that exceed the threshold.

 

Where You Call Home Can Affect Your Taxes!

One of the most exciting parts of a sport’s season is when free agency begins and several big name players change teams. One phrase you may often hear when referring to star players during NBA free agency is, “If they play for this team, they will make more money.” The reason for this is because the NBA has a maximum salary that players can earn. So no matter how great a player is, there is a cap on the salary a player can receive.

The specific details of a maximum can vary player to player, but in general a player who has completed fewer than seven seasons can earn up to 25% of the salary cap. As seasons played increase, so does the percent of the salary cap that a player can earn. A player completing more than seven, but less than ten seasons, can earn up to 30%, and a player completing ten or more seasons can earn up to 35% of the salary cap. The salary cap varies year to year, so the percentage is based on the salary cap in effect the first year of the contract. Specific contract details can be found in the NBA’s 2011 Collective Bargaining Agreement found on the NBA’s website.

So if the NBA has a maximum to their contracts, how can a player make more money playing for one team over another? The answer lies in the state and local income taxes in effect in the city the player calls home. Let’s take LeBron James for example. This year LeBron rescinded his talents from South Beach and returned them to Cleveland. LeBron agreed to a two-year, $42.2 million deal, receiving $20,644,400 in year one. The 2014-15 season will be LeBron’s eleventh season in the NBA. Therefore, he is eligible to earn up to 35% of the salary cap. The salary cap used to calculate maximum salaries is based on a percentage of the NBA’s Basketball Related Income, and is $58,984,000 for the 2014-15 season. $58,984,000 x 35% = $20,644,400. LeBron, therefore, is receiving the maximum contract.

Though LeBron had many reasons to come back to Cleveland, money was not one of them. If LeBron had re-signed with the Miami Heat, he would be playing in a state with no state or local income taxes. By coming to Cleveland, LeBron will be subject to both Ohio and Cleveland income taxes. For Ohio, LeBron will be in the highest tax bracket and pay a total of $1,219,282. Luckily, LeBron did some good tax planning when choosing where to build his home as he does not live within any city or school taxing districts. However, athletes are required to pay local taxes in the city games are played in. Therefore, LeBron will be subject to Cleveland’s 2% income tax for home games while he would have had no city income tax in Miami. The additional Cleveland income tax comes to $206,444. In total, LeBron will be taking home $1,425,726 less than if he had stayed in Miami in the first year of his contract alone.

So when choosing your next job or moving to a new home be sure to consider the tax implications. Though most of us won’t be losing in excess of $1.4 million, a significant portion of your take-home pay can be lost by choosing a new home within local taxing districts with high rates. Fortunately for LeBron, he does not need to worry about money and the $1.4 million is a small price to pay to come home.

By: Mark Sawyer, CPA

Deducting Charitable Donations: What You Need to Know

The end of the year will be here before we know it and if you are like most taxpayers, you will be scrambling for some last minute tax deductions. A taxpayer can itemize and deduct such items as medical expenses, state & local taxes, real estate taxes, mortgage interest and charitable contributions. While some of those items are added back if you are subject to alternative minimum tax (AMT) or as in the case of medical expenses, they are only deductible if they exceed 10% of income (7.5% for ages 65 and older); charitable contributions are not affected by these restrictions.

Come year-end, some taxpayers frantically search for additional deductions. However, charitable organizations can use these donations all year around. So I’m sure the question you’re asking is, “do all donations qualify?” Here are a few general rules that you need to follow if you want your donation to qualify on your Schedule A of your Form 1040.

Cash Donations:
• Donations must be made to a qualified organization. Click here to check to see if your organization qualifies.
• Most donations are deductible up to 50% of adjusted gross income (in some cases 20% and 30% ceilings).
• For all cash donations over $250, the taxpayer needs to keep a record of a receipt or cancelled check with the donation amount, date and qualified organization.

Non-Cash Donations:
• As with cash donations, non-cash donations also need a written acknowledgement of the donation for all donations over $250. If the donation is between $500 and $5,000, additional records for cost basis, acquisition date, and fair market value will be needed. Donations over $5,000, along with the information mentioned above, may need an appraisal.
• Non-cash donations over $500 need to be reported on the Form 8283
• You can donate used clothing and household items, but they have to be in good condition or better. Those items count as a donation up to the current fair market value and not the cost of the item

Nondeductible Donations:
• Donations made to an individual are never deductible
• Donations to foreign charitable organizations are not considered to be a qualified organization
• Any donations made to a political campaign are not considered to be a deductible charitable contribution
• Any donations where you are provided benefit over your donation, is not deductible
• If you donate more than the value of the benefit, you can deduct the difference as a charitable contribution.

There are more specific rules based on different types of charitable contributions, so be sure to consult your tax advisor with any detailed questions you may have regarding your donation.

By: Jill Blakeman, CPA

Tax Planning & Trimming Your Tax Bill

When it comes to making moves to slash your federal income-tax bill, it pays to start early. You have a limited opportunity to come up with planning strategies that may help reduce the taxes you’ll owe for 2014, so don’t miss out.

Can You Say Loss?

While you haven’t actually lost anything until you sell an underperforming investment, now may be a good time to review your portfolio for potential candidates. An investment that has lost value since you acquired it and consistently underperformed its benchmark may no longer belong in your portfolio. If the investment shows no sign of improving, selling it before year-end and taking a capital loss may be your best move. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Excess losses can be carried over for deduction in future years, subject to the same limitations.

A Good Time for Gains

Favorable tax rates may make taking profits on appreciated stock you’ve held longer than one year advantageous. Long-term capital gains from the sale of stocks and other securities are currently taxed at a maximum rate of 15% for most taxpayers, 0% for taxpayers in brackets below 25%, and 20% for taxpayers in the top regular tax bracket (39.6%). Current capital losses or carryover losses from a prior year can offset gains from the sale.

Don’t make taxes your only reason for selling an investment. Consider the impact the sale will have on your overall portfolio before you make a decision.

Save More, Pay Less

Increasing your pretax contribution to an employer-sponsored retirement plan before the end of the year may be another strategy to consider. Since you don’t pay current taxes on your contributions, deferring a greater amount of your pay can lower your tax bill. If you’ve reached age 50 and already contributed the maximum annual amount through salary deferrals, your plan may allow you to make catch-up contributions.

In addition, the contributions you make to a traditional individual retirement account by April 15, 2015, may be deductible on your 2014 tax return. The 2014 contribution limit is $5,500 ($6,500 if you’re age 50 or older). Your tax advisor can review the deduction requirements with you.

 

Donating to Charity

You have until year-end to make donations to your favorite organizations and claim an itemized deduction for charitable contributions. (Make sure the organizations qualify to receive deductible contributions.) By donating with a credit card or with a check mailed by December 31, you’ll be able to take the deduction on your 2014 return even though you won’t receive your credit card bill or have your check processed until January 2015. You’ll need to have specific proof of your gifts. Deduction limits apply.

Bunching Expenses

Accelerating or delaying expenses is a strategy that may help you exceed the floor amounts for certain deductions. For 2014, medical expenses are deductible only in the amount that exceeds 10% of adjusted gross income, or AGI (7.5% of AGI for individuals age 65 or older). Scheduling and paying out-of-pocket costs before year-end for medical appointments, elective surgery, dental work, or eye exams that you were planning for early 2015 may help you exceed the floor. The deduction for unreimbursed employee business and miscellaneous expenses is limited to the amount that exceeds 2% of AGI.

Not every strategy mentioned will be appropriate for your personal situation. Your tax advisor can help you determine those that can make a difference.

179D and Its Benefits for the Construction Industry

You probably have encountered section 179 and the accelerated depreciation benefits it provides. However, we have found the familiarity with section 179D to be greatly limited. This is discouraging considering the substantial benefits it can provide to those in the construction industry. Let’s take a brief look at 179D and highlight its advantages.

What is Section 179D?
It is a provision for energy efficient commercial buildings built or upgraded with energy efficient improvements after 12/31/2005. The maximum deduction available is $1.80 per square foot and acts as an accelerated depreciation deduction. The calculation for the deduction (up to the maximum) is based upon the interior lighting, HVAC, building envelope costs and efficiencies. This is certainly a nice benefit for building owners. However, the greatest tax savings are obtained by those in the construction industry, including engineers and architects.

Permanent tax benefit
As I eluded to earlier, the 179D deduction is inherently an acceleration of depreciation. Nevertheless, this deduction becomes more than an accelerated deduction for those in the construction industry. Why? The IRS realizes that governmental entities cannot benefit from this deduction due to their tax-exempt status and allows them to allocate (essentially transfer) the deduction to the responsible party for designing the property. This means that this deduction is a permanent benefit (once transferred) that would not otherwise be attainable by the designer. It is a method that reduces the tax burden on each governmental project and increases the after tax earnings for those firms that choose to take advantage of this opportunity.

Please contact your William Vaughan Company representative for further information and for guidance on the facilitation of this deduction.

By: Nate Bernath, CPA