Business Use of Car

ABA Tax Accounting | Income Tax Service for Small Businesses

Small Business Accounting - If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.

You can generally figure the amount of your deductible car expense using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, before choosing a method, you may want to figure your deduction both ways to see which gives you a larger deduction. For 2013, the standard mileage rate is 56.5 cents a mile for all business miles driven. If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes.

To use the standard mileage rate, you must own or lease the car; the car must not be used for hire, for example as a taxi; you must not operate five or more cars at the same time, as in a fleet operation; you must not have claimed a depreciation deduction using the Modified Accelerated Cost Recovery System (MACRS) on the car in an earlier year or any method other than straight-line for its estimated useful life; you must not have claimed a Section 179 deduction on the car, the special depreciation allowance; and you must not have claimed actual expenses after 1997 for a car you leased. You cannot use the standard mileage rate if you are a rural mail carrier who received a "qualified reimbursement".

Further, to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.

However, for a car you lease, you must use the standard mileage rate method for the entire lease period. For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that are after 1997.

To use the actual expense method, you must determine what it actually cost to operate the car for business purposes. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to business miles driven.

Other car expenses for parking fees, and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.

Generally, the Modified Cost Recovery System is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service, and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct. For a car qualifying for the special depreciation allowance that is first placed in service in 2004, the maximum depreciation allowance for 2004 (including the section 179 deduction and the special depreciation allowance) is $10,610 (or $10,910 for a truck or van) multiplied by the percentage of overall use that is business use. The maximum 2004 allowance for depreciation (including the section 179 deduction) for a car placed in service in 2004 that doesn't qualify for the special allowance is $2,960 (or $3,260 for a truck or van) multiplied by the business use percentage. These maximum amounts vary for cars placed in service before 2004. For additional information on the depreciation limits, please refer to Depreciation. Publication 463, Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits, and it discusses special rules applicable to leased cars.

The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement. For further information on record keeping, refer to Recordkeeping.

If you are an employee whose deductible business expenses are fully reimbursed under an accountable plan that meets the 3 accountable plan rules, the reimbursement should not be included in your wages on your Form W-2, and you should not deduct the expenses. If your employer uses a non-accountable plan to reimburse you for the expenses, the reimbursements should be included in your wages. Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a non-accountable plan with your wages, salary, or other compensation and report the total on your Form W-2. Your employee business expenses may be deductible as an itemized deduction. For a definition of Accountable and Non-Accountable plans, refer to Publication 463 and Employee Business Expenses.

Generally, if you are an employee, to deduct your car expenses including expenses that exceed reimbursement under an accountable plan, you must complete Form 2106 or Form 2106-EZ and itemize your deductions on Schedule A of Form 1040. Your expenses will be subject to the 2% of adjusted gross income limit. Refer to Miscellaneous Expenses for information on the 2% limit. If you are self-employed, car expenses are deductible on Schedule C Form 1040 or Schedule C-EZ of Form 1040, or on Schedule F of Form 1040 if you are a farmer.

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What you need to know about Business Travel Expenses

ABA Tax Accounting | Income Tax Service for Small Businesses

Small Business Accounting - Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. Generally, employees deduct these expenses using Form 2106 or Form 2106-EZ  and on Schedule A, Form 1040. You cannot deduct expenses that are lavish or extravagant or that are for personal purposes.

You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away.

Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.

In determining which is your main place of business, take into account the length of time you are normally required to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time spent at each location.

Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expenses paid in connection with an indefinite work assignment are not deductible. Any work assignment in excess of one year is considered indefinite. Also, you may not deduct travel expenses at a work location if it is realistically expected that you will work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for less than one year, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.

You may deduct travel expenses, including meals and lodging, you had in looking for a new job in your present trade or business. You may not deduct these expenses if you had them while looking for work in a new trade or business or while looking for work for the first time. If you are unemployed and there is a substantial break between the time of your past work and your looking for new work, you may not deduct these expenses, even if the new work is in the same trade or business as your previous work.

Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business. Special rules apply to conventions held outside the North American area.

Deductible travel expenses while away from home include, but are not limited to, the costs of:

·       Travel by airplane, train, bus, or car between your home and your business destination,

·       Using your car while at your business destination,

·       Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another,

·       Meals and lodging, and

·       Tips you pay for services related to any of these expenses.

Instead of keeping records of your meal expenses and deducting the actual cost, you can generally use a standard meal allowance ranging from $31 to $51 for certain high cost areas, depending on where you travel.

The deduction for business meals is generally limited to 50% of the unreimbursed cost.

If you are an employee, your allowable travel expenses are figured on Form 2106 or 2106-EZ. Your allowable unreimbursed expenses are carried from Form 2106 or 2106-EZ to Schedule A, Form l040, and are subject to a limit based on 2% of adjusted gross income. Refer to Miscellaneous Expenses for information on the 2% limit. If you do not itemize your deductions, you cannot deduct these expenses. If you are self-employed, travel expenses are deductible on Schedule C, C-EZ, or, if you are a farmer, Schedule F, Form 1040.

Good records are essential. Refer to Recordkeeping for information on record keeping.

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What is Business Income?

ABA Tax Accounting | Small Business Accounting

Business income is income received for products or services sold. For example, fees paid to a professional person are considered business income. Rents paid to a person in the real estate business are business income. Payments received in the form of property or services must be included in income at their fair market value.

Normally a business is organized as either a sole proprietorship, partnership, or corporation. A sole proprietorship is the simplest form of business organization. It has no existence apart from its owner. Business debts are personal debts of the owner. As a sole proprietor, you file Form 1040 Schedule C, or Form 1040 Schedule C-EZ, with Form 1040, to report the profit or loss from your business. Also, you must file Form 1040 Schedule SE  if you had net earnings (from Schedule C or C-EZ) of $400 or more or had church employee income of $108.28 or more. Schedule SE is used to figure self-employment tax, which is the combined social security and Medicare tax on self-employment income.

A partnership is an unincorporated business organization that is the result of two or more persons joining together to carry on a trade or business. Each person contributes a combination of money, property, labor, or skills, and each expects to share in the profits and losses. A limited liability company with more than one owner is generally treated as a partnership for tax purposes. A partnership's income and expenses are generally reported on Form 1065, an annual information return. No income tax is paid by the partnership itself. Each partner receives a Form 1065 Schedule K-1, which generally allocates the income and expenses among the partners according to the terms of the partnership agreement.

A corporation, for Federal income tax purposes, generally includes a business formed under Federal or state laws that refer to it as a corporation, body corporate, or body politic. It also includes certain businesses that elect to be taxed as a corporation by filing Form 8832. The owners of a corporation are the shareholders. The tax on a corporation's income is figured on Form 1120 or Form 1120A. For more information on corporations in general, refer to Publication 542, Corporations. Corporations that meet certain requirements may elect to become S corporations, which are treated in a manner similar to partnerships. An S corporation files Form 1120S, and generally does not pay tax on its income. Most income and expenses are "passed through" to the shareholders on Form 1120S Schedule K-1. These amounts are to be included on the shareholders' individual returns.

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Business Entertainment Expenses

ABA Tax Accounting | Accounting and Tax Professionals

Small Business Accounting - Entertainment expenses that are both ordinary and necessary in carrying on a trade or business may be deductible if they meet one of the following two tests: 

1.  the directly-related test, or
2.  the associated test.

In order to meet the directly-related test under the general rule you must show that: 

1. You had more than a general expectation of getting income or some other specific business benefit at some future time;
2. You engaged in business with the person being entertained during the entertainment period;
3.  The main purpose of the entertainment was the active conduct of business; and
4. The expenditure was allocable to the taxpayer and a person with whom the taxpayer conducted business during the entertainment or with whom the taxpayer would have conducted business (if it were not for circumstances beyond the taxpayer's control).

You may also meet the directly-related test by showing that the expenditure was for entertainment occurring in a clear business setting directly in furtherance of the taxpayer's trade or business; that the expenditure was made directly or indirectly to someone (other than an employee) as compensation for services; or that the expenditure was paid as a prize or award which is required to be included in the recipient's gross income.

For entertainment to meet the associated test, you must show that the entertainment was associated with the active conduct of your trade or business and directly preceded or followed a substantial and bona fide business discussion.

You must have records to prove the business purpose (under the applicable test) and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. For further information on record keeping, refer to Recordkeeping.

Generally, only 50% of meal and entertainment expenses are allowed as a deduction. For exceptions to the 50% limitation, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.

Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. This includes entertaining guests at night clubs, social events, theaters, sporting events, athletic clubs, on yachts, or on hunting and fishing vacations, and similar trips. The cost of a meal you provide a customer or client is deductible as entertainment (subject to the 50% limitation) only if you or your employee is present when the food or beverages are provided.

None of the dues you pay for membership in any club organized for business, pleasure, recreation, or other social purpose is deductible, if one of the club's principal purposes is to conduct entertainment activities or provide access to entertainment facilities for members or their guests.

If you are an employee whose deductible business entertainment expenses are fully reimbursed under an accountable plan that meets the 3 accountable plan rules, the reimbursement should not be included in your wages on Form W-2 (PDF) and you should not deduct the expenses. If you are not reimbursed under an accountable plan or your expenses exceed the reimbursement you received under an accountable plan, use Form 2106 (PDF), or if you meet the conditions, Form 2106-EZ (PDF) to report business entertainment expenses. These expenses, including expenses that exceed the reimbursement under an accountable plan, are carried over to Schedule A, Form 1040 (PDF), and are generally subject to the 2% of adjusted gross income limit. Refer to Miscellaneous Expenses for more information on the 2% limit, Recordkeeping for more information on record keeping requirements, and Publication 463 for a definition of accountable and nonaccountable plans.

If you are self-employed, use Schedule C, Form 1040 (PDF), or Schedule C-EZ, Form 1040 (PDF) , or if you are a farmer, use Schedule F, Form 1040 (PDF) to deduct these expenses. For no obligation free consultation contact us today! We're here to help!

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Foreign Tax Credit Compliance Tips

ABA Tax Accounting | Accounting and Tax Professionals

International Tax Strategy - The foreign tax credit laws are complex.  Below are some quick summaries of the more complex areas of the law along with links to web pages on IRS.GOV with additional helpful resources.

Foreign Sourced Qualified Dividends and Gains

If a taxpayer receives foreign sourced qualified dividends and/or capital gains (including long-term capital gains, unrecaptured section 1250 gain, and/or section 1231 gains) that are taxed in the U.S. at a reduced tax rate, the taxpayer must adjust the foreign source income that is reported on Form 1116, line 1a.  Otherwise, the allowable foreign tax credit may be significantly overstated which can trigger a substantial underpayment penalty.

Interest Expense

Interest expense must be apportioned between U.S. and foreign source income using an asset method.  See Publication 514 for more information on the asset methods.

Other Compliance Issues

• Charitable contributions are not apportioned against foreign source income.
• The amount of foreign tax that qualifies is not necessarily the amount of tax withheld by the foreign country. If you are entitled to a reduced rate of foreign tax based on an income tax treaty between the U.S. and a foreign country, only that reduced tax qualifies for the credit.
•  If a foreign tax redetermination occurs, a redetermination of your US tax liability is required in most situations. You must file a Form 1040X or Form 1120X. Failure to notify the IRS of a foreign tax redetermination can result in a failure to notify penalty. 

For more details about the topics above, go to Foreign Tax Credit Compliance Tips or contact us today for no obligation free consultation! We're here to help!

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