Author Archives: c25440404

Combining business and vacation travel: What can you deduct?

airport - frequent flyer

If you go on a business trip within the United States and tack on some vacation days, you can deduct some of your expenses. But exactly what can you write off?

Transportation expenses

Transportation costs to and from the location of your business activity are 100% deductible as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for your travel, then generally none of your transportation expenses are deductible.

What costs can be included? Travel to and from your departure airport, airfare, baggage fees, tips, cabs, and so forth. Costs for rail travel or driving your personal car are also eligible.

Business days vs. pleasure days

The number of days spent on business vs. pleasure is the key factor in determining if the primary reason for domestic travel is business. Your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home.

Standby days (days when your physical presence is required) also count as business days, even if you aren’t called upon to work those days. Any other day principally devoted to business activities during normal business hours also counts as a business day, and so are days when you intended to work, but couldn’t due to reasons beyond your control (such as local transportation difficulties).

You should be able to claim business was the primary reason for a domestic trip if business days exceed personal days. Be sure to accumulate proof and keep it with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take notes to show you attended the sessions.

Once at the destination, your out-of-pocket expenses for business days are fully deductible. These expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible.

We can help

Questions? Contact us if you want more information about business travel deductions.

© 2016

Using independent contractors? Protect your business with these tips

independent worker

Many businesses use independent contractors to keep payroll taxes and fringe benefit costs down. But using outside workers may result in other problems. The IRS often questions businesses about whether workers should be classified as employees or independent contractors for federal employment tax purposes.

If the IRS reclassifies a worker as an employee, your company could be hit with back taxes, interest and penalties. In addition, the employer could be liable for employee benefits that should have been provided but weren’t. Audits by state agencies may also occur.

The key is control

So, how can you safeguard your use of independent contractors? Unfortunately, no single factor determines a worker’s legal status. The issue is complicated, but the degree of control you have over how a worker gets the job done is often considered the most important factor. Little or no control indicates independent contractor status.

The IRS looks at a number of other issues, including:

Tools and facilities. Employers usually give tools, equipment and workspace to employees, while contractors invest their own money in these items.

Hours. Employees generally have set schedules, while contractors are allowed greater flexibility. (However, the IRS recognizes that some work must be done at specific times.)

Important steps

With those guidelines in mind, here are some tips:

  1. Clarify the relationship with a written independent contractor agreement. Include details, such as the services the contractor will perform, the term of the agreement and how much you’ll pay. Include statements that the individual is an independent contractor and will pay federal and state taxes.
  2. Give contractors leeway over how they perform their duties. Resist the urge to supervise them the way you oversee employees.
  3. Send each contractor (and the IRS) a Form 1099 showing non-employee income if you pay him or her $600 or more in a calendar year.
  4. Maintain good records. Keep an independent contractor’s taxpayer ID number and other information required by the IRS, but also keep items that can help prove the person is self-employed. For example, retain business cards, letterheads, invoices and advertisements from independent contractors.

In many cases, proactive planning can help secure independent contractor status. Contact us if you have questions about worker classification.

© 2016

salary or distribution

If you run your business as an S corporation, you’re probably both a shareholder and an employee. As such, the corporation pays you a salary that reflects the work you do for the business — and you (and your company) must remit payroll tax on some or all of your wages.

By distributing profits in the form of dividends rather than salary, an S corporation and its owners can avoid payroll taxes on these amounts. Because of the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately), the potential tax savings from classifying payments as dividends rather than salary may be even greater than it once would have been.

IRS audit target

But paying little or no salary is risky. The IRS targets S corporations with owners’ salaries that it considers unreasonably low and assesses unpaid payroll taxes, penalties and interest.

To avoid such a result, S corporations should establish and document reasonable salaries for each position using compensation surveys, comparable industry studies, company financial data and other evidence. Spell out the reasons for compensation amounts in your corporate minutes. Have the minutes reviewed by a tax professional before being finalized.

Prove a salary is reasonable

There are no specific guidelines for reasonable compensation in the tax code or regulations. Various courts, which have ruled on this issue, have based their determinations on the facts and circumstances of each case. Factors considered in determining reasonable compensation include:

  • Training and experience,
  • Duties and responsibilities,
  • Time and effort devoted to the business,
  • Dividend history,
  • Payments to non-owner employees,
  • Timing and manner of paying bonuses to key people, and
  • Compensation agreements.

Ascertain the right mix

Do you have questions about compensation? Contact us. We can help you determine the mix of salary and dividends that can keep your tax liability as low as possible while standing up to IRS scrutiny.

© 2016

Looking for a retirement plan for your business? Here’s one SIMPLE option

retirement plan documents and pen

retirement plan documents and pen

Has your small business procrastinated in setting up a retirement plan? You might want to take a look at a SIMPLE IRA. SIMPLE stands for “savings incentive match plan for employees.” If you decide you’re interested in a SIMPLE IRA, you must establish it by no later than October 1 of the year for which you want to make your initial deductible contribution. (If you’re a new employer and come into existence after October 1, you can establish the SIMPLE IRA as soon as administratively feasible.)

Pros and cons

Here are some of the basics of SIMPLEs:

  • They’re available to businesses with 100 or fewer employees.
  • They offer greater income deferral opportunities than individual retirement accounts (IRAs). However, other plans, such as SEPs and 401(k)s, may permit larger annual deductible contributions.
  • Participant loans aren’t allowed (unlike 401(k) and other plans that can offer loans).
  • As the name implies, it’s simple to set up and administer these plans. You aren’t required to file annual financial returns.
  • If your business has other employees, you may have to make SIMPLE IRA employer “matching” contributions.

Contribution amounts

Any employee who has compensation of at least $5,000 in any prior two years, and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put into a SIMPLE. An employee may defer up to $12,500 in 2016. This amount is indexed for inflation each year. Employees age 50 or older can make a catch-up contribution of up to $3,000 in 2016.

If your business has other employees, you may have to make SIMPLE IRA employer “matching” contributions.

Consider your choices

A SIMPLE IRA might be a good choice for your small business but it isn’t the only choice. You might also be interested in setting up a simplified employee pension plan, a 401(k) or other plan. Contact us to learn more about a SIMPLE IRA or to hear about other retirement alternatives for yourbusiness.

© 2016