What qualifies as a entertainment expense? Taking a client, customer or employee out for lunch, dinner or drinks?Learn when to deduct and when you have to “eat” the expense.

The cost of entertaining a client, customer or employee can qualify as an ordinary and necessary business expense.  Entertainment activities can include the cost of meals (food, beverage, tax,tip) Entertainment can be provided at facilities such as nightclubs, social clubs, sports facilities or theaters, or on hunting, fishing, vacation and similar trips.  However, a deduction is generally not allowed for the cost of renting or owning an entertainment facility.

To qualify for a deduction, the entertainment expenses must be directly related to or associated with the active conduct of a trade or business, or for the production or collection of income.

Directly related:

The taxpayer must show that the main purpose of the event was business, engage in business with a person or persons during a meal or entertainment activity and have more than a general expectation of receiving income or some other specific business benefit in the future.

Associated with:

The taxpayer provides entertainment or a meal directly before or after a substantial business discussion. The taxpayer must actively engage in a meeting, discussion or other business transaction to obtain income or some other specific business benefit.  It is not necessary that the taxpayer devote more time to business than to entertainment.

Note:

Meals with business associates and coworkers are generally not deductible unless that taxpayer can establish a clear business purpose.

Lavish or extravagant:

Expenses are not allowed for entertainment that is lavish or extravagant.  Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs or resorts. However, the expenses must be reasonable considering the facts and circumstances.

Policeman’s meals:

The IRS argues that a police officer’s cost of meals is a nondeductible personal expense.  But, an 8th Circuit court allowed a deduction by officers who were required by their employers to eat their meals in public restaurants, remaining on duty during the meal time.  The officers could not go home for meals or bring a meal from home.  While the IRS disagrees, for taxpayers in the 8th Circuit, there seems to be an argument for a deduction for officers who are subject to similar strict rules.

50% limit:

The deduction for meals and entertainment is limited to 50% of the amounts that would otherwise be deductible. The 50% limit applies to meals associated with business travel, and applies even if the meal cost is not separately stated from the total cost of an event.  The taxpayer must reasonably allocate the cost between meals and other costs.  Individuals subject to Department of Transportation(DOT) hours of service rules are subject to an 80% limit.

Medical and charitable meals:

The 50% limit on meals applies only to amounts incurred in a trade or business, or associated with income-producing property.  Deductible meal expenses incurred for medical or charitable purposes are not subject to the 50% limit.

Caution:

Meals are only deductible as medical expenses if included in the cost if inpatient care at a hospital or similar institutions.  Meals are deductible as a charitable expense only if eaten while the taxpayer is away from home overnight while performing services for a qualified charitable organization.

Related expenses subject to the 50% limit:

*Taxes and tips relating to a meal or entertainment.

*Cover charges for admission to a night club.

*Room rental for a business dinner or cocktail party.

*Parking at a sports arena.

Note:Deductible transportation costs to and from a business meal or entertainment event are not subject to the 50% limit.

Exceptions: 

The following are not subject to the 50% limit:

*De minimis fringe benefits.  Meals provided on the employer’s premises for the employer’s convenience, if more than 50% of the employees are furnished meals for the employer’s convenience.

*Meals and entertainment that are treated as taxable compensation to employees are fully deductible by the employer.  For example, employer rewards an employee and spouse with a trip and the cost is included in the employee’s wages.

*Promotional activities made available by the taxpayer to the general public.  For example, real estate brokers may deduct the full cost of free dinners provided to potential investors who attend sales presentations; wine merchants may deduct the cost of wine used as samples and food provided during a wine tasting event.

*Employer-provided social or recreational expenses for the benefit of employees who are not highly compenstaed, such as a summer picnic or holiday party.

*Meals and entertainment sold to customers.  For example, a restaurant deducts the full cost of meals it sells.

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.

If there is a city that prides itself on charitable giving, it is indeed Asheville.  From Habitat for Humanity to Brother Wolf Animal Rescue to Goodwill, the citizens of Asheville stand ready to help out their fellow man.  And, in exchange for being so kind during the year, a tax deduction could be in store for you.

Charitable contributions made to qualified organizations may help lower your tax bill.  The IRS has put together the following eight tops to help ensure your contributions pay off on your tax return.

1.If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct dontributions made to specific individuals, politocal organizations and candidates.  See IRS Publicaion 526, Charitable Contributions, for rules on what constitutes a qualified organization.

2.To deduct a charitable contribution, you must file form 1040 and itemize deductions on Schedule A.

3.If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.

4.Donations of stock or other non-cash property are usually valued at the fair market value of the property.  Clothing and household items must generally be in good used condition or better to be deductible.  Special rules aply to vehichle donations.

5.Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.

6.Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.  For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.

7.To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgement from the qualified organizations showing the amount of the cash and a description of any property contributed, and wether the organization provided any goods or services in exchange for the gift.  One document may satisfy both the written acknowledgement requirements for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.  If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.

8.Taxpayers donating an item or a group of similiar itmes valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.

For more information on charitable contributions, refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions. 

Links:

*Search for Charities or download Publication 78, Cumulative list of Organizations

*Publication 526, Charitable Contributions

*Instructions for Form 8283, Noncash Charitable Contributions

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.

One of the first decisions a taxpayer has to make when preparing his or her taxes is one of filing status.  Do you know which one you should be?  If you have a child, should you file single or head of household?  Please read on to answer these questions.

There are five filing statuses:

*Single

*Married filing jointly(MFJ)

*Married filing separately(MFS)

* Head of household(HOH)

*Qualifying widow(er)

Single:

A taxpayer is single if unmarried or separated from a spouse, either by divorce or a separate maintenance decree, on December 31.  A widow(er) whose spouse died before 2010 is single unless he meets the tests for qualifying widow(er).

Married Filing Jointly:

Taxpayers may file jointly if on the last day of the year they are:

*Married and living together,

*Married and living apart, but not legally separated or divorced,

*Separated under an interlocutory (not final) divorce decree, or

*Living in a common-law marriage, if common-law marriage is recognized in the state where they currently reside or in the state where the marriage began.

If one spouse died in 2010, the survivor can file jointly with the decedent if the couple met one of the above tests on the date of death and the survivor did not remarry in 2010. 

Same-sex couples cannot file joint returns.Only married couples can file jointly.  Same-sex couples cannot be considered married for federal tax purposes even if state law sanctions such marriages.

Married Filing Separately:

Taxpayer married at year end can elect to file separately.

Disadvantages of Married Filing Separately:

Lost Credits:

*Earned income credit

*Credit for the elderly or the disabled unless spouses lived apart  for the entire year.

*Child care credit unless spouses lived apart for last six months of the year.

*Adoption credit unless spouses lived apart for last six months of the year.

*Education credits.

Lost Education Benefits:

*Student loan interest deduction.

*Tuition and fees deduction.

*Savings bond interest exclusion.

Standard Deduction:

If one spouse itemizes deductions, the other must also itemize(that is, cannot claim the standard deduction).

Taxable Social Security:

A greater percentage of Social Security benefits may be taxable unless the spouses lived apart for the entire year.

IRAs:

*Traditonal IRA  deduction and Roth IRA contributions phased out at $10,000 of modified AGI unless the spouses lived apart for the entire year.

*Spouses IRA rules do not apply.

Capital Losses:

*Net capital loss deduction is limited to $1,500 per spouse.

Sale of Home:

*Gain exclusion is limited to $250,000 per spouse.

Passive losses:

*Rental real estate loss allowance is limited to $12,500 per spouse, with lower phase-out thresholds.

*One Spouse’s passive loss cannot be offset by the other spouse’s passive income.

AMT Exemption:

In addition to the exemption phasing out, some high income taxpayers must add an amount back to AMTI.

Reasons to file separately:

*No joint liability.  Each spouse who signs a joint return is responsible for the accuracy of the return as well as the payment of the tax.  A spouse who files separately is not responsible for reporting or paying tax on items attributable to the other spouse.

*Some couples pay less tax filing separately.  Tax brackets and standard deduction for MFS are one-half of those for MFJ.  Spouses with equal incomes will generally owe the same tax under either filing status unless one spouse had medical expenses, casualty losses or employee business expenses subject to a percentage limitation based on AGI.  A couple in this situation may pay less tax by filing separately because these expenses are limited by the AGI of only one spouse. If one spouse has significantly higher income than the other, the couple will generally pay less tax filing jointly.

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.

Many times an employee will incur expenses for the benefit of the employer and not be reimbursed.  In these cases, you might be able to take your expenses as a deduction if you itemize deductions on a Schedule A.

The IRS has put together the following facts to help you determine which expenses may be deducted as an employee business expense.

Expenses that qualify for an itemized deduction include:

     * Business travel away from home

     * Business use of car

     * Business meals and entertainment

     * Travel

     * Use of your home

     * Education

     * Supplies

     * Tools

     * Miscellaneous expenses

You must keep records to prove the business expenses you deduct.  For general information on recordkeeping, see IRS Publication 552, Recordkeeping for Individuals available on the IRS website,www.irs.com, or by calling 800-829-3676.

If your employer reimburses you under an accountable plan, you do not  include the payments in your gross income, and you may not deduct any of the reimbursed amounts.

An accountable plan must meet three requirements:

     1. You must have paid or incurred expenses that are deductible while performing services as an employee.

     2. You must adequately account to your employer for these expenses within a reasonable time period, and

     3. You must return any excess reimbursement or allowance within a reasonable time period.

If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages on your Form W-2.  You must report the income and itemize your deductions to deduct these expenses.

Generally, report expenses on IRS Form 2106 or IRS Form 2106-EZ to figure the deductions for employee business expenses and attach it to Form 1040, Schedule A, as a miscellaneous itemized deduction subject to 2% of your adjusted gross income rules.  Only employee business expenses that are in excess of 2% of your adjusted gross income can be deducted.

For more information see IRS Publication 529, Miscellaneous Deductions available on the IRS website,www.irs.com, or by calling 800-829-3676.

Links:

* Publication 552, Recordkeeping for Individuals

 * Publication 529, Miscellaneous Deductions

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.

Are you a photographer or someone who works exclusively from home?  Maybe a doctor who does billing from home?  You should, if appropriate, consider taking the IRS’ Home Office Deduction on your tax return.  This deduction could lower your tax liability.  Please read below to understand this deduction.

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.  Here are six things the IRS wants you to know about the Home Office Deduction.

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

     *     as your principal place of business, or

     *     as a place to meet or deal with patients, clients or customers in the normal course of your business, or

      *     in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use, or daycare- facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business.  Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 schedule C, Profit or Loss Business.

6. If you are an employee, additional rules apply for claiming the home office deduction.  For example, the regular and exclusive business use must be for the convenience of your employer.

Links:

* Publication 587, Business Use of Your Home 

* Form 8829, Expenses for Business Use of Your Home 

* Form 8829 Instructions 

* Schedule C, Profit or Loss from Business 

* Schedule A, Itemized Deductions  

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.

There are two federal tax credits available to help you offset the costs of higher education for yourself or your dependents.  These are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, the student cannot file for the credit.

For each student, you can choose to claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter’s tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.

However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit

• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.

2. Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.

You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.