Donations and Documentation

published December, 2013

Scurrying to make those donations deductible in 2013?

You’ll need some documentation to deduct charitable donations.

The level of documentation depends on what you’re donating, and the total amount donated. The two categories of donations are “cash” and “non-cash”—cash includes actual folding money, checks, credit card payments, payroll deductions, etc.

For cash, with an individual donation amount under $250, you’ll need to keep a copy of the cancelled check, credit card statement, or a letter from the charity. If you donate $250 or more, you must have a written acknowledgement from the charity – and the IRS has made it clear you need that letter in hand BEFORE we can take the deduction. For a payroll deduction, you need the Pledge Card and W-2 paystubs.

For non-cash with an individual donation of amounts under $250, you’ll need a written acknowledgement or “other record” – if you get a blank receipt FILL IT OUT! If you send me a blank receipt with your other tax documents, the deduction is $0. Maybe take a picture of what you’re donating so you remember? If your non-cash donations total $500 or more, I need to fill out the form with details, so please collect all those receipts.

For a non-cash donation of $250-under $500, you need a written acknowledgement. For a non-cash donation of $500 but under $5,000, you need the written acknowledgement, plus I need to fill out Form 8283 with details about what you donated, when you got it, the value when you acquired it, and the value when donated, etc. For donations of $5,000 or more, call me. For more information, see http://www.irs.gov/pub/irs-pdf/i8283.pdf. Did I mention if your non-cash donations total $500 or more, I need to fill out the form with details, so please collect all those receipts.

Donated cars carry a special form the charity should provide you with.

Itemized Deduction of Medical Expenses for 2013: 10%

published July, 2013

Not everyone who files an individual tax return itemizes deductions on their Form1040. There is a standard deduction set each year ($6,100 Single, $12,200 MFJ for 2013), and you generally take either itemizing or standard deduction, whichever is greater, and you get to decide each year (generally).

The kinds of expenses that get itemized include such things as mortgage interest, property tax, charitable donations, etc. One of the calculated deductions is medical expenses, including health insurance, provided you don’t take the self employed health insurance deduction elsewhere on the return (which is generally a better deal for those who qualify). The medical expenses that are deducted in order to calculate the total itemized deductions is limited—I guess the thinking is that everyone has SOME medical expenses, and it’s only when you’ve got lots of medical expenses that you can start to deduct them from your taxable income. What’s “lots?” it’s defined by a percentage of your adjusted gross income. For many years prior to 2013, we’ve used 7.5% of AGI as the floor. If you have more medical expenses than 7.5% of your AGI, the overage starts to count towards itemized deductions. Well, starting in 2013, the floor is 10% of AGI. That’s what’s new.

For example, if your AGI is $100,000, you have to have more than $10,000 of medical expenses to start counting medical expenses towards an itemized deduction total—to see if your itemized deductions are more than the standard deduction. So you’d need medical expenses of $16,101 to have $1 more than the standard deduction as a single person, if you had no other itemized deductions.

Confused? If you have a lot of medical expenses, let me know. If you’re not sure, let me know how much you’ve spend on medical expenses, and medical insurance (including long term care) separately.

Some medical expenses are NOT deductible. If you have over the counter drugs or homeopathic remedies, they are generally not deductible. If you buy drugs from Canada or Mexico without a prescription (because they’re cheaper), they’re generally not deducible. The massage may make you feel more healthy, but generally is not deductible. Get an MD to write you a prescription, and generally, it IS deductible.

For more information, see http://www.irs.gov/Individuals/2013-changes-to-itemized-deduction-for-medical-expenses.

S Corp Medical Insurance

published May, 2013

The most common issue I’ve run into this season was the S Corporation medical insurance issue for a greater than 2% shareholder.

I did write about this in October 2012’s newsletter (see this here: http://taxbuddha.com/newsletter/newsletter_2012_10.html)

If you’re the owner of an S corp and you want to deduct your medical insurance in the “most beneficial” way, the medical insurance payments need to appear on your W-2.

For more detailed information, see IRS Notice 2008-1 or
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues

QuickBooks does a good job of recording and reporting this, if you’re using QuickBooks for you payroll. The setup is a two-part process, first setting up the payroll item in the payroll item list, then adding the item to the payroll records of the owners who are receiving wages from the corp. Once set up, you’ll need to include the item in the paycheck (which will happen automatically). This will then show up on the year end W-2 form properly.

If I’m preparing your payroll, make sure I know how much medical insurance the corp is paying for each quarter.

Business Gifts

published February, 2013

I’m seeing more clients who are giving business gifts this year. There is a limit of $25 per person per year. Really. This is Regulation Section 1.274-3. Seems a bit low, eh? Well, it is. You can still give your tax preparer an $80 bottle of wine, but you’ll only be able to deduct $25 on your business tax return.

Incidental costs don’t count—incidental, like labeling the bottle with your business name, mailing or gift wrapping.

Certain gifts to employees may be deductible to a greater extent, there are different rules for that. If you’re not sure, feel free to email and ask

Get Ready for 1099s (Please!) (And info on 1099-K’s)

published December, 2012

Have you made payments to an individual or partnership from your business in amounts over $600? For non-employee compensation, we’ll issue 1099-MISC forms in January, 2013.

Now is the time to start gathering info for any vendors who need to receive 1099s from you. You need the (REAL) business name, address, tax ID# and amount paid.

Have you heard about the 1099-K? It is a new (as of last year) 1099 that credit card processors have to issue to their merchants – so Visa, Paypal, AmEx, etc will be sending statements to you, if you’ve accepted credit cards this year. A copy will also go to the IRS so they can match the income reported to your tax return.

Here’s the news: if you’ve paid vendors with a credit card or Paypal, you DON’T have to include those payments on a 1099-MISC (the 1099-K is filed instead of the 1099-MISC per IRS instructions). So, now you have to keep track not only of what you paid, but how payment was rendered. If you’re using QuickBooks and populate the check number field with the following:

  • Debit
  • Debitcar
  • DBT
  • DBT card
  • DCard
  • Debit cd
  • Visa
  • Masterc
  • MC
  • MCard
  • Chase
  • Discover
  • Diners
  • PayPal

QuickBooks will exclude the payment (as it should) from the regular 1099-MISC. (I guess they really like Chase bank, and really don’t care for AmEx.) This MIGHT make for less work (at least doing 1099s) but don’t worry, you make up for it in data entry.

So, what if you fail to exclude the credit card payments, and issue a 1099-MISC for the payments, and the credit card processor ALSO issues a 1099-K for the same income? The vendor may have some explaining to do on their tax return—and if this happens in reverse, we’ll have to explain it on your tax return.

Gone are the days of bringing a stack of 1099s into the office and saying “here’s all my income.” Some of your income may be duplicated if you accept credit cards, and you wouldn’t want to pay too much tax.

S Corporation Health Insurance

published October, 2012

IRS Notice 2008-1 ruled that under certain situations, a 2% or more shareholder is allowed an above-the-line deduction (that’s the good kind) even if the health insurance policy is purchased in the name of the shareholder. The notice has four examples; three have the shareholder purchasing health insurance and the other has the S corporation purchasing the health insurance.

The Notice says if the shareholder purchases the health insurance in his own name and pays for it with his own funds the shareholder is NOT allowed an above-the-line deduction (that’s worse, it gets deducted on Schedule A and is subject to various limitations). On the other hand, if the shareholder purchases the health insurance in his own name but the S corporation either directly pays for the health insurance or reimburses the shareholder for the health insurance AND ALSO includes the premium payment in the shareholder’s W-2, the shareholder IS allowed an above-the-line deduction.

For a shareholder to claim an above-the-line deduction (the good kind), the health insurance premiums have to be paid by the S corporation and have to be included in the shareholder’s W-2, so if you have an S Corporation, and you have health insurance, be sure the W-2 will reflect this—contact your payroll provider before year end! The Premiums are income to the shareholder, but are not taxed as Social Security, Medicare nor the various state taxes (except as state income).

S Corporations on the Web—Home Office

If you are only working from home, and the use is exclusive and regular, you may qualify to deduct expenses for the office space. Just posted: the Home Office segment of a web based CPE class for S Corporations based on the live in-person seminar so you don’t have to travel, and at a reduced cost. Take a look here: http://www.youtube.com/watch?v=h3ZuW8pFbg8

We’re posting these on YouTube.com so you can watch for free—the information “belongs” to everyone. However, CPE credit costs money (the format, and order that it is presented in, is copyrighted material), plus I think you should be able to sample a seminar before you pay for it. There will be a nominal fee for the CPE credit, or you can make a “contribution” to encourage my behavior (NOT tax deductible). IRS CPE is already available to those who complete the verification sheet (once all the segments are posted). Credit for CTEC will follow—we need to complete the series plus create quiz questions before applying for CTEC approval.

More segments to follow! I’ll also be posting the handout as a PDF as well as the “verification sheet” you’ll need to complete, but only if you want CPE credit.

Standard Mileage Rate Changes to 55.5 cents/mile July 1

published July, 2011

July 1 the mileage rate will change from 51 cents to 55.5 cents per mile. This was announced June 23.

This means YOU NEED TO GO CHECK YOUR AUTO MILEAGE and write it down if you’re going to deduct any kind of auto expense this year. Even if you use actual costs, we need to know the mileage.

Attorney Fees: Deductible?

published January, 2011

Sometimes attorney fees are deductible, and sometimes they aren’t. Even when they are deductible, the way they get deducted makes a difference.

Attorney fees for divorce are generally not deductible, except to the extent that you’re receiving tax advice or to get or collect alimony.

If your business incurs attorney fees, the fees are probably deductible by the business. (Startup fees are usually amortized.)

If you incur attorney fees personally, the fees MAY be deductible. If the fees were for the preservation of income, they are usually deducted on Schedule A, and are subject to the “2% haircut” as Mike Power, E.A. calls it—the expense is reduced by 2% of your AGI (Adjusted Gross Income), and is combined with other itemized expenses like mortgage interest and property taxes on your personal residence.

Each year, you compare your itemized expenses with the “standard deduction” (for 2010 standard deduction is $11,400 for a MFJ couple) and choose the higher deduction. Because attorney fees are a “preference item,” disregarded in the AMT world, you may be subject to AMT tax on the amount you paid your attorney—paying tax on money you don’t have. There’s an IRS case about this where the taxpayer argued his payment of contingent fees to his attorney should be the attorney’s income only, not the taxpayer’s income first then deducted on Schedule A as an itemized deduction; the IRS won. (See Commissioner v. Banks, 543 US 426 (2005).)

There are certain circumstances when attorney fees are deducted “above the line”—and not subject to AMT. This is certainly the situation to be desired. In 2004, there was legislation that led to IRS Code Section 62(a)(20) specifically for attorney fees in discrimination cases. It would appear this covers attorney fees in ERISA cases, but consult your tax preparer to be sure, as your situation may not be included in this code section. One labels these kinds of fees as “UDC” (for Unlawful Discrimination Claim) on line 36 for 2010 Form 1040s, and the deduction is limited to the income from the discrimination claim. For more information, see IRS Publication 525.

2011 Mileage Rates

published December, 2010

The IRS says it costs an extra penny per mile to drive your car next year—the new Standard Mileage Rate for business miles will go to $0.51 per mile from the current $0.50 per mile. Medical and Moving mileage rates are going to be $0.19 per mile and charitable mileage will be $0.14 per mile.