deductible expenses http://www.wisebread.com/taxonomy/term/11780/all en-US Tax Brackets Explained http://www.wisebread.com/tax-brackets-explained <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/tax-brackets-explained" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/women with computer.jpg" alt="professional women talking to and teaching each other" title="professional women talking to and teaching each other" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>Being in a high tax bracket seems to be something that people envy (in others) but avoid (for themselves). But what does that mean, and what does it matter? (See also:&nbsp;<a href="http://www.wisebread.com/15-surprising-facts-about-income-tax">15 Surprising Facts About Income Tax</a>)</p> <p>Here&rsquo;s what to know about tax brackets:</p> <ul> <li>Your tax bracket is based on taxable income (not your annual salary) and filing status with the IRS (such as Single or Married Filing Jointly)<br /> &nbsp;</li> <li>The percentage associated with your tax bracket is your marginal tax rate <br /> &nbsp;</li> <li>The percentage associated with your tax bracket is not the same as your average or effective tax rate<br /> &nbsp;</li> <li>You may be able to move to a lower tax bracket by making contributions to a tax-deferred investment account such as an IRA and 401(k); making charity contributions; or selling stock held in regular accounts at a loss<br /> &nbsp;</li> <li>Selling stock at a gain may move you to a higher tax bracket, even if your earned income stays the same</li> </ul> <h3>IRS&nbsp;Tax Brackets</h3> <p>Generally, when people talk about tax brackets, they are referencing income levels associated with IRS (federal) tax rates for ordinary income tax and not other types of taxes or withholdings for state and local taxes. Federal income rates and tax brackets change periodically. To give you an idea of current tax brackets, consider these income levels and percentages using information from <a href="http://www.irs.gov/publications/p505/ch02.html#en_US_2012_publink1000207460">IRS Publication 505, Tax Withholding and Estimated Tax</a>.</p> <p><strong>2012 Tax Brackets by Taxable Income</strong></p> <p>Single Filing Status</p> <ul> <li>10% &ndash; less than $8,700</li> <li>15% &ndash; between $8,700 and $35,350</li> <li>25% &ndash; between $35,350 and $86,650</li> <li>28% &ndash; between $86,650 and $178,650</li> <li>33% &ndash; between $178,650 and $388,350</li> <li>35% &ndash; over $388,350</li> </ul> <p>Married Filing Jointly</p> <ul> <li>10% &ndash; less than $17,400</li> <li>15% &ndash; between $17,400 and $70,700</li> <li>25% &ndash; between $70,700 and $142,700</li> <li>28% &ndash; between $142,700 and $217,450</li> <li>33% &ndash; between $217,450 and $388,350</li> <li>35% &ndash; over $388,350</li> </ul> <h3>What Difference Your Tax Bracket Makes</h3> <p>Your tax bracket determines your marginal tax rate. This percentage can be important when considering financial decisions. Specifically, knowing the marginal tax rate helps you to determine the impact of certain actions (such as making a charitable contribution or making an IRA contribution) on your cash flow.</p> <p>In trying to understand precisely what &ldquo;marginal&rdquo; in marginal tax rate means, I came upon several definitions. The one that made the most sense to me described &ldquo;marginal&rdquo; as being the one on the <em>top margin</em> of your income. (Definition from the Dictionary of Financial Terms from <a href="http://www.lightbulblabs.com/LBDictionary/default.aspx?id=13">Lightbulb Press</a>)</p> <p>For example, if you itemize deductions and you are in the 25% tax bracket, then a charitable donation of $1,000 will &ldquo;cost&rdquo; you $750; that is, you give away $1,000 but get a tax break of $250. Similarly, if you are in the 35% tax bracket, then you could reduce your tax bill by $350 for the same contribution.</p> <p>Likewise, putting money away in an IRA or 401(k) can have tax benefits. These benefits can be measured by your marginal tax rate. A $2,000 contribution might help you to reduce your tax liability by $200 if you are in the 10% tax bracket or $500 in the 25% tax bracket.&nbsp;When you reduce your taxable income, you may move to a lower tax bracket if you happen to be on the edge of a bracket.</p> <h3>Marginal Tax Rate vs. Average Tax Rate</h3> <p>You pay taxes based on a combination of tax rates (unless you are in the lowest tax bracket, and then you pay based on the lowest rate only). That is, taxpayers don&rsquo;t pay federal income tax that is equal to their taxable income multiplied by their marginal tax rate. Just a portion of your income is taxed at this higher rate.</p> <p>To determine your <a href="http://en.wikipedia.org/wiki/Tax_rate">average tax rate</a>, you need to calculate how much your taxable income is taxed at each level.</p> <p>For example, if you are single and your taxable income is $50,000, then your tax calculation (using Publication 505 to estimate your tax liability) is $4,867.50 + 25% x ($50,000-$35,350) = $8,530.00. Or, you can calculate this dollar amount by applying various tax rates to portions of your income, like this:</p> <ul> <li>Portion 1: $8,700 x 10% = $870</li> <li>Portion 2: ($35,350-$8,700) x 15% = $3,997.50</li> <li>Portion 3: ($50,000-$35,350) x 25% = $3,662.50</li> <li>Total of All Portions = $8,530.00</li> </ul> <p>Then take the total tax amount and divide by taxable income to calculate the average rate. In this case, the average tax rate is 17.06% ($8,530 / $50,000).</p> <h3>Average Tax Rate vs. Effective (or Actual) Tax Rate</h3> <p>Now that you see how the marginal rate differs from the average rate, consider how the average rate varies from your effective or actual rate. The actual rate (federal income tax liability divided by annual income) is less than marginal and average tax rates when you consider that your <em>taxable income</em> is much less than your <em>actual income.</em></p> <p>Here are some of the factors in determining taxable income.</p> <p><strong>Income</strong></p> <p>For many people, annual income is simply your annual salary or total of yearly wages. But income can also include earnings from <a href="http://www.wisebread.com/summer-camp-as-a-side-business">a side business</a> or <a href="http://www.wisebread.com/3-sources-for-freelance-work-at-home-jobs">freelance gigs</a>, unearned income from interest and dividends, capital gains from the sale of stock, <a href="http://www.wisebread.com/how-to-win-big-in-online-sweepstakes">sweepstakes' winnings</a>, unemployment compensation, and payments from pensions. (For a complete list, review <a href="http://www.irs.gov/pub/irs-pdf/f1040.pdf">IRS Form 1040</a> (PDF) and <a href="http://www.irs.gov/pub/irs-pdf/i1040gi.pdf">instructions</a> (PDF), call the IRS, or talk to your tax professional.)</p> <p><strong>Qualifying Expenses and Contributions</strong></p> <p>Certain expenses and contributions are deducted from income. These may include Health Savings Account (HSA) deposits, student loan interest deductions, contributions to IRAs, and self-employment retirement plans. Certain credits are also available, further reducing tax liability.</p> <p><strong>Exemptions and Deductions</strong></p> <p>Your income is reduced by <a href="http://www.irs.gov/newsroom/article/0,,id=252258,00.html">exemptions</a> (personal and dependent) and the <a href="http://www.irs.gov/pub/irs-pdf/p501.pdf">standard deduction</a> (PDF) or itemized deductions.</p> <p>So, your taxable income may be $50,000, but your actual income could be $50,000 + $3,700 (personal exemption for 2011) + $5,800 (standard deduction for 2011) or $59,500 (more if you made contributions to your IRA, 401(k), or HSA). In this case, your actual federal income tax rate is 14.34%. You will probably pay other taxes, like state and local taxes, so if you want to get a complete picture of your tax rate, then add up all taxes and divide by your income.&nbsp;</p> <h3>Capital Gains and Tax Brackets</h3> <p>Long-term capital gains from the sale of investments like stocks and mutual funds not held in tax-advantaged accounts are taxed at special rates. Through 2012, these long-term gains have a tax rate of 0% for those in 10% and 15% tax brackets and 15% for those in tax brackets of 25% and above. <a href="http://www.irs.gov/taxtopics/tc404.html">Qualified dividends</a> are also taxed at these favorable rates.</p> <p>Income from long-term capital gains is included in taxable income, so you can&rsquo;t sell lots of stocks for a profit and expect to pay nothing in taxes. However, if you have relatively low income and sell some mutual funds at a gain, then you may be able to benefit from this tax arrangement.</p> <p>Short-term capital gains (<a href="http://www.irs.gov/newsroom/article/0,,id=255079,00.html">held for one year or less</a>) and ordinary dividends are treated as ordinary income and taxed at regular rates.</p> <p>When retirees take money out of their <a href="http://www.wisebread.com/should-you-choose-a-roth-401k-or-a-regular-401k?wbref=readmore">Roth accounts</a>, they pay no taxes on qualified distributions (<a href="http://www.irs.gov/retirement/article/0,,id=232329,00.html">under current tax laws</a>). Compare that to ordinary tax rates for distributions from traditional IRAs and 401(k) accounts.</p> <p>So both the <em>amount</em> and the <em>type</em> of income that you have can impact your actual tax rate. That&rsquo;s why some people can have high incomes but lower than usual tax rates.</p> <p><em>Have you ever made a financial decision based on your tax bracket? Share in the comments.&nbsp;</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> of <a href="http://www.wisebread.com/tax-brackets-explained">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/heres-how-your-taxes-will-change-when-you-retire">Here&#039;s How Your Taxes Will Change When You Retire</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/3-ways-more-money-in-retirement-might-cost-you">3 Ways More Money in Retirement Might Cost You</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-last-minute-ways-to-cut-your-2016-tax-bill">7 Last-Minute Ways to Cut Your 2016 Tax Bill</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/top-10-red-flags-that-trigger-irs-audits">Top 10 Red Flags That Trigger IRS Audits</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-things-everyone-should-know-about-this-years-tax-changes">5 Things Everyone Should Know About This Year&#039;s Tax Changes</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Taxes deductible expenses financial decisions income tax tax brackets Fri, 22 Jun 2012 10:24:13 +0000 Julie Rains 935291 at http://www.wisebread.com 5 Myths about Deducting T&E Expenses http://www.wisebread.com/small-business/5-myths-about-deducting-te-expenses <div class="field field-type-link field-field-url"> <div class="field-label">Link:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="http://www.openforum.com/articles/5-myths-about-deducting-tampe-expenses" target="_blank">http://www.openforum.com/articles/5-myths-about-deducting-tampe-expenses</a> </div> </div> </div> <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/small-business/5-myths-about-deducting-te-expenses" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock_000017020332Small.jpg" alt="" title="" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>Travel and entertainment costs are a common expense for most businesses. Unfortunately, the <a href="http://www.openforum.com/idea-hub/topics/lifestyle/article/whats-tax-deductible-for-your-next-business-trip-1" target="_blank">rules for deducting T&amp;E costs</a> can be complicated and are often misunderstood. Here are five myths that you should be aware of.</p> <p><strong>Myth 1. The Full Cost of Business Meals and Entertainment is Tax Deductible</strong></p> <p>Taking a customer to lunch, wining and dining a vendor, or taking a prospective client to the theater or sporting event are normal business practices. Regardless of how much or how little you spend, you can only write off 50 percent. For example, you take an out-of-town customer to dinner and the theater. It costs you $350 for the evening. You can deduct $175; the balance is not deductible.</p> <p><strong>Myth 2. The Cost of Commuting To and From Work is Deductible</strong></p> <p>Regardless of how far you have to commute, the method of transportation you use, or what it costs you, you <i>cannot </i>deduct the cost of commuting. This is considered to be a nondeductible personal expense.</p> <p>If you have to pay extra to transport business-related tools during your commute, such as heavy equipment or large musical instruments, the added expense is deductible.</p> <p>Once you are at work, your travel to other business locations becomes deductible. A doctor can deduct the travel costs between her medical office and the hospitals at which she had privileges, but not the cost of getting to the medical office. If you have a home office for which you take a tax deduction, all trips from home for business&mdash;to see a customer or vendor, do banking, or buy supplies&mdash;are deductible; this is not commuting.</p> <p><strong>Myth 3. You Need Receipts for All T&amp;E Costs</strong></p> <p>You do <i>not</i> need receipts for expenses of $75 or less. Thus, if you take a taxi from your office to see a customer for a cost of $12, no receipt is required. Exception: You need a receipt for lodging of any amount, even at a Motel 6.</p> <p>While you may not be required to keep all receipts, it doesn&rsquo;t hurt to do so. They often serve as a reminder for a deductible expense, especially if you&rsquo;ve paid cash (e.g., the taxi ride).</p> <p><strong>Myth 4. There is a Dollar Limit on What You Can Deduct</strong></p> <p>There is no overall dollar limit on your deduction for T&amp;E expenses. However, you can&rsquo;t deduct meal and entertainment costs that are &ldquo;lavish and extravagant.&rdquo; The tax law does not define these terms. It&rsquo;s up to you (and your tax advisor) to decide whether costs are &ldquo;too much&rdquo; before you deduct them.</p> <p><strong>Myth 5. You can&rsquo;t Deduct a Trip if Your Family Comes Along</strong></p> <p>The tax law lets you combine business with pleasure under the right conditions. If you travel within the U.S. and the <i>primary</i> reason for the trip is business, you can deduct all of your travel (e.g., airfare) costs. The fact that your spouse, significant other, or your family comes with you does not negate your deduction.</p> <p>It may not even cost you anything extra (other than meals) to bring your spouse with you. If you drive, there&rsquo;s no extra cost, and usually there&rsquo;s no additional charge for another person in your hotel room.</p> <p>You can&rsquo;t deduct your costs for the portion of your trip spent sightseeing, visiting family, or pursuing other personal endeavors. For example, say you travel from Trenton to Los Angeles to meet with clients on Monday, Tuesday, Wednesday, and Thursday. You spend the rest of the week sightseeing and take the redeye home on Sunday night. The cost of your hotel and meals on the non-business days is not deductible. But your entire airfare remains deductible because the primary purpose of the trip was for business. Remember, even on the business days, only 50 percent of your meals are deductible.</p> <p><strong>Final Word</strong></p> <p>You can learn more about deducting travel and entertainment costs in <a href="http://www.irs.gov/pub/irs-pdf/p463.pdf" target="_blank">IRS Publication 463</a> (the IRS has not yet released the version for the 2011 return, but the general rules still apply). Also check with your tax advisor to determine the tax impact of your T&amp;E activities.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/barbara-weltman">Barbara Weltman</a> of <a href="http://www.wisebread.com/small-business/5-myths-about-deducting-te-expenses">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/250-tips-for-small-business-owners">250+ Tips for Small Business Owners</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-5-best-credit-cards-for-small-businesses">The 5 Best Credit Cards for Small Businesses</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-free-accounting-tools-for-freelancers">5 Free Accounting Tools for Freelancers</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/learn-how-to-travel-forever-from-these-7-digital-nomads">Learn How to Travel Forever From These 7 Digital Nomads</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-tax-tricks-to-try-if-youre-stuck-with-student-loans">8 Tax Tricks to Try if You&#039;re Stuck With Student Loans</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Entrepreneurship Small Business Resource Center Taxes Travel deductible expenses expenses small business t&e deductions tax deductions travel and entertainment Mon, 12 Dec 2011 21:36:58 +0000 Barbara Weltman 816775 at http://www.wisebread.com Accountable Plans Are Win-Win Taxwise http://www.wisebread.com/small-business/accountable-plans-are-win-win-taxwise <div class="field field-type-link field-field-url"> <div class="field-label">Link:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="http://www.openforum.com/idea-hub/topics/money/article/accountable-plans-are-win-win-taxwise-barbara-weltman" target="_blank">http://www.openforum.com/idea-hub/topics/money/article/accountable-plans-are-win...</a> </div> </div> </div> <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/small-business/accountable-plans-are-win-win-taxwise" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock_000011361290XSmall.jpg" alt="Business lunch" title="Business lunch" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>If your company has travel and entertainment <a href="http://ad.doubleclick.net/clk;218396076;41475586;v?http://www201.americanexpress.com/sbsapp/FMACServlet?request_type=alternateChannels&amp;lpid=298&amp;openeep=17460&amp;ccsgeep=17460">costs</a>, there's a way to pay for them without resulting in income to your employees or payroll taxes for the company. It's called an &quot;accountable plan&quot; and it is a reimbursement arrangement for the costs your employees pay for their business travel, entertainment, and other costs on behalf of the company.</p> <h3>Tax results for an accountable plan</h3> <p>An accountable plan is best understand by looking at what happens if you <em>don't</em> have one. Say you have a sales person who travels and wines and dines customers. Her annual travel and entertainment (T&amp;E) costs are $2,500, which she lays out and is then reimbursed by the company under a non-accountable plan. The results:</p> <ul> <li>The reimbursement is treated as income to her, which must be included on her W-2 form.<br /> &nbsp;</li> <li>She can claim a deduction for her T&amp;E costs, but only as a miscellaneous itemized deduction on Schedule A of Form 1040, which means she has to itemize her deductions instead of claiming the standard deduction. Miscellaneous expenses are only deductible to the extent they exceed 2% of adjusted gross income. She must complete Form 2106 to figure the deductible portion of these costs before entering them as a miscellaneous itemized deduction.<br /> &nbsp;</li> <li>If she's subject to the <a href="http://www.irs.gov/taxtopics/tc556.html">alternative minimum tax</a>, she loses any benefit from her itemized deductions; miscellaneous itemized deductions are not a subtraction for purposes of this tax.<br /> &nbsp;</li> <li>The company must pay payroll taxes on the reimbursement. Payroll taxes include the employer share of FICA, as well as federal unemployment taxes (FUTA) and state unemployment insurance. Also, such amounts are subject to income tax withholding for federal and, where applicable, state purposes.</li> </ul> <h3>What is an accountable plan?</h3> <p>An accountable plan lets the company claim a deduction for the T&amp;E costs reimbursed to the employee to the extent such costs are deductible. There's no income to the employee or any payroll taxes for the company on these reimbursements.</p> <h3>Requirements for an accountable plan</h3> <p>To be an accountable plan, all three of the following conditions must be met:</p> <p><strong>1. Business connection:</strong> The expenses must have a business connection. Expenses incurred by an employee while doing his or her job usually have such a connection. Reimbursements of personal expenses, such as commuting costs or a spouse's travel costs, do not meet this business connection condition.</p> <p><strong>2. Proper substantiation: </strong>The employee must adequately account to the company for expenses within a reasonable time (generally within 60 days after incurring the expense). Adequate accounting means completing expense reports (written or online) and providing the company with receipts, invoices, and other documentary evidence of the expense. For example, accounting for business lunches means following the &quot;4 Ws+1H&quot;: <em>who</em> did the employee dine with, <em>what</em> was the business purpose of the meal, <em>where</em> did the meal take place, <em>when </em>did the meal take place, and <em>how </em>much did it cost. In addition, a receipt for the meal or the charge card statement is the documentary evidence needed here.</p> <p><strong>3. Return of excess reimbursement</strong>: The employee cannot keep unused advances and must return to the company any excess reimbursements within a reasonable time. There are two ways to determine reasonable time:</p> <ul> <li><b>Fixed date</b> requires advances to be made no earlier than 30 days before the expense, substantiation made within 60 days of the expense, and excess reimbursements returned to the company within 120 days after the expense.<br /> &nbsp;</li> <li><b>Periodic statement </b>requires the company to give employees statements at least quarterly, showing substantiated amounts and requiring employee to substantiate other amounts or return any excess reimbursements.</li> </ul> <p>If the company uses an accountable plan but the employee fails to comply with these conditions, then reimbursements to this employee are treated as paid under a nonaccountable plan. In other words, the whole plan isn't disregarded, but this particular employee suffers the consequences of failing to meet all conditions (and the company owes employment taxes on the reimbursements that are income to the employee).</p> <h3>Technicalities</h3> <p>While the tax law does not require an accountable plan to be in writing, it is a very good idea to do so. A written plan given to employees lays out the substantiation requirements and times in which action must be taken. It's up to the company, not the employee, to create an accountable plan; an employee cannot simply convert reimbursements to accountable plan status by providing substantiation to the company and following other accountable plan rules. It is advisable for corporations to include accountable plans in their official records; corporate shareholders can vote them in a resolution and include them in corporate minutes.</p> <p>Details about accountable plans can be found in <a href="http://www.irs.gov/pub/irs-pdf/p463.pdf">IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses</a>.</p> <h3>What else you need to know</h3> <p>Accountable reimbursement plans aren't limited to travel and entertainment costs. They have been used successfully to reimburse employees for tools and equipment, training and certification if required for the job, and other business-related costs (e.g., dues to professional organizations, subscriptions to trade and professional journals, and work clothes required for the job).</p> <p>Some tax experts have suggested that accountable plans can be used to reimburse employees for home office deduction costs if the arrangement is undertaken for the convenience of the company; there have been no cases or rulings on this point.</p> <p>Companies can avoid the need for reimbursement arrangements by furnishing employees with corporate credit cards to be used solely on company business. Employees in this case will still need to substantiate their expenses to the company on expense account forms or by other means, but reimbursements aren't necessary here.</p> <p>A final word of caution: The IRS looks for <a href="http://www.irs.gov/irb/2006-46_IRB/ar08.html">abuses in accountable plans</a>, such as treating all reimbursements as paid under an accountable plan when some reimbursements may not qualify for this treatment (e.g., reimbursements for meals to employees who work late). Talk to your tax professional about how you can use an accountable plan in your company to minimize your payroll taxes.</p> <p><em>This is a guest post by <a href="http://www.barbaraweltman.com/">Barbara Weltman</a>. Barbara is an attorney, prolific author, and trusted professional advocate for small businesses and entrepreneurs.</em></p> <script type="text/javascript"> federated_media_section = "gold"; </script><br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/barbara-weltman">Barbara Weltman</a> of <a href="http://www.wisebread.com/small-business/accountable-plans-are-win-win-taxwise">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/250-tips-for-small-business-owners">250+ Tips for Small Business Owners</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-5-best-credit-cards-for-small-businesses">The 5 Best Credit Cards for Small Businesses</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/101-tax-deductions-for-bloggers-and-freelancers">101 Tax deductions for bloggers and freelancers</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-smart-ways-to-get-a-small-business-loan">10 Smart Ways to Get a Small Business Loan</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-inspiring-stories-of-normal-people-building-a-thriving-online-store">4 Inspiring Stories of Normal People Building a Thriving Online Store</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Entrepreneurship Small Business Resource Center Taxes accountable plans deductible expenses small business Sat, 13 Mar 2010 22:14:29 +0000 Barbara Weltman 5589 at http://www.wisebread.com When Is Lunch Deductible? http://www.wisebread.com/small-business/when-is-lunch-deductible <div class="field field-type-link field-field-url"> <div class="field-label">Link:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="http://www.openforum.com/idea-hub/topics/money/article/when-is-lunch-deductible-thursday-bram" target="_blank">http://www.openforum.com/idea-hub/topics/money/article/when-is-lunch-deductible-...</a> </div> </div> </div> <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/small-business/when-is-lunch-deductible" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock_000003063075XSmall.jpg" alt="Lunch meeting" title="Lunch meeting" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Sometimes a local restaurant is the best place to meet with clients. It may be more convenient and since you both have to eat, it makes sense to turn lunch into a business expense. Bringing in lunch for your employees can also turn a meal into a business deduction. But there are also many situations in which your lunch isn't deductible, even if you're eating it at your desk. Knowing the difference can make a big difference in your tax burden.</p> <h2>Feeding Your Clients</h2> <p>The IRS generally classes dining expenses under the broader category of entertainment expenses and makes them a little harder to write off than one might hope. Like any other business expense you plan to deduct, the IRS expects that the cost of your meal is both an ordinary and necessary cost of doing business. By that logic, most meals aren't deductible &mdash; after all, you'd still be eating lunch if you didn't own a business.</p> <p>But as long as a meal meets the requirements of one of the two tests used by the IRS, it can be either entirely or partially deductible. The first test is whether the expense is directly related to your business. To pass that test, the IRS requires you to show &quot;The main purpose of the combined business and entertainment was the active conduct of business; You did engage in business with the person during the entertainment period; You had more than a general expectation of getting income or some other specific business benefit at some future time.&quot;</p> <p>The alternative is proving that your <a href="http://ad.doubleclick.net/clk;218396076;41475586;v?http://www201.americanexpress.com/sbsapp/FMACServlet?request_type=alternateChannels&amp;lpid=298&amp;openeep=17460&amp;ccsgeep=17460">expenses</a> meet the associated test. To do so, you must show that the expense is &quot;Associated with the active conduct of your trade or business, and directly before or after a substantial business discussion.&quot;</p> <p>In general, you can deduct only fifty percent of your meal and entertainment expenses if they're related to your business. However, depending on what kind of business you run, you may be able to take advantage of exceptions to the fifty percent limit. For instance, meals and entertainment provided to the general public as part of a marketing campaign can be deducted in full.</p> <h2>Feeding Your Employees</h2> <p>If you buy a pizza for employees working late or throw a catered holiday party for your staff, the expense is generally deductible &mdash; although your own share of those meals may not be. More than a few companies list these expenses under office supplies, whether or not that's actually a suitable category. However, it is worth noting that meals for your employees are generally not a matter of entertainment expenses, though if you buy lunch often enough, it may be considered more of a fringe benefit.</p> <h2>Entertainment Expenses</h2> <p>Alex Serrano, a CPA and partner in the accounting firm Citrin Cooperman, has seen the question of deducting lunches and other expenses from both sides of the table. He's seen plenty of unusual expenses for dining and other entertainment that his clients have wanted to write off, including a cricket sports luxury box in England &mdash; the rental of the box is not a valid entertainment expense, Serrano notes, all the actual cost of entertaining using those facilities can be written off.</p> <p>Serrano says that keeping a record of your entertainment expenses can make the process of writing them off significantly easier. You must keep that record in the moment, though &mdash; trying to recreate such a record from bank statements and receipts at the end of the year won't do any good. Nor should you rely on your receipts and scribbling a description of who you ate with and why. It's too easy to lose receipts or to be unable to interpret just what you wrote down.</p> <p>There are plenty of methods to maintain such records. Serrano says that the most important factor is not which tool you use, but being able to to keep track of dining expenses.</p> <blockquote>The key is that they set up a system for recording and maintaining these records that will work for them throughout the year. It doesn't matter if it's on a blackberry, their laptop, a spreadsheet program on their desktop, or even if they keep the records in a notebook. The key is that they keep the records in real time or contemporaneous as the IRS describes, meaning that the description of the expense and basic details need to be recorded at the time of the expense.</blockquote> <p>Your records need to include the time, date, location, participants and a description of what business was discussed.</p> <h2>A Business Based on Food</h2> <p>If you operate a business that revolves around food, lunch may not fall into the category of entertainment expenses. Instead, those tasty treats may be a matter of research. Tracy Kellner, the owner of Provenance Food and Wine, routinely visits specialty food shops when she's traveling. She's able to write off her purchases as business expenses not because she's using them but because they're research into what her competition is selling, as well as what products new vendors have on the market.</p> <p>Kellner says that she doesn't set budgets for these trips.</p> <blockquote>I will read the product labels to see if there is a website or importer listed. If I&rsquo;m not able to purchase the product at the time, I&rsquo;ll contact the producer/importer directly to try and obtain samples. I would say on average, these purchases are around $30 to $50.</blockquote> <p>She takes multiple trips a year and has never had a problem claiming the expenses on her taxes.</p> <h2>Your Own Entertainment Expenses</h2> <p>Because the rules around deducting food and other entertainment expenses can be complex, it's best to consult your CPA or tax preparer. Every business' tax situation is different, but a tax professional familiar with your business can give you more detailed advice about how to handle deducting your lunches.</p> <p>But by knowing the rules, you've got a better chance of ensuring that the IRS won't reject your deductions on the basis that they meet neither the directly-related or associated tests.</p> <script type="text/javascript"> federated_media_section = "gold"; </script><br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/thursday-bram">Thursday Bram</a> of <a href="http://www.wisebread.com/small-business/when-is-lunch-deductible">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/250-tips-for-small-business-owners">250+ Tips for Small Business Owners</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-5-best-credit-cards-for-small-businesses">The 5 Best Credit Cards for Small Businesses</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/101-tax-deductions-for-bloggers-and-freelancers">101 Tax deductions for bloggers and freelancers</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-smart-ways-to-get-a-small-business-loan">10 Smart Ways to Get a Small Business Loan</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-inspiring-stories-of-normal-people-building-a-thriving-online-store">4 Inspiring Stories of Normal People Building a Thriving Online Store</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Entrepreneurship Small Business Resource Center Taxes deductible expenses small business Wed, 10 Feb 2010 17:00:05 +0000 Thursday Bram 4972 at http://www.wisebread.com