In Volume 1 of our 2014 newsletter, we highlight:
- Company Picnic
- Vehicle Deduction
- Flexible Spending Arrangements
- Provisions Expired In 2014
Jerrold D. Rosen recently became a partner in the tax department of Hochschild, Bloom & Company LLP. Jerry joined the firm in 2000 as director of taxation. He received his Bachelor degree from the University of Illinois, Urbana-Champaign and Juris Doctor degree from Washington University School of Law. He was admitted to the Illinois Bar in 1976 and the Missouri Bar in 1987 and passed the CPA examination in 1980. Jerry has been chairman of the Missouri Society of CPA’s Taxation Committee. His technical knowledge of tax law, ability to work with clients, and positive attitude will make Jerry a great addition to the partner group. He is based out of our Chesterfield office. Jerry and his wife Carla live in St. Louis. Congratulations to Jerry on his promotion as we see him continuing the Firm’s philosophy of integrity, trust, and concern for our clients, staff, and the community.
Jeffrey C. Trentmann recently received notice that he passed the AICPA Uniform CPA Examination and the certification is in process with the Missouri State Board of Accountancy to earn his license as a CPA. Jeff joined Hochschild, Bloom & Company LLP as a staff accountant in July 2011 in the Chesterfield office. He graduated from Southeast Missouri State University with a Master’s degree in Business Administration. He performs compilations, reviews, audits, and taxation services for various clients. Jeff was recently transferred to the Washington office where he grew up and now lives with his wife Johanna. We would like to congratulate Jeff on his huge accomplishment.
We are very pleased at the achievement of both of these two individuals and are proud to call them members of the HBC family.
Generally, a taxpayer’s deduction for business meals and entertainment expenses is limited to 50% of the expenses paid during the tax year. However, there are some exceptions to the limitation. One of those exceptions is for summer picnics and holiday parties.
Many small firms have a summer picnic or holiday party for their employees as a moral builder and to forge closer ties in the company. You can take a full tax deduction for these expenditures rather than the normal 50% deduction. So long as the outing is primarily for company employees and their families, you will receive a 100% deduction.
In general, if you use your vehicle in pursuit of a trade or business, you are allowed to deduct the ordinary and necessary expenses incurred while operating the vehicle. However, any expenses associated with the personal use of the vehicle are not deductible. For purposes of these deductions, “car” includes a passenger vehicle, van, pickup, or panel truck.
Business use of your car can include traveling from one work location to another work location within your tax home area; visiting customers and attending business meetings away from the regular workplace. The costs of travel between home and a regular place of work, however, are nondeductible commuting expenses.
In lieu of proving the actual costs of operating an automobile owned by them, employees and self-employed individuals may compute the deductible costs for their business use of an auto using a standard mileage rate. The 2013 standard mileage rate was 56.5 cents per mile (the rate decreased to 56 cents per mile for 2014). You may not depreciate your car or deduct lease payments if you use the standard mileage rate method. If you use the actual cost method, you may take deductions for depreciation, lease payments, registration fees, licenses, gas, insurance, oil, repairs, and tires. Regardless of the method used, if the vehicle is driven for personal as well as business purposes, only expenses or mileage attributable to the percentage of business use are deductible. There are separate considerations involved in leasing a car for business.
If you are using your car for business purposes, whether owned or leased, proper recordkeeping is critical. The recordkeeping requirements vary depending upon which method you use. If you use the standard mileage rate, you should keep a daily log showing the miles traveled, destination, and business purpose. Recordkeeping under the actual cost method is somewhat more onerous, but you still need to keep a mileage log in order to establish a business use percentage. In addition, you must keep receipts, invoices, and other documentation to verify expenses. Finally, you must be able to prove the original cost of the vehicle and the date it was placed in service for business use in order to claim depreciation.
The fact that an employer allows an employee to use an employer-provided car for personal purposes generally does not deprive the employer of a vehicle expense deduction. An employer who provides a vehicle to an employee as a fringe benefit may use one of the special valuation rules to calculate the amount of the benefit that is attributable to the employee’s personal use of the car.
Employers must report their employees’ personal use of the car on their Form W-2, Wage and Tax Statement. They are not required to withhold income taxes on this income, although social security taxes must be withheld.
An employee with an employer-provided car must substantiate the business use of the car with adequate records or evidence in order to claim a fringe benefit exclusion from income for personal use of the car. An employee who uses a personal car in the performance of services for his or her employer is entitled to deduct the car expenses if the car is used for the convenience of the employer, and is required as a condition of employment. Any unreimbursed employee expenses attributable to such use are deductible only to the extent that they exceed 2% of the employee’s adjusted gross income (AGI).
Whether you are an employer, an employee, or a self-employed individual that is using a car for business purposes, you may be able to take a deduction for your expenses. Please see us for guidance in claiming and substantiating these expenses.
Flexible Spending Arrangements
The Affordable Care Act, as passed in 2010, is gradually impacting the degree to which medical costs can be defrayed as tax-free fringe benefits. Notably, individuals until recently could use funds in their health Flexible Spending Arrangements (health FSAs) to pay for over-the-counter drugs, as well as prescription meds and other healthcare costs. After all, many medications increasingly have become available over-the-counter without a prescription. However, the health care reform package makes some important changes to health FSAs, including prohibiting health FSA dollars to be used for over-the-counter medications as well as limiting the amount of tax-free dollars an employee can contribute to a flexible spending account each year. The IRS has been busy with the reaction to these new restrictions and has most re-cently offered some relief from the health FSA use-it or lose-it rule.
Health FSAs allow employees to be reimbursed for health care, dependent care, or other expenses that would otherwise be excludable from gross income as a health insurance benefit if paid by an employer. Medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of a disease. Medicines and drugs are expenditures for medical care. The Affordable Care Act modified the definition of medical expenses for health FSAs to conform to the definition used for the medical expense itemized deduction.
The health FSA may be funded by employer contributions or by a pre-tax salary reduction agreement with each employee as that employee so elects at the start of each year. Since the employee’s contributions are pre-tax, they not only are excluded from Federal and State income tax but also Social Security and Medicare tax. The employer must take the initiative to establish the health FSAs; the employee cannot start one on his or her own. The employer as the plan sponsor also shoulders the incidental administrative costs of running the health FSAs.
The health care reform package places an important new limit on contributions to health FSAs. For tax years beginning after 2012, salary reduction contributions must be capped at $2,500 per year. The $2,500 amount is indexed for inflation after 2013. For 2014, the applicable rounding factor for this inflation computation keeps the cap at the $2,500 level.
Health FSAs have important, additional limitations. Amounts withdrawn from a health FSA must be used to reimburse medical care expenses. Any excess cash in the account at the end of the year not used for expenses incurred during that year will be forfeited. This is known as the “use-it or lose-it” rule. However, the IRS has given employers permission to amend their health FSAs in one of two ways. Employers may amend their health FSA plans to extend the deadline for up to 2½ months after the end of the plan year. Or employers may allow up to a $500 carryover into the next year of any unused health FSA funds. Fortunately, any use-it or lose-it carry-over into the next year, under either the 2½ month extension or the $500 rule, does not count toward the $2,500 per year cap on health FSA contributions for that next year. Partners in a partnership and 2% or more shareholders of an S corporation are not eligible to participate in their company’s FSA plan.
Independent of a health FSA, employers may set up dependent care FSAs to cover costs of day care, summer day camp, and for the care of a physically or mentally incapacitated dependent of any age. An employee can generally elect a salary reduction contribution of up to $5,000 for dependent care expenses. Any amounts covered under the dependent care FSA does not qualify for the child care credit.
Provisions Expired In 2014
Several popular tax provisions that had been in effect in 2013 and prior years have expired as of January 1, 2014. Currently, Congress has not acted to reinstate them but they may do so later, retroactive back to January 1.
There were several education deductions which expired. One was the $4,000 above-the-line deduction for higher education expenses. Another was the deduction of up to $250 for teacher out-of-pocket expenses for classroom supplies.
Previously, an individual could deduct either state and local income taxes or state and local sales tax as an itemized deduction. Now the deduction has gone back to just state and local income taxes. This election was very advantageous for taxpayers living in states who do not have a state income tax.
Adults age 70½ or older could transfer up to $100,000 from their IRA to a charity. This could be done without recording the distribution as income and likewise not recording the donation as an itemized deduction. This was very beneficial for people in higher income tax brackets. This also counted as part of your required minimum distribution
Residential energy credits of up to $500 for energy improvements to your principal residence have also expired. This was for items such as windows, insulation, doors, etc. There is still a credit for solar, geothermal, and fuel cell items for a credit up to 30% of their cost.
These items were all supposed to go away previously but Congress kept extending them. Only time will tell if they will come back.
For more information, please contact us.