Meals and entertainment expenses have a long history in business. They have been used to strengthen business relationships with colleagues, peers, and existing or potential clients. The deductions allowed have varied depending on the type of expenditure.
Under the new Tax Cuts & Jobs Act the amounts of deductions allowed have been updated effective January 1, 2018. Following is a quick analysis of the old and new rules.
Taxpayers need to be wary against scam groups masquerading as charitable organizations, luring people to make donations to groups or causes that don't actually qualify for a tax deduction. These ‘fake’ charities attempt to attract donations from unsuspecting contributors, using a charitable reason and a tax deduction as bait for taxpayers. Fake charities are one of the “Dirty Dozen” tax scams for the 2018 filing season.
Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime, but many of these schemes peak during filing season as people prepare their tax returns or hire someone to prepare their taxes.
Getting a tax benefit out of your home just became a little more difficult.
Homeowners have long used the equity in their homes as collateral to secure loans. Whether a home equity loan (typically fixed amount, term, and payment) or a home equity line of credit (a revolving credit line), individuals borrowed to get cash. The interest paid on these loans was often reported as mortgage interest for taxpayers itemizing on Schedule A.
Business expenses are best deducted in the business. Sometimes business expenses are paid for by an individual, and then reimbursed by the business. Occasionally, however, the expense is not reimbursed by the business, and an individual reports the unreimbursed business expense as a deduction on Schedule A.
This type of deduction has been considered an audit red flag in the past. However, thanks to the new tax law, this red flag is going away. You’ll want to make sure you are reimbursed for any business expenses, since starting with 2018 these deductions are eliminated for individuals. If you have some unreimbursed business expenses for 2017, get it reported to take your last tax deduction. But moving forward, make sure you get reimbursed by the business.
As we've said before, one of the most common questions we get is about how to deduct the business use of your vehicle. This type of deduction is fully allowed, and as CPAs we encourage you to deduct the business portion of your vehicle expenses.
The easy thing to do is to say your vehicle is used 100% for business purposes, and then deduct every auto-related expense in your business. Unfortunately, the easy thing is NOT the right thing, and that kind of attitude raises red flags for tax audits. It is extremely uncommon for a vehicle to be used 100% for business purposes, and the government knows that. In reality, even any high percentage of business use is pretty rare.
Regular and exclusive use. That is the first hurdle to claiming the home office deduction. No matter what, if you don't use your office regularly and exclusively as an office the deduction is not available.
Using your office "regularly" is pretty vague. While there is no clear definition by the IRS of what "regular" means, be prepared to show you use it regularly. Using your office "exclusively" is easier to define. If you do your work at the dining room table, that is not exclusive. Have a space that is yours, and make sure it is only used for your business.
Appropriate business deductions are always allowed. Always. The problem is that not all deductions are appropriate.
Sometimes taxpayers get carried away, and their vacation is morphed at tax time into a business trip. Others report their vehicle as being used exclusively for the business, and forget about all the personal driving they do in their cars. These types of deductions stand out to the IRS, making easy pickings for IRS auditors.
The rental of real estate is, by definition, considered a passive activity. Passive income is taxed like other income, and no special reporting is required. Passive losses, however, are typically limited and allowed only to the extent of passive income. That means if you have passive losses, but no passive income, the loss is not allowed.
Because of these passive loss rules, multiple years of rental losses may catch the attention of the IRS. That doesn’t mean the losses aren’t allowed, but if you are reporting losses, make sure you are claiming them appropriately. There are exceptions to the limitations, and rental real estate losses can be allowed.
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