taxgirl » small or home-based business

Credit Card Reporting for Tax Purposes Debuts This Month

Kelly — Sat, 14 Jan 2012 03:37:36 +0000

Form W-2, check.

Form 1099-Misc, check.

Form 1098, check.

Form 1099-K… wait, what?

Yep, there’s a new form from the IRS out this year and one might be landing in your mailbox soon. The federal form 1099-K, Merchant Card and Third Party Network Payments, will debut early this year: forms 1099-K are due to merchants by January 31, 2012. Electronically filed 1099-Ks are due to the IRS April 2, 2012 (normally March 31), while paper 1099-Ks are due February 28, 2012.

So what is the new form 1099-K? It looks like this (downloads as a pdf and yep, no longer in draft form!).

And here’s how it will work: certain payments for goods and services paid by credit card or third party merchants will be reported to the IRS via the form 1099-K. A reportable payment transaction is a transaction in which a payment card (such as a credit card or gift card) is accepted as payment or any transaction that is settled through a third party payment network like PayPal. It does not include ATM withdrawals, cash advances against a credit card, a check issued in connection with a payment card, or any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the card.

In plain talk, this means that taxpayers who have a credit card merchant account, Paypal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider. That would include professionals like lawyers and architects who accept online or credit card payments for services, freelancers compensated via PayPal and etsy sellers, affiliates, eBay merchants and other small businesses who accept credit cards, debit card or PayPal as payment for their wares.

But not every dollar will count. Reporting is only required when gross payments to an individual payee exceed $20,000 for the year and when there are more than 200 transactions with the participating payee. So the occasional sale of a crocheted toilet paper roll cover over the internet? Not likely to merit the issuance of a 1099-K. But a successful online store? That’s another story.

It’s the first year of reporting so there’s bound to be a lot of confusion. As a result, the IRS will delay penalty provisions and withholding requirements until January 1, 2013, for entities required to issue the forms 1099-K. The reporting, however, is moving forward.

The point of the law is to “improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.” Read: the IRS thinks you’re cheating. And some of you are. That explains the whole tax gap problem. This is yet another effort to step up compliance. Taxpayers who receive those forms 1099-K are going to be expected to report the income. Don’t get caught off guard.

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Ask the taxgirl: Getting Paid Under the Table

Kelly — Mon, 12 Dec 2011 14:14:36 +0000

Taxpayer asks:

I was wrongfully fired off of assumptions. It’s a small family owned business. They used to pay me under the table. What are the steps/where do I turn to, to have them caught red handed for paying under the table?

taxgirl says:

This is one of those questions that is difficult to answer in a few paragraphs but I’m going to give it a go. For the sake of simplicity, I’m going to restrict my answer to the tax-related implications and not address any of the employment related or other legal questions – that’s a whole other can of worms for which you may want to seek legal counsel.

First, it’s important to understand what “under the table” means. The implication is that you were being paid out of pocket and not documented. That may be true. It may also be true that your employer was classifying you as an independent contractor. Simply not having taxes withheld (even if you think they should have been) does not mean that you are being paid “under the table.” If you were, in fact, properly classified as an independent contractor – and not an employee – the employer would not have been required to withhold taxes.

Nonetheless, the employer should have clearly indicated to you the terms of your employment, including how you would be classified and paid. You should have also been asked to complete a federal form W-4 (for an employee) or a federal form W-9 (for an independent contractor).

If you believe that you have been misclassified as an independent contractor, you can report it to the IRS using a form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (downloads as a pdf). The IRS will review the facts and circumstances and contact the employer for his or her side before officially determining your status. If it turns out that the IRS agrees with you, it doesn’t exempt you from your own personal tax obligations.

If you didn’t complete any forms and it was clear that your employer really was paying you “under the table” or what we call “off the books” (meaning no record of your existence for tax or employment purposes), that’s different. In most cases, there’s no real incentive to completely pay workers off the books unless there’s something else going on, such as the employee not having the authority to work in this country or an attempt to avoid credit obligations such as student loans or alimony. But still, it happens.

Your employer never should have offered to pay you off the books and I’m not giving him or her a pass. But the problem in this context, from a tax perspective, is that by accepting an agreement to be paid off the books, you’ve caused yourself some agita in the process. You’re definitely not paying in to Social [entity display="Security" type="section" active="true" key="/security"]Security[/entity] or Medicare which affects your ability to collect in the future. You likely haven’t been reporting on your side to the IRS or the state (that’s the point of getting paid off the books, right?) so depending on how long this has been going on, you have some catch-up to do that will likely be expensive.

There may also be a difference in terms of how much money you actually received versus what your employer claims to have paid you. Again, if it’s off the books, the issue of proof is a big one. Make sure that you have excellent records.

So what should you do? That’s a personal choice. There are options if you were mistreated or misclassified. But if this really is just sour grapes because you accepted a deal that didn’t work out like you hoped, you don’t get a break for turning someone else in. My advice in many of these cases is to settle up on taxes on your end and move on. Yes, you can report your employer but I’m not really sure what that gets you, other than a bit of Schadenfreude.

Bottom line: don’t accept an offer to pay you off the books. Your employer isn’t doing you any favors and these arrangements almost always end in disaster. If and when this finally catches up with your employer, he or she won’t hesitate to throw you under the bus in much the same way you’re contemplating now.

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And let’s make sure we understand a few things, ok?

Unless you have a representation letter in hand, you and I don’t have an attorney-client relationship, capiche? I mean, I’m sure you’re a nice person. I appreciate you stopping by the blog. But it doesn’t mean anything more (I’m having a weird deja vu to a couple of bad dates in college).
Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. This blog isn’t meant to offer you legal advice. I’m just calling it like it is. If you have real questions – i.e. you’re hiding in a closet while the feds bang on your door – you need to consult with a tax professional. If you live in my corner of the world, that might be me. But see #1.
I do work at a law firm. Some might even say I’m a partner at said law firm. But this blog is in no way affiliated with my law firm. The other partner and my malpractice carrier insist on it. And I have to live with one of them. And it’s not my malpractice carrier. So, again see #1.
I’m not responsible for anything anybody says on this blog except me. But play nice. I don’t want to have to throw you out of here (there’s that deja vu to college again).
And one more thing. I’m not here to help you cheat the system. That should be obvious. But just in case it’s not, the IRS wants me to reiterate that I’m not. So consider this your Circular 230 Notice:

In order to comply with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this blog.

It will also fail to make you rich, lose weight, get white teeth or regrow hair that has been lost. I can’t guarantee dates or life matches (in fact, it’s arguable that if your friends find out that you read a tax blog, you could lose points – but I’m not telling!). I have never made a good stock tip (that I’m aware of) and I can’t buy your gold.

If after all of that, you still have a question, check out my “ask the taxgirl” policy here.

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Ask the taxgirl: Self-employment Tax

Kelly — Sat, 10 Dec 2011 14:10:17 +0000

Taxpayer asks:

Since the self-employment tax rate is 12.4 percent, why do I have to pay 15.3%?

taxgirl says:

Self-employment tax, sometimes called SE tax, is a tax consisting of Social [entity display="Security" type="section" active="true" key="/security"]Security[/entity] and Medicare taxes for those who work for themselves. It’s the equivalent of the total of Social [entity display="Security" type="section" active="false" key="/security"]Security[/entity] and Medicare taxes, sometimes called FICA taxes, withheld from an employee plus the amount paid out by an employer. In other words, the self-employed pay both parts (yes, there’s a credit but that’s a separate post). You figure SE tax by using Schedule SE on your form 1040.

The 12.4% figure you reference is the Social [entity display="Security" type="section" active="false" key="/security"]Security[/entity] portion of the tax. You get to the 15.3% by adding in your contribution for Medicare taxes, which works out to 1.45% each for employer and employee, or 2.9% for self-employed. The total is 15.3% (12.4% + 2.9%).

The 15.3% does not apply to all self-employed wages. For 2011, the first $106,800 of your combined wages, tips, and net earnings are subject to the Social [entity display="Security" type="section" active="false" key="/security"]Security[/entity] part of self-employment tax; the overage is not. There is no cap on Medicare taxes. Here’s a quick comparison:

Example 1: Your self-employment income is $100,000. All of the income would be subject to the full amount of taxes for Social [entity display="Security" type="section" active="false" key="/security"]Security[/entity] taxes and Medicare which, in 2010, would have been $15,300 (15.3% of $100,000).

Example 2: Your self-employment income is $110,000. Your income to $106,800 is subject to Social [entity display="Security" type="section" active="false" key="/security"]Security[/entity] tax of 12.4% on the first $106,800 plus Medicare taxes on the entire $110,000 which, in 2010, would have been $16,433.20 (12.4% of $106,800 + 2.9% of $110,000).

(Quick note: Thanks to @YvonneEsq for catching my math error!)

That said, for one year only, in 2011, there is a payroll tax holiday, which reduces payroll tax contributions. The break applies to the self-employed by the same 2%, so that instead of paying in at 6.2% for the “employee equivalent” part of the Social [entity display="Security" type="section" active="false" key="/security"]Security[/entity] taxes, contributions are 4.2% for Social [entity display="Security" type="section" active="false" key="/security"]Security[/entity] taxes. Contributions for Medicare remained the same. That makes the total 13.3% (4.2% + 6.2% + 1.45% + 1.45%) for 2011.

Assuming that nothing changes, the rate will go back to the full amount in 2012.

And let’s make sure we understand a few things, ok?

Unless you have a representation letter in hand, you and I don’t have an attorney-client relationship, capiche? I mean, I’m sure you’re a nice person. I appreciate you stopping by the blog. But it doesn’t mean anything more (I’m having a weird deja vu to a couple of bad dates in college).
Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. This blog isn’t meant to offer you legal advice. I’m just calling it like it is. If you have real questions – i.e. you’re hiding in a closet while the feds bang on your door – you need to consult with a tax professional. If you live in my corner of the world, that might be me. But see #1.
I do work at a law firm. Some might even say I’m a partner at said law firm. But this blog is in no way affiliated with my law firm. The other partner and my malpractice carrier insist on it. And I have to live with one of them. And it’s not my malpractice carrier. So, again see #1.
I’m not responsible for anything anybody says on this blog except me. But play nice. I don’t want to have to throw you out of here (there’s that deja vu to college again).
And one more thing. I’m not here to help you cheat the system. That should be obvious. But just in case it’s not, the IRS wants me to reiterate that I’m not. So consider this your Circular 230 Notice:

In order to comply with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this blog.

It will also fail to make you rich, lose weight, get white teeth or regrow hair that has been lost. I can’t guarantee dates or life matches (in fact, it’s arguable that if your friends find out that you read a tax blog, you could lose points – but I’m not telling!). I have never made a good stock tip (that I’m aware of) and I can’t buy your gold.

If after all of that, you still have a question, check out my “ask the taxgirl” policy here.

–

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IRS Announces 2012 Mileage Rates

Kelly — Fri, 09 Dec 2011 14:06:51 +0000

The IRS has issued the 2012 optional standard mileage rates used for deducting the costs of operating an automobile for business, charitable, medical or moving purposes. They are:

55.5 cents per mile for business miles driven
23 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations

These rates are effective as of January 1, 2012 and reflect very little in the way of movement from those rates which were effective as of July 1, 2011 (a rare mid-year change). The rate for business miles has not been changed while the rate for medical or moving purposes actually went down by a half cent (yes, really).

The rate for charitable organizations remains unchanged and has for nearly 15 years. That rate is not adjusted for the cost of living (yes, it’s shameful) and is set by Congress.

Under the current rules, you can generally use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. I know that seems odd but it’s a quirky little provision that might save you a few tax dollars.

Taxpayers also have the option of deducting “actual car expenses” rather than the standard mileage rate. “Actual car expenses” are exactly as advertised on the tin: the actual costs allocable to the use of the car. This includes depreciation or lease payments, maintenance and repairs, tires, the cost of gas, oil, insurance, and license and registration fees. To figure your deduction, total your expenses each year. The portion attributable to the business use of the car is and deductible; if the car is used for personal and for business use, the costs must be pro-rated.

Keep in mind that timing and ownership are important when deciding which method to use. If you want to use the standard mileage rate and you own the car, you have to claim it in the first year the car is available for use in your business; in later years, you can claim either the standard mileage rate or actual expenses. However, if you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. You must make the choice by the due date, including extensions, of your return and you cannot revoke the choice.

Regardless of whether you choose the standard mileage rate or actual car expenses, parking fees, tolls, interest and taxes are separately deductible for business, medical, moving and charitable purposes. Be sure and keep good receipts to substantiate those costs.

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IRS Offers Relief for Credit Card Reporting Requirements

Kelly — Tue, 01 Nov 2011 19:01:47 +0000

Panicked about those new form 1099-K (Merchant Card and Third Party Network Payments) requirements? Take a breath. The IRS has already figured out that things aren’t going terribly smoothly and is, as a result, offering “special transitional relief” for taxpayers and service providers.

Contrary to some internet rumors, this isn’t the same as a free pass. The law is still effective, just bits of it are delayed. As a result of concerns about the new law, the IRS will delay penalty provisions and withholding requirements for a full year, until January 1, 2013. However, the filing requirements are still in place, meaning that reporting for 2011 is still going to happen.

Under the current rules, information reporting for applicable payment card and third party network transactions are due to the IRS by February 28 each year (or March 31, if filed electronically) for the prior calendar year. That means that the first forms 1099-K for calendar year 2011 must be submitted to the IRS by February 28, 2012 (or April 2, 2012, since March 31, 2012, falls ons a Sunday, if filed electronically).

And just like a form 1099-MISC or 1099-DIV, those statements also need to be furnished to the payee. The form 1099-K must be provided to each participating payee by January 31 of each year for the prior calendar year. That means that forms 1099-K for the calendar year 2011 must be furnished to payees by January 31, 2012.

There are some tricky withholding rules that accompany the reporting requirements. Specifically, backup withholding of 28% is required if a payee fails to furnish a correct taxpayer identification number to the payor. The IRS noted that they had received requests to postpone the due date for backup withholding from a “number of payors” due to concerns about the procedure and difficulties in matching TINs to taxpayers in order to comply with the new rules. As a result, the IRS is postponing the effective date for backup withholding (as it applies to section 6050W payments) for an additional year. This means that backup withholding will be required on section 6050W payments made after December 31, 2012.

The IRS is also granting accuracy-related penalty relief. Under section 6050W, forms 1099-K must include the gross amount of reportable payment transactions, as well as the name, address and taxpayer identification number (TIN) of the payee. Penalties apply for failing include all required information or including incorrect information on the form 1099-K sent to the IRS or to the payee – just like with other forms 1099. However, payors were concerned about the potential penalties in light of the new reporting requirements and asked IRS for a break. As a result, the IRS will not impose accuracy-related penalties on payors that file forms 1099-K provided that the payors make good-faith efforts in filing accurate forms. This relief is only applicable to payments made in the calendar year 2011 and doesn’t apply to payors who simply don’t file.

Also on tap? The IRS has indicated that they might have some solutions for those pesky gross income reporting issues. Many practitioners had expressed concern about the requirement to report gross receipts paid out without regard to chargebacks, fees or other adjustments with many worried that such discrepancies would raise flags at IRS. Future guidance on this issue is expected to be released.

In the meantime, you can read more about the relief offered so far in IRS Notice 2011-88 and Notice 2011-89 (each will download as pdf) or check out the FAQ page on the IRS web site.

(Hat tip: @eligabiff)Similar Posts:

New Credit Card Reporting Requirement Worries Some Taxpayers

Kelly — Tue, 25 Oct 2011 18:47:56 +0000

And you thought bank fees were bad… There’s a new form on the block, Form 1099-K, Merchant Card and Third Party Network Payments, making its debut in a few months, just in time for the 2012 filing season. The form is the result of new compliance reporting requirements for certain credit card and third party network payments (think PayPal). More compliance reporting. You already know where this is going.

Before we get into the nitty gritty, first, a little background.

A little over three years ago, President Bush signed into law a bill known as The Housing Assistance Tax Act of 2008; it was part of the Housing and Economic Recovery Act of 2008, or HERA. As per usual, the bill was cleverly named so as to ~~sneak something past taxpayers~~ garner support from taxpayers. Even the title of the bill, technically HR 3221, was meant to tug at your sensibilities: A bill to provide needed housing reform and for other purposes.

Cause, c’mon? Who didn’t want housing reform in 2008? Okay, maybe I didn’t. But I was in the minority. The bill passed, putting into place $15.1 billion in tax incentives, including the first effort at the first-time homebuyers’ credit. And then we moved on.

What was forgotten about was that little “for other purposes” bit in the bill. Smack in the middle of the bill was a new requirement for banks and credit card merchants to report certain payments to the IRS. The law was passed in 2008 but the new reporting requirement didn’t kick in until this year (2011); it will show up for the first time when forms 1099-K are issued in early 2012. Yep, that’s just a few months away.

The idea of the law was to “improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.” Yes, they used the word “voluntary.” Only it’s not so much.

You see, you and I both know that there are hundreds of millions of dollars (if not more) exchanging hands that go unreported every year. This difference between what is actually reported versus actually earned is called the tax gap. A lot of the tax gap is thought to be the result of online transactions. And it’s true. Bloggers, etsy sellers, affiliates, eBay merchants and other small businesses have been able to stay under the radar if their income comes from multiple sources or if they are paid from companies that fail to file report that income (for whatever reason). The form 1099-K is an attempt to put an end to the underground/untaxed economy.

Here’s how it will work: certain payments for goods and services paid by credit card or third party merchants will now be reported to the IRS via the form 1099-K. The look and feel of the form 1099-K is very similar to the form 1099-INT used by banks to report interest and the form 1099-DIV used by banks to report dividends.

The form 1099-K will be required for “reportable payment transactions.” A reportable payment transaction is basically a transaction in which a payment card (such as a credit card or gift card) is accepted as payment or any transaction that is settled through a third party payment network like PayPal. It does not include ATM withdrawals, cash advances against a credit card, a check issued in connection with a payment card, or any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the card.

What this means, basically, is that taxpayers who have a credit card merchant account, Paypal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider at the end of the year.

The IRS is still working out the details (though they are more or less settled). Exceptions may apply in certain circumstances, such as if the total payments settled for the year are less than $20,000 or if there are fewer than 200 transactions.

It’s the first year that the rule will be in effect which means that there are going to be some issues. And by some issues, I mean lots of issues. The biggest area of concern seems to focus on the fact that the form 1099-K will report the gross amount paid out with no adjustments for fees or chargebacks for returns or mistakes. That means that there are going to be some issues reconciling the forms against income actually received. And again, by some issues, I mean lots of issues.

I don’t want to be a big naysayer here. I actually believe that better compliance should be a goal for the IRS and I also believe that internet based transactions should not escape taxation just because they are easier to hide (yes, hide, as in deliberate).

I am a little skeptical, however, at how smoothly the process of reporting for the first year is going to happen. I don’t think the IRS has done a stellar job of prepping the public for the changes. And while I completely agree that taxpayers who have been receiving credit card and electronic payments should have been reporting their income all along, some clearly haven’t or there wouldn’t be a need for the form in the first place. In other words, if everyone reported just fine, there’s no tax gap, right?

But should that equal a blindside? I don’t think so.

And what about those taxpayers who have been reporting but now find themselves a little confused by – or in disagreement with – the forms they receive? Some financial institutions may be, er, too big to fail but maybe they’re not too big to make a mistake? Or two?

We tend to fear what we don’t know and right now, we just don’t really know how this is going to play out. The first forms will be issued in January 2012, assuming all goes as planned. But for now, you can check out a draft of the 2011 form 1099K (downloadable as a pdf). Are you ready for it?Similar Posts:

The Business of Being Lindsay

Kelly — Thu, 13 Oct 2011 23:22:39 +0000

Ah, Lindsay Lohan. Always good for water cooler conversation. According to the gossip site TMZ, Lindsay is facing legal woes again. This time, she allegedly stiffed a limo company, Elite Transportation Limo and Security Services, for services from February 2009 to May 2009. The tally? A whopping $90,585.79.

It’s the kind of thing that makes people talk. And since I’m a tax attorney, these conversations inevitably turn to tax. So when a friend asked me if it was deductible, I wasn’t all that shocked. After thinking for a second, I replied that probably was… after all, the limos were reportedly used for travel to airports, hotels, drug rehab (which we already know is deductible) and media appearances – security was also said to have been provided by the limo company on these occasions. So the base cost of the limo bill is likely deductible.

But what about the lawsuit from the limo company? And what about those other lawsuits? The drug charges? The E*Trade “milk-a-holic” suit? The infamous necklace theft case? Deductible?

It’s clear that you can’t deduct any resulting fines, fees or penalties paid to the government for breaking the law. The support for that position is found at section 162(f) of the IRC which says:

No deduction shall be allowed… for any fine or similar penalty paid to a government for the violation of any law.

So, tickets for DUI, drug offenses, that sort of thing… not deductible. But what about those legal costs?

Legal services are generally not deductible to individual taxpayers: legal fees which are personal in nature are never deductible. However, you can deduct the cost of legal services related to producing or collecting taxable income. These expenses are deductible on Schedule A as miscellaneous itemized deductions subject to the 2% limitation – a pretty high bar for a top earning taxpayer .

But I’m guessing that Lindsay doesn’t report all of her income and expenses as a regular taxpayer. I’m guessing that she files as a business taxpayer. She is, after all, a marketable commodity and likely has more than one company associated with her brand.

If you are a business taxpayer, you can deduct any legal expenses on your return that could be considered business expenses. To be considered a bona fide business expense under 26 USC Sec 162(a), the expense must be “ordinary and necessary… in carrying on any trade or business.”

So the bigger question becomes, What exactly is the business of being Lindsay? In other words, when is defending Lindsay’s behavior (or in the case of E*Trade, defending her name) a personal endeavor versus a business one?

If you flash back to Lindsay’s Parent Trap and Mean Girls days, I would argue that the business of being Lindsay hinged largely on her good girl image. Protecting that image was, at one time, of primary importance. I would think, then, that any actions to protect her image – from defending charges to pursuing suits to protect her reputation – could (note that I said could, not would) be considered expenses relating to the business of being Lindsay.

But now, I don’t think you can say that Lindsay relies on her good girl image for business. In fact, it could be argued that it’s quite the opposite. A quick poll on Facebook supported that idea: nearly 80% of the respondents identified Lindsay in a negative light. So, does the analysis still hold? Is the business of being Lindsay – even as a bad girl – still a considered a business for purposes of business expense deductions?

To qualify, expenses relating to the business of being Lindsay would have to meet the “ordinary” and “necessary” criteria. An ordinary expense is one that is “common and accepted in your trade or business.” In the most generic use of the term, legal expenses are certainly common and accepted for celebrities. But if you look at specific behavior, would legal defense fees for criminal activity be considered common and accepted for celebrities? Does it depend on who you ask?

Assuming that you could argue that case, it brings us to the second question: are the expenses necessary? A necessary expense is one that is “helpful and appropriate for your trade or business.” On some level, of course the expenses were necessary – it’s generally considered foolish to represent yourself in court, especially on criminal matters. But are they helpful and appropriate for Lindsay’s trade or business? I think that might depend on what business you’re describing.

These matters are so fact and circumstances dependent that it’s impossible to give a thorough answer without knowing more information. But it does make for fun cocktail party conversation, especially among the tax geek set (just as it did with respect to Belichick’s cheating scandal).

As with other actors, celebutantes and sports figures before her, it’s an interesting question from a tax policy standpoint. Assuming that Lindsay is allowed to claim the deduction for all of her legal expenses — and that’s a big assumption — is it good policy? If so, does that mean that the business of being Lindsay more important than the business of being, say, you or me? Where is that line exactly?Similar Posts:

Back to School: Education Costs as Business Expenses

Kelly — Sun, 25 Sep 2011 15:06:14 +0000

t’s common to think about education expenses as they relate to fresh faced college students just starting out – but what about the rest of us? Can you deduct the cost of an education when you’re not pursuing a degree or certificate for your first career?

You might.

Under some circumstances, you may be able to claim the cost of an education as a business expense. To take the deduction, you must be working (sorry, recent or soon to be college grads); itemize your deductions on Schedule A if you are an employee or file a file a Schedule C, Schedule C-EZ, or Schedule F if you are self-employed, and have qualifying work-related education expenses for education.

To qualify for the deduction, your education must either be required by your employer or the law to keep your present salary, status, or job or your education must help you maintain or improve skills needed in your present job. That said, expenses don’t qualify if the education is intended to meet the minimum educational requirements of your present trade or business (meaning to get started), or is intended to qualify you for a new trade or business.

It sounds complicated but think of it this way: if it’s a course you have to take (even if leads to a degree) in order to continue to keep your job – or get better at your job – it’s generally deductible. This includes continuing education credits and seminars, for example.

You can’t deduct the cost of getting your first degree or prepping for your first job (initial bar exam fees, for example, have consistently been found to be not deductible) or the cost of training to switch jobs. While your mother might find it great that you decided to give up the law to become a Master Gardener, the cost of making that jump is not deductible as a business expense – although that cost may qualify for certain educational tax credits, like the Lifetime Learning Credit.

This, of course, brings us to today’s giveaway. Deductible or not, paying for an education while working can be tiring. We have a host of giveaways today to help you stay connected with friends and family

First up, we have one netTALK DUO, which is a small, simple digital telephone adapter that provides free HD calls throughout the US and Canada using a regular phone for just $69.95, which includes a full year of service, and just $29.95 for each additional year. The netTALK DUO allows for a dedicated line inside your home or dorm room so long as you have internet access. In June, PC Mag ran ran a rave review, granting it the coveted Editor’s Choice Award. And in these cost-cutting days, the netTALK DUO is the perfect way to cut back on Back to School expenses. The netTALK DUO is available via netTALK’s website and at WalMart, Amazon, Dell, Buy.com, TigerDirect.com, CompUSA, CircuitCity, and online and instore at P.C. Richard & Son (also available in Canada, eh?).

To keep up with your iPad or Kindle, we have a TuffLuv iPad or Kindle case, the perfect functional and stylish accessory to help students easily adapt to the hustle of campus life. You can choose from a diverse range of materials and styles to wrap the latest devices in – from natural Hemp to animal-free Veggie Leather as well as the striking Moroccan design of the Marrakesh line. Tuff-Luv cases can withstand all of college life’s little hazards even those less ordinary, like a fall out of a second floor window.

Next up: a TP-LINK router. With the number of hours that students spend online, they really need a solid and reliable wireless router that will keep them online and without any drops in connection. There are a lot of fancy-looking routers out there, but TP-LINK spends their time on the quality of the Router to ensure that it just plain works. No one wants to keep walking back to the crevices of their home to reboot their router. You will set it up and never have to think about it again. The TP-lINK Ultimate Wireless N Gigabit Router (TL-WR1043ND) is easy to set-up, and will keep you online with a fast, constant connection, so you can do research online, stream music and videos, and — when you need a break, of course, play online games.

We’re also giving away a skin for your laptop and/or phone from Sticky Skins. You can give your cell phone, laptop, iPod, tablet or gaming device a unique look while protecting your investment against slippage, scratches, or other damage. At Sticky Skins, you can choose from top artist designs or customize your own protective skin to turn an everyday cell phone, iPod or laptop into a work of art that reflects your style and tastes to make any device uniquely yours. You’ll enjoy beautiful designs, colors, and artistic patterns every time you text, surf the net, or jump into a game. Sticky Skin covers made of high quality vinyl that is digitally printed with vibrant colors that make your device stand out. Sticky Skins fit perfectly on hundreds of devices and are easily removable without leaving any residue. They also work well with your hard cases or carrying bags.

Finally, you can wind down with a set of BodyGuardz Bump series earphones. Bump boasts 16 ohms of sensitivity wrapped in the smallest of the Earjax models. You’ll be amazed that such incredibly crisp sound, fantastic treble, and deep bass can come out of such a little device. Bump features a full suite of silicone tips, providing a comfortable fit in virtually any ear and comfortably blocking outside noise to give you the maximum listening experience every time. And don’t forget the handy black aluminum tube and lanyard that come inside the package, helping to keep your buds safe and close by.

It’s easy to enter. Just post a comment below to tell me what you would go back to school to study if cost – and deductibility – weren’t an issue. Art? Law? Medicine? Marine Biology? Drama.

I’ll choose one winner randomly (using a number generator) for each prize out of all of the qualifying entries.

Here are some more rules because, as you know, I’m a lawyer and I like rules:

Entries must be posted in the comments section for this blog post in the space below by 6:59 p.m. EST on September 26, 2011.
Don’t panic if your comment doesn’t show immediately. If it goes to moderation because, for example, you’re new here, the time stamp on your comment is what counts. If you have difficulty registering, please send an email to blogadmin@forbes.com and copy me (tech@taxgirl.com) so that I can help if I need to/can.
I love my Twitter followers and my Facebook fans but for this particular giveaway, tweets and Facebook comments will not be counted. Ditto for emails. You must leave your comment on the blog at this post.
You can enter as many times as you like but you must leave a different answer each time you comment.
Offensive comments or comments that otherwise violate the comment policy will be deleted and will not be considered valid for purposes of the contest.
Pingbacks and other links will be disregarded for purposes of the contest.
You must include your full name and your email address with your entry, just enter it when you register to comment. I won’t publish your email address but I do need contact information for the winning entry.
Due to shipping considerations, only United States addresses, please. Sorry, Canada, eh?
I respect your privacy and I will not send you anything unrelated to your entry in this contest.
By entering the contest, you agree that I may post any part or all of your submission including your name as a part of the contest announcements or promotions, with the exception of your email address.
Finally, the giveaway is about me, me, me. It’s not affiliated with or endorsed by Forbes. So leave them out of it, okay?

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IRS, Employers Finally Connect on Cell Phone Issues

Kelly — Wed, 14 Sep 2011 14:57:14 +0000

I have a terrible confession to make: I never leave the house without my cell phone. Really.

I rely on my cell phone for work-related calls while I’m out of the office as well as email and messaging. I use it to check Twitter and post to Facebook, and occasionally check the web. I can also browse – and post to – the blog from my phone. And you already know that I have the IRS app on my phone (and the Tax Code on my iPod).

That may sound a little bit over the top to my some occasional cell phone users like my mom (who, remarkably, texts) but it’s becoming the norm for many working folks these days. Employers and employees alike rely on cell phones to stay connected: in fact, many employers issue cell phones to their employees to do so.

Until last year, the IRS took the position that employer-issued cell phones were a taxable benefit. Relying on a rule from 1989, employers that hand out cell phones to their employees had to report the value of employer-issued cell phones as they would compensation. The same law required employees to keep detailed records of all calls made on cell phones issued by employers indicating which calls were business and which calls were personal. And in 2009, they made an effort to enforce that law. The results weren’t pretty.

The hue and cry that followed was deafening. The IRS eventually reversed course and proposed more specific rules for the taxation of personal use of cell phones. Subsequently, the IRS solicited taxpayer input on the issue and released Notice 2009–46, Substantiating Business Use of Employer-Provided Cell Phones (downloads as a pdf).

And then the lines fell silent for a bit.

Today, the IRS issued guidance designed to clarify the issue. The IRS now takes the position (based on prior feedback and a provision in the Small Business Jobs Act of 2010) that when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee.

Woohoo!

And it gets better. As a result, the IRS will not require recordkeeping of business use in order to receive this tax-free treatment (if you’ve seen me wax on about this recordkeeping bit, you’d understand my enthusiasm for this news).

Specific details can be found in Notice 2011-72 (downloads as a pdf).

At the same time, the IRS addressed how to treat cash allowances and reimbursements for work-related use of personally-owned cell phones. Here’s where they come down on the issue: employers that require employees, primarily for noncompensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees’ expenses for reasonable cell phone coverage as nontaxable.

There is a catch: the guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related. Outside of the obvious examples of what would be not primarily business related, the IRS specifically singled out the provision of cell phones “to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation” (I’m kind of intrigued that an employer would use a cell phone in an attempt to woo an employee: that would have to be some cell phone). That use remains generally taxable.

So, finally, this issue has been put to bed… until we start to argue over what constitutes “similar telecommunications equipment” (that iPad you’ve been drooling over, perhaps?). Considering that it took about 40 years for the IRS to nail down how to treat cell phones, I’m thinking we have some time.

Update:

Rumbak Law, PA also has the story.Similar Posts:

Tax Court Rules Bathroom Deduction All Wet

Kelly — Sat, 20 Aug 2011 03:12:10 +0000

Every person in America has that certain uncle, brother or father that you joke does all their best work in the bathroom.

Well, now you can point to Luis Bulas, a Florida accountant, as proof that best work or no, the bathroom is, in fact, not necessarily deductible as a home office expense.

And nope, folks, I am not kidding. You can’t make this stuff up.

In T.C. Memo. 2011-201, Luis Bulas, Petitioner, v. Commissioner of Internal Revenue, Respondent, Docket No. 18977-09 (downloads as a pdf), filed just this week, U.S. Tax Court Judge Haines agreed with the IRS that taxpayer Luis Bulas was not entitled to a deduction for his use of the bathroom as a home office expense.

Bulas, a Florida taxpayer, knows a little something about the tax system. He has a master’s degree in accounting from Florida International University. Even better, he worked for the IRS for seven years as a tax technician, revenue agent, Appeals auditor, and Appeals officer, prior to starting his own tax agency. So, yes, for a long while, he was the guy who helped make decisions about whether a taxpayer was complying with the tax laws (cue music).

Bulas also happens to be a father of two daughters, one in high school and one in college, that helped him out with the business from time to time. This is only relevant because he claimed that he paid wages to his daughters and yet managed not to issue any forms 1099 or forms W-2 to them, a fact that also came up as part of his examination.

But, yawn. That’s kind of run of the mill boring stuff. Let’s get to the potty humor.
Bulas was flush enough (wince, I know, terrible pun) to have a personal residence which included a house, a garage, and a guesthouse. The total amount of space worked out to about 2,677.34 square feet.

Like many professionals, Bulas used one of the rooms in his home – in this case, a spare bedroom – as his office space. The total amount of the space for the bedroom was 226.3 square feet. Bulas eventually put an additional bathroom in his home, ostensibly for his clients’ use.

The IRS issued Bulas a notice of deficiency, denying the deductions for the wages paid to his daughters and the business use of his residence. Bulas, of course, appealed, which is how the case made it to Tax Court.

If you’re familiar with the rules relating to deductions for a home office, you know that there are a few key elements that come into play. To qualify for the deduction, you must use the part of your home attributable to business “exclusively and regularly for your trade or business” and that part of your home must be your principal place of business; a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or a separate structure used in connection with your trade or business. In other words, to be deductible, your home office must be your actual office and not just at your home for convenience. And more importantly, if you use part of your home as a workspace, it must be space that is solely used for business.

Bulas claimed that he used one of the bedrooms in his house exclusively for his office. Um, okay. That seems reasonable.

Bulas also argued, however, that he used the hallway – wait, he’s losing me here – and the bathroom exclusively for his accounting business. He went on to testify that his children and personal guests also used the bathroom.

The IRS was willing to grant him the use of the bedroom. The bedroom was, as mentioned earlier, about 226.3 square feet, which worked out to about 8.45% of the total square feet associated with Bulas’ residence. That means that he was entitled to pro-rate his allocable expenses and take 8.45% as a business deduction. No more. Bulas could not offer proof that the personal use of the hallway and bathroom met any exception under section 280A(c) of the Tax Code and thus, the personal use of the space trumped the business use. The result? He lost the deduction.

Maybe he didn’t have enough paperwork to support his deductions? (Sorry, I couldn’t resist.)

(Hat Tip: TaxProf Blog)

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