CPA. Tax Guide for Legislators. South Carolina. Provided by the South Carolina Association of Certified Public Accountants

Transcription

1 2013 Tax Guide for Legislators South Carolina CPA Provided by the South Carolina Association of Certified Public Accountants 570 Chris Drive, West Columbia, South Carolina (803) (803)

2 CPA Day at the State House Wednesday, May 1, 2013 at the Columbia Metropolitan Convention Center South Carolina CPA Mission Statement - To empower our members to grow professionally. We believe that by providing education, advocacy, communication, and leadership we will ensure our success.

3 2013 Tax Guide for Legislators The South Carolina Association of CPAs is pleased to provide you with the 2013 Tax Guide for Legislators to assist you with the unique income tax ramifications of being a state legislator. As a state legislator, you are an employee of the State of South Carolina for income tax purposes. Expenses incurred in carrying out your duties as a representative of your district are employee business expenses. The rules for employee business expenses are complicated, and there are some special rules that apply to you as an elected official. The Tax Guide is intended to assist you in identifying those expenses that are deductible as a state legislator, accounting for any reimbursements for those expenses which you receive, and the substantiation required to document any expenses which you deduct on your income tax return. You should not rely on this Tax Guide as the final authority for determining how the various tax laws apply to your particular circumstances. We recommend that you seek advice from your CPA tax advisor on all matters contained herein. Table of Contents 4 Employee Business Expenses In General 5-7 Vehicle and Other Travel Expenses 7 Meals and Lodging Away from Home 8-9 Business Meals and Entertainment 10 Advertising Other Deductible Expenses Office and Related Expenses Campaign Contributions and Expenditures Newsletter Funds Substantiation and Record Keeping 17 Helpful Websites Computations of Business Expenses for State Legislators 2013 TAX GUIDE 3

4 Employee Business Expenses In General Q1. What are the general rules regarding expenses that I incur as a legislator in carrying out my duties? A. The general tax rules allow an employee to deduct all expenses which are ordinary, necessary and reasonable in carrying out his/her business as an employee as a schedule A itemized deduction subject to a 2 percent adjusted gross income limitation. Examples of these expenses are as follows: travel, including auto; airfare and parking; lodging; meals; entertainment; an in home office expense; and any other expenses which are related to the taxpayer s business as an employee. To be considered ordinary, an expense must be customary or usual within the particular industry of the employee. An expense will be considered necessary if it is appropriate and helpful to the employee in his business. The courts have further imposed a requirement that an expenditure must be reasonable in amount and in relation to its purpose. Q2. If I have been elected to serve as a legislator, and therefore required to conduct legislative business in Columbia, can I deduct expenses for traveling to and from Columbia and expenses for travel, lodging and meals in Columbia? A. The general tax rule is that a taxpayer is not allowed to deduct the cost of travel between his residence and his tax home. Nor is he allowed to deduct the cost of lodging and meals at his tax home even though the tax home is far enough away from his residence to require him to stay overnight. The tax home is normally considered to be the place where the services of the employee are primarily rendered; in the case of a state legislator, the tax home would be Columbia. However, Internal Revenue Code Section 162 (h) and Treasury Regulation includes a special provision that allows a state legislator to elect to have his residence within his legislative district treated as his tax home. This special provision only applies to state legislators that have already been sworn in and to allowable expenses starting on the day the legislator is sworn in. The effect of this election is that any deemed living expenses incurred during the legislative session will be deductible. An example of the election to be attached to your Form 1040 is as follows: State Legislator s Election to Treat Residence as Tax Home Taxpayer s Name Taxpayer s Address Social Security Number Taxpayer, a state legislator, elects to treat his residence as his tax home pursuant to Code Sec.162 (h). His place of residence is within the (name of district) district, which is the legislative district that he represents. The residence is more than 50 miles from the capitol building of the State. Q3. Does it matter how far Columbia is from my residence in my legislative district? A. Yes, one exception to the provision allows a state legislator to elect to treat his residence as his tax home. This election is not available if the residence of the legislator within the legislative district which he represents is 50 or fewer miles from the capitol building of the state. Q4. Are there any special tax rules regarding business meals and business entertainment? A. Yes, these expenses must be accounted for separately because the law allows you to deduct only 50 percent of business meals and business entertainment. Q5. What effect do reimbursements by the state have on my deduction for expenses that I have incurred? A. Once you have identified the total amount of your business expenses which are deductible, you are required to reduce this amount by any reimbursements which you have received. Furthermore, the law requires that if you are entitled to seek reimbursement and fail to do so, the expenses for which reimbursement were available are not allowed as deductions. If your total reimbursements or available reimbursements are less than the business expenses you have incurred, you are entitled to deduct the excess on your federal and state income tax returns. If your reimbursements and available reimbursements are greater than the business expenses you have incurred, you must report this excess as income on your federal and state income tax returns, unless you return the excess within a reasonable period of time. Q6. Am I entitled to a full deduction for the total amount of my business expenses less the reimbursements I have received and less the 50 percent exclusion for meals and entertainment expenses which are not reimbursed? A. Employee business expenses are miscellaneous itemized deductions and are subject to further limitation. This limitation requires that you add your employee business expenses to certain other deductible expenses. The total of all of these expenses is deductible only to the extent that it exceeds 2 percent of your adjusted gross income for the year. Some examples of the other expenses which are included in this category are professional dues and subscriptions, accounting and tax preparation fees, estate planning fees, tax consulting fees, safety deposit box rentals, IRA custodial fees, brokerage account maintenance fees, investment counseling fees and deductible legal fees. Remember you must specifically allocate the expenses to the appropriate category TAX GUIDE

5 since the 50 percent limitation will apply to the unreimbursed allowable meals and entertainment expenses. It is important to note that this limitation is dependent on income. Therefore, identifying additional deductible expenses can still help you minimize your tax liability. Section 162(a) still applies to travel expenses that are outside of Section 162(h) deemed living expenses. Vehicle & Other Travel Expenses Q1. What kinds of expenses are considered to be travel expenses? A. Travel expenses include the cost of transportation by vehicle, bus, train or airplane. As with all business expenses, these costs must be ordinary and necessary in relationship to your business as a legislator. Q2. How do I compute my cost for these types of travel expenses? A. When traveling by bus, train or airplane, the actual cost of your ticket, associated fees and taxes, as well as ordinary and necessary luggage or other expenses, are deductible. With regard to the use of a vehicle, in the year in which you first start using the vehicle, you must choose (for that vehicle) to calculate your deduction under one of two methods. The first method is referred to as the standard mileage method. In calculating your deduction under this method, you simply multiply the total business miles you drove during the year by the standard mileage rate. The standard mileage rate for 2012 is $0.555 per mile. For purposes of basis adjustment, the vehicle is considered to have been depreciated at a standard rate of $0.23 per mile. In 2013, the standard mileage rate will be $0.565 per mile. The second method for calculating your vehicle expense is based on your actual expenses. In calculating your deduction under this method, the business use percentage (non-commuting miles driven as a legislator divided by total miles driven) is multiplied by the total cost of all expenses incurred for the year (gas, oil, repairs, maintenance, insurance, tires, property taxes, license/registration fees, car washes, etc.) plus depreciation based on the vehicle s original cost (see also Q13 & Q14 and Q12 for leased vehicles). Parking and tolls are 100 percent deductible when the costs incurred are directly attributable to use as a legislator and 0 percent deductible when incurred for personal use. If you use more than four vehicles at a time, the actual expense must be used. The calculation is made separately for each vehicle and all expenses must be identified by vehicle. See Questions 9, 10, 11, 12 and 13 for more details concerning these two methods. Q3. What mileage qualifies as business mileage? A. Business mileage includes all travel to district meetings, speaking engagements, and civic/political functions or meetings which are important to attend because of your position as a legislator. Additionally, the mileage incurred in connection with the operation and management of your office is also business mileage. Detailed written logs should be maintained to substantiate the deductibility of your mileage. Commuting mileage is considered personal, non-business mileage. Q4. Am I entitled to a deduction for the miles I drive from my home district to Columbia for General Assembly sessions and for driving to the Capitol each day that I am in Columbia? A. You are entitled to treat the miles driven between your home district and Columbia as business mileage if you make the election discussed previously in EMPLOYEE BUSINESS EXPENSES IN GEN- ERAL, Q2. You are also entitled to treat all miles driven in Columbia from the place you are staying to the Capitol and to or from any other legislative related activities as business mileage. You are allowed to treat this as business mileage because Columbia is not considered your tax home. Therefore, travel to and from Columbia and in Columbia is not considered commuting. Q5. I have an office in my home district. Can I deduct the cost of driving from my residence to my office in my home district? A. No, the mileage from your residence to your office in your home district is considered a personal, non-deductible, commuting expense. Q6. If I ride to Columbia from my home district with another legislator, am I allowed to claim a deduction for the mileage even though I did not drive my own car? A. No, when you ride with someone else and do not directly incur any travel expense yourself, you are not allowed any deduction. If you pay the person who is giving you a ride, you are entitled to deduct that cost. The legislator who drove should consider your payment a reimbursement. Q7. Am I allowed a deduction for mileage expense incurred in attending meetings during a political campaign for my re-election? Although I am running for re-election, I still feel it is incumbent upon me to explain to my constituents the activities of the General Assembly, the legislation that we are currently working on, and the disposition and explanation of legislation that has gone through committees or that we have already acted on. A. Federal income tax law specifically states that campaign expenses are not 2013 TAX GUIDE 5

6 tax deductible (see CAMPAIGN CONTRI- BUTIONS AND EXPENDITURES). Because of this, it is important for a legislator to distinguish between those expenses which are directly related to an election campaign and those expenses which are directly related to serving the legislator s constituency. It would be advisable to maintain separate accounting records for your campaign expenses and your noncampaign expenses. Upon examination by the Internal Revenue Service, separate records would aid you in substantiating your business expense deduction. Q8. I received a traffic ticket because I was rushing to get to Columbia to be on time for a session or committee meeting. Is the fine a tax deductible expense? A. No, a traffic violation fine is a penalty, and therefore not a deductible expense. Parking tickets are also nondeductible expenses. Q9. Will the standard mileage method or the actual expense method give me the greater deduction? A. The answer will vary depending on such factors as the age and cost of your car, the actual cost of operating your vehicle, how many business miles you drive each year, and how often you trade vehicles. Q10. If I use actual expense method one year, can I use the standard mileage rate method the following year? A. You can under certain situations. The standard mileage rate method may not be used if (1) the vehicle was previously depreciated under the actual cost method using a depreciation schedule other than straight line, (2) a Section 179 deduction was claimed, or (3) the taxpayer had claimed the modified accelerated cost recovery system (MACRS). If, after using the standard mileage rate, the taxpayer uses actual costs, the taxpayer must use straight-line depreciation for the vehicle s remaining estimated useful life. Q11. Are there any tax effects from a decrease in my business usage of an automobile? A. Yes, if you have used the actual expense method of calculating your tax deduction for any prior year for the same car you are currently using for business and your business usage percentage declines to 50 percent or less, you may be required to report as income some accelerated depreciation deductions claimed in prior years. Therefore, you may want to consider using the straight line method of depreciation. Q12. What expenses may I deduct if I lease a vehicle rather than purchase one and use it for business travel? A. The fact that a vehicle is leased does not change the basic structure of calculating your tax deduction. The first step in determining your deduction attributable to a leased vehicle is to determine whether you have an operating lease or a financing lease. Generally, if your lease is structured to provide that you pay a certain number of monthly lease payments and at the end of the lease term, you return the vehicle to the lessor, you will have an operating lease. You will generally be considered to have a financing lease if at the end of the lease term you are allowed to purchase the vehicle for a nominal sum or if you are obligated to purchase the vehicle for a predetermined amount. This distinction is necessary because if you have an operating lease, the lease payments themselves are treated as rental expense to be included in your total vehicle expenses subject to the business use percentage calculation. If the lease is considered to be a financing lease, you will be treated for tax purposes as if you own the car, and you will claim depreciation and interest expense instead of rental expense. Contrary to popular belief, the fact that a vehicle is leased does not create business usage. That determination is still based on whether the miles driven are an ordinary and necessary business expense directly related to your business as a legislator. To prevent avoidance of the personal use limitations that apply to purchased vehicles, a parallel system of limitations has been adopted in the regulations for leased vehicles. Under this system, a taxpayer who leases a vehicle for business may be required to include an amount in gross income in order to offset the deduction for the rental expense in excess of the depreciation deduction that would have been allowable if the vehicle had been purchased. A taxpayer must include in income an inclusion amount determined under the procedures set forth in Reg. Section 1.289F-7(a). The inclusion amount for each taxable year during which the vehicle is leased is determined as follows from published tables: 1) Select the revenue procedure covering the tax year in which the vehicle first enters service. 2) For the appropriate range of fair market values, select the dollar amount from the column for the taxable year in which the vehicle is used under the lease. 3) Prorate the dollar amount for the number of days of the lease term included in the taxable year. 4) Multiply the above prorated dollar amount by the percentage of business use of the car during the taxable year. Q13. If I use my automobile for business travel and choose to use the actual expense method of calculating my deduction, are there any limits on the depreciation that I am allowed? A. For vehicles purchased in 2012, the 2012 depreciation deduction is limited to $11,060, including bonus depreciation TAX GUIDE

7 Without electing bonus depreciation, up to $3,160 of depreciation may be taken. In the 2nd, 3rd, and each succeeding year until the depreciable basis of the vehicle is recovered, the limitations are $5,100, $3,050, and $1,875, respectively. If you are leasing your vehicle, there may also be a limitation on the deductible lease payments (See A12). For trucks and vans, including SUVs less than 6,000 pounds, additional depreciation of $200 and $100 may be taken in 2012, 2013, 2014, respectively. When the business use is less than 100 percent the limitations are reduced proportionately. The above limits do not apply to passenger trucks and vans (including any minivan or SUV built on a truck chassis) with a gross vehicle weight (loaded) of 6,000 pounds or more. Q14. Can I use the immediate expense that was increased to $500,000 for 2012 on my vehicle? A. Yes, although a taxpayer can make a Section 179 election with respect to a passenger vehicle (less than 6,000 pounds unloaded weight), the maximum amount deductible under Section 179 is subject to the limitation described in A13. Further, sport utility vehicles placed in service after Oct. 22, 2004 are subject to an additional limitation on the Section 179 deduction that can be claimed. For 2012, $25,000 may be deducted as an immediate expense pursuant to the Section 179 deduction election. Other heavier non-passenger trucks and vans are not subject to this limitation and may deduct up to $500,000 in Section 179 deduction. Meals & Lodging Away From Home Q1. Are expenses for meals and lodging considered employee business expenses? A. Yes, meals and lodging are considered employee expenses and subject to the same requirement as other employee business expenses that they be ordinary, necessary and reasonable in the conduct of your business as a legislator. You may account for these expenses using either the per diem method or the actual expense method. The per diem method allows you to claim a predetermined amount for each day that you are able to substantiate that you are away from your tax home. If you choose not to use the per diem method of accounting for your meals and lodging expense, you are allowed to deduct the actual amount spent for meals and lodging, subject to limitations described in Business Entertainment and Meals, Q8. Q2. If I choose to use the actual expense method, what can I deduct for lodging while living in a hotel, motel, or apartment or similar type of residence while attending sessions in Columbia? A. If the room or apartment is used solely for the purpose of providing a place for you to stay while you are away from your home and in Columbia on legislative business, you will be allowed to deduct the total cost of the hotel, motel or apartment. You would also be allowed to deduct the cost of any furniture that you rent, any utilities you might pay and a cleaning service. Q3. What if I share a place to stay while in Columbia with another legislator or individual? A. If you share an apartment or other place to stay, you are still allowed to deduct your share of the rent for the apartment or room and other expenses noted in Q2 above. It is recommended that you keep copies of all receipts with a summary of total cost and how these costs were divided between you and such other person. Q4. Because I am in Columbia for long periods of time, I feel it is necessary and desirable to have my spouse and children come to Columbia on occasion. Can I deduct the costs of their travel to and from Columbia and meals and lodging while in Columbia? A. No deduction is allowed for travel expenses paid or incurred with respect to a spouse, dependent or other individual accompanying you on business travel. No deduction is allowed unless such person is an employee of yours, such person is accompanying you for a bona fide business purpose and the expenses would otherwise be deductible by such person. Q5. I understand that there are special provisions related to meals and lodging expenses for legislators who live more than 50 miles from Columbia. How do these provisions affect me? A. The IRS has ruled that a taxpayer s home is considered to be his regular or principal place of business Columbia, in your case. However, a state legislator may elect to have his residence within his legislative district treated as his tax home, see Q1. This election enables you to deduct meals and lodging expenses while working in Columbia because you are considered to be away from home, if your residence is more than 50 miles from the Capitol. If you make this election, you are allowed to deduct the normal South Carolina per diem reimbursement amount for each legislative day. This is an amount equal to the greater of the daily per diem for federal employees while away or serving in the US, or the state daily per diem but not over 110 percent of the federal per diem. A legislative day is any day on which the legislature was in session, including any day in which the legislature was not in session for a period of four consecutive days or less, and any day on which the legislature was not in session, but your physical presence was formally recorded at a meeting of a committee of the legislature. You are allowed this deduction whether or not you were actually 2013 TAX GUIDE 7

8 in Columbia; however, you must reduce this deduction by the amount of per diem payments actually made to you by the State of South Carolina. The amount of the deduction for the normal South Carolina per diem reimbursement is limited by federal law to a maximum amount. If your residence is within 50 miles of the capitol building, this election is not available to you and you cannot deduct the cost of lodging and related meals. Business Meals & Entertainment Q1. What is an entertainment expense? A. Entertainment is defined as any activity which is generally considered to be entertainment, amusement or recreation, including entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events and hunting or fishing trips. The term entertainment also includes entertaining at a social gathering at your residence. If an activity is of such a nature to be considered as entertainment for tax purposes it will be treated as an entertainment expense even though it may otherwise qualify as another type of business expense, such as advertising. Q2. What constitutes a deductible business entertainment or meal expense? A. The first requirement for an entertainment or meal expense to be deductible is that it must be ordinary, necessary and reasonable. This rule applies to all trade or business expenses. The second requirement for an entertainment or meal expense to be deductible is that the expenditure must be directly related to or associated with the active conduct of the taxpayer s trade or business. In your circumstances this means that the expenditure must relate to the active conduct of legislative activities. Q3. What are directly related entertainment or meal expenditures? A. An expenditure for entertainment or a business meal will be considered to be directly related to the active conduct of the employee s business if it involves an active discussion aimed at obtaining immediate business benefits or occurs in a clear business setting. An example of a clear business setting is a hospitality room at a convention. Q4. What are associated with entertainment or meal expenditures? A. An expenditure for entertainment or a business meal will be considered to be associated with the active conduct of the employee s business if there is a clear business purpose for the expense, such as to establish new business relationships or to encourage the continuation of an existing business relationship, and if the entertainment or meal directly precedes or follows a substantial and bona fide business discussion. Q5. Sometimes my spouse and I will entertain people who have important relationships to my service as a legislator. When we invite these people to bring their spouses are the costs allocable to the spouses deductible? A. These costs will be deductible if the expense otherwise meets the requirements to be classified as directly related to or associated with your business as a legislator. Q6. Occasionally I entertain other elected officials such as city council members, mayors and congressmen, primarily for the purpose of maintaining communications with them to explore common problems. Can I deduct the expense of this entertainment? A. Even though this entertainment activity may not be directly related to your business as a legislator, it should qualify as associated with your business as a legislator because it fosters the continuation of an existing business relationship or helps to establish new relationships which should be beneficial to you as a legislator. It is still incumbent upon you to be able to substantiate that the relationship between you and those being entertained has a business purpose. Q7. On special occasions, I will host a gathering of fellow legislators and other individuals connected with the legislative business. Can I deduct the expense of this gathering as a business expense? A. If you are able to demonstrate that the gathering is primarily for a business purpose and then you would be allowed to deduct the cost. The determination of whether the gathering would be primarily for business purpose would depend on your ability to demonstrate business relationships with the people who have attended the gathering. It is recommended that you keep records of who attended the function and their relationship to your business as a legislator. Q8. Is there a limitation on the amount I can deduct as business entertainment or a business meal expense? A. The cost of a business meal or business entertainment is subject to the 50 percent limit discussed previously. No deduction is allowed for any food or beverage expense to the extent that the expense is lavish or extravagant under your circumstances. The 50 percent limitation is applied after excluding amounts which are considered lavish or extravagant. The costs which are subject to this limitation are the actual costs of the entertainment or the meal including taxes, gratuities, cover charges, room rentals for parties and parking at theaters and sports are TAX GUIDE

9 nas. However, transportation costs, such as cab fare to and from the entertainment or the business meal, are not subject to the 50 percent exclusion. Q9. Sometimes I entertain individuals who are associated with my business as a legislator at my beach house. Am I allowed to deduct an allowance for depreciation on any part of my vacation home? A. Assuming all other requirements of the entertainment or meal expense meet the requirements for deductibility, you may deduct your out-of-pocket costs for food and entertainment. However, expenses related to the beach house, such as depreciation, rent, utilities, maintenance and housekeeping are not deductible. The tax law clearly states that any expenses related to an entertainment facility are not deductible, with a few specific exceptions that do not apply to this general circumstance. An entertainment facility includes yachts, hunting lodges, fishing camps, swimming pools, tennis courts, bowling alleys, airplanes, automobiles, hotel suites, apartments and vacation homes. Expenses such as interest, property taxes and casualty losses associated with an entertainment facility may still be deducted as itemized deductions if they otherwise qualify. Q10. I belong to a country club in my home district. I entertain constituents at the club on a regular basis. What costs associated with my membership and entertaining at the club are deductible? A. You are allowed to deduct your actual cost for any business meals or entertainment at your club subject to the rules previously discussed. You are not allowed any deduction for club dues or membership fees regardless of how much the club is used for business purposes. This rule applies to various types of clubs including business clubs, social clubs, athletic clubs, luncheon clubs and sporting clubs. Q11. Can I deduct tickets to sporting or theater events that I purchase for business associates or acquaintances? A. Because these activities are considered to be entertainment, you are allowed to deduct only 50 percent of your cost of these tickets. Furthermore, you may not deduct more than 50 percent of the face value of the tickets regardless of your actual cost. Certain exceptions do apply to sporting events that are essentially considered charitable fundraisers and meet certain other requirements. Q12. If I rent a skybox at a football stadium, and provide the food and beverage and admission tickets for constituents and other associates related to my business as a legislator, what costs can I deduct? A. Assuming that the relationships with the invited guests meet the requirements that have been previously discussed, you are allowed to deduct 50 percent of the cost of the food, beverage and the tickets. A skybox is defined as a private luxury box or other facility at a sports arena that is separate from other seating and is available at a higher cost. The cost of the tickets that you are allowed to deduct may not exceed the face value of a nonluxury box ticket. You are allowed no deduction for the cost of renting the skybox. If the rental of the skybox includes the admission of your guests, you are allowed to deduct the normal cost of a non-luxury box ticket for each guest and yourself. Q13. If I meet with a constituent regarding a legislative problem and I pay for the meal we have while we are discussing this problem, am I allowed to deduct this expense? A. This expenditure should clearly meet the definition of a directly related expense. You would be allowed to deduct 50 percent of the cost of the meal. Q14. At the end of a legislative session, I may take secretaries or other staff members out to dinner or buy them candy or flowers. Is this expense deductible? A. Yes, these expenses would be deductible because they are directly related to your business as a legislator. The cost of the meals would be subject to the 50 percent limitation. The deduction for candy, flowers or other gifts would be subject to a limitation of $25 per recipient. Q15. Can I use a per diem rate for meals and incidental expenses while on business travel? A. Yes. A per diem allowance for meals and incidental expenses in lieu of reimbursing actual expenses while traveling is permissible. The allowance is computed as the lesser of the per diem allowance for that day or the amount computed at the federal M&IE rate for the locality of travel for that day. See Q5 in the Meals and Lodging Away From Home section. Internet access to the per diem rates (CO- NUS tables) and other per diem matters can be found at the U.S. General Services Administration website, perdiem. Q16. If I use a per diem allowance instead of actual expenses, does this change my substantiation requirements? A. Yes. Beginning with expenses incurred on or after November 1, 2003, the per diem allowance will be deemed substantiated for purposes of paragraphs (b)(2) and (c) of , provided the individual substantiates the elements of time, place and business purpose of the travel for that day in accordance with those regulations TAX GUIDE 9

10 Advertising Q1. Because I am a member of the General Assembly, I am often called upon to pay for ads in trade journals, books or magazines distributed by various organizations in my district. Can I deduct the cost of these ads? A. When these ads are paid for by you and are a necessary part of your business in order to maintain relations with your constituency and to promote your name, this type of expenditure may be deducted as an unreimbursed employee business expense on your tax return. If these ads appear during a re-election campaign period and are primarily related to your reelection efforts, the cost is not deductible. Q2. As a member of the General Assembly, I am requested (and required, in effect, because of my position) to attend many dinners within my district. Can I deduct the cost of these dinners? A. Yes, if you pay for your dinner. Any costs incurred to attend such dinners (travel expense, parking fees, etc.) are also deductible. Remember that unreimbursed expenses for meals are only 50 percent deductible. Q3. I buy calendars, pens or similar items which I will pass out to my constituents as a means of advertising that I am their legislator. These items have my address and phone number on them so that my constituents can contact me when needed. Can I deduct the expense of such items? A. Since this is directly related to the business purpose of adequately and properly serving your constituency, you may deduct the cost of these items on your tax return. Such promotional items are fully deductible. See Other Deductible Expenses, Q3. Other Deductible Expenses Q1. What other expenses may I deduct on my tax return? A. There are many expenses you might incur as a result of your position as a member of the General Assembly that would be deductible. Some of these expenses would include the following: 1) Stationery and postage relating to mail concerning your business as a member of the General Assembly, 2) Supplies such as pens, paper clips, pencils, etc. that are necessary to maintain your office and serve your constituency, 3) Dues to civic-oriented organizations or clubs you did not belong to prior to being a member of the General Assembly, but now belong to as a matter of policy and because membership is essential to performing your duties, 4) Cost of obtaining additional publications such as newspapers and magazines which are necessary for you to improve yourself as a legislator, 5) Cost of greeting cards sent to district leaders, precinct committees and leaders in the community as a form of advertising, and; 6) Cost of newsletters sent to constituents, see Newsletter Funds, Q6. Q2. Can I deduct the cost of my home telephone since I use it for calling and receiving calls from constituents and for other state business? A. The basic cost of the home telephone is an expense that you would incur regardless of your position as a member of the General Assembly, and therefore is not deductible. If you are charged extra for calls in excess of a maximum amount, then the cost of these calls, as long as they relate to state business or your position as a member of the General Assembly, is a deductible expense. The cost of long distance telephone calls that relate to state business is a deductible expense. An answering machine or voic service to record messages phoned into your home in your absence is an expense required by your office and, therefore, would be a deductible business expense. If you have a separate phone number or fax line, those expenses would be fully deductible. Q3. What are the rules on gifts that I make to individuals who are important to my job as legislator? A. Even if a gift is an ordinary and necessary business expense, the total amount deductible is limited to $25 a year for each recipient. Excluded from the limitation are items of an advertising nature costing less than $4 each which have your name clearly and permanently imprinted on them, or a sign, display rack or other promotional material to be used on the business premises of the recipient. In addition, special rules allow gifts of tangible personal property having a cost of $400 or less to an employee for length of service or a safety achievement under circumstances that do not create a significant likelihood of disguised compensation. If an award plan meets certain qualification tests, the item of tangible personal property can cost as much as $1,600. A legislator may distribute turkeys, hams or other items of merchandise of nominal value (called de minimis gifts) to employees as holiday gifts. He can usually deduct the cost of these items, and the recipient normally does not have to report the value of the gift as income. Q4. Are there any special requirements regarding the deduction of expenses for a cellular telephone? A. As of Dec. 31, 2009, cellular telephones are no longer treated as listed property. Business and personal use would still need to be calculated and documented unless the cell phone is provided to an employee. When an employer provides an employee with a cell phone primarily TAX GUIDE

11 for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee and are deductible as an ordinary and necessary expense. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment. The business portion of the representative s cell phone service would be deductible as an ordinary and necessary expense. Q5. Are fees charged by accountants and attorneys deductible employee business expenses? A. Fees that you pay accountants and attorneys for professional services received that are ordinary and necessary expenses directly related to conducting your business as a member of the General Assembly are deductible as business expenses. Fees that include payments for work of a personal nature such as drafting a will or for tax preparation and advice are not allowed as a business deduction, but may give rise in whole or in part to a miscellaneous itemized deduction. Office & Related Expenses Q1. Can I deduct any costs of my home as business expenses? A. Since many of your legislative duties may be carried on at your residence, such as receiving and making telephone calls, reading and analyzing legislation, writing letters, seeing constituents, and performing other legislative related projects, a portion of your home expenses may be deductible as a business expense as long as you do not rent the part of your home used for business to the state and you meet the following requirements: In the case of your residence: 1) The home office is used exclusively and regularly for your legislative duties, and 2) You can demonstrate that your home office is your principal place of business, or that you meet there regularly with constituents in the normal course of your legislative business. A home office meets the principal place of business test if (a) you use it regularly and exclusively for administrative or management activities of your business and (b) you have no other fixed location where you do a substantial amount of such work. Note: In the case of a separate structure, which is not attached to the dwelling unit, it must be used exclusively and on a regular basis in connection with your legislative duties. A separate structure does not have to qualify as your principal place of business or a place for meeting constituents, clients, or customers. Q2. Specifically, how do I figure the home office expense deduction? What type expenses are allowed? Is there a deduction limit? A. To calculate the deduction you must first determine the business use percentage of the home. Any reasonable method can be used; a common one is the business square footage divided by the total square footage of your home. Second, you need to compile your home operating expenses and classify them as either direct, indirect or unrelated. Direct expenses relate to the business portion of your home only. Examples are painting or repairs made to the business area of your home only. These expenses are deductible in full, subject to the deduction limit discussed later. Indirect expenses are those for running the entire house. Examples are real estate taxes, deductible mortgage interest, utilities, general repairs, insurance and depreciation. These expenses are deductible based on the business use percentage of your home, subject to the deduction limit discussed later. Unrelated expenses are those only for the parts of your home not used for business; examples are the costs of lawn care and painting a room not used for business. These expenses are not deductible. The deduction attributable to business use of the home, other than expenses which would have been deductible in any event, such as mortgage interest and real estate taxes, is limited to your gross income for serving in the legislature reduced by all other deductible expenses which are not allocable to the use of the home itself, such as salaries, supplies, travel, meals and entertainment. Deductions which are disallowed, solely because of the income limitation, may be carried forward to later years. However, these amounts which carryover cannot create or increase a net loss from your legislative activity because they remain subject to the income limitation. Q3. If I deduct a home office expense for the business use of my home and subsequently sell or exchange it, does such use affect the gain on sale? A. Although you may be able to exclude gain up to $250,000 ($500,000 for certain married persons filing a joint return) on the sale of your principal residence, you cannot exclude the gain that is equal to any depreciation allowed or allowable for the business use of the home after May 6, {Any depreciation you claimed (or could have claimed) as a result of deducting expenses of a home office must be recaptured as tax owed at the rate of 25 percent of that depreciation.} Q4. Can I deduct expenses for office equipment and furniture, such as a desk, file cabinet, adding machine and similar items, used for legislative purposes? A. Yes. If these assets are used exclusively in the conduct of your business as a legislator, you are allowed to depreciate them TAX GUIDE 11

12 Furthermore, there are special provisions of the tax law under code Section179 that allow you to make an election to currently deduct up to $500,000 in For equipment and furniture purchases with some limitation based on income and amount of investment. There are also certain aspects of the law that require you to recognize income if you dispose of this equipment prior to the end of its tax life; in addition, there are other special provisions which may limit these deductions for computer equipment. Q5. Instead of an office in my home, I maintain a rented office in my district for the purpose of serving my constituency. What expenses can I deduct on my tax return for the cost of maintaining this office? A. If the rented office is being used exclusively for legislative business, all expenses related to this office (rent, utilities, depreciation on improvements and equipment, etc.) are fully deductible. Q6. I am considering purchasing a personal computer for my home. Will I be able to deduct this cost? A. If the computer is used exclusively for your legislative business, it may be depreciated and can possibly be fully deducted in the year of purchase. However, if the business use of the computer is less than 100 percent, you may only deduct the business portion of the cost. Furthermore, if the business use is 50 percent or less, you must depreciate only the business portion, you must use the straight line method of depreciation and you may not use the special rules that allow a full or increased deduction of the cost of the computer in the year of purchase. Q7. Can I deduct the wages and payroll taxes for my staff and assistants which are not paid by the state? A. Yes, wages and payroll taxes are other deductible expenses you may incur. If you hire someone to assist you in legislative matters and handle constituent complaints, such as a full-time or parttime secretary, the compensation paid is deductible. If an individual is on your payroll, you must obtain a federal identification number and pay the proper payroll taxes, which are deductible. You should contact your CPA for his advice; his fee is a business expense and may also be deducted. Campaign Contributions & Expenditures Q1. Am I required to include any political contributions in my taxable income? A. Political contributions are not included in your taxable income so long as you maintain them in a segregated account, which will be treated as a political organization even if the account is in your name, as explained in Question 3 below. If you do not maintain these funds in a segregated account, you may be asked to prove that the funds were for political and not personal purposes. You will be taxed on any contributions you divert to your personal use or receive in exchange for political favors. Surplus funds remaining after paying all qualified expenses will be treated as expended for personal use except as set forth in Question 4 below. Q2. Once I have received a political contribution, what am I allowed to spend this money on to prevent having to recognize it as income? A. You need not report any income on funds collected as political contributions and spent on expenses of a political campaign or a similar purpose, but if you do not deposit the funds into a segregated account, you may need to prove the funds were not used for your personal purposes. Expenditures are considered to be used for campaign purposes if they are spent for generally recognized campaign expenses, regardless of when incurred, contributed to the national, state or local committee of the candidate s party, or used to reimburse the candidate for his out-of-pocket expenses paid during the current or previous election campaigns. Examples of expenditures the IRS will generally consider to be for campaign purposes include the following; items for similar purposes may also qualify: 1) Even if you re not officially a candidate, and want to run for election to a public office, if you travel throughout the state or a district to rally support for your intended candidacy, and attend a convention of an organization to solicit its support, the amount expended for travel, lodging, food and similar expenses would qualify. 2) If you re a candidate for reelection and travel with your spouse to or throughout the district and feel it is important for your reelection that your spouse accompany you. While in your district, you make speeches and appearances to persuade voters to reelect you. Travel expenses for you and your spouse would qualify. 3) As a candidate for public office and in connection with your campaign, you take voice and speech lessons to improve your skills. The expenses for these lessons would qualify. 4) As an officeholder and candidate for reelection, you purchase tickets to a testimonial dinner. Your attendance at the dinner is intended to aid your reelection. Such expenditures would qualify. IRS regulations also list examples of items that do not qualify. If you have any doubts as to a particular expenditure, you should consult the regulations or ask your tax advisor TAX GUIDE

13 Funds collected by a political organization (including funds paid out of a segregated account) and used to pay or reimburse your expenses of carrying out your duties as a legislator, such as office expenses, or anything you could ordinarily deduct as an expense of holding office are not taxable even though not used for campaign purposes. If you receive the contributions directly, rather than through a political organization, and use them for non-campaign purposes, they must be reported in your income, but may be deducted to the extent paid for deductible expenses of holding office. Spending money for purposes other than campaign expenses or otherwise deductible expenses could cause the funds to be treated as funds diverted to your personal use and would require them to be included in your taxable income. Q3. Am I required to segregate political contributions from my personal funds? A. Although there is no specific requirement of such segregation, you should segregate your personal funds from political funds to avoid having to trace how they were used. A segregated account will be treated as a political organization even though it is just a separate bank account into which only political contributions are deposited and out of which only campaign expenses are paid. You may keep the segregated account in your own name without being taxed so long as you do not commingle the funds with your personal funds, or spend any of the funds for personal purposes. If your personal funds are commingled with political funds and it becomes impractical to trace the use of the political contributions, the tax law creates a presumption that all political contributions have been diverted to personal use and you will be required to report all the political contributions as taxable income. Q4. If I have surplus funds remaining after paying all of my campaign expenses, what am I allowed to do with this surplus? A. In order to avoid such funds considered as being diverted to your personal use and therefore includible in your gross income, you must use such surplus funds in one of the following ways: 1) Return the surplus funds to the original contributors 2) Transfer the surplus funds to the general fund of the U.S. Treasury, any state or local government, or exempt public charity 3) Use the surplus funds to pay the cost of attending a political party s national convention 4) Pay for expenses of voter research, public opinion polls, or voter canvasses for a later political campaign 5) Hold the funds in the segregated account if you reasonably anticipate running for office again and spending them in a way that would qualify as campaign expenses 6) Pay reasonable transition expenses, but not personal living expenses See also Question 2 for other uses of contributions that may not result in income to a candidate even though not used for campaign expenses. Q5. If I pay any campaign expenses out of my personal funds, am I allowed a deduction for income tax purposes? A. No, campaign expenses, whether paid out of your personal funds or from contributions are considered nondeductible personal expenses regardless of the results of the election. Such expenses would include the cost of attending political conventions, contributions to the party which sponsored your candidacy, expenses of campaign travel and advertising. Expenses for defending a contested election, filing fees or legal fees incurred in litigation over redistricting may or may not be deductible. Q6. If political contributions are maintained in an interest bearing account or invested temporarily before they are expended for campaign purposes, am I required to pay income tax on any dividends, interest or other investment income earned? A. Yes, a political organization is required to pay income tax on any investment income it earns within a taxable year in excess of $100. Q7. Are any tax benefits available to an individual who makes a political contribution? A. No tax credit or deduction is available to an individual who makes a political contribution. You may in some cases be required to disclose the nondeductibility of contributions to potential donors in your campaign solicitations. Q8. Are political contributions which consist of property, such as stocks or bonds, treated the same as cash contributions? A. The fair market value of the property on the date of contribution is treated the same as a cash contribution. Although political contributions are not subject to the gift tax, a donor who transfers appreciated property as a political contribution is taxed on the gain as if he had sold the property. Q9. If one of my constituents chooses to make an unrestricted gift to me that I may use for any personal use, am I required to include this in income? A. Gifts to political candidates are presumed by the IRS to have been made as political contributions unless the donee can show otherwise. If you can overcome this presumption, you must also show that the donation was a true gift, without any consideration or quid pro quo, in order to exclude it from your income TAX GUIDE 13

14 Q10. If I return surplus funds of my political organization to known contributors, what are the tax consequences? A. If you refund political contributions to the original contributors, they will not be required to recognize any income because they received no benefit from the original contribution. You are not required to recognize any taxable income because the refund of the surplus is not considered to be expended for your personal purposes. Q11. Are proceeds collected from fundraising events and testimonial dinners treated differently from other political contributions? A. No, these proceeds are treated the same as any other political contributions. Q12. What accounting records am I required to keep regarding the political contributions? A. Detailed accounting records should be kept in such a manner that you are able to account for all receipts of political contributions and the disbursement of all such funds; if not, you may be required to report political contributions as taxable income. Q13. For income tax purposes, what reporting is required of a political committee, organization, club, or other association formed to manage campaign contributions and expenses of a candidate? A. A new organization (including a segregated bank account that will be treated as a political organization) is required to notify the IRS of its existence electronically by completing an online form 8871 located on the IRS website at gov. This reporting requirement does not apply to: (i) organizations that are required to report to the Federal Election Commission, (ii) some state or exempt organizations, and (iii) small political organizations that expect to always have annual gross receipts less than $25,000. Organizations may be required to make copies of the Form 8871 available to the public, make regular reports to the IRS of their contributions and expenditures, and file an annual information return. Most organizations required to file Form 8871 are also required to file Form 8872, Political Organization Report of Contributions and Expenditures, and provide information detailing its receipts and expenditures. In addition, political organizations with political organization taxable income (which includes interest income) in excess of the $100 specific deduction must file form 1120-POL, U.S. Income Return for Certain Political Organizations, by the fifteenth day of the third month following the close of each taxable year. You may wish to file 1120-POL even if you do not have any taxable income to start the statute of limitations running. Certain tax exempt organizations may be exempt from this requirement, but may be required to file Form 990, Return of Organization Exempt from Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt from Income Tax. Q14. Are the financial records of my political organization subject to review by the Internal Revenue Service or the South Carolina Department of Revenue? A. Yes, these agencies can review your records to ensure proper tax treatment of all receipts and expenditures. Newsletter Funds Q1. What is a newsletter fund? A. It is a fund established and maintained by an individual who holds, has been elected to, or is a candidate for nomination or election to any federal, state or local elective public office. The fund must be used by the individual exclusively for the preparation and circulation of the individual s newsletter. The fund is treated for tax purposes as a political organization. A candidate is defined as an individual who has publicly announced that he/she is a candidate for nomination or election to an office and meets the qualifications prescribed by law to hold such office. Q2. How is a newsletter fund accounted for? A. A newsletter fund is treated as an exempt political organization. The assets in the fund must be maintained in a separate account and used solely for preparation and circulation of the newsletter. It is important that your accounting records sufficiently identify all receipts and the nature of all disbursements of the fund. Q3. What expenses may be paid out of a newsletter fund? A. Newsletter fund assets may not be used for campaign activities. The assets of the fund may be used solely for the preparation and circulation of the newsletter which include secretarial services, printing, addressing and mailing expenses. If assets of a newsletter fund are used for any purpose other than preparation and circulation of the newsletter, such amounts and future contributions to the fund are treated as expended for the personal use of the individual establishing the fund and would be required to be reported in taxable income. Q4. What am I allowed to do with excess amounts in a newsletter fund after I have left public office? A. The unexpended balance of a newsletter fund may be contributed, within a reasonable period of time, to or for the use of another newsletter fund, transferred to the U.S. Treasury or any state or local government, or an exempt organization under sect. 509 (a), without being considered as having been diverted for the TAX GUIDE

15 elected official s personal use. However, transfer of unexpended amounts to a political organization which is not a newsletter fund will be considered as being diverted for the elected official s personal use and will be required to be reported by him/her as taxable income. Q5. Is a newsletter fund subject to income tax on any earnings? A. Yes, a newsletter fund is subject to tax because it is a political organization and is taxed on the gross income for the taxable year over the deduction allowed to the fund. One difference between a newsletter fund and other political organizations is that a newsletter fund is not eligible for the one hundred dollar deduction that is allowed to political organizations. Q6. If I do not have a newsletter fund and pay the cost of publishing and distributing a newsletter out of my personal assets, can I deduct these costs? A. The cost of publishing and distributing a newsletter may qualify as an employee business expense which would be deductible by you if you are holding office when you incur these costs. If you incur these costs while you are a candidate for office and do not currently hold the office, they may be treated as campaign expenses which are not deductible. Substantiation & Record Keeping Q1. Do I need to keep records? A. A taxpayer must maintain records for expenses reported on their tax returns. Internal Revenue Code Section 274(d) and Treasury Regulation T details the substantiation requirements for travel away from home including meals and lodging, entertainment, gifts, or listed property expenses. Q2. What kind of records do I need to substantiate my deduction for travel expenses? A. Estimates are not acceptable; the taxpayer must substantiate by adequate records all expenditures for travel, entertainment and business gifts. All business expenses must be supported by receipts, invoices and canceled checks. In every case, the business nature of the expense must be documented in some fashion. The taxpayer must substantiate each element of the expenditure or use by adequate records or by sufficient evidence corroborating the taxpayers own statement. No deduction or credit will be allowed based on estimates or unsupported testimony of the taxpayer. Temporary Treasury Regulation Section T(a) makes the following clear: for purposes of travel, entertainment, gifts and listed property, the substantiation requirements of IRC Section 274(d) are strictly applied, and prohibit the use of estimates. This is true even if the cost necessary to produce such documentation is a burden on the taxpayer. In Field Service Advice the IRS denied a taxpayer the use of a statistical sampling methodology to estimate the amount of meals and entertainment deduction. The additional elements of documenting travel expenses are: 1) The amount spent each day for transportation, meals and lodging (Note: Meals do not need to be broken out by meal.) 2) The dates of departure and return and the number of days spent on business 3) The business mileage driven by date and destination 4) The destination of the travel, designated by the name of a city, town, or similar description 5) The business purpose or benefit of the trip Congress repealed the contemporaneous records provision. The law no longer requires that records be prepared as the expense is incurred. A record of the elements of an expenditure or use made at or near the time of the expenditure or use has a high degree of creditability. However, we suggest that records be maintained currently, but immediate recording of expenses as incurred is no longer required. The Cohan rule is something the Courts use to allow a taxpayer a partial deduction, and cannot be used by the taxpayer to estimate the applicable expenses claimed. Q3. How should entertainment expenses be substantiated? A. They should be recorded as follows: 1) The amount and description, e.g., dinner or theater, of each separate expenditure 2) The time and place the entertainment was provided 3) The business purpose or benefit of the activity, including the nature of any business discussion with the person entertained 4) The business relationship of the person entertained, which may be indicated by name, title, occupation, or other designation sufficient to establish the relationship If the taxpayer entertains a large group of persons, he need not record the name of each individual present if a class designation would suffice to indicate the business relationship. However, members of the class must be readily identifiable. A designation such as all the officers of the 3rd District would be sufficient, but if the group is too large and heterogeneous so that members could not be easily identified, the taxpayer is required to list each person entertained. Q4. How should gifts be substantiated? A. Gifts should be recorded as follows: 1) Cost of the gift 2) Date gift was given 2013 TAX GUIDE 15

16 3) Description of gift 4) Business reason for gift or nature of benefit expected or derived 5) Occupation or other information relating to the recipient of the gift including name and title Q5. How should listed property be substantiated? A. Listed property should be recorded as follows: 1) The amount of each expenditure with respect to the listed property 2) The amount of each business use based on some measure such as mileage or time 3) Date of the expenditure or use of the listed property 4) The business purpose for an expenditure with respect to the listed property. Listed property is property that lends itself to personal use. This includes, but is not limited to, laptops, personal computers, automobiles, entertainment, recreational and amusement property. For tax years starting in 2010, cellular telephones are no longer considered listed property and therefore, do not have to meet the heightened substantiation requirements of Internal Revenue Code 274(d). However, the taxpayer must still be able to substantiate the deduction claimed by some corroborating evidential matter just as they would for any Internal Revenue Section 162 expense. This means the taxpayer does not have to keep a log of business and personal use, but still has to substantiate the expense was incurred, paid and is ordinary and necessary. Q6. What constitutes substantiation if I lose my records? A. If the loss of records is beyond your control, you shall have the right to substantiate a deduction by reasonable reconstruction or your expenditures. Ex- amples, of circumstances beyond your control include fire or theft. Q7. If the entertainment is associated with rather than directly related to the active conduct of my trade or business, must I record any additional items? A. Yes, the following items are required for associated with expenses: 1) The date and duration of the business discussion which preceded or followed the entertainment 2) The place where the business discussion was held 3) The nature of the business discussion, its purpose, and the benefit derived or expected from the discussion 4) The identity of the persons entertained who participated in the business discussion Q8. What do adequate records consist of? A. Adequate records usually consist of diaries, account books, logs, statements of expense and other documentary evidence. It is not necessary to record any information which duplicates information reflected on a receipt. Diaries and books. It is suggested that the elements of an expenditure be recorded at or near the time when the expense was incurred. Such records are believed to have a high degree of credibility not present with respect to a statement prepared subsequent thereto when generally there is a lack of accurate recall. Although no special form of records must be maintained, it is clear that the IRS contemplates that the taxpayer will keep a diary or account book in which entries can be made as incurred or at least weekly. The degree of specificity of entries in a diary or account book will vary with the facts and circumstances of each expenditure. Confidential or highly sensitive information need not be recorded in a diary or account book. However, the taxpayer should be ready to submit a record of the expenditure to the IRS during an audit if they are to obtain a deduction for the expenditure. Documentary evidence. A diary or account book standing alone is not sufficient substantiation in all circumstances. The taxpayer must be prepared to produce documentary evidence, e.g., receipts or paid bills, in order to deduct lodging and meal expenses incurred while traveling away from home and transportation expenses in excess of $75. Documentary evidence supporting an expenditure for transportation such as cab fare or bus tickets not in excess of $75 will not be required if such is not readily available. Such expenses can be easily authenticated by fare schedules and mileage rates. Usually a receipt will suffice if it contains enough information to establish the amount, date, place and character of an expense. Thus, a hotel receipt must include the name, location, date, and the separate charge for lodging, meals, telephone, etc., if it is to serve as adequate substantiation of a business travel expense. Similarly, a restaurant receipt must indicate the name and location of the restaurant, the date and the charge for food, beverages, and other items. A canceled check will not ordinarily constitute adequate documentary evidence since it does not show in detail the specific items comprising the total expenditure. For example, if a taxpayer makes a long distance telephone call to his home, which is a personal expense, a hotel receipt would usually indicate this fact while a canceled check would not. However, a canceled check, in connection with the payee s bill, will typically be sufficient to substantiate the business nature of an expenditure. The detail required is important since it is the basis upon which an allocation between personal and business expenses can be made. Moreover, if TAX GUIDE

17 expenses incurred with respect to certain persons (i.e., spouses) are not deductible, it is essential that evidence of the cost incurred with respect to the person not on business be available. Otherwise, they will be deemed to bear a proportionate share of the total charge, and the deduction reduced. Q9. How long must the records be retained? A. The taxpayer must retain his records and related documentary evidence in support of travel, entertainment and gift deductions during the period that his tax return in subject to audit. Normally, this period is three years from the date of filing the tax return for federal returns. Some states require four years. However, the period of limitations is longer if the taxpayer consents to an extension or if there has been a substantial omission from gross income. Moreover, there is no statute of limitations in cases of fraud. Further, the Tax Reform Acts of 1984 and 1986 have effectively increased the period which taxpayers must retain records if they depreciate an auto, computer, or other listed property since recapture of depreciation and investment tax credit may occur if the business use of the asset drops below fifty percent. Effective for expenses incurred on or after Oct. 1, 2008, the IRS has issued Revenue Procedure which provides rules under which the amount of an employee s business expenses for meals, lodging and incidentals while traveling away from home are deemed substantiated under Reg. Section when a pay or, such as an employer, provides a per diem allowance to pay for the expenses. In addition, this revenue procedure provides an optional method for employees and self-employed individuals who pay or incur meal costs to use in computing the deductible costs of business meal and incidental expenses paid or incurred while traveling away from home. This revenue procedure also provides an optional method for use in computing the deductible costs of incidental expenses paid or incurred while traveling away from home by employees and self-employed individuals who do not pay or incur meal costs and who are not reimbursed for the incidental expenses. Use of a method described in this revenue procedure is not mandatory, and a taxpayer may use actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation. This revenue procedure does not provide rules under which the amount of an employee s lodging expenses will be deemed substantiated when a payor provides an allowance to pay for those expenses but not meal and incidental expenses. It is recommended that taxpayers who are reimbursed for business expenses, or who incur their own such expenses, review Revenue Procedure in evaluating their deductible expenses and substantiation thereof. Helpful Websites - The South Carolina Association of CPAs Website is an excellent resource for up-to-date information concerning the accounting profession. - The official Website of South Carolina. - The official Website of the Internal Revenue Service. Great site for forms, instructions for forms and publications explaining different rules and regulations, search for refund information. - The State Library including the latest South Carolina business, economic and employment information. -Website for the attorney general for South Carolina including Current Issues and Important Links. - Largest and most comprehensive directory of South Carolina information on the internet; SC jobs, businesses, real estate, hotels, entertainment, calendar, etc. - South Carolina s largest newspaper. sc.htm - Links to S.C. news: headlines, weather, media guides, newspapers, magazines and TV. - A comprehensive listing of links to federal agencies and departments, federal government directories, government databases, Congress/ White House, state governments and worldwide governments. - Official website for searching the U.S. Government. - Search engine for local, state and international governments. - One stop registration for new businesses. This is a great site for new businesses with tutorials, checklists, FAQs, due dates, workshops and training opportunities. The Wall Street Journal online is a good source for world and U.S. news for businesses, personal finance, markets, real estate and economics. - Use to check when that flight you re meeting will arrive TAX GUIDE 17

18 Computations of Business Expenses for State Legislators HOUSE AND SENATE GENERAL INFORMATION The total number of legislative days for the Senate in 2012 was 94 days between January and July. At printing, one additional day has been scheduled for Dec. 12, If convened, the Senate would have met 95 days during the 2012 year. Five (5) of those days were convened under Rule 1B and considered statewide while 20 were local days. The total number of days available for state legislator s travel expenses away from home is 82*. The per diem rates according to the Internal Revenue Service website for South Carolina was $85 for lodging and $51 for meals for the entire year. *This number does not include furlough days adopted by House or Senate. Please check with clerk of each body to confirm the correct number of days in the session. Computation of State Legislators Travel Expenses Away From Home For Federal Income Tax Purposes (Based on 95 Senate Days) Legislators residing more than 50 miles from the State Capitol Building: Employee Business Expense Computation (January July, plus December 12): 70 Miscellaneous Itemized Deduction (January July, plus December 12): 25 Total Days Available For Deduction: 95* * Jan. 10 Feb 10, Feb 21 Mar 30, April 17 Jun 28, Jul 17 (These dates reflect House statewide sessions of 64 days and local House sessions of 18 days.) There were three furlough weeks; Feb 14-16, Apr 3-5, Apr DEDUCTIONS COMPUTED AS FOLLOWS: Lodging Employee Business Expense, Jan. July: 70 $85 = $5,950 Misc. Itemized Deduction, Jan. July: 25 $85 = $2,125 Total Lodging: 95 days $8,075 Meals Employee Business Expense, Jan. July: 70 $51 = $3,570 Misc. Itemized Deduction, Jan. July: 25 $51 = $1,275 Total Meals: 95 days $4,845 Explanation (For Federal Purposes) Reimbursements for statewide legislative day for legislators who reside more than 50 miles away from the capitol building have not been included on the legislator s W-2. Therefore, these expenses are not included in income and are not deductible on federal Form (See Example A, Line 7.) Unreimbursed expenses (expenses for the remainder of the legislative session) are subject to the 50 percent exclusion for meals and are deductible as a miscellaneous itemized deduction, subject to the 2 percent adjusted gross income limit on federal Form (See Example A, Lines 8-10). The above computation assumes the legislator makes the election required under Section 162(h) of the Internal Revenue Code. Legislators who reside within 50 miles of the State Capitol Building are not entitled to a federal deduction for travel expenses under 162(h) of the Internal Revenue Code. Reimbursements for these legislators are included in income on the legislators W-2. Therefore, the above computation and accompanying Example A are not applicable. Legislators who reside within 50 miles of the Capitol should consult their tax return preparers or advisors concerning possible deductions associated with their legislative duties. Computation of State Legislators Travel Expenses Away From Home For South Carolina Income Tax Purpose Legislators residing more than 50 miles from the State Capitol Building: The same rules apply for South Carolina purposes as for the Internal Revenue Service. (See explanation above.) No adjustment to federal taxable income is needed on the South Carolina return. Legislators residing within 50 miles of the State Capitol Building: Legislators who reside within 50 miles of the capitol, though not entitled to a federal deduction, are entitled to a state deduction on their South Carolina return pursuant to S.C. Code Ann. Section (5). For ease of computation, use federal Form 2106, and indicate at the top For South Carolina Purposes Only. (See example A). Carry the appropriate figures over to dummy Schedule A, also labeled For South Carolina Purposes Only. From your South Carolina itemized deductions, subtract your federal itemized deductions and report the difference on SC1040, Line 3u TAX GUIDE

19 Example A: For South Carolina Purposes Only Form 2106 Department of the Treasury Internal Revenue Service (99) Your name Employee Business Expenses Attach to Form 1040 or Form 1040NR. Information about Form 2106 and its separate instructions is available at OMB No Attachment Sequence No. 129 Occupation in which you incurred expenses Social security number Part I Employee Business Expenses and Reimbursements Step 1 Enter Your Expenses Column A Other Than Meals and Entertainment Column B Meals and Entertainment 1 Vehicle expense from line 22 or line 29. (Rural mail carriers: See instructions.) Parking fees, tolls, and transportation, including train, bus, etc., that did not involve overnight travel or commuting to and from work. 2 3 Travel expense while away from home overnight, including lodging, airplane, car rental, etc. Do not include meals and entertainment. 3 4 Business expenses not included on lines 1 through 3. Do not include meals and entertainment , Meals and entertainment expenses (see instructions) Total expenses. In Column A, add lines 1 through 4 and enter the result. In Column B, enter the amount from line Note: If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8. 4, , , Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1 7 Enter reimbursements received from your employer that were not reported to you in box 1 of Form W-2. Include any reimbursements reported under code L in box 12 of your Form W-2 (see instructions) , , Step 3 Figure Expenses To Deduct on Schedule A (Form 1040 or Form 1040NR) 8 Subtract line 7 from line 6. If zero or less, enter -0-. However, if line 7 is greater than line 6 in Column A, report the excess as income on Form 1040, line 7 (or on Form 1040NR, line 8) , , Note: If both columns of line 8 are zero, you cannot deduct employee business expenses. Stop here and attach Form 2106 to your return. 9 In Column A, enter the amount from line 8. In Column B, multiply line 8 by 50% (.50). (Employees subject to Department of Transportation (DOT) hours of service limits: Multiply meal expenses incurred while away from home on business by 80% (.80) instead of 50%. For details, see instructions.) Add the amounts on line 9 of both columns and enter the total here. Also, enter the total on Schedule A (Form 1040), line 21 (or on Schedule A (Form 1040NR), line 7). (Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and individuals with disabilities: See the instructions for special rules on where to enter the total.) , , For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No N Form 2106 (2012) 2013 TAX GUIDE 19

20 Special Thanks The South Carolina Association of Certified Public Accountants (SCACPA) would like to thank the following members for serving on the SCACPA Taxation Committee and for their contributions to the 2013 Tax Guide for Legislators. Charles Ayers, CPA McDowell-Pearman, LLC Columbia William Barefoot, CPA WebsterRogers, LLP Florence William Byrd, CPA, CMA, CGMA William Levan Byrd, CPA, PC Sumter Michelle Florine, CPA Derrick Stubbs and Stith, LLP Columbia Rick Gregory, CPA Harry B. Gregory & Associates, CPAs Columbia Eddie Howard, JD, CPA W. Edward Howard Jr. Attorney at Law, LLC Lexington James Stewart, CPA Waring & Associates, CPAs, PA Florence Caroline Strobel, PhD, CPA University of South Carolina Columbia Maurice White, CPA Maurice A. White, CPA Charleston Ken Newhouse, CPA Moore Beauston Woodham West Columbia IRS CIRCULAR 230 NOTICE: To ensure compliance with the requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this publication is not intended or written to be used for the purpose of (a) avoiding penalties under the Internal Revenue Code or (b) promoting, marketing or recommending to another party any transaction or tax related matter[s]. To provide you with a communication that could be used to avoid penalties under the Internal Revenue Code will necessarily entail additional investigations, analysis and conclusions on our part. South Carolina CPA