The MICPA s Essential Tax Guide For Members of the Michigan Legislature

Transcription

1 The MICP s Essential Tax Guide For Members of the Michigan Legislature 2015 Michigan ssociation of Certified Public ccountants

2 TBLE OF CONTENTS Preface 3 Introduction 4 Record Keeping 5 Calculating Your Expenses 6 1. utomobile Expenses 7 2. Parking Fees, Tolls, Etc Lodging and Other Travel Expenses 9 4. Other Business Expenses 11 a. dvertising 11 b. Telephone 11 c. Other Miscellaneous Expenses 12 d. Office in Home Meals and Entertainment Expenses SOCC and Mileage Reimbursements 17 Exhibits Exhibit : Section 162(h) of the Internal Revenue Code 18 Exhibit B: Sample 162(h) Election 19 Exhibit C: Legislative Days Calculation Table 20 Exhibit D: Formal House of Representatives Session Day Memorandum 21 Exhibit E: Formal Senate Session Day Calendar 22 Exhibit F: Example Individual Record of Compensation 24 Commission Expenses Exhibit G: General Substantiation Rules for Travel, Entertainment 25 and Other Deductions Forms 2015 Form 2106 Employee Business Expenses 28

3 PREFCE: THE CP PROFESSION TODY Today s Certified Public ccountant (CP) occupies a central position in business management and oversight, also serving as trusted advisors to individuals with Tax and Financial Planning. reas of practice include taxation and tax planning; audit of public and private companies; review and compilation of financial statements; estate, trust and retirement planning; budgeting; management advisory services; financial management and financial forecasting. The highest professional standards and integrity in the practice of accountancy are maintained by holders of the CP certificate and license issued by the State of Michigan or by other states. To be licensed to practice in Michigan, a CP must: Have fulfilled a stringent 150-hour college education requirement. Have passed a comprehensive exam covering auditing, taxation, financial accounting and reporting, business law, financial management and other related business concepts. Have worked a minimum of 2,000 hours in the field of accounting. Obtain a minimum of 40 hours of continuing education every year. bide by the CP profession s Code of Professional Conduct. The Michigan ssociation of CPs (MICP) is a diversified, professional organization of over 18,000 members in every corner of Michigan s economic marketplace. MICP members serve all types of Michigan business entities, providing a one-of-a-kind insight of the state s financial climate. s the state s premier professional organization for CPs, MICP members promote high standards of quality, objectivity, integrity and practicality in the services they provide. MICP actively participates in the public policy-making process, communicating the total picture with clarity and objectivity, and translating complex information into critical knowledge. MICP members subscribe to the rules of professional conduct embodied in its bylaws and subject themselves to stringent selfregulation. Several members of this elite group of trusted advisors have come together to develop the 2015 Tax Guide for Members of the Michigan Legislature to assist you in understanding tax issues unique to your position as a State legislator. Technical Review and update for the 2015 Tax Guide for Members of the Michigan Legislature was provided by: Barbara J. Dobb, CP Dobb & Sager CPs PLC (State Rep ) Marilyn H. Zigarac, CP rvai & ssociates PC The Michigan ssociation of Certified Public ccountants 5480 Corporate Drive Suite 200, Troy, Michigan Phone: (248) Fax: (248) legislation@micpa.org 3

4 INTRODUCTION The Michigan ssociation of CPs has undertaken the task of developing a Tax Guide to assist you or your tax professional in understanding tax issues unique to your position as a State legislator. The Guide provides extensive and detailed information relating to those tax issues that arise specifically due to your position as a State legislator and is not intended to cover all tax matters related to your tax return. dditional information and resources are available at This Guide addresses how to handle various items such as record keeping, automobile and transportation expenses, lodging, advertising, telephone, home office, other expenses, meals and entertainment, and expense reimbursement, in a straightforward and comprehensible format. This Guide has been written to provide general information and does not create a client relationship with the author. New Internal Revenue Service procedures require certain disclosures on written communications regarding federal tax issues. The information included in this Guide is not intended or written to be used nor may it be relied upon to avoid any penalties that may be imposed on the reader under the Internal Revenue Code. We welcome your comments to improve this guide to better meet your needs in the preparation of your tax returns. ny inquiries or questions relating to the Tax Guide should be directed to Shane. Barry, Government Relations, at sbarry@micpa.org or by cell phone at (248) The Michigan ssociation of Certified Public ccountants 5480 Corporate Drive Suite 200, Troy, Michigan Phone: (248) Fax: (248) legislation@micpa.org 4

5 RECORD KEEPING dequate record keeping is the basis for preparing any report, and particularly for preparing an income tax return. Without good records, items included in the tax return may not be adequately substantiated when needed, or items which should have been included in the return may be overlooked. ll items of expense should be documented by cancelled checks, receipts or paid invoices. You should review the adequacy of your record keeping procedures with your certified public accountant. Taxpayers are required to keep adequate records to substantiate deductions in the following areas: 1. Traveling expenses (including meals and lodging while away from home, as well as local travel) that are trade or business expenses 2. Entertainment expenses 3. Business gifts If the taxpayer does not have adequate records, no deduction is allowed for that item. These records must substantiate the business use of property. The records must indicate: 1. The amount of the expense 2. The date and place of the travel, entertainment, recreation, or amusement 3. The business purpose giving rise to the travel, entertainment, recreation, or amusement 4. The business relationship of the person or persons being entertained or receiving a business gift more detailed discussion of the general substantiation rules for travel, entertainment and other deductions is included in Exhibit G. What problems result from inadequate documentation? If a taxpayer understates his or her tax liability as a result of claiming deductions or credits not supported by adequate records, in addition to disallowance of the deduction or credit, the taxpayer may be subject to negligence and/or fraud penalties. 5

6 CLCULTING YOUR EXPENSES Unique to State legislators is the ability to choose to treat their legislative district as their tax home, and therefore treat most expenses incurred while in Lansing as deductible travel expenses while away from home. This tax treatment is only available to legislators who live more than 50 miles away from the Capitol Building in Lansing and who make an annual election provided for in Section 162(h) of the Internal Revenue Code (see Exhibit ). Legislators who live 50 miles or less from the Capitol are considered to have their tax home in Lansing. The rules for calculating automobile expenses, lodging and meal per diems are different for legislators whose tax home is in their district. These rules are discussed in more detail in the utomobile Expenses, Lodging and Other Travel Expenses, and Meal and Entertainment Expenses sections of this guide. Business expenses related to your position as a State legislator are reported on Form 2106 Employee Business Expenses. 6

7 UTOMOBILE EXPENSES The Internal Revenue Code allows you to deduct mileage expense for your non-commuting business-related miles. For those legislators whose tax home is in their district, and who elect Section 162(h), all trips to the Capitol for legislative business or related to your position as a State legislator are deductible. Legislators whose tax home is Lansing may not deduct their daily commuting trips to the Capitol. What other mileage is deductible? Legislators may deduct any additional miles they incur going to civic functions, constituent meetings or other meetings related to his/her legislative duties. How do I calculate my automobile mileage deduction? When calculating the expense value of the mileage incurred you may choose one of two methods: the Standard Mileage Rate method or the ctual Expense method. The Standard Mileage Rate is calculated in Part II, Section B of Form ctual Expenses are reported in Part II, Sections C and D of Form ll legislators are required to complete Part II, Section. This section is used to prorate the percentage of business miles to total miles driven for the year. This business percentage is applied to the total actual expenses incurred. Note: If you previously depreciated your vehicle using a method other than the straight-line method you cannot switch to the standard mileage method. If you lease your vehicle you cannot change methods during the lease term. If I choose the ctual Expense Method what automobile expenses can I deduct? ctual expenses include depreciation (if you own your vehicle), lease payments, gas and oil, repairs and maintenance, and insurance. There are special rules for depreciation for luxury automobiles, SUVs, trucks, etc. lso, if you lease a vehicle, you may be required to reduce your lease payments by an amount called an inclusion amount if your vehicle is considered a luxury automobile. What records do I need to keep? system for recording mileage is essential. The IRS will accept a written record that you keep in your car, notations in your planner or electronic calendar, or a weekly record compiled by your staff. The record must be made near to the time of the trip. If you use the ctual Expense method you will need receipts to substantiate your deductions. 7

8 If I ride with another person to Lansing, can I still claim a mileage deduction for that particular day even though I did not drive my own car? When you ride with someone else and do not incur any transportation expense yourself, you may not claim any mileage expense for that day s travel. I have an office in my home district. May I deduct mileage expense from my home to this office? The mileage from your residence to your place of business is not deductible; this is considered a nondeductible commuting expense. PRKING FEES, TOLLS, ETC. Other transportation expenses that do not involve overnight travel or commuting to and from work are reported on Form 2106 Part I, Line 2. What other transportation related expenses can I deduct? Parking fees and tolls for business purposes may be deducted. lso, legislators who live more than 50 miles from the Capitol (who have elected their district as their tax home) may deduct costs of alternative forms of transportation in traveling to the Capitol, such as flights into Lansing, train or bus fares, etc. If I use another mode of transportation such as a bus, train or airplane to get to Lansing, can I deduct these expenses in addition to my mileage expense? No. You cannot deduct both mileage and the costs of other modes of transportation for the same day. 8

9 LODGING ND OTHER TRVEL EXPENSES s a general rule, your tax home is the business place where your job requires you to spend most of your time. Lodging and travel expenses while away from your tax home on business are deductible business expenses. If you are a State legislator, Internal Revenue Code Section 162(h) allows you to elect to have as your tax home your residence within your legislative district. This special election is not available to State legislators who reside 50 or fewer miles from the Capitol Building. ssuming I am eligible, how do I make this election? You attach a statement to your tax return that includes: 1. The name, address and social security number of the State legislator, 2. Identifies the election, 3. Indicates the election is made under IRS Code Section 162(h), 4. Specifies the period for which the election is being made and the property to which the election is to apply, and 5. Provides any information required by the Internal Revenue Code or any Information necessary to show that the taxpayer is entitled to make the election. 6. See Exhibit B for a sample election. What may I deduct for lodging and other travel expenses while I am working in Lansing? If you make the IRS Code Section 162(h) election, you use a daily per diem rate. Multiply each legislative day by the greater of: 1. The daily per diem allowed for federal employees traveling within the United States, or 2. The daily allowance allowed by the State of Michigan not to exceed 110% of the amount described in 1. Note: legislative day is any day during the taxable year when the legislature is in session (including any day in which the legislature was not in session for a period of 4 consecutive days or less). lso, a legislative day includes any day that the legislature is not in session, but the physical presence of the legislator was formally recorded at a meeting of a committee of such legislature. See Exhibits C, D, and E for further explanation. 9

10 What is the daily per diem rate for Lansing for 2015? The total daily per diem rate for Lansing for 2015 is $ 142. Under the transition rules, you may use this rate for the entire year even though the rate changed as of October 1, The lodging rate portion per day is $91 and the meal rate portion per day is $51. Multiply $91 by the number of legislative days and include this amount on Form 2106, Part I, Line 3. Multiply $51 by the number of legislative days and include this amount on Form 2106, Part I, Line 5, Column B. lternatively, you can choose to use the 2015 rates for travel expenses incurred January 1 through September 30, 2015 and use the new rates for travel expenses incurred October 1 through December 31, This will require additional computations. The new rates effective October 1, 2015 are $96 for lodging and $59 for meals for a total of $155 daily per diem. What expenses are covered under the daily per diem rate method? The daily allowance includes lodging, meals, laundry, cleaning and pressing of clothing, and fees and tips for services, such as for waiters and porters. re there other expenses I can deduct in addition to the daily per diem amount? Yes. You may also deduct expenses for cab fares, telegrams, business related phone calls, facsimile charges, internet charges, etc. If the state pays me an allowance for travel and other expenses, is this allowance additional income to me? llowances that are intended to reimburse you for certain expenses incurred as a State legislator need not be included as income. However, if your expenses exceed your allowance and you want to claim a deduction for the excess expenses, report your total expenses on Form Your allowance will also be reported on Form 2106 under expense reimbursements. See the SOCC and Mileage Reimbursements section in this Guide. 10

11 OTHER BUSINESS EXPENSES Other job-related expenses such as advertising, telephone, office in home, etc. are reported on Form 2106, Part I, Line 4. Do not include meals and entertainment in this section. dvertising Expenses May I deduct the cost of advertisements in publications? Yes. It is necessary for a public official to support business and community enterprises in their districts. However, ads for campaigns should be paid by campaign contributions and are not deductible on the personal income tax return. May I deduct the costs of pens, calendars, magnets or similar items bearing my name, address and phone number, which I give to constituents? Yes. It is important for legislators to encourage constituents to contact them and be of service. Telephone Expenses May I deduct my personal residence (district) telephone costs? I use it for making and receiving calls to/from constituents and for other state business. The base charges of the telephone is an expense that you would incur whether or not you were a member of the legislature, and is therefore a personal nondeductible expense. Only extra charges for zone and long distance calls are deductible as necessary business expenses. If you have a second telephone line installed exclusively for business use, or use a cell phone exclusively for business use, the entire cost of this telephone would be deductible. Separately billed long distance telephone charges which relate to legislative business are also a deductible expense. n answering service or a tape recording device for telephone messages is deductible if related directly to the business. In addition to the specific toll charges, the excise taxes and/or sales taxes directly related to such charges are also deductible. If you maintain a separate residence in Lansing, similar rules would apply. 11

12 Other Miscellaneous Expenses May I deduct the cost of computers and other equipment used in my home? You can deduct equipment depreciation to the extent of business use. Therefore, location is irrelevant. The important factor is the percentage of the time that the equipment is used for your business activities. May I deduct wages paid for administrative and clerical help or legislative assistants? Yes. You may be required to file federal and state payroll tax returns. The only exception to this requirement is if your help qualifies as an independent contractor. The test for treatment of an individual as an independent contractor versus an employee is very complicated and should be reviewed with your certified public accountant. What other business expenses may I deduct on my tax return? Other deductible business expenses you are likely to incur as a member of the legislature are as follows: 1. Stationery, postage, and office supplies relating to your position as a member of the legislature. 2. Dues to organizations you have joined because they are helpful to you as a State legislator, such as civic and political organizations. Dues to organizations of which you were a member before being elected to public office are deductible if business related. 3. Publications, including books, newspapers and magazines, which you purchase to assist you in your work as a legislator. Expenses of this nature incurred for personal reasons are not deductible. 4. The cost of holiday greeting cards for persons with a business relationship to you. Do any special rules apply to the deduction of club dues and expenses? Yes. For social, athletic and sporting clubs, there is a two-fold rule: First, club dues are no longer deductible. Second, meals and entertainment incurred at clubs, which are directly related to the active conduct of one s business, are deductible subject to the 50% limitation rule. 12

13 Office in Home Home office deductions have always been a confusing and controversial aspect of many legislators tax returns. The following overview touches on the issues you need to keep in mind. Taxpayers now use a simplified option when figuring the deduction for business use of their home. Note: This simplified option does not change the criteria for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements of the allowable deduction. Highlights of the simplified option: Standard deduction of $5 per square foot of home used for business (maximum 300 square feet). llowable home-related itemized deductions claimed in full on Schedule. (For example: Mortgage interest, real estate taxes). No home depreciation deduction or later recapture of depreciation for the years the simplified option is used. Comparison of methods Simplified Option Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes llowable square footage of home use for business (not to exceed 300 square feet) Standard $5 per square foot used to determine home business deduction Home-related itemized deductions claimed in full on Schedule No depreciation deduction No recapture of depreciation upon sale of home Deduction cannot exceed gross income from business use of home less business expenses mount in excess of gross income limitation may not be carried over Loss carryover from use of regular method in prior year may not be claimed Same Regular Method Percentage of home used for business ctual expenses determined and records maintained Home-related itemized deductions apportioned between Schedule and business schedule (Sch. C or Sch. F) Depreciation deduction for portion of home used for business Recapture of depreciation on gain upon sale of home Same mount in excess of gross income limitation may be carried over Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year Selecting a Method You may choose to use either the simplified method or the regular method for any taxable year. You choose a method by using that method on your timely filed, original federal income tax return for the taxable year. Once you have chosen a method for a taxable year, you cannot later change to the other method for that same year. If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business. 13

14 Under what circumstances may I claim the expenses of my home as a business expense? To qualify as a deductible expense, a portion of your home must be exclusively used on a regular basis for activities connected to work as a legislator. Specifically, the following circumstances will qualify for home office deductions: 1. Your home office must be a place where constituents meet or contact you as their legislator regarding legislative affairs. Telephone conversations can satisfy this requirement, but occasional contacts are not enough. 2. The space in your home must be exclusively used for legislative business. This space cannot be used for personal activities. What expenses are deductible as home office expenses? There are three general types of expenses related to home office expenses. 1. Direct. Expenses that are directly related only to the part of your home used for business. Examples are painting or repairs only in the area used for business. These expenses are fully deductible. 2. Indirect. Expenses for maintaining your entire home. Examples are insurance, utilities, and general repairs. These expenses are deductible based on the percentage of your home used for business. 3. Unrelated. Expenses incurred only for the part of your home NOT used for business. Examples are lawn care or painting a room not used for business. These expenses are not deductible. Is there a limit to how much I may deduct for my home office? Expenses which qualify for deduction may not exceed the net income from your activity computed before the office in home expenses are deducted. ny expenses in excess of the income limitation may be carried over to subsequent years under the same rules. What forms do I need to file to claim the office in home deduction? DO NOT FILE FORM Instead complete the worksheet from IRS Publication 587. Include your allowable expenses for business use of your home on Form 2106, Part I, Line 4. Refer to IRS Publication 587 for further information 14

15 MELS ND ENTERTINMENT EXPENSES re the costs of business meals and entertainment deductible? Generally, yes. However, certain requirements have to be met: 1. The expense must be ordinary and necessary and incurred in carrying on a trade or business. 2. You or one of your employees must be present. 3. The expense cannot be lavish or extravagant. 4. The expense must be substantiated. What are the substantiation requirements? Documentation should be recorded in an account book, log, diary, expense record, or any similar record and should be evidenced with receipts or paid bills. Documentation should be recorded at or near the time the expenditure took place. Documentation that is not contemporaneous could result in disallowance of the expenditure. Required documentation for each expenditure includes: 1. Who persons attending the meal/entertainment and the business relationship. 2. What the amount of each separate expenditure. 3. When the date the expenditure was incurred. 4. Where the location where the expenditure was incurred. 5. Why the business purpose of each expenditure. I meet a constituent regarding a legislative problem. We have lunch or some other meals together and I pick up the check. Is this a deductible expense? Yes, you will record your meals and entertainment expenses on Form 2106, Part I, Line 5, Column B. The deduction for meals and entertainment expenses is limited to 50% of the amount expended, which is calculated on line 9, column B. 15

16 What if the meal takes place on a legislative day? If you are using the per diem allowance to calculate your meals expenditure for legislative days you may not deduct your portion of the expenditure for that day. I occasionally entertain other elected officials, such as city council members, mayors, and congressmen, primarily for the purpose of maintaining communications with them and to explore common problems. May I deduct this expense? Yes. The criteria for deducting entertainment costs are that such expenditures have a business purpose and that you and the persons entertained have a business relationship. If the business discussion does not take place during the entertainment, it must at least precede or follow the entertainment. If I host a gathering of fellow legislators and other individuals connected with the legislature, can I deduct the expenses of the gathering? The expenditures will be deductible if you can establish that the activity is primarily business motivated and directly related to your business of being a legislator. s a member of the legislature, I am asked to purchase tickets for many dinners within my district. Can I deduct the cost of these dinners? Yes, if you personally pay for your dinner. The meal is subject to the 50% deduction limitation, but the costs to attend (travel, parking, cab fare, etc.) are 100% deductible. Remember, you may not take both the per diem rate and actual expenses for meals on the same day. However, you may deduct the costs of business related meals (subject to the 50% limitation) that you incur for others in addition to the per diem rate. 16

17 SOCC ND MILEGE REIMBURSEMENTS The amount of the expense allowance for Michigan legislators is recommended by the State Officers Compensation Commission (SOCC). The SOCC reimbursement for 2015 is $10,800, prorated at $900 per month. In addition to the SOCC allowance, Michigan legislators are reimbursed for certain mileage expenses. These reimbursements are reported to the legislators at the end of the year. See Exhibit F Individual Record of Compensation Commission Expenses. If you are claiming business expenses on Form 2106, you will need this form in order to calculate your expense reimbursements. Expense reimbursements are reported on Form 2106, Part I, Line 7. How do I calculate what portion of the SOCC allowance represents reimbursement for meals and what represents lodging? Calculate your expense reimbursement in the same ratio as the federal per diem rate. The total 2015 per diem rate for Lansing is $142, assuming you have chosen to use this rate for the entire year. The portion for lodging is $91 or 64.09%. The portion for meals is $51 or 35.91%. Lodging multiply the total SOCC allowance paid in 2015 ($10,800 per the example in Exhibit F) by 64.09%. The result is reported on Line 7, Column. Meals multiply the total SOCC allowance paid in 2015 ($10,800 per the example in Exhibit F) by 35.91%. The result is reported on Line 7, Column B. Where do I report my automobile expense reimbursement? Total the reimbursements for regular trips, in-district mileage, and extra trips. This is your total automobile expense reimbursement. This amount is also included on Line 7, Column. 17

18 Section 162(h) of the Internal Revenue Code EXHIBIT (h) State legislators travel expenses away from home (1) In general For purposes of subsection (a), in the case of any individual who is a State legislator at any time during the taxable year and who makes an election under this subsection for the taxable year () the place of residence of such individual within the legislative district which he represented shall be considered his home, (B) he shall be deemed to have expended for living expenses (in connection with his trade or business as a legislator) an amount equal to the sum of the amounts determined by multiplying each legislative day of such individual during the taxable year by the greater of (i) the amount generally allowable with respect to such day to employees of the State of which he is a legislator for per diem while away from home, to the extent such amount does not exceed 110 percent of the amount described in clause (ii) with respect to such day, or (ii) the amount generally allowable with respect to such day to employees of the executive branch of the Federal Government for per diem while away from home but serving in the United States, and (C) he shall be deemed to be away from home in the pursuit of a trade or business on each legislative day. (2) Legislative days For purposes of paragraph (1), a legislative day during any taxable year for any individual shall be any day during such year on which () the legislature was in session (including any day in which the legislature was not in session for a period of 4 consecutive days or less), or (B) the legislature was not in session but the physical presence of the individual was formally recorded at a meeting of a committee of such legislature. (3) Election n election under this subsection for any taxable year shall be made at such time and in such manner as the Secretary shall by regulations prescribe. (4) Section not to apply to legislators who reside near capitol For taxable years beginning after December 31, 1980, this subsection shall not apply to any legislator whose place of residence within the legislative district which he represents is 50 or fewer miles from the capitol building of the State. 18

19 EXHIBIT B SMPLE ELECTION Joe Legislator 1234 Main Street nywhere, MI 4xxxx SSN: xxx-xx-xxxx Taxpayer hereby makes an election under IRC section 162(h). Taxpayer is a duly elected legislator of the Michigan House of Representatives representing House District # xx. The taxpayer s place of residence within House District #xx at 1234 Main Street; nywhere, MI is not 50 or fewer miles from the state capitol building at 100 South Capital venue; Lansing, MI. ** This election must be made for each taxable year for which the election is to be in effect and must be made no later than the due date (including extensions) of the taxpayer s Federal income tax return for the taxable year. 19

20 EXHIBIT C Legislative Days Calculation Table Formal Session Days (Verified by Clerk of the House or Secretary of the Senate) XXX dd Days the Legislature was not in Session for a period of four consecutive days or less (see example) + XX dd Days the Legislature was not in Session, but you were physically present at a formally recorded meeting of a committee of the Legislature + XX Total Legislative Days XXX Example The Legislature is formally in Session on Tuesday, Wednesday and Thursday during weeks 1 and 2, and Wednesday and Thursday during week 3. Count Friday, Saturday, Sunday and Monday between weeks 1 and 2 as 4 additional Legislative days. There are no additional Legislative days between weeks 2 and 3 since the Legislature was not in Session for more than 4 consecutive days. Sun. Mon. Tues. Wed. Thurs. Fri. Sat. Week 1 X X X O O Week 2 O O X X X Week 3 X X X = Formal Session Days 8 O = dditional Non-Session Days 4 Total Legislative Days 12 20

21 EXHIBIT D 21

22 EXHIBIT E 22

23 EXHIBIT E 23

24 EXHIBIT F Individual Record of Compensation Commission Expenses 24

25 EXHIBIT G General Substantiation Rules for Travel, Entertainment and Other Deductions Generally, a deduction will be allowed for any expense that can be shown to be ordinary, necessary, and reasonable in the conduct of a trade or business for the production of income. The scope of what can qualify is enormous; the common requirement for a deduction, however, is that the business purpose be proven. For deductions on account of travel, entertainment, gifts, and the use of certain property, substantiation requires, at a minimum, that records be maintained that include the following information for each such expenditure: 1. The amount of each separate expenditure 2. The time, date and place of the expenditure 3. The business purpose of the expenditure 4. The business relationship to the taxpayer of each person entertained, using the property or facility, or receiving a gift The Internal Revenue Service regulations provide further detail depending on the nature of the expenditure: Travel For business travel away from home, the taxpayer must record: 1. The amount of each separate expenditure; meals and incidental expenses may be aggregated into reasonable categories 2. The dates of departure and return for each trip and the number of days spent on business 3. Destinations or locality of travel by name 4. The business reason for travel or the nature of business benefits obtained or expected Other Transportation Expenses To substantiate deductions for the use of automobiles or other transportation property the regulations require that taxpayers must keep a record for each use specifying: 1. The date 2. The name of the person using the automobile 3. The number of miles driven 4. The business purpose of the trip 25

26 EXHIBIT G It is not necessary to make estimates for non-business trips if the overall use of the automobile is determined by odometer readings taken at the beginning and end of the year. If an automobile is used exclusively for business purposes, generally the entire cost of maintaining and operating the automobile (including depreciation) is deductible. If the automobile is used partially for business and partially for personal purposes, the expense must be allocated between business and personal use and only the portion attributable to business is deductible. If the deductions are claimed for actual operating expenses, records must be kept to substantiate the costs of gasoline, oil, repairs, insurance and other related expenditures. In lieu of actual expenses, generally a deduction may be claimed equal to the standard mileage rate in effect for the current year ($.575 for January through December 2015) multiplied by the total number of business miles driven during the year. Entertainment n expenditure for entertainment that is not directly related to the active conduct of the taxpayer s trade or business is not deductible unless: 1. It was associated with the active conduct of a trade or business, and 2. The entertainment directly preceded or followed a substantial and bona fide business discussion. n expenditure is considered associated with the active conduct of the taxpayer s trade or business if the taxpayer establishes that he or she had a clear business purpose for the expenditure, such as to obtain new business or to encourage the continuation of an existing business relationship. If a taxpayer claims a deduction for entertainment directly preceding or following a bona fide business discussion, the records must include the amount, date, duration, place, participants, and their business relationship and nature of the business discussion. For example: taxpayer entertains business associates or prospective customers attending business meetings at a convention, between, or in the evening after, such meetings. To substantiate the entertainment expense the taxpayer must document the participants, their business relationship, and business purpose of the meeting. 26

27 EXHIBIT G Use of Property Taxpayers who claim deductions for the business use of an entertainment facility (country club, yacht, hunting lodge, etc.) or for a computer are required to keep records for each use of the property. If the overall use (personal and business combined) cannot definitely be determined by some other means it is necessary to record both personal and business uses. s in the case of automobiles the records must include: 1. The date of the use 2. The name(s) of the person(s) using the property 3. The amount of time the property was used 4. The nature of the business use, or if the overall use cannot be separately determined, the fact that it was a personal use dequate Records To meet the adequate records requirement a taxpayer is required to maintain an account book, diary, statement of expense or similar record and documentary evidence which, in combination, are sufficient to establish each element of an expenditure. Recording of expenditures should be made at or near the time of the expenditure when the taxpayer has full knowledge. n expense account report submitted by an employee, which is a transcript of an account book, diary, or similar records, maintained by the employee, shall be an adequate record for the taxpayer. Documentary Evidence Documentary evidence, such as receipt, paid bills, or similar evidence, to support an expenditure is required for: 1. ny expenditure for lodging while traveling away from home, and 2. ny other expenditure of $75 or more. Documentary evidence will be considered adequate to support an expenditure if it includes sufficient information to establish the amount, date, place and nature of the expenditure. For example, a restaurant receipt is sufficient to support an expenditure for a business meal if it contains the following: name and location of the restaurant, the date and amount of the expenditure, and if a charge is made for something other than meals and beverages, an indication that such is the case. In addition, however, to substantiate the deduction, the business purpose and business relationship of the parties also must be documented, preferably in a diary. canceled check, payable to a named payee, would not by itself support an expenditure. See IRS Publication 463 for more information regarding Travel, Entertainment, Gift and Car Expenses. 27

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