2018 Virginia Legislators Tax Guide

Transcription

1 2018 Virginia Legislators Tax Guide vscpa.com/legislatorstaxguide

2 Developed by: Vivian J. Paige, CPA Edited by: Warren Chapman, CPA David Creasy, CPA Monique Valentine Ford, CPA The VSCPA is here to help! Virginia CPAs play a central role in business management, whether in government, corporate finance, education or traditional public accounting. The Virginia Society of Certified Public Accountants (VSCPA) includes more than 12,000 members and has 10 chapters across the state. Members subscribe to the rules of professional conduct laid out in the organization s bylaws and subject themselves to the discipline thereunder. This guide has been prepared specifically for members of the Virginia legislature to assist you in preparing your 2017 federal and state income tax returns. This guide is not intended to cover items that are unrelated to your position as a legislator. Although this guide is an excellent reference tool, it is not meant to be used as the sole basis for your final decisions regarding your specific tax situation. We suggest that any decisions regarding your unique situation be made after consulting with your CPA. The VSCPA is always happy to arrange briefings for legislators. Please direct any questions or inquiries to VSCPA Vice President, Advocacy Emily Walker, CAE, at (804) or ewalker@vscpa.com. NOTE: This guide was prepared in December 2017 for the 2017 tax year. Any tax law changes passed after this date are not reflected in this guide. Please be sure to review recent changes to the tax laws. 2 1

3 CONTENTS Introduction...3 Special IRC 162(h) Election for Tax Home...4 Living Expenses During Legislative Session...5 Transportation and Travel Expenses Office Expenses Advertising...8 Entertainment and Meals...9 Telephone Expenses Other Expenses Virginia Income Tax Recordkeeping Introduction Legislators are employees of the Commonwealth of Virginia. Compensation, including salary and amounts received for attendance at interim meetings, is reported on Form W-2. Legislators also receive an allowance for office expenses. For members of the House, this allowance does not meet the requirements of an accountable plan and is therefore included as income on Form W-2. Members of the Senate may elect to participate in an accountable plan. If the election is made, the amounts are not included as income on Form W-2. A deduction is allowed on your income tax returns for ordinary and necessary business expenses that are not reimbursed. These unreimbursed expenses are reported on Form 2106 and are classified as miscellaneous itemized deductions on Schedule A of Form They are only deductible to the extent that they exceed 2 percent of your adjusted gross income. It is important that legislators maintain adequate records to substantiate all expenses. The burden of proving the appropriateness and extent of deductibility is on you, the taxpayer. Failure to adequately support an expense can result in its disallowance in the event of an audit. Campaign contributions are not income to you if they are used for the expenses of the campaign. In addition, campaign expenses are not deductible by the legislator. The U.S. Treasury requires candidates to maintain detailed records of campaign receipts and disbursements. If campaign funds are commingled with personal funds, they may be considered diverted for personal use and would be considered income to you. 2 3

4 Special IRC 162(h) Election for Tax Home To determine the deductibility of certain travel expenses while away from home, a determination of what is considered to be your home for tax purposes must be made. Home does not necessarily mean where you maintain a residence. Instead, it is based on the facts and circumstances for each taxpayer. Generally, your tax home is the principal place of activity for your business in this case, your business as a legislator. Living expenses lodging, meals, and incidental expenses in your tax home are not deductible. U.S. Internal Revenue Code Section (IRC) 162(h) provides a special election for state legislators who attend legislative sessions away from where they maintain their residence. This election allows the legislator to designate his or her personal residence as his or her tax home. The election is not available if the legislator lives within 50 miles of the state capitol. In making this election, the legislator claims a fixed amount, generally equal to the federal per diem rate, in lieu of actual living expenses incurred for legislative days. A form, similar to the one available at vscpa.com/162h, must be attached to each return on which the election is made. The election can only be revoked with U.S. Internal Revenue Service (IRS) consent. Please consult with your CPA to determine if this election is best for you. This tax guide assumes that Richmond is not your tax home. Living Expenses During Legislative Session Virginia legislators receive a per diem allowance equal to the allowable federal per diem for lodging, meals and incidental expenses for the City of Richmond for each day the legislature is in session. The per diem reimbursement is considered an accountable plan and is not included in your W-2. If your actual expenses for these items, based on detailed records you have maintained, exceed the allowance, you may deduct the difference. You would report the total expenses and the total reimbursement on Form Be aware that the federal per diem is actually two separate parts one for lodging and the other for meals and incidentals. You will need to break down your expenses and reimbursements into these two separate parts. The deduction for meals is limited to 50 percent of the cost. Transportation and Travel Expenses Transportation expenses consist of those costs incurred for travel while at home. Included are auto expenses, taxi fares, tolls and parking. Travel includes transportation and other expenses incurred while away from home. For this purpose, home means your tax home as discussed above. Transportation Expenses Virginia legislators are reimbursed for one weekly trip to and from Richmond while the legislature is in session and for other state business travel, such as for committee meetings outside of session. This reimbursement may be in the form of mileage or actual 4 5

5 costs, if you traveled by train or plane. The reimbursement is not included in your W-2. If the reimbursement equals the expenses you incurred, no reporting is necessary. If the reimbursement is less than the expense, report the total expense and the reimbursement on Form Legislators often drive a great deal while in their home districts. Travel to meetings where you speak or that are important to attend because of your elected position is tax deductible. You should maintain a mileage log and record all business miles driven and the purpose. Mileage related to campaigning is not deductible. Your deduction for the use of your automobile can be either in the form of the standard mileage rate per business mile or your actual automobile expenses for the business portion. The standard mileage rate for 2017 is 53.5 cents per mile. If you use actual expenses, add all the costs of operating your vehicle (gas, oil, repairs, registration and insurance) plus lease costs (subject to certain restrictions) or depreciation. Multiple this total by the business percentage, which is computed by dividing the business miles by the total miles driven. Parking fees and tolls related to business are an additional deduction under either method. Travel expenses In addition to legislative sessions, you may incur lodging, meals and incidental expenses related to away from home trips made as the result of your job as a legislator. Include these expenses on Form Note that only 50 percent of meals are deductible. Office Expenses Virginia legislators receive a monthly allowance for office expenses. The allowance covers the expenses, such as office supplies, stationary, postage, pens and paper, that are necessary to maintain your in-district office and serve your constituency. For members of the House, this allowance does not meet the requirements of an accountable plan and is included as income on your W-2. The expenses incurred are considered unreimbursed expenses and are deductible, provided you have maintained the required records. Members of the Senate may elect to participate in an individual accountable plan for the office expense allowance. If you choose to participate, information on the expenses must be provided to the Senate Fiscal Office and the office allowance is not included in your W-2. You are required to maintain documentation of these expenses, and only those expenses which exceed the allowance are deductible. If you maintain a rented office in your district to serve your constituents, you may also deduct the costs of operating your office, including rent, utilities, and telephone and cost recovery (depreciation) on furniture and equipment. Include these expenses on Form If, instead, you maintain an office in your home, you may be entitled to claim expenses related to that office. You must be able to show that the office is used regularly and exclusively as: (1) your principal place of business within your legislative district; or (2) a place where you meet for legislative business as a normal and regular activity. 6 7

6 Occasional or incidental use will not meet the test. In addition, because you are an employee, the office must be used for the convenience of your employer, the Commonwealth of Virginia. The rules regarding deductibility for a home office are complex and in most cases, legislators will not qualify for the home office deduction. Please check with your CPA for an analysis of your situation. Advertising Generally, amounts paid for advertising are considered normal trade or business expenses. Placing ads to maintain relationships with your constituency and promote your name is a normal and necessary part of your business as an elected official and are deductible by you. In addition, expenses to promote goodwill in the community are considered advertising expenses. As an added bonus, any food or beverages distributed to the general public during an event to promote goodwill are fully deductible and not subject to the usual 50 percent limit on meals and entertainment. Entertainment and Meals Generally, only 50 percent of entertainment and meal expenses can be deducted and the amounts must be reasonable. For business meals to be deducted, the legislator (or his or her employee) must be present and the meal must be directly associated with your trade or business as a legislator. For entertainment to be deductible, only business associates can be entertained and the entertainment must be either directly related or associated with the active conduct of your trade or business as a legislator. A business associate is someone with whom the legislator reasonably expects to do business. They could be a constituent who has a state issue or other elected officials with whom you confer on problems. Directly related means the expense was incurred in an actual business meeting or discussion in a clear business setting. Associated with expenses must be incurred before or after a bona fide business discussion and serve a specific business purpose. As with all deductions, you are required to keep records to substantiate the expense. Advertising costs are deducted on Form Please be aware, though, of the timing of the advertising. If they appear during an election campaign period, they would be considered nondeductible campaign expenses. (Such expenses should be paid from your campaign contributions.) Telephone Expenses If you have a separate phone line installed exclusively for legislative business, the cost of the service is deductible as a business expense. The same is true for a cellular phone, although the cost of personal calls cannot be deducted. Use of an answering service, if directly related to your position as a member 8 9

7 of the legislature, is also deductible. If you use your home telephone for legislative purposes, the basic cost of that line is not deductible. However, amounts charged in addition to the basic rate for calls related to state business, such as long-distance charges, are deductible. Other Expenses There are many other expenses you might incur as a member of the legislature. Some of these are listed below and are deductible on Form 2106 to the extent that you are not reimbursed: 1. Gifts. If you give gifts to constituents, you may deduct the actual cost of the gift up to $25 annually per recipient. 2. Dues. Dues to organizations you normally have not belonged to prior to being a member of the legislature but now belong to as a matter of policy are deductible (i.e., civic and community organizations). Certain club dues, including those of country clubs and social clubs, are not deductible under any circumstances. 3. Publications. The cost of obtaining additional publications, such as newspapers and magazines, that are necessary because of your position as a state legislator is deductible. If you incurred this expense on a normal basis for personal reasons, the costs would not be a deductible expense. 4. Cards. The cost to produce and send holiday cards to district and community leaders is a form of advertising expense and is deductible. Included in the deduction is the cost of the cards, envelopes and postage. If the card includes a photograph, include the cost of the photo. 5. Newsletter. Newsletters are a popular way of staying in touch with constituents. Their costs, including printing and postage, are deductible. Virginia Income Tax Virginia income tax is based on income for federal purposes with certain modifications. As the result, the business-related expenses deducted on your federal income tax return will generally be deductible on your Virginia income tax return. Recordkeeping It is your responsibility to maintain timely, accurate records of your expenses. Legislators must substantiate each element of an expenditure or use by adequate records or sufficient evidence corroborating his own statements. Estimates generally are not acceptable. Business expenses must be supported by receipts, canceled checks, bills and/or books of record (such as a diary or log) for any lodging expenditure and any other business expenditure of $75 or more. These records should be maintained for at least three years after the filing of your returns. Refer to the chart on the next page for specific guidance on record maintenance for each type of expense

8 If you have expenses for: Travel THEN you must keep records that show details of the following elements: Amount Time Place or Description Business Purpose, Business Relationship Cost of each separate expense for travel, lodging and meals. Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. Dates you left and returned for each trip and number of days spent on business. Destination or area of your travel (name of city, town or other designation). Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Relationship: N/A Entertainment Cost of each separate expense. Incidental expenses such as taxis, telephones, etc., may be totaled on a daily basis. Date of entertainment. (Also see Business Purpose.) Name and address or location of place of entertainment. Type of entertainment if not otherwise apparent. (Also see Business Purpose.) Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. For entertainment, the nature of the business discussion or activity. If the entertainment was directly before or after a business discussion: the date, place, nature and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity. Gifts Cost of the gift. Date of the gift. Description of the gift. Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. (The above also applies to gifts.) Transportation Cost of each separate expense. For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use and the total miles for the year. Date of the expense. For car expenses, the date of the use of the car. Your business destination. Purpose: Business purpose for the expense. Relationship: N/A 12 13

9 Virginia Society of CPAs 4309 Cox Road Glen Allen, VA (800) vscpa.com vscpa.com/legislatorstaxguide VSCPA Vice President, Advocacy Emily Walker, CAE (804) VSCPA President & CEO Stephanie Peters, CAE (804)