2017 IRS Income Tax Changes

Besides changing the 2017 Income Tax Brackets and the 2017 Earned Income Credit, the IRS announced other inflation linked changes to amounts in the tax code. These other deduction and credit amounts are important in 2017 and can affect how much taxes are paid. The tax items for tax year 2017 of greatest interest to most taxpayers include the following dollar amounts

 

Restrictions on Itemized Deductions – Pease Limitation

If the Pease limitations apply, the total of all your itemized deductions is reduced by the lesser of:

3% of AGI above the applicable threshold; or 80% of the amount of itemized deductions otherwise allowable for the tax year.

Pease limitations apply to charitable donations, the home mortgage interest deduction, state and local tax deductions and miscellaneous itemized deductions. They do not apply to medical expenses, investment expenses, gambling losses, and certain theft and casualty losses.

Keep in mind that the floor for medical expenses in 2017 is 10% of adjusted gross income (AGI) for all taxpayers. Taxpayers over the age of 65 could use the 7.5% floor through 2016: in 2017, the favored tax rate disappears and all taxpayers are subject to the 10% floor

 

2017 Kiddie Tax

The kiddie tax applies to unearned income for children under the age of 19 and college students under the age of 24. For 2017, the threshold for the kiddie tax – meaning the amount of unearned net income that a child can take home without paying any federal income tax – is $1,050. All unearned income in excess of $2,100 is taxed at the parent’s tax rate.

 

2017 AMT (2017 Alternative Minimum Tax)

The Alternative Minimum Tax exemption amount for tax year 2017 is $54,300 and begins to phase out at $120,700 ($84,500, for married couples filing jointly for whom the exemption begins to phase out at $160,900). The 2016 exemption amount was $53,900 ($83,800 for married couples filing jointly).  For tax year 2017, the 28 percent tax rate applies to taxpayers with taxable incomes above $187,800 ($93,900 for married individuals filing separately).

2017 Child & Dependent Care Credit Amount

For 2017, the value used to determine the amount of credit that may be refundable is $3,000. Keep in mind that this is the value of the expenses used to determine the credit and not the actual amount of the credit.

 

2017 Transportation Fringe Benefit Limit

For tax year 2017, the monthly limitation for the qualified transportation fringe benefit is $255, as is the monthly limitation for qualified parking,

 

2017 Adoption Credit Amount

The credit allowed for an adoption of a child with special needs is $13,570, and the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $13,570. Phaseouts do apply beginning at taxpayers with modified adjusted gross income (MAGI) in excess of $203,540 and completely phased out for taxpayers with MAGI of $243,540 or more.

 

2017 Hope Scholarship Credit Amount

The Hope Scholarship Credit for 2017 will remain an amount equal to 100% of qualified tuition and related expenses not in excess of $2,000 plus 25% of those expenses in excess of $2,000 but not in excess of $4,000. That means that the maximum Hope Scholarship Credit allowable for 2017 is $2,500. As with the Hope Scholarship Credit, income restrictions apply to the Lifetime Learning Credit. For 2017, the adjusted gross income amount used to determine the reduction in the Lifetime Learning Credit is $56,000 ($112,000 for joint filers).

 

2017 Student Loan Interest Deduction.

The maximum amount that you can take as a deduction for interest paid on student loans remains at $2,500. Phaseouts apply for taxpayers with modified adjusted gross income (MAGI) in excess of $65,000 ($135,000 for joint returns) and is completely phased out for taxpayers with modified adjusted gross income (MAGI) of $80,000 or more ($165,000 or more for joint returns).

 

2017 Estate Tax Limits

For 2017, the estate and gift tax exemption is $5.49 million per individual, up from $5.45 million in 2016. That means an individual can leave $5.49 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield just shy of $11 million ($10.98 million) from federal estate and gift taxes. The annual gift exclusion remains at $14,000 for 2017.

 

2017 Health Savings Account Limits

For tax year 2017 participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,250 but not more than $3,350; these amounts remain unchanged from 2016. For self-only coverage the maximum out of pocket expense amount  is $4,500, up $50 from 2016. For tax year 2017 participants with family coverage, the floor for the annual deductible is $4,500, up from $4,450 in 2016, however the deductible cannot be more than $6,750, up $50 from the limit for tax year 2016. For family coverage, the out of pocket expense limit is $8,250 for tax year 2017, an increase of $100 from  tax year 2016.

 

Tax treatment of the expenses of buying, leasing or developing computer software

Do you buy or lease computer software for use in your business? Do you develop computer software for use in your business, or for sale or lease to others? There are complex IRS rules that apply to determine the tax treatment of the expenses of buying, leasing or developing computer software.

 

How to deduct Purchased software.

Generally, the way to account for the cost of purchased software is to amortize (ratably deduct) the cost over the three-year period beginning with the month in which you placed the software in service. However, software that (1) is readily available for purchase by the public, (2) is subject to a nonexclusive license and (3) hasn’t been substantially modified (non-customized software), and (4) is placed in service in tax years beginning before 2014 qualifies as “section 179 property,” and is thus eligible for the Code Sec. 179 elective expensing deduction that is generally available only for machinery and equipment. For tax years that begin in 2012 or 2013, the deduction is limited to $500,000.

 

Section 179 Limitations on Deducting Software

The limit is reduced by the cost of other section 179 property for which the election is made. Also, the election is phased out for taxpayers placing more than $2,000,000 of section 179 property into service during tax years beginning in 2012 or 2013. Non-customized software that is acquired and placed in service before Jan. 1, 2014 is also eligible for a 50%-of-cost depreciation deduction in the year that the software was placed in service (bonus depreciation).

 

How to calculate bonus depreciation for software?

The bonus depreciation for an item of software is reduced to take into account any portion of the item’s cost for which a Code Sec. 179 election is made, and regular depreciation deductions are reduced to take into account both the bonus depreciation and any Code Sec. 179 election. There are two other exceptions to the three-year amortization rule. One exception requires that, if you buy the software as part of a hardware purchase in which the price of the software isn’t separately stated, you must treat the cost of the software as part of the cost of the hardware.

 

Depreciating Software Purchase

Thus, you must depreciate the software under the same method and over the same period of years that you depreciate the hardware. The other exception requires that if you buy the software as part of your purchase of all or a substantial part of a business, the software must be amortized over 15 years (unless the software is non-customized software).

 

Deducting Leased software on tax returns

You must deduct the amounts you pay to rent leased software in the tax year in which paid, if you are a cash-method taxpayer, or the tax year for which the rentals are accrued, if you are an accrual-method taxpayer. Generally, however, deductions aren’t permitted before the years to which the rentals are allocable. Also, if a lease involves total rentals of more than $250,000, special rules may apply.

 

Deducting costs for Software you develop.

Costs for developing computer software may be accounted for using any of the following methods: (1) amortizing the costs over a three-year period beginning with the month that the software was placed in service; (2) deducting the costs in the tax year in which the costs are paid (if you are a cash-method taxpayer) or in the tax year in which the costs are accrued (if you are an accrual-method taxpayer), but only if all of your costs of developing the software are deducted this way; (3) amortizing the costs over a five-year period beginning with the completion of the development, but only if all of your costs of developing software are amortized this way; (4) amortizing the costs over a period longer than five years, but only if the costs are Code Sec. 174 “research or experimental expenditures.”

 

How do deduct costs of software you develop?

You should also be aware that if following any of the above rules requires you to change your treatment of software costs, it will usually be necessary for you to obtain IRS consent to the change by following prescribed procedures.

2016 Standard Mileage Rates for Business, Medical and Moving

The IRS today issued the 2016 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

 

2016 Business Mileage Deduction Rate

Beginning on Jan. 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 54 cents per mile for business miles driven, down from 57.5 cents for 2015
  • 19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015
  • 14 cents per mile driven in service of charitable organizations

IRS Mileage Rate Decrease

The business mileage rate decreased 3.5 cents per mile and the medical, and moving expense rates decrease 4 cents per mile from the 2015 rates. The charitable rate is based on statute.

 

2016 Standard Mileage Rate

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

 

Depreciating Vehicle Instead of Mileage

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.  Notice 2016-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Per Diem Method of Substantiating the Amount of Business Travel Costs

A taxpayer may use a per diem method of substantiation in lieu of accounting for and deducting the actual amount of travel costs. The IRS provides the rules regarding the per diem substantiation method and reimbursements. Per diems can be used to substantiate travel cost; the time, place, and business purpose must still be substantiated through adequate documentation.

 

Who can use per diem method of substantiation?

The per diem method is available to (1) employers for use with an employee reimbursement plan, (2) employees not covered by an accountable or other expense allowance arrangement, and (3) self-employed individuals. Self-employed individuals can use the optional per diem method only for deducting meals and incidental expenses.

 

When can an employer use a per diem allowance to reimburse employees for business travel expenses?

An employer can use a per diem allowance to reimburse employees for business travel expenses incurred while away from home. The per diem amount can be at or below the applicable federal per diem rate, a flat rate or stated schedule, or in accordance with an IRS-specified rate or schedule. The amount deemed substantiated for each calendar day (or partial day) is the lesser of the per diem allowance or the amount computed at the federal per diem rate for the locality of travel.

 

Documentation required by IRS for Per Diem Expense Method

Although per diem allowance plans eliminate the need for employees to gather documentation supporting the actual amount spent while traveling on company business, employees must still substantiate the other elements of the travel-related expenses (i.e., time, place, and business purpose) before the allowance can be treated as made under an accountable plan. If the expense allowance arrangement routinely results in payments of excess allowances that are not repaid or treated as wages, the entire plan will be treated as an unaccountable plan, and 100% of the per diems (not just the amount in excess of the federal rate) will be treated as employee compensation subject to employment tax.

 

Receipts are not required to prove the amounts of travel expenses when using the per diem method

While receipts are not required to prove the amounts of travel expenses when using the per diem method, employees may find it convenient to submit lodging receipts (these generally conclusively prove the dates and place of the travel) on which the employee has stated the business purpose for the travel. A lodging receipt can be an easy way for employees to meet the remaining documentation requirements. An airline ticket is another convenient source document that provides most of the needed information.

 

How to Calculate Travel Allowance

A travel allowance that is computed on a basis similar to that used in computing the employee’s compensation (e.g., hours worked, miles traveled, or pieces produced) is not a per diem allowance unless, as of December 12, 1989, (1) the allowance was identified by the payor either by making a separate payment or by specifically identifying the amount of the allowance, or (2) an allowance computed on that basis was commonly used in the industry in which the employee is employed.

Per Diem Business Travel Expenses

A taxpayer may alternate during a tax year between using the per diem method (except for the shortcut high/low method mentioned later in this key issue and except for a special rule for transportation industry workers) of substantiation and substantiation of actual amount of travel costs. A taxpayer may alternate as frequently as daily between methods.

 

Maximum per diem amounts for business travel

The maximum per diem amounts that are deemed substantiated under the IRS guidelines are those that apply to federal employees. There are two separate rates for each locality: a rate for lodging and a rate for meals and incidental expenses (M&IE). The government issues separate tables for the following travel locations: (1) continental U.S. (CONUS) and (2) nonforeign locations outside the continental U.S. (Non-contiguous), which includes Alaska, Hawaii, and U.S. possessions, and foreign locations (OCONUS). The CONUS rates are updated October 1 of each year (although there may be occasional updates during the year) while the Non-contiguous and OCONUS rates are normally updated each month. The rates can be found at the government’s General Services Administration website at www.gsa.gov/perdiem.

 

CONUS lodging and M&IE rates

Because the update cycle for the CONUS rates occurs during the calendar year (October 1), the IRS allows taxpayers to use the old rates for the entire calendar year. Thus, for 2012, taxpayers can use the rates in effect for January through September for the entire year or switch to the updated rates beginning October 1.The CONUS lodging and M&IE rates vary depending on location. (See the previously mentioned website for the per diem amounts for specific locations.) Employers have the option of using a simplified per diem method known as the high/low method, which use only two sets of per diem rates—one for designated high-cost localities and another for all other localities. (This method is not available to self-employed taxpayers or unreimbursed employees.

Restrictions on Travel Expenses Deductions on Business Taxes

The possibility always exists that taxpayers will attempt to treat vacation or pleasure travel as deductible business travel. To prevent such practices, the tax law contains restrictions on certain travel expenses.

 

Deducting Travel Expenses

For travel expenses to be deductible, a convention must be directly related to the taxpayer’s trade or business. If the proceedings of the convention are videotaped, the taxpayer must attend convention sessions to view the videotaped materials along with other participants. This requirement does not disallow deductions for costs (other than travel, meals, and entertainment) of renting or using videotaped materials related to business. The Code places stringent restrictions on the deductibility of travel expenses of the taxpayer’s spouse or dependent.15 Generally, the accompaniment by the spouse or dependent must serve a bona fide business purpose, and the expenses must be otherwise deductible.

 

Types of Travel to Deduct

Travel as a form of education is not deductible. If, however, the education qualifies as a deduction, the travel involved is allowed.

To be deductible, travel expenses need not be incurred in the performance of specific job functions. Travel expenses incurred in attending a professional convention are deductible by an employee if attendance is connected with services as an employee. For example, an employee of a law firm can deduct travel expenses incurred in attending a meeting of the American Bar Association.

 

Travel Deductions and Personal Vacation

Travel deductions have been used in the past by persons who claimed a tax deduction for what was essentially a personal vacation. As a result, several provisions have been enacted to govern deductions associated with combined business and pleasure trips. If the business/pleasure trip is from one point in the United States to another point in the United States, the transportation expenses are deductible only if the trip is primarily for business. If the trip is primarily for pleasure, no transportation expenses qualify as a deduction. Meals, lodging, and other expenses are allocated between business and personal days.

 

Deducting Foreign Travel Expenses

When the trip is outside the United States, special rules apply. Transportation expenses must be allocated between business and personal unless (1) the taxpayer is away from home for seven days or less or (2) less than 25 percent of the time was for personal purposes. No allocation is required if the taxpayer has no substantial control over arrangements for the trip or the desire for a vacation is not a major factor in taking the trip.

Foreign Vacations and Deducting Travel Expenses

If the trip is primarily for pleasure, no transportation charges are deductible. Days devoted to travel are considered business days. Weekends, legal holidays, and intervening days are considered business days, provided that both the preceding and succeeding days were business days.

New Standard Mileage Rates Now Available; Business Rate to Rise in 2015

The Internal Revenue Service today issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 57.5 cents per mile for business miles driven, up from 56 cents in 2014
  • 23 cents per mile driven for medical or moving purposes, down half a cent from 2014
  • 14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle. Likewise, the standard rate is not available to fleet owners (more than four vehicles used simultaneously). Details on these and other special rules are in Revenue Procedure 2010-51, the instructions to Form 1040 and various online IRS publications including Publication 17, Your Federal Income Tax.

Besides the standard mileage rates, Notice 2014-79, posted today on IRS.gov, also includes the basis reduction amounts for those choosing the business standard mileage rate, as well as the maximum standard automobile cost that may be used in computing an allowance under a fixed and variable rate plan.

Self Employed Form 1040 and Schedule C or Schedule C-EZ

Overview of Small Business Tax Issues for Self- Employed

If you are in business for yourself or you carry on a trade or business as a sole proprietor or you’re an independent contractor, you generally would consider yourself self-employed; and you would file Schedule C or C-EZ with your Form 1040.Here are a few things the IRS wants you to know about self-employment.Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

What is Self-Employment Tax?

If you are self-employed, you generally have to pay self-employment tax. Self-employment tax is Social Security and Medicare.It’s similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax yourself, using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income. And if you’re self-employed, you generally have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages.

What are Estimated Taxes?

Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly tax payments, you may be penalized for underpayment at the end of the tax year. You can deduct the costs of operating your business.

What Business Expenses?

These costs are known as business expenses. Assets you will use in your business for more than one year, such as buildings or furniture, are things you’ll have to depreciate. Assets with a life of a year or less, such as office supplies, are not depreciated but are deductible in the year you purchase them. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. In addition, you must be able to substantiate your expenses. Therefore, it’s important to keep good records. And finally, for information, see the Small Business and Self-Employed Tax Center on www.irs.gov. Generally, you are self-employed if any one of the following apply to you.

 

Schedule C or Schedule C-EZ

To file your annual Federal tax return Form 1040, you will need to use Schedule C or Schedule C-EZ to report your income or loss from a business you operated or profession you practiced as a sole proprietor. Also, be sure to include any income reported to you as a self-employed person on Form 1099-MISC. Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. To report your Social Security and Medicare taxes, file Schedule SE (Form 1040), Self-Employment Tax.

Calculate Social Security and Medicare taxes Due

Use the net income or loss from Schedule C or the net income from Schedule C-EZ to calculate the amount of Social Security and Medicare taxes due for the year. The instructions for the Schedule SE will be helpful in filling out the form.

Schedule C-EZ instead of Schedule C

You may use Schedule C-EZ instead of Schedule C only if you had business expenses of $5,000 or less; used a cash method of accounting; did not have an inventory at any time during the year; did not have a net loss from your business; had only one business as either a sole proprietor, qualified joint venture, or statutory employee; and you had no employees, no depreciation or amortization of business expenses, you do not deduct expenses for business use of a home, and no prior-year un-allowed passive activity losses. Over time, a sole proprietorship may have to switch from Schedule C-EZ to the Schedule C. This is usually an indication that the business has grown and now has more expenses, inventory, employees, et cetera.Use Form 1040 (Schedule C) to report income or loss from a business you operated or a profession you practiced as a sole proprietor.

What does the IRS Consider a Business?

An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit, and you are involved in the activity with continuity or regularity. Also use Schedule C to report gross receipts and expenses of your sole proprietorship, as well as certain miscellaneous income shown on Form 1099-MISC. Since most businesses start off as sole proprietor, we’re using Form 1040 (Schedule C) in our examples.Calculating a profit or loss from business is divided into five parts. Parts 1, 2, and 3 use terms such as gross receipts, net profit or loss, net sales, cost of goods sold, and gross profit. Parts 4 and 5 ask for information about your vehicle and other expenses. In the next few slides, I’ll explain these terms. Let’s begin with net profit or loss. To figure estimated taxes and to report income earned from your business, you must figure your net profit or loss.

What is Self-Employment Net Profit?

Net profit is the amount on which you pay tax. If you operated at a loss, enter the amount in parentheses. The basic way to determine profit or loss is the same for each type of business organization. You’ll use this formula: Gross income less expenses equals net profit or loss. Net profit is the amount by which the gross profit is more than the business expenses for the same period. A net loss is where the cost of goods sold and business expenses are more than the gross receipts. If your Schedule C shows a profit, enter the amount on both Form 1040 and Schedule SE.

Net Loss on Form 1040 Schedule SE

If you have a net loss and all of your investment is at risk, enter the loss on both Form 1040 and Schedule SE.If you have a loss and some of your investment is not at risk, in most cases you must complete Form 6198, At-Risk Limitations, to figure your allowable loss. The At-Risk Rules may limit the amount of loss you can claim.

What are Considered Gross Receipts?

Next we’ll discuss gross receipts, returns, and allowances and net sales. Gross receipts or sales are the income that a business receives from the sale of its products or services. Take a look at this basic formula: Gross receipts less returns and allowances equal net sales. Individuals that don’t make or buy products for resale as part of their business don’t have returns or allowances to deduct on gross sales.

What is Cost of Goods Sold?

Now for the next term, cost of goods sold. Cost of goods sold is the cost to a business to buy or make the products being sold. It’s easy to figure the cost of goods sold if you sell all your merchandise during the year; however, some of your sales will probably be from inventory that you carried over from earlier years, and you will probably have an inventory left unsold at the end of the year. Note, some companies that provide services, such as lawn care, web design, et cetera, do not have inventories and don’t need to compute the cost of goods sold amount. Here’s another formula for you.

Calculating Cost of Goods Sold

To figure the cost of goods sold, start with the cost of the inventory on hand at the beginning of the year. Add the cost of additional goods purchased or manufactured during the year. Be sure to subtract the cost of any merchandise withdrawn for personal use, such as food a grocer may take home or gasoline a garage owner may give to relatives. The result is the cost of items available for sale during the year. Then subtract the value of your inventory at the end of the year. Your cost of goods sold is the remainder. Some businesses may choose to keep a continuous or automated inventory system. But no matter how you choose to track it, you need to keep good beginning and year-end inventory records. Now I’m going to figure gross profit. Here comes the final formula we’re discussing today. Beginning with gross receipts, subtract your sales, returns, and allowances and the cost of goods sold to determine gross profit.

What expenses can Service Companies Deduct?

Again,we note that sole proprietorships that are service companies don’t need to deduct the cost of goods sold to complete their gross profit.Let’s go into more detail about common business expense deductions. We’ll start with travel, transportation, and entertainment.These deductions are common to all types of businesses. We’ll take a look at each type. Travel expenses are the ordinary and necessary expenses for traveling overnight away from home in the course of your trade or business. These expenses include the cost of public transportation, operating and maintaining your car, meals, lodging, and other related expenses.

Deducting Transportation Costs

You can deduct the actual cost of meals or use a standard per-diem rate. See Publication 463 for the latest per-diem rates and detailed information about your travel expenses. Transportation expenses are the ordinary and necessary expenses of getting from one workplace to another in the course of your business or profession while you are not away from home. Commuting expenses are not deductible.Exactly what are commuting expenses? You cannot deduct the cost of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. These costs are personal commuting expenses. You cannot deduct commuting expenses no matter how far your home is away from your regular place of work. You cannot deduct commuting expenses even if you work during the commuting trip.For example, you sometimes use your cell phone to make business calls while commuting to and from work. Sometimes business associates ride with you to and from work, and you have a business discussion in the car.These activities do not change the trip from personal to business.

You cannot deduct your commuting expenses.

You cannot deduct your commuting expenses. If you use a car for business only, you may base your deduction on the full cost of operating it. If you use the car for both personal and business purposes, you must divide your expenses between those uses on the basis of mileage to compute a business percentage. Do not include commuting to and from work as business mileage. You may take a deduction for your actual business expenses for the car or use a standard mileage rate. Standard mileage means multiplying your business mileage by a standard rate. For this year’s rate, check the IRS website.

Using Standard Mileage Deduction

However, to use the standard mileage rate on a vehicle after the first year of business use, you must have used the standard mileage rate for the first year. In later years, you can alternate between standard mileage and actual expenses. This alternating option is not available to you if you claimed actual expenses in the first year of business use. Actual business expenses include gas, oil, repairs, insurance, depreciation, tires, and license plates. Under either method, parking fees and tolls are deductible. See Publication 463, Travel, Entertainment, Gift and Car Expenses, for more information on using standard mileage rates and the use of a car in your business.Business entertainment expenses are deductible only if they are ordinaryand necessary expenses of carrying on your trade or business. To deduct these expenses, you must maintain receipts and records. This includes taking clients to lunch. Publication 463 explains the 50% limit on business meal expenses.

 

What is Section 1244 Stock?

Ordinarily, a loss on a sale or exchange of stock is a capital loss. Capital loss treatment is generally less advantageous than ordinary deduction treatment because of the fact that a capital loss recognized by an individual is applied, first against capital gain (which is usually subject to tax at a maximum marginal rate which is lower than that on ordinary income), and, to the extent it exceeds capital gains recognized during the year, is subject to limitations on deductibility.

 

Section 1244 Loss Deductions

Fortunately, the tax law allows ordinary loss treatment on certain losses with respect to stock of small
corporations. In general, this special treatment is only available if the following conditions are satisfied:
(1) As of the time the stock was issued, the aggregate amount that was received by the issuing
corporation for stock, as contributions to capital and as paid-in surplus, must not have exceeded $1
million.
(2) The stock must have been issued for money or property (other than stock or securities). Thus, the
stock can’t be issued as compensation for services.
(3) For the five years before the year the loss was sustained, the corporation must not have received
50% or more of its receipts from certain passive sources.
(4) The taxpayer claiming the special treatment must be an individual (including, if certain conditions
are satisfied, individuals who claim the loss through holding an interest in a partnership that is selling
the stock). The special treatment isn’t available to corporations, trusts or estates.
(5) The stock must have been issued to the individual claiming the special treatment, or to the
partnership through which the individual is claiming the special treatment, and held continuously by
that individual (or partnership) to the time of sale.
In any year, the total loss treated as ordinary under these rules can’t be more than $50,000 (or $100,000
if you file a joint return).

Tax deductions and credits for taxpayers in Puerto Rico

Credits and deductions for taxpayers with income from sources within Puerto Rico that are exempt from US contributions. These tax rules are a little different and can affect the taxes owed. 

Residents bona fide of Puerto Rico can not claim deductions and / or credits assignable or taxable income from Puerto Rican sources that are excluded from federal tax return of the United States.Deductions and income not attributable to specific loans have to be divided among the excluded income from sources within Puerto Rico and income from all other sources, to determine the part that can be deducted or credited to the federal tax return US.

 

Examples of Special Puerto Rico Tax Deductions

Examples of this type not attributable to specific income deductions and therefore have to be divided include maintenance for the divorced spouse, the standard deduction and certain itemized deductions such as medical expenses, charitable donations, property taxes and mortgage interest on their principal residence. Generally, you can claim personal exemptions in full.

If you have taxable income from sources within Puerto Rico in its US federal payroll taxes, then you can claim a credit for foreign taxes paid to Puerto Rico.

However, it is not allowed to claim a credit for foreign taxes paid in respect of income from Puerto Rican sources that are excluded from the US payroll contributions. Therefore, to calculate your foreign tax credit properly, you have to reduce the amount of taxes paid by the amount of taxes allocated to the excluded income Puerto Rican sources.

 

VITA in Puerto Rico

The Internal Revenue Service sponsors the VCP Taxpayer Assistance for the Preparation of Income Tax ( VITA) and offers free help taxpayers in several of offices in convenient community locations. The program VITA is a program of the IRS that trains volunteers to provide assistance to taxpayers in places that are convenient to the community and prepare them free worksheets basic contribution.

Free Tax Preparation in Puerto Rico

The IRS provides support through a toll-free telephone charges. For assistance, call 1-800-829-1040. When calling this number, you can ask questions to help with the preparation of your return or questions regarding any notice you received. In certain areas, the IRS has local offices that you can visit for support; or taxpayers can call 787-622-8929 in Puerto Rico (this is not a toll-free telephone).

 

Other IRS Assistance in Puerto Rico

The IRS also sponsors Assistance Program and the Community Advisory Tax, which provides tax seminars to assist taxpayers in preparing your tax return. Seminars can cover a variety of topics and are designed according to the needs of your group or organization. Contact the office of the IRS nearest you for more information on these services.

Tax Deduction for Bad Debts

If someone owes you money that you can not collect, you might have a bad debt and can use this to offset income. For a description of what is considered a valid debt, see Publication 550 , Investment Income and Expenses (Income and capital expenditure) and Publication 535 , Business Expenses (Business Expenses). Usually, to deduct a bad debt, you must have previously included that amount in your income or have paid the amount in cash.

 

What is the Tax Deduction for Bad Debt?

If you are a taxpayer cash basis, can not take a deduction for a bad debt for money had hoped to receive, but received (eg money owed for services rendered or rent), since the amount was never included in your income. To claim that there is a bad debt, you have to indicate when the transaction that was a loan and not a gift. If you lend money to a relative or friend with understanding that the friend or relative may not pay, you should consider it as a gift and not a loan.

 

Types of bad debts – commercial and noncommercial

Usually a bad commercial debt is the resulting performance of your trade or business. You can deduct this debt on their tax return business. The following examples are considered uncollectible trade receivables (if the amount previously included in income):

  • Loans to customers and suppliers,
  • Credit sales to customers or
  • Secured business loans.

 

Taking Bad Debt Tax Deduction

A business takes its bad debts from gross income when calculating taxable income. You can deduct all or part of uncollectible trade receivables. You can claim a bad commercial debt using the method of canceling tally bad experience or accrual method based on the risk of the amount to be collected.

All other bad debts are not commercial. To be deductible, these non-commercial debts have to be uncollectible in full. You can not deduct a noncommercial bad debt that can partially recover.

 

When is Bad Debt Uncollectible?

A debt is uncollectible when facts and circumstances around it indicates that there is no possibility that the amount due is paid. To demonstrate this, we must establish that it has taken reasonable steps to collect the debt. No need to go to court if you can show that the verdict would establish that the debt would be uncollectable. You can take the deduction only in the year in which the debt is uncollectible. No need to wait until the maturity of the debt to determine what is bad.

 

Declaring noncommercial bad debt

Declare a noncommercial bad debt as loss of short-term capital on line 1 of Part 1 of Form 8949 ,Sales and Other Dispositions of Capital Assets (Sales and other dispositions of capital assets). Enter the name of the debtor and the English phrase ” bad debt attached statement “(attached statement of bad debt) in column (a). Enter your bad debt based in column (e) and enter zero in column (d). Use a separate line for each bad debt. This loss is subject to limit capital losses.The deduction of bad debt noncommercial requires a separate and detailed explanation, which is attached to your return.

More information about nonbusiness bad debts

For more information about nonbusiness bad debts, see Publication 550 , Investment Income and Expenses (Income and capital expenditure). For additional information about business bad debts, see Publication 535 , Business Expenses (Business Expenses).