Tax Audit tips for Travel, entertainment and education

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tax Tips Tax Audit Tips for Travel, Entertainment, and Education How would your tax records hold up in an IRS audit? What? You don’t have much in the way of records, but you think you could get them in shape before the IRS gets to you? Think again. This is highly unlikely to work, for three reasons: 1. You violate the timely records rule, and the IRS is likely to figure this out. 2. You likely don’t have the receipts required. 3. You likely don’t know what you are supposed to document. Now, think of the wasted time you would spend creating records that likely will give you nothing for the effort. That’s what happened to Nathan E. Lang. Employee Expenses Lang claimed $16,327 as employee expenses. The IRS audited Lang’s tax return. How much did the IRS allow in employee-expense deductions? Answer: zero. Business Deductions Lang claimed $17,875 in proprietor expenses on Schedule C. How much did the IRS allow in Schedule C deductions? Answer: zero. What Happened You might ask: how could the IRS disallow everything? Answer: Lang dug his own grave with bad records. Looking for Relief in Court Lang took his case to court. The Tax Court explained the rules that apply to Lang’s deductions as follows:1 1. The IRS is presumed correct in denying all of Lang’s deductions. 2. Lang has the burden of overcoming this presumption and proving that the IRS is wrong. 3. Under Cohan,2 the court may estimate certain deductible expenses if Lang provides sufficient evidence for estimates; but in deciding the deductible amounts, the court must bear heavily against Lang, as such inexactitudes are of his own making. 4. The court may not apply Cohan estimates to travel; meals and entertainment; or listed property, such as a passenger vehicle. The court must disallow these deductions in full if they fail the strict substantiation requirements of Section 274(d) as to amount; time and place; business purpose; and, in the case of meals and entertainment, business relationship.3 Who Is Mr. Lang? On his federal tax return, Lang listed his occupation as graphics. Additionally, Lang is a performing artist who engages in “voice-over” and “on-camera” work. What Happened in Court? In court, Lang produced proof of his deductible union dues of $202 and his tax preparation fees of $425. He also convinced the court to grant him $349 of his claimed $17,875 in Schedule C deductions. This means of the $34,202 in deductions that the IRS denied, Lang salvaged $976 by going to court—what a waste of time. How did Lang allow the IRS and the court to beat him like a rug? Missing Receipts Lang proves the point that bad records can cost you just about every tax deduction. You can testify as to your deductions, but without the records, your testimony is pretty worthless. Think of it this way: When it comes to your taxes, paper talks. And in some circumstances, your smartphone apps can create records that talk to the IRS, as we explained in New in Business? Avoid These Two Tragic Vehicle Deduction Errors. Business Purpose The law authorizes business deductions and then imposes an additional requirement called “proof.” Receipts can offer proof of business purpose, but usually you need more. Building Audit-Proof Support The Lang case illustrates the high cost of not keeping tax records. Think of the time Lang spent getting ready for the IRS and then add the time he spent with the IRS. Think of the time he spent getting ready for court. Think of the time Lang spent in court. All wasted time. So now he is out that time spent forever and out his $33,226 in tax deductions, and he has to pay an accuracy-related penalty of 20 percent on the taxes that he owes. We estimate that Lang spent at least 10 times more time dealing with the IRS and the court than he would have spent keeping the records in the first place (and saving his deductions). You can use any method that meets the law’s requirement to document your deductions. Make sure you know what is needed, and then make sure you have the proof. Tax life is so much simpler this way. Takeaways You are probably like most business people. You don’t get up in the morning excited about keeping your tax records. It’s also likely that you don’t get happy about reconciling your checkbooks or putting ink or toner in your printers, just as the farmers you know don’t get excited about cleaning out their barns. But if you want to be in business and not suffer when the IRS audits your tax returns, you need to keep tax records. This takes a little time, and you should do it daily or weekly. If you wait longer than a week, you · violate the IRS’s timely-records rules, · keep crummier records that cost you tax dollars, and · spend more total time on your tax records than if you had kept them on a timely basis. 2016 Tax Extension Deadlines are approaching. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale or purchase of a business property in excess of $5,000. • Sale or purchase of a residence or other real estate.

Audit Proof your Records

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tips to Audit-Proof Your Records You may hate the keeping records part of the tax system, but it’s critical to your tax health. It’s also important to your business health. Good records help you monitor and improve your business. Do not depend on the IRS for mercy when it comes to your tax records. You will never find the word “mercy” in the same sentence with the IRS. It does not exist in the code or the regulations. Since there is no mercy, you have no choice but to get your records right. Getting your tax records right is not difficult when you know what to do. This article gives you the record-keeping basics you need and helps you spend less time keeping records. Checking Accounts The first rule to keeping good records: Do not commingle activities in your checking accounts. Most taxpayers should maintain separate checking accounts for · husband, · wife, · each separately reported Schedule C business, · each corporation, and · rental property (if there are substantially different types of rentals, then additional separate accounts may be necessary here). Example. You operate your business as a proprietor and cover your spouse with a Section 105 medical reimbursement plan. If you have only one checking account for the family and the proprietorship, writing the reimbursement check to yourself likely would destroy the Section 105 plan. That’s how Darwin Albers lost his Section 105 plan deductions. The Albers case is just one example of how using a joint account for both business and personal reasons causes a loss of deductions. Rule 1. Maintain a separate checking account for each business activity. Deposit Receipts in the Account for the Business That Earns the Money You may not earn income in your personal name and then assign that to your corporation. Income is taxed to the person or entity that earns it. You don’t want business receipts in your personal accounts or personal receipts in your business accounts. The separate checking gives you the ability to avoid commingling which is something to avoid always. When the IRS gets confused looking at your accounts, it simply taxes all the income. True, you might be able to undo that assertion and prove that all the deposits are not taxable, but that takes time and effort. By simply getting the deposits right to begin with, you save yourself from confusing the IRS—which saves the IRS, in turn, from frustrating you. Record Deductible Expenses Daily We heard you screaming when you saw the word “daily” above. Don’t worry, the daily requirement, which actually existed for auto expenses in 1984, was repealed and replaced with an adequate records requirement. So the IRS now gives you a week to meet the “timely” and “adequate” records requirements for vehicles, travel, entertainment, and listed property. We doubt that you will, but you probably should thank the IRS for the one-week rule. Why? Because recording your business expenses within one week makes good business sense. After all, if you wait too long, you won’t remember the nature or reason for the expenses. Keep Logs To deduct your vehicle expenses, you need proof of business use. This is true regardless of the form your business takes. Thus, if you operate as a corporation, you (the employee) must submit proof of your business use to the corporation. We recommend that you keep your vehicle mileage in your appointment book so it reflects your business activities for each day. Further, the appointment-book recordings facilitate use of a sampling method, such as the three-month log of business miles to prove business use for the year. If you own rental properties, you should track for at least three consecutive months the time spent on the rentals, to prove material participation and, if applicable, real estate professional status. If you claim a deduction for an office in the home, you should track time spent working in the home office. Your use of the home office must meet the “regular use” test. If you use your home office a little more than 10 hours a week on a consistent basis, you meet the requirements for regular use as set out in Green. Record Required Elements of Travel and Entertainment Regardless of business form, you need to prove, for each day of travel, where you were and why you were there. For entertainment, you need to record who, what, when, where, why, and how much. You can meet all these requirements by adding a short note to the receipt with the · name of the person you entertained, and · why you entertained this person. The “why” should relate to the immediate or future business benefit you hope to achieve with the entertainment. Try to keep the “why” explanation to seven words or less. We made up this seven-word guideline and have used it successfully for the past 30 years because it makes for a clear explanation of the entertainment activity. Further, you have additional corroborative evidence in your files and e-mails. The receipt contains the remaining documentation for · what (e.g., food, drinks, golf); · when (date); · where (name and address of the place); and · how much. If you operate as a corporation, you need to turn the documentation in to the corporation, and the corporation needs to either pay for the entertainment and travel expenses directly (say, with a corporate credit card) or reimburse you for the amounts spent. Make certain the corporation pays. You do not want to claim deductions for these expenses as employee business expenses. Best Advice For all expenses, from the purchase of your desk to pens for your office, keep these two points in mind: 1. You need to prove what you bought. 2. You need to prove that you paid for what you bought. Step 1: What you bought. Generally, the receipt or invoice will prove both the description of what you bought and how this purchase relates to your business. With entertainment at a restaurant, the receipt that proves what you bought is the receipt that shows the details of what you had to eat and drink. Step 2: What you paid. Tax law considers the charge to a credit card as payment, regardless of when the card gets paid.6 Thus, you can prove payment by credit card with either the credit card receipt that shows the total charge or the credit card statement. The canceled check proves payment by check. The bank statement proves payment by electronic transfer. As a general rule, don’t pay in cash. These are the first questions an auditor will ask about a cash payment: · Where did the cash come from? · How good is the trail of cash to the payment? · Was an ATM withdrawal evident before the cash payment? · Did the taxpayer really spend the cash or just make up this deduction? You face no such questions for payments by check or credit card. Petty Cash For most small businesses, a petty cash system is a disaster. If you have such as system and it works well for you, fine. If not, use the reimbursement method. Under the reimbursement method, if you or an employee spends money on behalf of the firm, you simply have the firm write a check to reimburse the expense based on documentary evidence such as · a receipt for the expenditure, and · an expense report for the auto mileage, if applicable. The reimbursement method is direct, clear, and less subject to mistakes than the petty cash system. Statute of Limitations The “statute of limitations” refers to the period of time when you and the IRS can make changes to your tax returns. Most taxpayers think of the limitation periods as the time frames during which the IRS can audit returns. The periods laid out in IRS publications are listed below:7 · Three years, if you filed on time or with extensions and did not understate your income by 25 percent or more, and did not file a fraudulent return Six years, if you filed on time or with extensions but understated your income by more than 25 percent · Forever, no limit, if you filed a fraudulent return · Forever, no limit, if you did not file a return Three years after filing or two years after the tax was paid, if you filed an amended return or other change to your original return, such as a quick claim for refund · Seven years, if you filed a claim for a loss from worthless securities or a bad-debt deduction If you have employees, you must keep your employment tax records for four years after the date the tax was paid or due, whichever is later. How Long to Keep Records The statutes of limitations tell you the time period during which the IRS can audit your returns. If your returns are examined, you need tax records that prove your deductions. This means you need to keep your records for longer than you might think. Assets. Assets such as your car, desk, computer, and office building are relevant to your tax return during their depreciable class lives. · If you are depreciating the assets, the depreciation shows up in those returns. If you used Section 179 to expense the assets, then you have potential recapture during the depreciable class life. Example. You buy a $1,500 desk and depreciate it over the seven-year MACRS life (this takes eight years). In year eight, you still have to prove the depreciation. That means you need the original purchase record in year eight. You also need the purchase record in year eleven to meet the three-year statute of limitations on this year eight deduction. If you used Section 179 expensing on this desk, your records requirement is identical to the example. You have recapture exposure during the eight years, and you need to hold onto your proof of purchase for three years beyond that, or 11 years in total. Make this easy. For any asset that has a life of more than one year, keep the purchase records in a permanent file. With a separate permanent file of asset purchases, you don’t have to think or worry about class lives or limitation periods. The five-drawer method. To use the five-drawer method, you need to keep your permanent files in another place (such as a different set of file drawers). Next, you must report your income and file and pay your taxes on time or with extensions, to limit your audit exposure to three years from the date you filed your return. If you fit this profile, the five-drawer system can simplify your records retention. It works like this: · Drawer 1: Accumulation of current year tax return information · Drawer 2: Last year (tax return filed this year, say on April 15) · Drawer 3: Two years ago · Drawer 4: Three years ago · Drawer 5: Four years ago At the beginning of each year, the contents of drawer 5 go to the dump and all drawers move down one notch. Employment taxes. If you have employees, you must keep all employment tax records for at least four years after the date the tax becomes due or is paid, whichever is later. Again, simplify. If you have employees, use a six-drawer method. Toss the sixth drawer when your four-year statute expires. Thoughts That Make Keeping Records More Pleasant Think of your business records in the way you think of golf handicaps and batting averages. The records tell you what you need to do to continue improving. The fact that the tax law requires the records is another incentive to keep them. But really, if no tax law existed, as a businessperson you would want records that show you where you have been and where you might go. Please call us if you have any questions. 2016 Tax Extension Deadlines are approaching. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale or purchase of a business property in excess of $5,000. • Sale or purchase of a residence or other real estate.

Office equipment — lease or buy?

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tax Tips Office equipment — lease or buy? For many companies, the decision to lease or buy office equipment bears directly on cash flows and profits. Copiers, phones, computers, printers, and networking software all must be either purchased or rented. How do you decide which is the best option for your business? Pros and cons of leasing. When you lease your equipment, you sign the lease agreement and start making payments. It's simple. The company that leases equipment to you (the lessor) generally promises to maintain it. The lessor may even cover insurance and other costs during the lease term. With a lease, your business won't need to take out a loan or make a down payment to use the equipment. Lease terms often roughly coincide with the expected service life of the leased assets. So by the time the equipment is returned to the leasing company, it may be fully depreciated. When the technology becomes obsolete, your firm won't be stuck with equipment you can no longer use. You can return it. Nevertheless, over the long run, leasing is often more expensive than buying. For example, you can buy desktop computers today for $1,000 each. Leasing the same equipment for three years at $50 per month will cost $1,800. Keep in mind, too, that your lease contract will likely require lease payments even if you stop using the equipment. (Breaking the lease may be an option, but often an expensive one.) Moreover, unless you establish the right to buy the equipment at a bargain price when the lease expires, your company won't have equity in the leased items. Pros and cons of buying. When purchasing a piece of equipment outright, you're responsible for maintenance, insurance, loan payments and associated costs. But if the equipment retains its value, you can continue using it after any loans have been paid off. You don't have to continue making lease payments and there's no penalty for breaking a lease contract. When you no longer need the equipment, you may recover a portion of the cost by selling it to the highest bidder. However, purchasing equipment requires cash today. To buy a telephone system, for example, you may need to deplete cash accounts or divert revenue to cover loan payments. That's money that won't be available for advertising, salaries, utilities, and all the other costs of operating your business. The best way to determine if leasing or buying is right for your company is to determine the approximate net cost of the equipment, carefully including tax breaks and resale value. After this, consider other possibilities, like the product becoming obsolete or your need for the assets expiring before the lease does. If you would like to discuss the details, we're here to help. Please call us if you have any questions. 2016 Tax Extension Deadlines are approaching. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale or purchase of a business property in excess of $5,000. • Sale or purchase of a residence or other real estate.

Hire your Children

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tax Tips Hiring your child for the summer Is your teenager looking for a job for the summer? Hiring him or her to work in your business not only provides a little income for your child, but it can result in several tax and financial benefits. For starters, wages your child earns are tax-free up to the standard deduction amount of $6,350 in 2017. Furthermore, any excess is generally taxed at just 10 percent. In comparison, additional amounts you receive from your business as compensation are taxed at your top marginal tax rate — which could be as high as 39.6% — while dividends are generally taxable at 15 or 20 percent if you're in the top tax bracket. Under the "kiddie tax" rule, unearned income above $2,100 received in 2017 by a child under age 19, or a full-time student under age 24, is taxed at the parents' top tax rate. But wages aren't treated as unearned income, so there are no kiddie tax concerns here. If your child is under age 18 and works for your unincorporated business, the earnings are exempt from FICA tax. An exemption also applies to Federal unemployment tax up until the age of 21. This creates tax savings when the parent employing the child is self-employed or in a partnership. Your child may also benefit from fringe benefits such as an employer-provided 401(k) or other qualified retirement plan. Similarly, he or she may contribute to an IRA on a deductible basis in combination with or instead of the company plan. Finally, the wages paid to your child are deductible by your business – just like they are for every other employee. Of course, this arrangement might put a strain on family relations, so factor the personal aspects, as well the tax breaks, into the equation Please call us if you have any questions. 2016 Tax Extension Deadlines are approaching. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale or purchase of a business property in excess of $5,000. • Sale or purchase of a residence or other real estate.

Tax Tips 5 Tax Breaks for Summer

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 5 business tax breaks for summer Now that summer has arrived, you may find opportunities to combine business activities with pleasure, which could result in tax breaks. Here are five of those potential breaks. 1. Organize a company outing. Normally, deductions for business entertainment and meals are limited to 50 percent of the expenses. However, you can write off 100 percent of the cost of a company picnic or other get-together. Note that you can't restrict the outing to only a select few employees. 2. Take a mini-vacation. If you're traveling on business, you might extend the trip a few days to get in some sightseeing. Generally, you can deduct your travel expenses — including airfare and 50 percent of your meals — if the primary purpose of the travel is business related. But you can't deduct expenses for your side trips. 3. Send the kids to camp. When you send your children who are under age 13 to day camp so you and your spouse can work in the summer, you may claim the dependent care credit for the expense. Usually, the maximum credit is $600 for one child and $1,200 for two or more children. The cost of overnight camp doesn't qualify. 4. Lease your vacation home. If you rent out your vacation home when you're not using it, you often can deduct your rental expenses in full. Deductions are limited to rental income if your personal use for the year exceeds the greater of 14 days or 10 percent of the rental time. Note: There are no tax consequences for a rental of two weeks or less. 5. Fish for deductions. Although you can't claim deductions for an entertainment facility, like a boat, you may still write off 50 percent of entertainment expenses relating to the facility. For instance, if you take a client deep sea fishing after a substantial business meeting, you can deduct the fuel, food, and drinks — even the fish bait. These are just five possibilities, but it's important to be aware of exclusions and limitations that may apply to your situation. Please call us if you have any questions. 2016 Tax Extension Deadlines are approaching. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale or purchase of a business property in excess of $5,000.

Every Taxpayer has rights

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tax Tips Know your rights as a taxpayer Did you know that as a taxpayer you have certain rights that are outlined and available to you in the "Taxpayer Bill of Rights?" In a 2012 taxpayer survey, only 46 percent of participants indicated that they believed they had rights before the IRS. The fact that so many taxpayers were unaware of their rights was one of the reasons the IRS worked to bring the Taxpayer Bill of Rights to American taxpayers in 2015. The Bill includes these ten basic rights. 1. The Right to Be Informed. Taxpayers have the right to know what is needed to comply with the tax law. They are entitled to clear explanations of the law and IRS procedures. 2. The Right to Quality Service. Taxpayers have the right to receive prompt, courteous, and professional assistance in dealings with the IRS. Communications must be easily understandable. 3. The Right to Pay No More than the Correct Amount of Tax. Taxpayers have the right to pay only legally due tax, including interest and penalties, and to have all tax payments applied properly. 4. The Right to Challenge the IRS's Position and Be Heard. Taxpayers have the right to raise objections and provide additional documentation in response to IRS actions. 5. The Right to Appeal an IRS Decision in an Independent Forum. Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions. They generally have the right to take cases to court. 6. The Right to Finality. Taxpayers have the right to know the time allowed for challenging the position of the IRS and when an audit is finished. 7. The Right to Privacy. Taxpayers have the right to expect that any IRS action will comply with the law and be no more intrusive than necessary. 8. The Right to Confidentiality. Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized. 9. The Right to Retain Representation. Taxpayers have the right to retain an authorized representative to represent them in their dealings with the IRS. 10. The Right to a Fair and Just Tax System. Taxpayers have the right to expect consideration of facts and circumstances that might affect their situation. Please call us if you have any questions. 2016 Tax Extension Deadlines are approaching. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale or purchase of a business property in excess of $5,000. • Sale or purchase of a residence or other real estate.

What part of Social Security is taxable?

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tax Tips Social Security benefits: A tale of two tax tiers After paying taxes on earnings during your entire work career, you may finally be entitled to receive Social Security retirement benefits. But be aware that those benefits could come at a tax price. Depending on a complex calculation based on two tiers, you might have to pay federal income tax on a portion of the benefits. The tax liability for Social Security benefits depends on a two-tier system that takes your "provisional income" (PI) into account. PI is defined as the total of three amounts: (1) your adjusted gross income (AGI) for other tax purposes, (2) tax-exempt interest income, like municipal bond interest, and (3) 50 percent of the Social Security benefits received. For example, if you have an AGI of $100,000, municipal bond income of $5,000, and Social Security benefits of $20,000, your PI is $115,000 ($100,000 plus $5,000 plus $10,000). The calculation for taxing Social Security benefits under the two tiers is complex. Without going into all the details, here's what you need to know. If your PI falls between the lower threshold of $32,000 and upper threshold of $44,000 for joint filers (between $25,000 and $34,000 for single filers), up to 50 percent of your benefits are taxable. If your PI exceeds the upper threshold, up to 85 percent of your benefits are taxable. Thus, if you reach the second tier, you're taxed on a larger share of the benefits. In addition, the thresholds for the two tiers aren't indexed for inflation, so the tax will continue to kick in at relatively modest levels. How can you reduce your tax liability for Social Security benefits? Keep an eye on the PI components. For instance, you might lower your AGI by postponing capital gains from securities sales to next year or taking losses this year to offset gains. It's wise to consider all the relevant factors before you make any moves. Call if you have questions. Please call us if you have any questions. 2016 Tax Extension Deadlines are approaching. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale or purchase of a business property in excess of $5,000. • Sale or purchase of a residence or other real estate.

Hobby Loss Rules

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tax Tips Hobby or Business When you are a W-2 Wage earning opening a business could help you develop additional deductions while building a business that is 100% your own. However, you have to be careful about about Hobby / Loss Rules. If an individual, partnership, estate, trust, or an S corporation engages in an activity that is not conducted as a for-profit business, deductions are limited to the amount of income from the activity. This rule does not apply to corporations, other than S corporations. If an activity is considered a for-profit business, deductions can exceed income, allowing the resulting loss to offset other income. Determination In determining whether an activity is a hobby or a business, all facts and circumstances are taken into account. No one factor can make the determination. The following list is not intended to be all inclusive. 1) Manner in which the taxpayer carries on the activity. Factors that may indicate a business include maintaining complete and accurate books and records, carrying on the activity substantially similar to other profitable activities of the same nature, and changing operating methods and techniques to improve profitability. 2) The expertise of the taxpayer or his or her advisors. Factors that may indicate a business include knowledge of the taxpayer, or consultation with those who are knowledgeable about a particular industry, then using that knowledge to try and make a profit. 3) The time and effort expended by the taxpayer in carrying on the activity. Factors that may indicate a business include spending a lot of time and effort in the activity, particularly if the activity does not have substantial personal or recreational aspects. Taking time away from another occupation may also indicate a profit motive. Spending little time will not be counted against the taxpayer if qualified employees are hired to carry on the activity. 4) Expectation that assets used in the activity may appreciate in value. Even if no profit is made from operations, if the value of land or other assets in the activity appreciate so that an overall profit is made from a sale, the activity may be considered a business. 5) The success of the taxpayer in carrying on other similar or dissimilar activities. If the taxpayer was successful in the past turning an unprofitable venture into a profitable venture, the current activity may be a business even if it has not yet made a profit. 6) The taxpayer’s history of income or losses with respect to the activity. Early losses during start-up will not count against the taxpayer, but continued losses after the customary start-up stage that are not explainable may indicate a hobby. Losses sustained due to unforeseen circumstances, such as casualty or thefts beyond the taxpayer’s control, will not count against the taxpayer. Any series of profitable years are strong evidence the activity is a business. 7) The amount of occasional profits, if any, which are earned. The amount of profits in relation to the amount of losses, and in relation to the taxpayer’s investment in the activity, may indicate intent. An occasional small profit one year, mixed with large losses in other years or large taxpayer investments, may indicate the activity is a hobby. Substantial occasional profits mixed with frequent small losses or investment may indicate a business. An opportunity to earn substantial ultimate profits in a highly speculative venture also indicates a profit motive. 8) The financial status of the taxpayer. If the taxpayer does not have substantial income or capital from other sources, the taxpayer may have a profit motive. If the taxpayer has substantial income from other sources, and losses from the activity in question generate substantial tax benefits, the taxpayer may not have a profit motive. 9) Elements of personal pleasure or recreation. Where there are recreational or personal elements involved with the activity, a lack of profits may indicate a hobby. On the other hand, a lack of any appeal in the activity other than possible profits indicates a profit motive. It is not necessary that the sole purpose for engaging in an activity is to make a profit. The availability of other investments that might produce a higher rate of return will not count against the taxpayer. The fact that a taxpayer derives personal pleasure in the activity is not sufficient in itself to classify the activity as a hobby if other factors indicate the activity is a business. Presumption of Profit IRS rules state that if an activity is profitable in three of the last five tax years, including the current year, the presumption is it is carried on for profit, and the hobby loss limitations do not apply. If the activity consists primarily of breeding, training, showing, or racing horses, the IRS will presume it is carried on for profit if a profit is produced in at least two of the last seven tax years, including the current year. Reporting Hobby Income and Expenses Occasional profits from hobby activities are not subject to self-employment tax, and losses from hobby activities cannot be used to offset other income. Hobby Income Gross income for the purposes of the hobby loss rules equals gross receipts minus the cost of goods sold deduction. Hobby income may include capital gain, rent, and other income. Hobby Expenses Expenses related to hobby income are reported as itemized deductions on Schedule A. Activities Not Engaged in for Profit IRS examiners consider the following in their analysis to determine whether or not an activity is engaged in for profit. • Are there activities with large expenses and little or no income? • Are losses offsetting other income on the tax return? • Does the activity result in a large tax benefit to the taxpayer? • Does the history of the activity show that it is generat-ing any profit in any years? Examples of possible hobby activities include: – Airplane Charter – Games – Artists – Gardening – Auto Racing – Horse Breeding – Boating – Horse Racing – Bowling – Jewelry Making – Collecting – Knitting – Cooking – Motocross Racing Please call us if you have any questions. Tax season is here. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale or purchase of a business property in excess of $5,000. • Sale or purchase of a residence or other real estate.