1. UNDERSTANDING THE TAX CODE:
EARNING MORE FROM YOUR BUSINESS
EXPENSES
Memphis Consulting Group, LLC.
1
2. Agenda
1. Why is this Important?
2. Everyday Business Expenses
3. Qualifying Business Expenses
4. Business Entertainment Expenses
5. Employee Expense Reimbursement
6. Insurance Deductions
7. Business Travel and Transportation Expenses
8. Domestic Travel v Foreign Travel
9. The Importance of Adequate Record Keeping
10.Conclusion 2
3. 1. Why is this Important?
■ This session is to help business owners “Start with the end
in mind.”
■ All business owners want to be successful and generate
income from their businesses.
– Business owners also want to build wealth, manage the
wealth, and transfer wealth
– Business owners cannot work forever. They need to plan
for retirement.
3
4. a. What the Big Boys Are Doing?
Companies Net Income Tax Rate
CBS $1.8 Billion -13.1%
GE $5.8 Billion 0.9%
Prudential Financial $3.5 Billion -3.0%
Time Warner $4.3 Billion -0.6%
PG&E Corp $1.8 Billion -4.6%
4Source: Center for Tax Justice
In business terms, it is called tax avoidance. These companies are using
perfectly legal means to pay less tax. So why don’t you, the small
business owner?
5. b. Income
Income is money that an individual
or business receives for providing a
good or service or through investing
capital.
5
6. c. Types of Income
6
■ There are four types of income:
– Taxable – Taxable income is wages, salary, commissions, sales,
rents, interest, dividends, and royalties.
– Tax-free – Tax free municipal bonds are the most popularly
thought or example of tax free income. However, fringe benefits
can be even better. With fringe benefits the employer gets a
deduction and the employee has no taxable income upon receipt.
– Tax-deferred – Taxes should always be deferred as long as
possible. Examples of tax deferral strategies include: IRAs,
401(k)s, Health Savings Account, and Deferred Annuities.
– Tax-sheltered – Tax sheltered income is where you escape the
system and never pay the tax. We would all like this, but not
everyone can arrange to deposit income in tax shelters and avoid
probing by the tax authorities.
7. d. Fringe Benefits
■ Certain fringe benefits can provide an unusually tax favored
manner of supplementing the compensation of key
executives.
■ The employer may be able to take a depreciation deduction
and deduct any cost incurred to provide the benefit.
■ Examples of fringe benefits:
– Use of Company Car
– Meals
– Employee Discounts
– Vacation Pay and Sick Pay
7
8. 2. Everyday Business Expenses
■ What are everyday business expenses?
– An everyday business expense is any expense incurred in the
ordinary course of business. Business expenses are deductible and
are always netted against business income. According to the IRS,
business expenses are the cost of carrying on a trade or business.
These expenses are usually deductible if the business operates to
make a profit.
■ Examples of business expenses:
– Fringe benefits
– Rent
– Utilities
– Advertising
■ Business owners have every right to use these expenses as a deduction
to hold on to more of their business income.
8
9. a. Commissioner v Soliman
■ Soliman was an anesthesiologist who traveled to three
different hospitals for work, but neither hospital offered
him an office. Soliman had a home office, and he did not
see any patients in his office. However, he conducted a
variety of tasks that were related to his medical practice.
The Commissioner did not allow the deductions for his
home office because he did not believe that the office was
Soliman’s primary place of business.
■ The tax court did not agree with the Commissioner and
ruled in favor of Soliman stating that his home office was
his primary place of business and the expenses were
ordinary and necessary for his practice.
9
10. 3. Qualifying Business Expenses
■ Even though a business owner may deduct their business
expenses, not all expenses of a business would qualify as a
deduction.
■ Qualifying expenses are expenses that are ordinary and
necessary for your business to function efficiently.
■ Here are some example of expenses that would not qualify
as a deduction:
– Lobbying expenses
– Clothing expenses
– Vacation expenses
– Some membership dues (with the exception of
Professional Organizations and Chambers of
Commerce) 10
11. a. Ordinary and Necessary
according to the IRS
■ To be deductible, the IRS states the business expenses have to be
ordinary and necessary. Do your expenses qualify as ordinary and
necessary for the function of your business?
■ An ordinary expense is one that is common and accepted in your
trade or business.
■ A necessary expense is one that is helpful and appropriate for your
trade or business.
■ Examples of ordinary and necessary expenses:
– Rent
– Interest from loans
– Taxes 11
12. b. Hamper v Commissioner
■ Hamper was a news anchor in the mornings and
afternoons. As an anchor, she had to wear business suits in
order to conduct her daily job requirements. She then
decided to deduct her expenses for the clothes she
purchased for her job. The Commissioner did not allow the
deduction stating that all of her expenses were not ordinary
and necessary for her job.
■ The court found in favor of the Commissioner stating that
all of her expenses were not clothing for her job. Most of
her expenses included other items that were deemed to be
personal purchases.
12
13. 4. Business Entertainment Expenses
■ Paying for entertainment expenses incurred on behalf of
the company due to business responsibilities is a
traditional benefit.
■ Taxpayers may deduct entertainment expenses incurred for
business purposes.
■ To be deductible, the expenses must be ordinary and
necessary and incurred in the operation of a business
regularly carried on by the taxpayer.
■ Lavish or extravagant entertainment expenses are not
deductible.
13
14. a. Wounded Warrior Project
Scandal
■ Since January 2016, the media and public have been
up in arms against the Wounded Warrior Project.
– The Wounded Warrior Project is a non-profit
organization that raises awareness for injured
veterans and assists them and their families with
finding programs and services to meet their
needs.
■ According CBS, only 60% of the company’s donations
went to the assistance of veterans. Everyone wondered
where did the rest of the money go?
■ Former employees of the Wounded Warrior Project
stated that the company would take lavish trips and
host expensive parties.
■ According to the CEO, the trips were conferences and
the parties were fundraisers for the injured veterans.
However, the Wounded Warrior Project spent $26
million on “conferences” and $34 million on fund
raisers in 2014. The CEO and COO were released in
March 2016 due to lavish spending.
Source: CBS News and New York Post
14
15. 5. Employee Expense Reimbursement
■ Employers can receive a tax deduction if they reimburse their
employees for any money spent towards the functions of the
business. This is called employee expense reimbursement.
■ This is a method for paying employees back when they spend their
own money on business-related expenses. Examples include:
– Business travel
– Supplies
– Education (related to current career)
■ The employee expense reimbursement falls under the accountable
plan for tax purposes.
■ To be an accountable plan, the reimbursement has to follow certain
rules and guidelines in order to qualify.
■ The expenses have to be reimbursed before they can be considered.
15
16. a. Rules for the Accountable Plan
■ To be an accountable plan, the reimbursement or
allowance must include all of the following rules:
1. The expenses must have a business connection.
2. The employee must adequately account for the
expenses within a reasonable time period.
3. Any excess reimbursement or allowance must be
returned within a reasonable time period.
16
17. 6. Insurance Deductions
■ If a business owner pays insurance premiums for their
employees, this could count as a deduction for the
business.
■ This includes medical, dental, and long-term care
insurance.
■ Employers can deduct premiums paid and incurred for
health insurance.
17
18. 7. Business Travel and Transportation
Expenses
■ Travel, meals, and lodging expenses incurred by a taxpayer while
away from home in connection with his services as an employee are
deductible.
■ The expenses are only deductible if the purpose of the trip is
primarily for business.
■ Examples of deductible travel expenses undertaken for business
include:
– Meals and lodging
– Air, rail, ship, bus, and baggage charges
– Telephone and telegraph expenses
– Taxi
– Laundry, cleaning, and clothes
18
19. a. Commissioner v Flowers
■ Flowers was an attorney in Jackson, Mississippi who also worked as
counsel for a railroad company. The railroad company offered
Flowers a new position which would require him to work in their
corporate office in Mobile, Alabama. He elected to take the position,
but refused to move to Mobile permanently. The company allowed
Flowers to stay in Jackson and fly back and forth to Mobile. The
company would not reimburse him for traveling since Flowers
elected to pay for the cost himself and refused to move to Mobile, so
he decided to use his travel expenses as a deduction towards his own
taxes. The Commissioner did not allow the deduction stating that
these are considered personal expenses.
■ The court found in favor of the Commissioner stating that the
expenses are not considered business-related. Flowers decided to
remain in Jackson instead of moving to Mobile where his new
position is located which makes the expenses his own personal
costs. 19
20. 8. Domestic Travel vs. Foreign
Travel■ If a trip within the United States is primarily for business, the
taxpayer may deduct the entire travel cost to and from the
destination as a business expense.
■ Foreign business travel has more restrictive requirements.
– Expenses for primarily personal pleasure or for vacation costs
are not allowed, but business expenses at the destination are
allowed.
– Trips outside the US primarily for business but there were some
nonbusiness activities, not all travel cost from home to the
business destination and back may be deductible.
– To be fully deductible, foreign travel must be primarily for
business.
20
21. 9. The Importance of Adequate
Record Keeping
■ To receive deductions for business expenses, a business owner has
to keep adequate record of those charges. According to the IRS, you
should keep the proof you need in an account book, diary, log,
statement of expenses, trip sheets, or similar record. You should also
keep documentary evidence that, together with your records, will
support each element of an expense.
■ Record keeping is the process of recording transactions and events
in an accounting system. In addition to keeping books of accounts,
you must be able to support the transactions.
■ Any purchases, sales, payments, or other transactions have to be
recorded accurately. Here are some examples of different accounting
systems:
– QuickBooks
– Sage 21
22. a. Lysford v Commissioner
■ Lysford was a mortgage broker and a trained pilot who
would fly to different areas to conduct business for his
company. To keep track of his flight and transportation
expenses, Lysford would write the information in a spiral
notebook that he kept on his plane for tax purposes. The
Commissioner did not allow his expenses to qualify as a
deduction because there was not enough evidence to
substantiate as proof of his claim for business expenses.
■ The court found in favor of the Commissioner stating that
the spiral notebook was not adequate for accurate record
keeping for business expenses incurred.
22
23. 10. Conclusion
■ Business transactions can be beneficial to taxpayers in
more ways than one.
■ Think about the income you can keep and not just the
income your business earns.
■ To receive those benefits, a business owner has to make
sure they are meeting the guidelines set forth by the IRS.
■ It may be helpful to consider meeting with a trained
professional to help you keep more of what you make and
grow more of what you keep.
23
