Archive for 'General'

Dec 15

Igi-108269107-733x358magine this scenario — Jane just received a CP508C notice informing her that her passport is being revoked. Unfortunately, it’s bad timing for Jane as she is about to travel overseas for business. She doesn’t know what to do and reaches out to her CPA for help.

Jane’s CPA explains that the IRS notified the U.S. State Department of her seriously delinquent federal tax debt (SDTD) and as a result is revoking her current passport. Jane has limited options. She needs to request an installment agreement or pay off the tax debt (both are a struggle for her as she needs to travel overseas to earn income to pay her debts).

She ends up finding a way to pay the IRS in full at which point her CPA notifies the local Taxpayer Advocate Service (TAS) office to help expedite the passport decertification process. She receives CP508R notifying her that the certification of tax debt was reversed. Only with the diligent help of her CPA and the TAS is Jane able to get her passport reinstated, just in time for her travel plans.

Could this scenario be a common occurrence for your clients soon?

Background

On Dec. 4., 2015, the Fixing America’s Surface Transportation Act (FAST Act) was enacted and included Sec. 7345, Revocation or denial of passport in case of certain tax delinquencies, allowing the IRS to notify the Secretary of State to deny, revoke or limit a U.S. passport upon certification of an SDTD.

An SDTD is defined as “an unpaid, legally enforceable federal tax liability of an individual” which has been assessed, is more than $50,000 indexed for inflation (current threshold is $51,000), and for which a lien has been filed under Sec. 6323, Validity and priority against certain persons. Also, the administrative Collection Due Process (CDP) rights under Sec. 6320, Notice and opportunity for hearing upon filing of notice of lien, have been exhausted or lapsed or a levy has been made under Sec. 6331, Levy and distraint. Note that the tax liability includes the actual tax plus assessed penalties and interest.

Simply put, if an individual taxpayer currently owes more than $51,000, a federal tax lien was filed against the taxpayer for all the tax periods covering the federal tax liability, CDP rights have been exhausted and a levy has been issued, then the individual could be subject to passport revocation. Submitting a payment to bring the liability under the $51,000 threshold after an individual has been certified will not reverse the notification of certification.

The process

There are many facets to the passport revocation process. Here are some considerations and details to keep in mind:

IRM 5.19.1.5.19.2 (12-26-2017) states that an SDTD includes tax assessments made under an individual’s Social Security number (SSN) or federal employer identification number (FEIN) including U.S. individual income taxes, trust fund recovery penalties, business taxes for which the individual taxpayer is liable and other civil penalties. Assessments, including FBAR penalties assessed under Title 31 of the Bank Secrecy Act and other non-tax liabilities outside the scope of the IRS, do not constitute an SDTD. The $50,000 threshold does not include accrued interest and penalty (IRM 51.12.27.2 (12-20-2017)).
The statutory exceptions to passport revocation or denial include a tax debt being paid in a timely manner under Sec. 6159, Agreements for payment of tax liability in installments, or Sec. 7122, Compromises, a debt where collection is suspended due to a requested or pending CDP hearing or a request for relief under the innocent spouse rules of Sec. 6015, Relief from joint and several liability on joint returns. Other statutory exclusions are detailed in IRM 5.1.12.27.3 (12-20-2017).
The IRS also has the discretion to exclude categories of tax debt from certification (IRM 5.1.12.27.4 (12-20-17) and 5.19.1.5.19.4 (12-26-17)), even if the debt meets the criteria of an SDTD. Some of these include debt deemed uncollectible due to hardship, debt resulting from identity theft or taxpayers in a disaster zone.
The IRS is required to notify the taxpayer, in writing, at the time the certification of an SDTD is made to the State Department (IRM 5.1.12.27.7 (12-20-17)).
Often, taxpayers’ representatives with a valid power of attorney are not receiving the CP508C or CP508R notices. Taxpayers’ representatives must remember to ask clients with liabilities over $51,000 to forward all notices to them including the CP508C and CP508R.
The IRS can reverse the certification of an SDTD as outlined in IRM 5.1.12.27.8 (12-20-17).
There is no administrative appeal process for certification of a taxpayer’s account. Taxpayers whose accounts are certified to the State Department as an SDTD can file suit in U.S. Tax Court or a District Court of the U.S. If the court determines the certification is erroneous or should have been reversed, it can order the certification reversal (IRM 5.1.12.27.9 (12-20-2017)).

Pushback

The 2017 National Taxpayer Advocate Annual Report to Congress included a section on passport denial and revocation that provided criticisms of the process and detailed the taxpayer rights that have been severely and negatively impacted.

The report stated that the TAS provided the IRS with constructive comments on Notice CP508C. First, the notice only provides two options for the taxpayer to preclude the State Department from denying, revoking or limiting the passport: payment of the debt in full or the alternate payment arrangements described above. Second, the notice does not refer to scenarios where the taxpayer may be a victim of identity theft or qualifies for uncollectible status.

Nina E. Olson, the National Taxpayer Advocate (NTA), has written several articles for the TAS NTA blog about the IRS’s passport program which includes a focus on the IRS’s refusal to exclude open TAS cases from passport certification.

There are systemic issues associated with the passport revocation program. Examples include an instance when the tax liability was paid in full and the taxpayer received a CP508C notice one month after the liability was paid in full. In another case, the taxpayer had an existing installment agreement, yet the taxpayer received a CP508C notice. In both cases, the TAS was contacted and assisted in resolving the case.

What CPAs can do

Practitioners and their clients should be proactive in attempting to resolve unpaid tax liability issues. Ask your clients with outstanding tax issues how they would like to resolve the issue. A few of the alternatives include an installment agreement, offer in compromise, full payment of the liability or request for uncollectible status due to financial hardship.

Remember, a pending installment agreement request will stop the CP508C letter from being issued. Use this request for an installment agreement template as a guide.

Do not let your clients lose their CDP rights. File a Form 12153, Request for a Collection Due Process or Equivalent Hearing, in response to Notice 3172 and/or Notice 1058 and try to resolve the issue through CDP. Remember CP508C letters can be issued if the accumulated liability exceeds $51,000 and all administrative remedies such as CDP have been exhausted. Look at the IRS Collection Appeal Options Quick Reference Chart to help you navigate the hurdles.

The process of decertification does work. In a recent case, a husband and wife each received notice of certification (CP508C) on Aug. 20, 2018. The husband and wife’s outstanding tax liability was placed in uncollectible status due to financial hardship through a Revenue Office and notice CP508R was issued on Oct. 22, 2018.

In another case where the taxpayer owed over $300,000, the taxpayer was able to enter into an installment agreement of $100 per month and within two months received notice CP508R.

Always work and attempt to resolve cases at the lowest possible level. Make sure that all unfiled tax returns have been filed and, if needed, an estimated tax payment submitted for the current year. Also, have the appropriate collection information statement (Forms 433-A or 433-F) complete and ready to go, should you need to justify your client’s financial situation. Consider contacting your local TAS office to assist with decertification.

Passport revocations are becoming more frequent as the IRS cracks down on SDTD. If your client finds out he or she is subject to a passport revocation for failure to pay the IRS, there are many avenues of assistance available to get them back on track.

Jul 25

State Minimum Wage
Alabama $7.25 (Federal, no state minimum)
Alaska $9.84
Arizona $10.50
Arkansas $8.50
California $11.00*
Colorado $10.20
Connecticut $10.10
Delaware $8.25
Washington D.C. $12.50 (set to increase on 7/1/18 to $13.25)
Florida $8.25
Georgia $5.15 (Employers subject to Fair Labor Standards Act must pay the federal minimum wage.)
Hawaii $10.10
Idaho $7.25
Illinois $8.25
Indiana $7.25
Iowa $7.25
Kansas $7.25
Kentucky $7.25
Louisiana $7.25 (Federal, no state minimum)
Maine $10.00
Maryland $9.25
Massachusetts $11.00
Michigan $9.25
Minnesota $9.65**
Mississippi $7.25 (Federal, no state minimum)
Missouri $7.85
Montana $8.30
Nebraska $9.00
Nevada $8.25
New Hampshire $7.25 (Federal, no state minimum)
New Jersey $8.60
New Mexico $7.50
New York $10.40
North Carolina $7.25
North Dakota $7.25
Ohio $8.30
Oklahoma $7.25
Oregon $10.25
Pennsylvania $7.25
Rhode Island $10.10
South Carolina $7.25 (Federal, no state minimum)
South Dakota $8.65
Tennessee $7.25 (Federal, no state minimum)
Texas $7.25
Utah $7.25
Vermont $10.50
Virginia $7.25
Washington $11.50
West Virginia $8.75
Wisconsin $7.25
Wyoming $5.15 (Employers subject to Fair Labor Standards Act must pay the federal minimum wage.)

Jun 19

debt

The Complete Guide to Small Business Debt

. . .  it takes money to make money

Debt financing provides business owners with the opportunity to invest in new equipment, additional employees, and pretty much any other operational necessity that arises.

It’s crucial to have a firm grasp on how your initial investment will improve your bottom line.

36 percent of U.S. small business owners who’ve borrowed funds are “very or somewhat” uncomfortable with their debt load, according to a Gallup Poll.  The poll also found that 49 percent of those small business owners say it’s “extremely difficult” to pay down their current debt. Next-

  • the different types of business debt,
  • how to conduct an ROI analysis,
  • the concept of good debt,
  • prepayment penalties,
  • how to pay off business debt.

 

Common types of small business debt

  • SBA loans and grants from the U.S Small Business Administration (https://www.sba.gov/funding-programs/loans) provide various government-based loan types that include general loans, disaster loans, microloans, and real estate and equipment loans. The Annual Percentage Rate (APR) is often among the lowest available. For example, a general small business loan has an APR between 6.5 percent and 8.5 percent as of June 2017,  but SBA loans can be difficult to obtain.
  • Small business term loans are repaid, with interest, over a specified time period. Approvals can be fast and may not require collateral. But you could face a relatively short repayment term (say, 36 months or less). As is often the case, your APR can vary, depending on the lender, the amount borrowed, and so on.
  • Small business lines of credit differ from loans. With a line of credit, you’re approved for a specific dollar amount, which you draw from as needed. A loan, by comparison, is for a lump sum up front. Another advantage to a line of credit is that you only pay interest on what you’ve borrowed. The APR can fluctuate, however, while a loan’s APR is usually set, and rates may be higher than a term loan’s rate. Also, you may pay a small fee, such as 1 percent to 3 percent, whenever you borrow from the line.
  • Small business credit cards are a popular way to buy now, pay later. As with consumer credit cards, small business credit cards are available from a variety of financial institutions. Some cards offer cash-back rewards, others give you travel perks, and so on. It helps to shop around and compare cards.

 

     Stay tuned for the next installement-

Conducting an ROI analysis of the growth opportunity can help you decide if    more debt makes sense now

May 16

index

BUSINESS ENTERTAINMENT EXPENSES -NEW RULES

 

Transportation to and from event

Ticket price for anything

Scalpers ticket price

Cover charge, taxes and tips

Country club fees, dues

Golf, business discussed

Tickets to charitable fundraising event

Tickets to non profit high school/college sports event.

 

NO % IS DEDUCTABLE- NOTHING!!!!!

 

stay tuned for Part 2 and 3 . . .

 

Apr 17

Tuesday afternoon, the agency couldmn’t accept information transmitted from tax software providers. (Taxpayers won’t be penalized) But that’s not the biggest of the IRS’s problems. If a bill to retool it gains steam, the agency- already crippled by years of budget cuts,vulnerable to fraud and reliant on antiquated technology- could face restructuring just as it faces major changes to the tax code.Fix it!539w

Jan 22

Logo_of_the_Internal_Revenue_Service.svg

The shutdown is here and the IRS released its contingency plan for the filing season because, yes, tax season will go on even during a shutdown.
Without a deal, the government officially ran out of money for the fiscal year and shut down at midnight. Of course, shutdown is a loaded word since not every facet of government shuts down. For example, the IRS will maintain some functions, and those are outlined in their contingency plan. Specifically, the agency notes that “If the IRS is confronted by a lapse in appropriations during the 2018 Tax Filing Season (January 1 – April 30, 2018) the IRS will need to continue return processing activities to the extent necessary to protect Government property, which includes tax revenue, and maintain the integrity of the federal tax collection process, along with certain other activities authorized under the Anti-Deficiency Act.”
During a shutdown, agencies are allowed to perform activities that are supported by funding that doesn’t expire at the end of the fiscal year, as well as other activities that are either expressly permitted under the law or are deemed necessary. Sometimes those activities cross over. For example, Social Security payments are funded outside of an annual appropriation, so those employees will continue to work, as well as those IRS employees who support them (even though IRS funding is not outside of annual appropriation).
The law also allows for “activities necessary to safeguard human life or protect government property.” You might not think of your tax return as a matter of life or death but the government begs to differ: The IRS may process tax returns to ensure the protection of those returns that contain remittances (in other words, they can make sure that the government gets its money).
Here’s a partial list of functions that directly impact taxpayers and would typically be put on hold if the government shuts down:
• No tax refunds issued
• No processing of non-disaster relief transcripts
• No processing of forms 1040X, amended returns
• No non-automated collections
• No audit or examinations (some exceptions apply)
• No whistleblower office activity
Here’s a partial list of functions that directly impact taxpayers which will typically continue if the government shuts down:
• Processing of returns with payments
• E-filing
• Mailing tax forms
• Appeals (statutory deadlines will not be changed)
• Call centers (only during filing season)
• Civil and criminal tax cases
• Certain communications to taxpayers
• Active criminal investigations
• IRS.gov
To facilitate those activities, the IRS anticipates that 35,076 employees, or 43.5% of the total employee population, would be retained during a shutdown. So who stays on the job?
Top of the list is Acting IRS Commissioner David J. Kautter. The Commissioner is a presidential appointee who is not subject to furlough. The Commissioner’s salary is paid no matter how many hours he works, so he cannot be placed in a non-duty, non-pay status. A handful of Deputy Commissioners and Chiefs of Staff would also remain on staff or on call as needed.
A significant number of Criminal Investigation (CI) employees – more than 2,800 – are slated to report to work. This makes sense: If the bad guys don’t take a break, neither should those in pursuit of them. Currently, CI is working nearly 3,800 active criminal investigations with an additional 4,800 investigations in the adjudication phase (pre-indictment, indictment, trial and post-trial) in 93 judicial districts. That means that right now, nearly 9,000 investigations are in process on some level: special agents are actively gathering evidence, conducting interviews, testifying in court proceedings, executing search warrants and conducting arrests. CI will operate at close to “normal” levels since federal courts, federal prosecutors and federal law enforcement partners are operating with business as usual.
Just under a dozen employees will be needed to keep the IRS.gov website up and running. During the shutdown, taxpayers should still be able to access a number of online services, including filing tax returns and paying tax online. In fiscal year 2017, IRS.gov served over 1.8 million page views, helping drive more than 121 million form downloads and over 77.5 million payments.
More than 3,000 IT-related workers will stay in place to ensure that taxpayer data is protected and that computer systems function appropriately.
Finally, more than 10,000 Customer Service Representatives will remain in place to handle phones and paper service issues. It’s important to note that this is slated to happen only if a shutdown happens during filing season (during the 2013 government shutdown, customer service operations, including the call centers, stopped).
It’s worth noting that while this is the contingency plan, it’s not set in stone. In 2013, changes were made at the last minute, including shuttering the TAS offices.
The 2018 filing season is slated to open on January 29, shutdown or not. The IRS expects to process more than 155 million individual tax returns in 2018.

 

Dec 17

Congressional leaders unveiled a wide-ranging deal on tax extenders, making some items permanent.

The Protecting Americans from Tax Hikes Act of 2015 is a culmination of recent work done in both chambers of Congress and renews and makes permanent important tax incentives that support both individuals and job creators. Among the provisions that would be made permanent are the enhanced Child Tax Credit, the enhanced American Opportunity Tax Credit, the enhanced Earned Income Tax Credit, the above-the-line deduction for teachers who buy school supplies, the charitable deduction of contributions of real property for conservation purposes, along with the Research & Development Tax Credit and Section 179 expensing.

The permanent R&D Tax Credit provision permanently extends the research & development tax credit and, for the first time, allows for eligible small businesses to claim the credit against the alternative minimum tax liability or against the employer’s payroll tax liability. The Section 179 provision permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014; and sets a new threshold at $500,000 and $2 million, respectively, from the current amounts of $25,000 and $200,000, respectively.

In addition, the legislation suspends the 2.3 percent excise tax on medical devices through 2017 and delays for two years the so-called “Cadillac tax” on high-priced health insurance plans that was supposed to begin in 2018. It also phases out bonus depreciation. Another provision permanently extends the exception from subpart F income for active financing income. The legislation also permanently extends the rule reducing to five years (rather than 10 years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains.

Another provision permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs) of up to $100,000 per taxpayer in any tax year.

Congress is expected to vote by the end of the week on the tax legislation along with an omnibus spending bill that was also unveiled late Tuesday night (see Congress Reaches Deal on Tax Extenders).

“Santa came early this year with gifts for almost everyone in the form of numerous tax relief provisions, although the IRS may view its gift as a lump of coal,” said Peter Mills, managing editor of federal taxes for Bloomberg BNA. “Tax planners would gain more certainty because the bill would make permanent many important tax provisions, most notably the research and development credit, the expanded §179 expensing limitations, the enhanced child tax credit, and the earned income tax credit, as well as extending some popular temporary provisions, such as bonus depreciation. Foreign investors would gain advantages in increasing investment in U.S. real estate by increasing their ownership percentage of publicly traded REITs without being taxed on sales of the interests, and by exempting foreign retirement and pension funds from being taxed on sales of REITS holding U.S. real estate. It also would delay some of the taxes associated with the Affordable Care Act. The IRS fares less well under the bill with new restrictions, including a rule providing for the termination of any IRS employee who takes official actions for political purposes. Moreover, the IRS has the burden of processing these changes in time for the upcoming tax season.”

The Internal Revenue Service would receive $11.23 billion in fiscal year 2016, an increase of $290 million over the current level, specifically for customer service, identity theft and cybersecurity, according to the National Treasury Employees Union. While that figure is $1.7 billion less than the administration’s request of $12.9 billion, the NTWU noted, the final amount is an improvement over the House proposal to cut the IRS budget by almost $838 million compared to the current level.

The bill would make permanent a provision that allows retailers to depreciate remodeling and other improvements to their stores over 15 years rather than the previous standard of 39 years, the National Retail Federation pointed out. The provision, which also applies to restaurants, is important because retailers typically remodel every five to seven years. In addition to helping keep stores attractive to customers and profitable, the remodeling work creates tens of thousands of construction jobs each year.

A separate provision that allows 50 percent of the cost of improvements to be written off under “bonus deprecation” would be extended for five years, and would be expanded to cover stores and restaurants that are owned rather than just those that are leased.

Section 179 expensing, which determines the amount of an investment a small business is allowed to write off entirely in the first year rather than being depreciated over multiple years, would be made permanent and its level would be increased.

The Work Opportunity Tax Credit, which gives retailers a tax incentive to hire the disabled, welfare recipients and other economically challenged individuals, would be renewed for five years.

Paul Gevertzman, a tax partner at Anchin, Block & Anchin, sees benefits in having more certainty about the tax provisions. “The most positive aspect of this extender package is that many of the perennially expiring provisions are either made permanent, or at least pushed off beyond another New Year’s morning expiration,” he said. “What it means for businesses is that they can now plan properly. They can operate with the knowledge that if they follow the prescribed steps they can achieve the anticipated tax result. I had one client tell me just this morning how he’s been sweating it out because they spent $20+ million dollars on equipment purchases in 2015 not knowing for certain how much of that spend could be written off this year. This bill takes the guesswork out of the equation. This certainty allows tax incentives to actually incentivize businesses to spend, rather than to simply provide a benefit to businesses post facto for what they’ve already done.”

Speaker of the House Paul Ryan, R-Wis., spoke of the advantages of the tax deal during a press briefing Wednesday. “I cannot tell you how many times I have visited with small businesses and farmers who tell me, ‘Give me some certainty in the tax code, and I can go create jobs.’ We are finally delivering on one of those tax policies we’ve been trying to—for years—to get certainty in the tax code so we can create more jobs,” he said. “I think this is one of the biggest steps toward a re-write of our tax code that we’ve made in many years. And it will help us start a pro-growth, bold tax reform agenda in 2016.”

The Senate Finance and House Ways and Means Committees have worked on efforts in Congress to overhaul the tax code through working groups, hearings, roundtables, issue papers and markups.

“Passing this legislation and making more tax policies permanent will provide significant tax relief for hard-working taxpayers in every walk of American life, from the middle class to military families to the working poor,” said Senate Finance Committee chairman Orrin Hatch, R-Utah, in a speech on the Senate floor Wednesday. “It will do the same for businesses and job creators throughout our country, resulting in a healthier U.S. economy, increased growth, and more American jobs,” Hatch said. “Put simply, more permanence in the tax code will be a good thing for our country, and the PATH Act will provide just the kind of permanence we need.”

Earlier this year, the Senate Finance Committee reported out a bipartisan tax extenders package that extended provisions to help families, individuals and small businesses for two years. The House Ways and Means Committee advanced several tax bills that would make permanent a number of policies, like incentives for innovative research and development, among others.

The PATH Act includes a number of bipartisan legislative policies that were advanced by the two tax-writing committees.

“It makes absolutely no sense the way America handles its tax code,” said House Ways and Means Committee chairman Kevin Brady, R-Texas, in a statement. “How can families and local businesses count on tax relief each year as long as Congress can’t decide what’s permanent and what’s not? That confusion ends now, and our economy will be stronger for it.”

However, the bill will come at a cost of billions of dollars added to annual budget deficit, which may complicate passage in Congress.

“This bill highlights clear priorities for reforming our tax system,” said Wyden. “What does that mean?  Millions of working families with children will not find themselves suddenly taxed into poverty. Millions of college students won’t have the rug pulled out from under them when the tuition bill arrives. Charities can confidently plan and expand the good work they do. And small business and enterprises on the forefront of innovation now have the economic certainty they deserve. At the same time we are phasing out provisions like bonus depreciation which were always designed to be temporary. But now is not the time for Congress to slow down and pat itself on the back. Today is a down payment on tax reform and our work continues as we strive towards a complete overhaul of our broken tax system.”

The tax extenders package also includes a five-year extension of the wind energy production tax credit to lead to a phase-down of the industry-specific tax credit. The wind production tax credit will be 100 percent in 2015 and 2016, 80 percent in 2017, 60 percent in 2018 and 40 percent in 2019.

Sen. Chuck Grassley, R-Iowa, had advocated for passage of this provision. “As the father of the first wind energy tax credit in 1992, I can say that the tax credit was never meant to be permanent,” Grassley said in a statement. “I also can say that the wind energy industry is the only energy industry that came forward with a phase-out plan. The oil and nuclear industries have benefited from tax incentives that have been permanently on the books for decades.  The five-year extension for wind energy brings about the best possible long-term outcome that provides certainty, predictability and a responsible phase-down of a tax incentive for a renewable energy source.”

The tax package includes an extension of the existing biodiesel fuel blenders credit, the small agri-biodiesel producer credit, the tax credit for cellulosic biofuels producers, the alternative fuel vehicle refueling tax credit, and bonus depreciation for cellulosic biofuel facilities.

Jul 31

little-boxes-624x236

Additional information on returns relating to mortgage interest.

Sec. 6050H is amended to require new information on the mortgage information statements that are required
to be sent to individuals who pay more than $600 in mortgage interest in a year. These statements will now be
required to report the outstanding principal on the mortgage at the beginning of the calendar year, the address
of the property securing the mortgage, and the mortgage origination date. This change applies to returns and
statements due after Dec. 31, 2016.

Jul 31

highway

The short-term highway funding extension passed by the Senate on Thursday contains several important tax
provisions. The bill modifies the due dates for several common tax returns, overrules the
Supreme Court’s Home Concrete decision, requires that additional information be reported on mortgage
information statements, and requires consistent basis reporting between estates and beneficiaries.

         

Due date modifications

For partnership returns -  the new due date is March 15 (for calendar-year partnerships) and the 15th day of the
third month following the close of the fiscal year (for fiscal-year partnerships).

For C corporations – the new due date is the 15th day of the fourth month following the close of the
corporation’s year.

The new due dates will apply to returns for tax years beginning after Dec. 31, 2015. However, for C
corporations with fiscal years ending on June 30, the new due dates will not apply until tax years beginning
after Dec. 31, 2025.

taxes-646511_640

Oct 01

Regulations issued on Tuesday finalize rules the IRS put into effect in 2012 allowing employees to deduct certain expenses paid or incurred for local lodging as business expenses.
Normally, lodging expenses a taxpayer incurs while not traveling away from home are considered personal expenses under Sec. 262(a) and are not deductible. However, under the new rules, local lodging expenses that meet certain criteria will be considered ordinary and necessary business expenses and therefore deductible under Sec. 162.
To be deductible, local lodging expenses must meet a facts-and-circumstances test under Regs. Sec. 1.162-32(a) or qualify for a safe harbor under Regs. Sec. 1.162-32(b). Local lodging expenses paid by an employer on behalf of an employee may be deductible under Sec. 132 as a working condition fringe benefit if they meet the new tests. If an employee is reimbursed by the employer for local lodging expenses, the reimbursement amount may be excludable from the employee’s income if the expense allowance arrangement qualifies as an accountable plan under Sec. 62(c).
One factor considered under the facts-and-circumstances test is whether the expense is a “bona fide condition or requirement of employment imposed by the taxpayer’s employer.” Examples given in the regulations to illustrate the facts-and-circumstances test include employees who are required to stay at a local hotel during a work-related training session; professional athletes who are required to stay at a local hotel before a home game; an employee who is relocating for work and looking for a new home; an employee who has to stay at a hotel near the office while working long hours; and employees who occasionally are on call for a night duty shift and stay at a local hotel.
Under the safe harbor, local lodging expenses will be treated as an ordinary and necessary business expense if:
· The lodging is necessary for the employee to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function;
· The lodging does not exceed five calendar days and does not occur more than once each calendar quarter;
· The employer requires the employee to remain at the activity or function overnight; and
· The lodging is not extravagant or lavish and does not provide a significant element of personal pleasure.
The final regulations clarify that expenses that do not qualify for the Regs. Sec. 1.162-32(b) safe harbor may nevertheless be deductible under the facts-and-circumstances test.
Taxpayers may apply the new rules to any tax year that is still open.