CHANGING BUSINESS MODELS AND METHODS
COMPLICATE 2016 TAX RETURNS
Bob Dylan said it best: “The Times They Are a-Changin”!
In the business world, things are changing, sometimes faster than rules can be written. Asked about what they do for a living, we hear from many clients that they are part of the new economy. This new economy is ever changing and includes things like driving for Uber, renting out rooms or entire homes through Airbnb, buying and selling bitcoins and funding businesses using a crowdfunding site. Add to this sales made through eBay or Amazon.
While these new-economy income generators often provide extra income, they are also complicating the tax returns of those involved. Once popular multi-level marketing plans are being replaced by a number of income-stream possibilities. They help people make up for hours lost to employer cutbacks as well as a job market that is just not what it used to be.
It’s important to consider the tax consequences of these activities. Since many are so new, not every taxpayer or even every tax professional understands them. To make matters worse, the tax consequences can vary from person to person.
For example, if you rent out your home with Airbnb for 14 days or less during the year, the rent is tax free, and the expenses are not deductible. If you rent it out for 15 days, you must report all rent collected and provide services with the rental (such as cleaning, breakfast, et al.). The rental gets reported on Schedule C, making any profit subject to self-employment tax. If the rental has losses, hobby loss rules may apply. Moving income off of Schedule C to the front of your 1040 and moving the expenses to Schedule A makes them (along with other miscellaneous deductions) subject to a reduction equal to 2% of your adjusted gross income. All this makes record keeping more important than ever and means that having a knowledgeable and qualified tax pro is imperative.
Enjoy driving and like to make a few extra dollars doing it? Uber or Lyft might be good options for some extra income, but you will want to keep records of not only the miles you are paid for but also those you put on the vehicle while driving around between pick-ups and drop offs trying to get additional fares. You should also keep track of the hours spent so that you can show that you had a profit motive even if you don’t actually earn a profit. You also need to track personal use vs. business use of your vehicle. One of the questions we are always asked is, “Which is better, the standard mileage rate or actual expenses?” The truthful answer is that we won’t know until we add up both and see which is best for you. This is why it’s so important to keep good records of all your expenses.
Many people are using a crowdfunding application to raise money for all manner of things, such as business start-ups, arts projects, presales of new products or services and even to help out someone who has suffered a medical or financial setback. What the money is raised for can have a huge impact on how it’s being taxed or even if it is taxed at all. Funds might be considered current taxable income, investment capital or even tax-free gifts. It all depends on how the money is raised and what is promised to those doing the actual funding in return for the funds received.
Bitcoins are a new digital currency based on a very complicated and involved system. Transactions are made with no middlemen – meaning, no banks! Their appeal is that there are no transaction fees and no need to give your real name. They may be virtual, but they are not tax free. They are taxable income at the time received if they are received from the sale of property or as payment for services, based on their fair market value (FMV) when received. Later, when converted to dollars or used for a purchase, there could be a taxable gain or loss depending on their FMV when exchanged.
At the very least the new economy brings new changes to both taxpayers and accountants. It requires complex choices and requires careful planning. It also requires a knowledgeable professional who understands the tax laws and as well as the activity you are participating in.
Business Travel, Meals, and Entertainment
A Deduction Checklist
Type of Expense Deductible Percentage
Travel 100% 50% 0%
Local business travel…………………………………………………………….X
Out of town business travel and lodging…………….…….………..…………X
Travel as a form of education………………………………………………………..………….X
Investment seminar fees, travel, and meal expenses……….…..……..….…….………….X
Business meals for yourself while away from home overnight on business……….X
Meal with employee, colleague, business contact, customer,
or client with business discussed before, during, or after……….……………………X
Meal with employee, colleague, business contact, customer,
or client with no business discussion……………………………..……….………..………….X
Lavish and extravagant portion of a business meal…………………….…………………….X
“Goodwill” or “quiet” business meal with no business discussion………….………………..X
Entertaining a client or customer, with significant business discussion …….……..X
Entertaining a client or customer, with no business discussion…………………………….X
Tickets to sporting or cultural event connected with significant
Business gifts of no more than $25 per recipient……….…………………….X
Entertaining employees at a company picnic, Christmas party, etc…….….X
Samples and promotional items provided to general public for
Reporting Business Travel and Entertainment
Generally, business travel remains fully deductible, but business meals and entertainment are only 50% deductible. Special rules allow workers under DOT hours of service regulations to deduct 80% for 2016.
It is the employer’s reimbursement policy that determines whether it’s the employee or the employer who must reduce meals and entertainment expenses before taking a deduction on the tax return.
If an employee is not reimbursed by his employer for business expenses, the employee must adjust his meal and entertainment expenses for the nondeductible portion. These expenses may be deducted on his tax return only if he itemizes and then only to the extent such expenses along with other miscellaneous itemized deductions exceed 2% of his adjusted gross income. In this situation the employer gets no deduction.
If the employee is reimbursed by his employer under an “accountable plan,” the employee does not report the reimbursements as income nor does he report the expenses as deductions. The employer in this case deducts reimbursements paid to the employee
after making a reduction for 50% of meals and entertainment.
If the employee is reimbursed by his employer under a “non-accountable plan,” the reimbursements are includible in the employee’s gross income, are reported as wages on his Form W-2, and are subject to withholding and other payroll taxes. Employee business expenses paid under a non-accountable plan are deductible (by the employee) only as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor (and subject to the limitations on total itemized deductions for higher income tax-payers). Meal and entertainment expenses are subject to the 50% limitation.
A non-accountable plan is any plan that fails to meet the requirements of an accountable plan.
Deductible Travel Expenses
- Travel by air, bus, taxi, train, or automobile
- Lodging expenses
- Baggage charges
- Cleaning and laundry charges
- Cost of temporary help during business travel (i.e. secretarial help or telephone answering service)
- Reasonable tips
- Expense of transporting sample cases or display materials
- Telephone calls
Deductible Entertainment Expenses
- Transportation to or from an entertainment event
- Tickets for entertainment, such as a sporting event, theater, or concert
- Nightclub cover charges
- Catering charges and room rental for entertainment activity
- Entertaining business clients at home
Deductible Meal Expenses
- Food, beverages, taxes, and tips
- Meals on business trips
- Meals furnished to employees on the employer’s premises
- Transportation to or from restaurant
- Limited to $25 per recipient
Business travel, meals, and entertainment expenses must be substantiated by adequate records. An account book, diary, log, expense record, or the like should be kept. The expense and the business purpose must be recorded at or near the time of the activity. Information that must be recorded varies with the kind of expenditure but generally includes the following:
- Amount spent
- Date, time, and place of expenditure
- Business purpose of activity
- Name and business association of individuals involved
In addition, a receipt or other substantiation is required for all lodging.
Overtime Exempt & Non-Exempt Employees as of December 1, 2016
What is New
Increased Minimum Pay Requirements for Exempt Employees
The U.S. Department of Labor issued new regulations, effective December 1, 2016 that increases the minimum compensation of overtime exempt executive, administrative and professional (“EAP”) employees to $47,476 per year or $913 per week to qualify as a salaried employee exempt from overtime pay.
Highly Compensated Employees (‘HCE”) Base Increased
The Highly Compensated Employee compensation base increases to $134,004 annually beginning December 1, 2016. To be exempt as a HCE, the employee must receive standard salary amount of at least $913 per week in addition to other compensation and meet a minimal duties test.
Compensation Amounts Indexed for Inflation
The new DOL regulations establish a mechanism for the automatic updating of the salary and compensation levels every three years to the required percentiles.
Who is Exempt from OT
Executives are Exempt if:
- They meet the minimum salary requirement of $47,746 per year, $913 per week AND;
- Their primary duty is managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise AND;
- They customarily and regularly direct the work of at least two or more other full-time employees or their equivalent AND;
- They have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
Administrators are Exempt if:
- The employee meets the minimum salary requirement of $47,746 per year, $913 per week AND;
- The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers AND;
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Professionals are Exempt if:
- The employee meets the minimum salary requirement of $47,746 per year, $913 per week AND;
- The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment AND;
- The advanced knowledge must be in a field of science or learning AND;
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
Computer Professionals are Exempt if:
- The employee must be compensated either on a salary or fee basis (as defined in the regulations) at a rate not less than $913 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour AND;
- The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below AND;
- The employee’s primary duty must consist of:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications OR;
- The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications OR;
- The design, documentation, testing, creation or modification of computer programs related to machine operating systems OR;
- A combination of the aforementioned duties, the performance of which requires the same level of skills.
Outside Salespersons are Exempt if:
- The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer AND;
- The employee must be customarily and regularly engaged away from the employer’s place or places of business.
Highly Compensated Employees are Exempt if:
- They are performing office or non-manual work and paid total annual compensation of $134,004 or more (which must include at least $913 per week paid on a salary or fee basis) AND;
- They must customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.
Blue Collar Workers ARE NEVER Exempt:
The exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy. FLSA-covered, non-management employees in production, maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers are entitled to minimum wage and overtime premium pay under the FLSA, and are not exempt under the Part 541 regulations no matter how highly paid they might be.
Non-Exempt Employees Must Be Paid Based On Actual Hours Worked:
Tracking of hours worked and overtime pay at time and a half is required for all workers that do not meet the requirements of one of the exemptions covered here.
Time and a half applies to hours worked in excess of 40 hours per week. Be sure to also check your states Overtime requirements as well.
Questions & Answers
Q. We currently pay employees every 2 weeks. Will our pay periods need to switch to every week?
A. No. Employers may still pay their employees on a biweekly basis. An employer’s overtime pay obligation is determined on a week-by-week basis, but they may pay their employees on a biweekly basis.
Q. I have an employee that works 50 hours a week on exempt status. He will be moved back to hourly, and will get a pay reduction. This will help us to maintain his current weekly wage. Is this something that we can do and be in compliance with FLSA.
A. Employers have a range of options for responding to the updated standard salary level. For each affected employee newly entitled to overtime pay, employers may:
- increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
- pay an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked;
- reduce or eliminate overtime hours;
- reduce the amount of pay allocated to base salary
Have More Questions
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Media Quotes & Recent Press
Seminars On Demand
Here are some recordings of past seminars conducted by RMS Accounting. While we realize the best way to experience these great learning opportunities is at a live seminar where you can participate and ask questions, we also know that it’s often not possible due to scheduling, time and distance to attend the live seminars. If after viewing any of the seminars you have questions just email us at firstname.lastname@example.org
Tax Strategies For Real Estate Professionals (this seminar is recorded in 3 parts)