New Mileage Rates Announced By IRS For Balance Of 2022

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New Mileage Rates Announced By IRS For Balance Of 2022

In recognition of recent gasoline price increases, the IRS announced an increase in the optional standard mileage rate for the final 6 months of 2022.

For the final 6 months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022. The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute.

Taxpayers may use the optional standard mileage rates to calculate the deductible costs of operating an automobile for business and certain other purposes instead of relying on actual costs which require substantiation beyond maintaining a mileage log.

Midyear increases in the optional mileage rates are rare, the last time the IRS made such an increase was in 2011.

Limitation Of Deducting Business Mileage

Before the 2017 Tax Cuts And Jobs Act was enacted into law, many taxpayers relied on the IRS’ annual publication of the mileage rates to be used for business travel. For many taxpayers this was a significant tax deduction but the 2017 Tax Cuts And Jobs Act changes that.

Why fewer taxpayers will be itemizing in 2022:

Increase Of Standard Deduction – $12,950 for single filers; $19,400 for heads of household; and $25,900 for joint filers.

Limit On Deduction For State And Local Taxes – A taxpayer may claim an itemized deduction of only up to $10,000 ($5,000 for a married taxpayer filing a separate return) in (i) personal state and local property taxes, and (ii) state and local income taxes (or sales taxes in lieu of income taxes).  Taxes paid or accrued in carrying on a trade or business are not subject to this limitation.

Limit On Deduction Of Mortgage Interest – For mortgages incurred after December 31, 2017, taxpayers may deduct interest on up to $750,000 of principal (mortgages existing before January 1, 2018 are still subject to the pre-existing law’s $1 million limit). But for all taxpayers there is no longer a deduction for interest paid on home equity loans.

Elimination Of Miscellaneous Itemized Deductions And Deduction For Moving Expenses – A taxpayer can no longer deduct miscellaneous itemized deductions which include unreimbursed employee expenses and tax preparation costs.  Also the deduction for moving expenses is gone.

But for those who can benefit from deducting costs of operating an automobile for business, charitable, medical or moving purposes, here are the rates for 2022:

2022 Tax Year Mileage Rates:

Purpose Rates 1/1 through 6/30/22 Rates 7/1 through 12/31/22
Business 58.5 62.5
Medical/Moving 18 22
Charitable 14 14

 

Time Limits For Keeping Your Tax Records

Even though your current income tax return is processed by the IRS and a refund is issued, that does not mean the IRS can later question or audit the tax return,  In fact the Statute Of Limitations allows the IRS three years to go back and audit your tax return.  That is why it’s a good idea to keep copies of your prior-year tax returns and supporting backup documentation for at least three years. In the case of backing of any deductible mileage, you will need to retain your travel log showing the distance traveled, who you visited and the purpose of the visit.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Metropolitan Los Angeles (Long Beach) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you.   And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Tax Planning In The Era Of COVID-19 – What You Need To Know About Business Meals And Advertising And Marketing Costs

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Tax Planning In The Era Of COVID-19 – What You Need To Know About Business Meals And Advertising And Marketing Costs

The Consolidated Appropriations Act, 2021, Pub. L. No. 116- 260, 134 Stat. 1182 (December 27, 2020) amended §274 of the Internal Revenue Code (Code) providing a temporary 100-percent deduction for expenses that are paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant.

On April 8, 2021 the IRS released Notice 2021-25 which provides guidance regarding the temporary 100-percent deduction for expenses that are paid or incurred in 2021 and 2022, for food or beverages provided by a restaurant.  In particular, the notice explains when the temporary 100-percent deduction applies and when the 50-percent limitation continues to apply for purposes of § 274 of the Internal Revenue Code.

Historical Treatment Of Deductions Relating to Meal And Entertainment Expenses

Under prior law, a taxpayer generally can deduct business-related meal and entertainment expenses paid or incurred in entertaining a client, customer, or employee. The taxpayer had to show that the item was directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business.  In such case, a deduction is allowed, although it is generally limited to 50% of the expense amount.

Starting with 2018 more stringent rules apply with respect to a deduction for meal and entertainment expenses paid after 2017.  The Tax Cuts And Jobs Act Of 2017 (“TCJA”) TCJA signed into law by President Trump on December 22, 2017, repeals the deduction for most entertainment expenses, effective for amounts incurred after 2017. There was no exception for amount incurred that are directly related to, or associated with, the active conduct of the taxpayer’s trade or business. This repeal would extend to the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets, golf club dues, etc.

However, it is still possible that some amounts may still be deductible if they meet the exceptions in IRC § 274(e), a provision that was not touched by the TCJA.

The main exceptions in IRC § 274(e) allowing deductibility are:

  1. Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for the taxpayer’s employees.
  2. Expenses for recreational, social, or similar activities (and facilities used in connection therewith) primarily for the benefit of employees, other than highly-compensated employees.
  3. Expenses incurred by a taxpayer which are directly related to business meetings of the taxpayer’s employees, stockholders, agents, or directors.
  4. Expenses directly related and necessary to attendance at a business meeting or convention of any certain organizations such as business leagues, chambers of commerce, real estate boards, and boards of trade.
  5. Expenses for goods, services and facilities made available by the taxpayer to the general public.

This lack of clarity by the TCJA created a lot of confusion in the business community which the IRS was looking to address.

IRS Guidance Issued 2018

On October 3, 2018 the IRS issued guidance, Notice 2018-76, clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction by the TCJA.    Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations.

Under the interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:

  1. The expense is an ordinary and necessary business expense under IRC § 162(a) paid or incurred during the tax year when carrying on any trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

The interim guidance includes three examples illustrating how the IRS would apply these rules. All three examples involve attending a sporting event with a business client and having food and drink while attending the event.

Living In The Era Of COVID-19 – Impact Of New Law And New Guidance

Most taxpayers consider business meals to be part of entertainment and promotion which is an area that IRS targets in examinations of income tax returns as the IRS believes that there is abuse of this provision and/or a higher level of errors made by taxpayers in trying the comply with the law’s limitations.  So the issuance by IRS of Notice 2021-25 is extremely timely.

To summarize –

  1. The 100% deduction of business meals is available when the business meal from a restaurant. The term “restaurant” means a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk.  In addition, an employer may not treat as a restaurant for purposes of this provision: (a) any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income, or (b) any employer-operated eating facility treated as a de minimis fringe even if such eating facility is operated by a third party under contract with the employer as described. Additionally, the 5 points listed above would still apply.
  2. Ineligible business meals described above should still qualify to be 50% deductible but again the 5 points listed above would still apply.

In all cases, only the food and beverage portion are deductible.  Entertainment continues to be non-deductible.  The 100% deduction enhancement that started January 1, 2021 expires January 1, 2023.

Advertising And Marketing Costs

The tax law allows businesses to deduct expenses that help them bring in new customers and keep existing ones. These costs may include expenses for advertising and marketing. Here are some details about this valuable tax deduction that can help small businesses save money on their taxes.

Advertising and marketing costs must be ordinary and necessary to be tax deductible.

  • An ordinary expense is one that is common and accepted in the industry.
  • A necessary expense is one that is helpful and appropriate for the trade or business. An expense does not have to be indispensable to be considered necessary.

Here are a few advertising expenses that are usually deductible:

  • Reasonable advertising expenses that are directly related to the business activities.
  • An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future.  An example provided by IRS is the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
  • The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.

Generally, small businesses cannot deduct amounts they pay to influence legislation, which includes advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate.

What Should You Do?

Like with any expense you are looking to deduct it is important to make sure that the tax law would support a deduction and that you have the required backup documentation in case you are audited by the IRS. Also, be mindful that in any audit by IRS, an agent will be making sure that taxpayers are not inflating the amount charged for food and beverages in order to circumvent the disallowance of entertainment.

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Additionally, if you are involved in the cannabis industry, check out Cannabis Tax Attorney.  Also, if you are involved in crypto currency, check out what a Bitcoin tax attorney can do for you.

Living In The Era Of COVID-19 – Business Meals May Be Fully Deductible

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Living In The Era Of COVID-19 – Business Meals May Be Fully Deductible

The Consolidated Appropriations Act, 2021, Pub. L. No. 116- 260, 134 Stat. 1182 (December 27, 2020) amended §274 of the Internal Revenue Code (Code) providing a temporary 100-percent deduction for expenses that are paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant.

On April 8, 2021 the IRS released Notice 2021-25 which provides guidance regarding the temporary 100-percent deduction for expenses that are paid or incurred in 2021 and 2022, for food or beverages provided by a restaurant.  In particular, the notice explains when the temporary 100-percent deduction applies and when the 50-percent limitation continues to apply for purposes of § 274 of the Internal Revenue Code.

Historical Treatment Of Deductions Relating to Meal And Entertainment Expenses

Under prior law, a taxpayer generally can deduct business-related meal and entertainment expenses paid or incurred in entertaining a client, customer, or employee. The taxpayer had to show that the item was directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business.  In such case, a deduction is allowed, although it is generally limited to 50% of the expense amount.

Starting with 2018 more stringent rules apply with respect to a deduction for meal and entertainment expenses paid after 2017.  The Tax Cuts And Jobs Act Of 2017 (“TCJA”) TCJA signed into law by President Trump on December 22, 2017, repeals the deduction for most entertainment expenses, effective for amounts incurred after 2017. There was no exception for amount incurred that are directly related to, or associated with, the active conduct of the taxpayer’s trade or business. This repeal would extend to the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets, golf club dues, etc.

However, it is still possible that some amounts may still be deductible if they meet the exceptions in IRC § 274(e), a provision that was not touched by the TCJA.

The main exceptions in IRC § 274(e) allowing deductibility are:

  1. Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for the taxpayer’s employees.
  2. Expenses for recreational, social, or similar activities (and facilities used in connection therewith) primarily for the benefit of employees, other than highly-compensated employees.
  3. Expenses incurred by a taxpayer which are directly related to business meetings of the taxpayer’s employees, stockholders, agents, or directors.
  4. Expenses directly related and necessary to attendance at a business meeting or convention of any certain organizations such as business leagues, chambers of commerce, real estate boards, and boards of trade.
  5. Expenses for goods, services and facilities made available by the taxpayer to the general public.

This lack of clarity by the TCJA created a lot of confusion in the business community which the IRS was looking to address.

IRS Guidance Issued 2018

On October 3, 2018 the IRS issued guidance, Notice 2018-76, clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction by the TCJA.    Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations.

Under the interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:

  1. The expense is an ordinary and necessary business expense under IRC § 162(a) paid or incurred during the tax year when carrying on any trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

The interim guidance includes three examples illustrating how the IRS would apply these rules. All three examples involve attending a sporting event with a business client and having food and drink while attending the event.

Living In The Era Of COVID-19 – Impact Of New Law And New Guidance

Most taxpayers consider business meals to be part of entertainment and promotion which is an area that IRS targets in examinations of income tax returns as the IRS believes that there is abuse of this provision and/or a higher level of errors made by taxpayers in trying the comply with the law’s limitations.  So the issuance by IRS of Notice 2021-25 is extremely timely.

To summarize –

  1. The 100% deduction of business meals is available when the business meal from a restaurant. The term “restaurant” means a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk.  In addition, an employer may not treat as a restaurant for purposes of this provision: (a) any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income, or (b) any employer-operated eating facility treated as a de minimis fringe even if such eating facility is operated by a third party under contract with the employer as described. Additionally, the 5 points listed above would still apply.
  2. Ineligible business meals described above should still qualify to be 50% deductible but again the 5 points listed above would still apply.

In all cases, only the food and benevrage portion are deductible.  Entertainment continues to be non-deductible.  The 100% deduction enhancement that started January 1, 2021 expires January 1, 2023.

What Should You Do?

Like with any expense you are looking to deduct it is important to make sure that the tax law would support a deduction and that you have the required backup documentation in case you are audited by the IRS. Also, be mindful that in any audit by IRS, an agent will be making sure that taxpayers are not inflating the amount charged for food and beverages in order to circumvent the disallowance of entertainment.

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Additionally, if you are involved in the cannabis industry, check out Cannabis Tax Attorney.  Also, if you are involved in crypto currency, check out what a Bitcoin tax attorney can do for you.

More COVID-19 Tax Relief: IRS extends additional tax deadlines for individuals to May 17 and affirms deductibility of PPE

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More COVID-19 Tax Relief: IRS extends additional tax deadlines for individuals to May 17 and affirms deductibility of PPE

The IRS announced that individuals have until May 17, 2021 to meet certain deadlines that would normally fall on April 15th, such as making IRA contributions and filing certain claims for refund.  Additionally, the IRS announced that the purchase of personal protective equipment (PPE), such as masks, hand sanitizer and sanitizing wipes, for the primary purpose of preventing the spread of coronavirus are deductible medical expenses.

This follows a previous announcement from the IRS on March 17, 2021, that the federal income tax filing due date for individuals for the 2020 tax year was extended from April 15, 2021, to May 17, 2021.  Notice 2021-21 provides details on the additional tax deadlines which have been postponed until May 17th.

Time to make contributions to IRAs and health savings accounts extended to May 17th

In extending the deadline to file Form 1040 series returns to May 17th, the IRS is automatically postponing to the same date the time for individuals to make 2020 contributions to their individual retirement arrangements (IRAs and Roth IRAs), health savings accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs).  This postponement also automatically postpones to May 17, 2021, the time for reporting and payment of the 10% additional tax on amounts includible in gross income from 2020 distributions from IRAs or workplace-based retirement plans.  The IRS is also postponing the due date for Form 5498 series returns related to these accounts to June 30, 2021.

2017 unclaimed refunds – deadline extended to May 17th

For tax year 2017 Federal income tax returns, the normal April 15th deadline to claim a refund has also been extended to May 17, 2021. The law provides a three-year window of opportunity to claim a refund.  If taxpayers do not file a return within three years, the money becomes property of the U.S. Treasury. The law requires taxpayers to properly address, mail and ensure the tax return is postmarked by the May 17, 2021, date.

Additionally, foreign trusts and estates with federal income tax filing or payment obligations, who file Form 1040-NR, now have until May 17, 2021.

2021 AFSP deadline postponed to May 17th

Tax preparers interested in voluntarily participating in the Annual Filing Season Program (AFSP) for calendar-year 2021 now have until May 17, 2021 to file their application with the Internal Revenue Service. The normal due date is April 15th.

First Quarter 2021 estimated tax payment remains due April 15th

IRS’ announcement does not alter the April 15, 2021 deadline for estimated tax payments.  These payments are still due on April 15th. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS by people whose income isn’t subject to income tax withholding, including self-employment income, interest, dividends, alimony or rental income. Most taxpayers automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer.

Deductibility of PPE

Expenses for masks, hand sanitizers, sanitizing wipes and other personal protective equipment (PPE) used primarily to prevent the spread of COVID-19 will be treated as amounts paid for medical care under Internal Revenue Code (IRC) §213(d).  These expenses are included in Medical Expenses on Schedule A, Itemized Deductions, and the amount in excess of 7.5% of your Adjusted Gross Income is deductible.

Alternatively, the amounts paid for PPE are also eligible to be paid or reimbursed under health flexible spending arrangements (health FSAs), Archer medical savings accounts (Archer MSAs), health reimbursement arrangements (HRAs), or health savings accounts (HSAs).

An Opportunity For Taxpayers Who Owe The IRS

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.

Also, if you are required to make estimated tax payments, you must be current in making those payments. Fortunately, as we are now in 2021, taxpayers who expect to owe for 2020 should have their 2020 income tax returns done now so that the 2020 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2021.

Remember that COVID-19 does not alter the tax laws, so all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making payments and deposits with the IRS, as they are required to do.

The take away from this – use the Federal government’s extension to your advantage to prepare for the future.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Northern California (Sacramento and San Francisco Bay Area) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Proposed Treasury Regulations Issued On Deducting Business Meals

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Proposed Treasury Regulations Issued On Deducting Business Meals

The Tax Cuts And Jobs Act Of 2017 (“TCJA”) was signed into law by President Trump on December 22, 2017.  It has been a good 30 years since the last time the Internal Revenue Code received such a major update but for taxpayers.

Deductions Relating to Meal And Entertainment Expenses

Under prior law, a taxpayer generally can deduct business-related meal and entertainment expenses paid or incurred in entertaining a client, customer, or employee. The taxpayer had to show that the item was directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business.  In such case, a deduction is allowed, although it is generally limited to 50% of the expense amount.

Starting with 2018 more stringent rules apply with respect to a deduction for meal and entertainment expenses paid after 2017.  The TCJA repeals the deduction for most entertainment expenses, effective for amounts incurred after 2017. There is no exception for amount incurred that are directly related to, or associated with, the active conduct of the taxpayer’s trade or business. This repeal would extend to the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets, golf club dues, etc.

However, it is still possible that some amounts may still be deductible if they meet the exceptions in IRC § 274(e), a provision that was not touched by the TCJA.

The main exceptions in IRC § 274(e) allowing deductibility are:

  1. Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for the taxpayer’s employees.
  2. Expenses for recreational, social, or similar activities (and facilities used in connection therewith) primarily for the benefit of employees, other than highly-compensated employees.
  3. Expenses incurred by a taxpayer which are directly related to business meetings of the taxpayer’s employees, stockholders, agents, or directors.
  4. Expenses directly related and necessary to attendance at a business meeting or convention of any certain organizations such as business leagues, chambers of commerce, real estate boards, and boards of trade.
  5. Expenses for goods, services and facilities made available by the taxpayer to the general public.

This lack of clarity by the TCJA created a lot of confusion in the business community which the IRS was looking to address.

Proposed Regulations

On October 3, 2018 the IRS issued guidance, Notice 2018-76, clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction by the TCJA.    Now that the IRS issued Proposed Regulations, here is what you need to know.

Under the proposed regulations, taxpayers may deduct 50% of an otherwise allowable business meal expense if:

  1. The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business;
  1. The expense is not lavish or extravagant under the circumstances;
  1. The taxpayer or an employee of the taxpayer is present when the food and beverages are furnished;
  1. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  1. For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

Regarding the requirement in No. 4 above that the food and beverages be provided to a current or potential business contact, the IRS defines such a contact as “a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”

What Should You Do?

Like with any expense you are looking to deduct it is important to make sure that the tax law would support a deduction and that you have the required backup documentation in case you are audited by the IRS. Also, be mindful that in any audit by IRS, an agent will be making sure that taxpayers are not inflating the amount charged for food and beverages in order to circumvent the disallowance of entertainment.

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County (Long Beach) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Additionally, if you are involved in the cannabis industry, check out what a Cannabis Tax Attorney can do for you; and if you are involved in crypto currency, check out what a Bitcoin Tax Attorney can do for you.

Why Is Taxation Related To Cannabis Businesses So Complicated?

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Beware 2020 Could Be A Banner Year For IRS Audits Of Cannabis Businesses.

We previously reported in our blog that the Trump Administration organized a committee of federal agencies from across the government to combat public support for marijuana and cast state legalization measures in a negative light while attempting to portray the drug as a national threat. The IRS appears to be following the agenda of the Trump Administration when it comes to Cannabis and has formed special audit groups that are tasked with conducting cannabis tax audits on medical and recreational cannabis businesses.

Yes – Cannabis Businesses Have to Report Income To IRS And Pay Taxes!

While the sale of cannabis is legal in California as well as in a growing number of states, cannabis remains a Schedule 1 narcotic under Federal law, the Controlled Substances Act (“CSA”) 21 U.S.C. § 812. As such businesses in the cannabis industry are not treated like ordinary businesses. Despite state laws allowing cannabis, it remains illegal on a federal level but cannabis businesses are obligated to pay federal income tax on income because I.R.C. §61(a) does not differentiate between income derived from legal sources and income derived from illegal sources.

I.R.C. § 280E

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Cannabis, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

IRS Guidance On Cannabis.

The IRS issued a memo to provide guidance to its agents on conducting audits of cannabis businesses addressing whether an IRS agent can require a taxpayer trafficking in a Schedule 1 controlled substance to change its tax accounting to conform to I.R.C. §280E.

Not surprisingly that the IRS ruled that IRS agents have the authority to change a cannabis business’ method of accounting so that pursuant to I.R.C. §280E costs which should not be included in inventory are not included in Costs Of Goods Sold (“COGS”) and remain non-deductible for income tax purposes.

Cannabis Tax Audits & Litigation.

It is no surprise that cannabis businesses are proliferating as more States legalize cannabis and make available licenses to grow, manufacture, distribute and sell cannabis. The IRS recognizes this and it is making these cannabis businesses face Federal income tax audits. IRC §280E is at the forefront of all IRS cannabis tax audits and enforcement of §280E could result in unbearable tax liabilities.

Proving deductions to the IRS is a two-step process:


• First, you must substantiate that you actually paid the expense you are claiming.
• Second, you must prove that an expense is actually tax deductible.

Step One: Incurred And Paid The Expense.

For example, if you claim a $5,000 purchase expense from a cannabis distributor, offering a copy of a bill or an invoice from the distributor (if one is even provided) is not enough. It only proves that you owe the money, not that you actually made good on paying the bill. The IRS accepts canceled checks, bank statements and credit card statements as proof of payment. But when such bills are paid in cash as it typical in a cannabis business, you would not have any of these supporting documents but the IRS may accept the equivalent in electronic form.

Step Two: Deductibility Of The Expense.

Next you must prove that an expense is actually tax deductible. For cannabis businesses this is challenging because of the I.R.C. §280E limitation. Recall that under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

A cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods. For a cannabis reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income. You can be sure the IRS agents in audits will be looking closely at what is included in COGS. Working with a cannabis tax attorney can ensure that you receive the proper treatment of COGS versus ordinary and necessary expenses resulting in the lowest possible income tax liability.

In addition to IRS audits, state cannabis audits are also complex and thorough and generally include all taxes specific and nonspecific to the cannabis business. Potentially at risk is the cannabis license that enables the business to operate. State audits will focus on records regarding sales and use tax, excise taxes, and seed-to-sale tracking records.

Now if your cannabis IRS tax audit is not resolved, the results may be challenged and litigated in the U.S. Tax Court or Federal District Court. The U.S. Tax Court has jurisdiction to hear disputes over federal income taxes before final assessment and collections while the Federal District Court generally requires taxpayers to first pay the liability then seek repayment through a refund request.

Tips For Cannabis Tax Return Preparation

Here are some tips for cannabis businesses to follow in the preparation of their 2019 tax returns.

  • Reconcile Your Books Before Closing Your Books. Incomplete books can cause delays and add unnecessary complexities.
  • Utilize A Cannabis Tax Professional. Engage a tax professional who has experience in the cannabis industry. Such a professional would be familiar with the intricacies of IRC Sec. 280E and relevant cases to make the proper presentation on the tax return in a manner that would support the smaller tax liability possible.
  • Justify Your Numbers As If An IRS Audit Is A Certainty. Don’t wait to receive a notice from IRS that the tax return is selected for examination. That can be one or two years away. Instead make it a point to put together the backup to you numbers now while everything is fresh.

What Should You Do?

Ultimately it is the tax risk with IRS that could put any cannabis business “out of business” so you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.

Don’t Let A Simpler Form 1040 Fool You – Be Prepared For An IRS Audit.

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Don’t Let A Simpler Form 1040 Fool You – Be Prepared For An IRS Audit.

The Tax Cuts And Jobs Act Of 2017 (“TCJA”) was signed into law by President Trump on December 22, 2017. It has been a good 30 years since the last time the Internal Revenue Code received such a major update but for taxpayers.

Major Changes From The TCJA Include:

A Simpler Form 1040

There are major changes to the Form 1040 that started with 2018. The 2019 Form 1040 continues with the same format but with even more changes compared to previous years.

While it has not come down to being a postcard, the new Form 1040 does streamline the reporting process as follows:

  • The 2019 Form 1040 replaces Forms 1040, 1040A and 1040EZ with one Form 1040 that all taxpayers will file. 
  • Forms 1040A and 1040EZ continue to be unavailable. Taxpayers who used one of these forms sometime in the past will now have to file Form 1040.
  • The 2019 Form 1040 continues to use a “building block” approach and allows taxpayers to add only the schedules they need to their 2019 tax return.
  • The most commonly used lines on the prior year form are still on the form. Other lines are moved to new schedules and are organized by category. These categories include income, adjustments to income, nonrefundable credits, taxes, payments, and refundable credits.

Many taxpayers will only need to file Form 1040 and no schedules. Those with more complicated tax returns will need to complete one or more of the 2019 Form 1040 Schedules along with their Form 1040. These taxpayers include people claiming certain deductions or credits, or owing additional taxes.

The 2019 Form 1040 Makes It Harder For U.S. Taxpayers To Avoid Non-compliance Or Claim Ignorance.

Starting with the 2019 Form 1040, Schedule 1, Additional Income And Adjustments To Income, includes the following checkbox question:

At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency? 

 ◊ Yes            ◊ No

Taxpayers who file Schedule 1 to report income or adjustments to income that can’t be entered directly on Form 1040 will now be required to check the appropriate box to answer the virtual currency question. Taxpayers do not need to file Schedule 1 if their answer to this question is NO and they do not have to file Schedule 1 for any other purpose. This requirement is similar to how the IRS includes questions on Schedule B inquiring whether a taxpayer has foreign bank accounts.

Taxpayers who answer “no” and for who the IRS later determines should have answered “yes” could face civil or criminal penalties and it could affect their success in having penalties abated for reasonable cause.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. For California taxpayers, the Franchise Tax Board has up to four years to select a California State Income Tax Return for audit. In some cases these 3 and 4 year periods are extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business activities.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you and if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.

Top Four Tips For Taxpayers About The Gig Economy And Taxes

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Top Four Tips For Taxpayers About The Gig Economy And Taxes

From renting spare rooms and vacation homes to car rides or using a bike…name a service or a craft & handmade item marketplace and it’s probably available through the gig economy which is proliferating through many digital platforms like Uber, Lyft and Airbnb.

Here are four tips you should know about how the gig economy might affect your taxes:

1. The activity is taxable.

If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash and to minimize how much you need to pay in taxes, it is imperative that you keep track of your business expenses.

2. Some expenses are deductible.

The tax code allows you to deduct certain costs of doing business from gross income. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 57.5 cents per mile for 2020. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

Example: You used your car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drove the car a total of 15,000 miles of which 12,000 miles were driven to provide transportation services through a company that provides such services through requests to its app. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12). 

Example: You use your car both for personal purposes and to provide transportation arranged through a company that provides transportation service through its app. You must divide your personal and business expenses based on actual mileage. You can deduct the business part of these actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Depending on the facts and circumstances, you may be providing the services either in a self-employed capacity or as an employee. If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. 

3. You Could Be Subject To Self Employment Tax

The net income from your service-related activity with the sharing economy facilitator is subject to Self-Employment taxes, (Social Security and Medicare), at a 15.3% rate.  Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.

So whether you are using your personal car for business or part of your residence as a home office, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will loose out on a lot of deductions and pay a lot more in taxes.

4. Beware Of Requirement To Make Estimated Tax Payments.

Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”.  As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings.  The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year. These payments are due on April 15, June 15, September 15 and January 15 (of the next year). Taxpayers use Form 1040-ES to figure these payments.

Why The IRS Likes The Gig Economy.

Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, gig economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.

What Should You Do?

As the gig economy continues to grow, so do the associated tax problems. The IRS obviously is interested in folks who earn money using their autos as on-call car services or rent their homes to out-of-towners. That is why it’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

What You Need To Know To Deduct Charitable Contributions On Your 2019 Income Tax Return

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What You Need To Know To Deduct Charitable Contributions On Your 2019 Income Tax Return

The end of 2019 is coming and so more people are thinking how they can reduced their taxes. The more itemized deductions you can rack up on you individual income tax return, the smaller amount of taxable income you will have which now puts more money in your pocket. Taxpayers who gave money or goods to a charity should be able to claim charitable contributions which get included as an itemized deduction on their 2019 federal tax return.

Here are some important facts you need to know about claiming charitable contributions to save on taxes and withstand an IRS audit.

  1. Qualified Charity. Only donations to qualified charitable organizations are deductible. Do not merely rely on the organization’s website or what the organization may state. If you are questioning whether an organization is qualified, you can check with IRS directly through the IRS website. To check the status of a charity, use the IRS Select Check tool. Keep in mind that religious institutions including churches, synagogues, temples, and mosques are considered “de facto” charitable organizations and are eligible to receive deductible donations even if they are not on the IRS’ website. However, you can never deduct donations to political organizations and candidates. Also, you cannot deduct contributions to specific individuals no matter how deserving or sympathetic to their tragic situation.
  1. You Must Itemize. To deduct donations, you must include these donations as Itemized Deductions on Schedule A of Form 1040. If the total amount of your Itemized Deductions does not exceed the Standard Deduction already given to you by the Federal government, you won’t get any real benefit from making these donations.
  1. Deductible Portion Of Donation May Be Reduced. You can only deduct the amount of your donation that exceeds the fair market value of the benefit received. If you get something in return for your donation, you would have to reduce your deduction by the value you received. Examples of benefits include merchandise, meals and tickets to events.
  1. Property donation. If you give property instead of cash, you can normally only deduct the item’s fair market value. Fair market value is generally the price you would get for the property item on the open market. Donating property that has appreciated in value, like stock, can result in a double benefit. Not only can you deduct the fair market value of the property (so long as you have owned it for at least one year), you will avoid paying capital gains tax.
  1. Donations From Your Retirement Account. Typically, if you want to make a donation from your IRA, you’d have to withdraw those funds, pay the tax and then make the donation. However, IRA owners who are age 70½ or older can transfer up to $100,000 per year to an eligible charity tax-free and the transfer counts toward your required minimum distribution (RMD) for the year. To be an eligible transfer, funds must be transferred directly by the IRA trustee to the charity. Withdrawing the monies first and then writing the check to the charity will not qualify for the non-recognition of income.
  1. Form to File. You would file Form 8283 for all non-cash gifts totaling more than $500 for the year. Keep an itemized list of for donations of non-cash items – do not just state you gave a bag of clothes and expect to substantiate the value of what you gave. Instead be specific, noting the description and condition of the items. You can generally take a deduction for the fair market value of the item which is the price that a willing buyer would pay to a willing seller. If you contribute property worth more than $5,000, you must obtain a written appraisal of the property’s fair market value.
  1. Proof of Donation. If you donated cash or goods of $250 or more, you must have a written statement from the charity. The statement must show:
    • Amount of the donation.
    • Description of any property given.
    • Whether the donor received any goods or services in exchange for the gift.  

For cash donations under $250, you should always have substantiation of payment by a bank record such as a canceled check or credit card receipt, clearly annotated with the name of the charity or in writing from the organization. Even with a statement from the charity, it is still a good idea to retain this evidence of payment.

  1. You Can’t Deduct The Value Of Your Time. While your time is valuable, when you volunteer your time for charities, the IRS does not allow a charitable deduction for the time you spent. However, most out of pocket expenses relating to volunteering are should be deductible so long as they are not reimbursed to you or considered personal. Out of pocket charitable expenses which might be deductible include parking fees and tolls; other travel expenses; uniforms or other related clothing worn as part of your charitable service; and supplies used in the performance of your services. You will need to keep receipts evidencing payment in case you are questioned by the IRS.
  1. Timing Of Contribution. Contributions are deductible in the year the contributions are made so for the 2019 tax year that would had to been no later than December 31, 2019. But that doesn’t necessarily mean that by the 31st the cash payment had to be made out of your account. Contributions made by text message are deductible in the year you send the text message if the contribution is charged to your telephone or wireless account. Contributions made by credit card charges are deductible in the year charged so long as the charge is posted by your credit card company in that tax year. The credit charge itself does not have to be paid off by the end of the tax year it was charged. Similarly, checks which are written and mailed by the end of the year will be deductible for the year written if they are not cashed until the following year. Announcing that you intend to donate assets will not qualify for a deduction in the current tax year until the tax year you make good on the pledge.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, unreported crypto currency transactions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. If you are involved in cannabis, check out what a cannabis tax attorney can do for you. If you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Important Tax Tips To Know If You Receive Income From Uber, Lyft, Airbnb Or Other Online Platform

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Important Tax Tips To Know If You Receive Income From Uber, Lyft, Airbnb Or Other Online Platform

During my last ride on Lyft, I was thinking about how the IRS is responding to the growing usage of many online platforms like Uber, Lyft and Airbnb in what is commonly referred to as the “sharing economy”.

Here are four important tips you should know about how the sharing economy might affect your taxes and to keep you out of trouble with the IRS:

1. The activity is taxable.

If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash and to minimize how much you need to pay in taxes, it is imperative that you keep track of your business expenses.

2. Some expenses are deductible. The tax code allows you to deduct certain costs of doing business from gross income. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 58 cents per mile for 2019. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

Example: You used your car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drove the car a total of 15,000 miles of which 12,000 miles were driven to provide transportation services through a company that provides such services through requests to its app. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12). 

Example: You use your car both for personal purposes and to provide transportation arranged through a company that provides transportation service through its app. You must divide your personal and business expenses based on actual mileage. You can deduct the business part of these actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Depending on the facts and circumstances, you may be providing the services either in a self-employed capacity or as an employee. If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. 

3. You Could Be Subject To Self Employment Tax

The net income from your service-related activity with the sharing economy facilitator is subject to Self-Employment taxes, (Social Security and Medicare), at a 15.3% rate.  Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.

So whether you are using your personal car for business or part of your residence as a home office, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will loose out on a lot of deductions and pay a lot more in taxes.

4. Beware Of Requirement To Make Estimated Tax Payments.

Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”.  As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings.  The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year. These payments are due on April 15, June 15, September 15 and January 15 (of the next year). Taxpayers use Form 1040-ES to figure these payments.

Why The IRS Likes The Sharing Economy.

Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, sharing economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.

What Should You Do?

As the sharing economy continues to grow, so do the associated tax problems. The IRS obviously is interested in folks who earn money using their autos as on-call car services or rent their homes to out-of-towners and being that it is summer the IRS knows this activity is even more prevalent. It’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including Walnut Creek and San Jose) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. And if you are involved in cannabis, check out what a cannabis tax attorney can do for you.