Good News for Tax Payers

December 20, 2014

There has been good news for all taxpayers and one piece that’s of real help to small business. Congress extended approximately fifty special benefits to small business for 2014 only. They are up for renegotiation next year and it is not certain which of them will survive in 2015.

Of special interest to small business are the immediate write off of up to $500,000 on business equipment purchases. For those who used the old cap of $25,000, you can still take advantage by purchasing and placing in service business property on or before 12/31/14. This will be hard to do, but if you have already purchased more than $25,000 of new equipment, you can basically expense up to $500,000. There are many other benefits as well, including the IRC Section 45 credit for maintenance of track by Class II and Class III railroads. These are definitely small businesses. The Research and Development Credit has also been extended.

For a more complete description, see, “Passage of Tax Extenders Contains Key Tax Breaks”.

IRS published its updated Per Diem Rates for 2014-15 for Business related travel. The IRS recently published new and revised per diem rates in Notice 2014-57. These rates are very important for the transportation industry, since its employees are often in travel status away from home. The list revises areas considered to be “high cost areas” for which taxpayers are entitled to a higher per diem rate. These areas can be “high cost” all year long or during certain periods. The rates and localities supersede those found in Notice 2013-65 and apply to any travel allowances paid to employees after 10/1/14. The rates vary from $259 for travel to high cost destinations and $172 for travel to any other locality in the continental United States. The rates are quite detailed and taxpayers should consult Notice 2014-57 on the IRS website ( Taxpayers should also consult Revenue Procedure (“Rev Proc”) 2011-47 on the IRS website for details of the requirements to substantiate travel expenses. Note that failure to substantiate the expenses will result in their being included in the employee’s compensation. As with all deductible business expenses, they must be “ordinary and necessary” where ordinary means in part that they must not be excessive. “T & E” is frequently audited by the IRS, particularly those expenses incurred by officers, shareholders and directors, so it pays to document them well and follow the methods in the Rev Proc.

Under TD 9696 taxpayers may, in certain circumstances, deduct the cost of local lodging. Local lodging expenses will be considered ordinary and necessary (and thus deductible) if they meet the following tests:

1) the lodging is necessary for the employee to participate fully in training in a business meeting/function or training;
2) the lodging does not extend beyond five calendar days and does not occur more than once a quarter.

3) the employer requires the employee to remain at the activity overnight;

4) the lodging is not extravagant or lavish or contain a significant amount of personal pleasure.

Taxpayers may amend their business returns for all open years to take advantage of this TD.

Document, Document, Document Those T & E Expenses.

A recent article in the December 2014 Tax Advisor provides a timely reminder of the need to document business t & e expenses, in order to deduct them.. A taxpayer lost the right to deduct business travel expenses because he did not keep adequate contemporaneous records. The court admitted that the taxpayer had some business t & e expenses, but since he failed to adequately document them none of them were deductible.

Sec 274 (d) lists the types of t & e expenses, which are required to be documented contemporaneously. The following four classes are the types of T & E expenses for which specific substantiation is required:

• Sec. 274(d)(1) for travel expenses (including meals and lodging while away from home);
• Sec. 274(d)(2) for any item with respect to an activity that is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity;
• Sec. 274(d)(3) for business gifts (which are limited to $25); and
• Sec. 274(d)(4) for expenses with respect to any listed property (as defined in Sec. 280F(d)(4)).

Sec. 274(d)(4) requires the taxpayer to substantiate "by adequate records or by sufficient evidence corroborating the taxpayer's own statement":
• The amount of the expense or other item;
• The time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift;
• The business purpose of the expense or other item; and
• The business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift.

The impression from the above paragraph is that "a taxpayer's own statement" by itself does not carry weight in the IRS's consideration of whether to allow a deduction. (Emphasis added)

Adequate, contemporaneous documentation is a very high standard, but this case, along with Garza demonstrates the importance of meeting this standard if the taxpayer wishes to sustain the deduction for T & E expenses.