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Is Your Employer Provided Auto Creating a Tax Problem for You?

By Stacie Clifford Kitts, CPA

Do you have an employer provided automobile? If so, here are some things to know.

The law provides that the personal use of an employer-provided automobile represents additional compensation to an employee. This compensation is also known as a taxable fringe benefit.

Many employees are surprised to learn that when you use a business vehicle to commute to and from work or for any other personal use, you are generating additional taxable income that will be included on your W2.

No, sorry you did not get an unexpected raise. This portion of our tax code is just another example of how nothing in life is free. Not even an innocent trip to the park, or maybe that parent teacher conference – at least not if you got there in the company car.

Anyway, since this additional income along with the appropriate payroll taxes is determined annually by your employer, it is important that you carefully document your business versus personal use of the vehicle. After all, there is no need to pay more tax than is necessary. At a minimum, you should maintain a daily log that shows the miles you have driven, the business purpose for your trip, and where you were going.

You may also want to discuss the need for additional income tax withholding with your CPA or qualified tax preparer to make sure there are no tax surprises during tax filing time.

Now, the calculation of the income element for your visit to that parent teacher conference or other personal trips can be based on a couple of methods. Your employer may choose any one of the following to calculate your taxable personal use:

Cents-Per-Mile Rule
Your employer will multiply the total miles you used the vehicle for personal use by the standard mileage rate.
In order to use this method certain requirements must be met. You can check out the details of this method in Publication 15-B Employer’s Tax Guide to Fringe Benefits.

Lease Value Rule
If your employer uses this method, your employer will determine the percentage of personal use by dividing the total miles driven by the amount of personal miles driven. The resulting personal use percentage will then be multiplied by the vehicles “lease value.” The IRS provides the Annual Lease Value table that will be used in this calculation. Additional calculation information can be found at Publication 15-B.

Commuting Rule
If your employer provides a vehicle for the purposes of commuting such as a commuter vanpool, the taxable benefit is calculated by “multiplying each one-way commute by $1.50.”

One final note for S corporation shareholders who receive a W2 and who have a company vehicle, if at any time during the year you owned more than 2% of the outstanding stock of your S-Corp you are treated like a partner and not an employee in regards to the application of these rules. Check with your CPA or tax preparer for more information.

Guidance – Proposed Reg Exclusion From Gross Income Amounts Received on Account of Personal Physical Injuries

REG-127270-06 contains proposed regulations relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness. The proposed regulations reflect amendments under the Small Business Job Protection Act of 1996. The proposed regulations also delete the requirement that to qualify for exclusion from gross income, damages received from a legal suit, action, or settlement agreement must be based upon “tort or tort type rights.” The proposed regulations affect taxpayers receiving damages on account of personal physical injuries or physical sickness and taxpayers paying these damages.

Guidance – Rev Proc 2009-39 re automatic consent for changes in accounting method

Revenue Procedure 2009-39 amplifies, clarifies, and modifies Rev. Proc. 2008-52, which provides procedures for taxpayers to obtain automatic consent for the changes in method of accounting described in its APPENDIX. This revenue procedure also clarifies and modifies Rev. Proc. 97-27, as amplified and modified by Rev. Proc. 2002-19, as amplified and clarified by Rev. Proc. 2002-54, and as modified by Rev. Proc. 2007-67, which provides the general procedures for obtaining non-automatic consent for changes in method of accounting.
Revenue Procedure 2009-39 will be in IRB 2009-38, dated September 21, 2009.

Is it a Hobby or a Business?

From the IRS summer tax series. I really love these tips.

Summer is a time many Americans take their fishing poles and gardening tools out of storage. Hobbies – such as woodworking, stamp collecting and scrapbooking – are often done for pleasure, but can result in a profit.

If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.

Here are eight questions that will help determine if your activity is a hobby or a business.

Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.

Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit.
Do you depend on income from the activity? If so, your activity is likely considered a business.

Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.

Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.

Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.

Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.

More information about not-for-profit activities is available in Publication 535, Business Expenses, available on the IRS.gov Web site or by calling 800-TAX-FORM (800-829-3676).

Link: IRS Publication 535, Business Expenses

Tips For Reporting Your Gambling Winnings

You may know when to hold ‘em and when to fold ‘em but do you know how and when to report ‘em? Whether you are playing cards or the slots, it is important to know the rules about reporting gambling winnings and losses.
Here are seven things the IRS wants you to know about reporting what Lady Luck has sent your way.
All gambling winnings are fully taxable.
Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, poker tournaments and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips.
A payer is required to issue you a Form W-2G if you receive certain gambling winnings or if you have any gambling winnings subject to federal income tax withholding.
Even if a W-2G is not issued, all gambling winnings must be reported as taxable income. Therefore, you may be required to pay an estimated tax on the gambling winnings. For more information on paying estimated taxes, refer to IRS Publication 505, Tax Withholding and Estimated Tax.
You must report your gambling winnings on Form 1040, line 21.
If you itemize your deductions on Form 1040, Schedule A, you can deduct gambling losses you had during the year, but only up to the amount of your winnings. Your losses are not subject to the 2 percent of AGI Limitation.
It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.
For more information, refer to IRS Publications 525, Taxable and Nontaxable Income, and 529, Miscellaneous Deductions. Additional information can also be found in IRS Instructions for Forms W-2G and 5754, Certain Gambling Winnings & Statement by Person(s) Receiving Gambling Winnings. These publications are available at IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).
Publication 525, Taxable and Nontaxable Income
Publication 505, Tax Withholding and Estimated Tax
Publication 529, Miscellaneous Deductions

How To Avoid Nicholas Cage’s Tax Problems

Learn how to avoid Nicholas Cage’s tax problems. This post at my The Business Perspective Blog, provides 7 sure fire ways to avoid being without the funds to pay your tax bill.

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