Reporting Gains and Losses From Recreational Gambling

March 7, 2012 Leave a comment

Reporting Gains and Losses From Recreational Gambling

Here’s a common scenario: Gavin spends a weekend in Las Vegas. His overall position from gambling is negative, but he made a couple of lucky bets. He receives Form W-2G showing $3,000 in winnings. If he does not report the $3000 on his Form 1040, the IRS computers will be likely to catch the discrepancy between their records and Gavin’s tax return, and Gavin will receive a notice that he owes additional taxes.

If Gavin already has itemized deductions that total to more than his standard deduction, he can deduct up to $3000 of gambling losses on Schedule A (itemized deductions) to offset the winnings.

Here’s how it works:

Scenario 1 – Overall Positive Outcome From Gambling

Gavin’s W2-G says $3,000, but this does not include losses of $2,500 from slot machines. Gavin also spent $645 on transportation and lodging.

Gavin can take the following deductions on Schedule A:

Gambling losses   $2,500
Travel Expenses    $   500

Taxable Gain         $   -0-

Scenario 2 – Overall Negative Outcome From Gambling

Gavin’s W2-G says $3,000, but this does not include losses of $2,500 from slot machines and $1,000 from other bets.

Gavin can take the following deduction on Schedule A:

Gambling losses   $3,000

Taxable Gain         $   -0-

In other words, you can offset gambling winnings with gambling losses and expenses, but only up to the amount shown on Form W-2G. A recreational gambler cannot use gambling losses or expenses to reduce his pre-gambling taxable income.

But what if Gavin’s itemized deductions total less than the standard deduction? In this case, Gavin will have to report his $3000 of winnings from Schedule W-2G. Period. He will not be able to offset any of the gambling winnings with gambling losses or other expenses, even though he had an overall loss from his gambling activities.

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How to Deduct Entertainment Expenses Part 2

March 6, 2012 Leave a comment

Can I deduct my wife´s dinner?

Ian is a software engineering consultant who works for a small firm of which he is a 25% owner. He much prefers working at his computer to going out on the town, but occasionally he finds it necessary to take clients or prospective clients to dinner.

“I can talk about software technology all day,” he told me, “but I´m a bumbling buffoon when it comes to socializing. The only way I manage to get through those ordeals where I´m supposed to wine and dine a client is to take Susan [Ian’s wife]. She´s just incredible. She can talk to anybody about anything. So … since the client would have a terrible time with just me there, can´t I deduct my wife´s dinner?”

The rule is that the cost of the dinner for both the host’s and the customer’s or client’s spouse is deductible if it´s not practical to entertain the client or customer without his or her spouse. But Ian needs Susan at dinner, regardless of the presence or absence of his client´s wife. Can Ian deduct the cost of Susan´s meal, even if the client comes alone? IRS would be likely to challenge this — the greater the amount deducted for Susan´s meals, the more likely it would be of interest to IRS.

For deductions of this sort that do not fit neatly within a section of the Tax Code or Treasury Regulation, you would want to have extra documentation. For example, Ian´s firm might want to record minutes of a meeting where they discuss the need for Ian to entertain clients and prospects, together with Ian´s difficulties in social situations and Susan´s social skills. If the other partners in Ian´s firm agree that Susan´s presence at client dinners will be very likely to help the firm increase sales and retain existing clients, it would be difficult for IRS to argue convincingly that the cost of Susan’s meals is not an ordinary and necessary business expense.

When is entertaining not entertainment?

In general, the deduction for meals and entertainment expenses is 50% of what you actually spend (75% for the transportation industry). But in some cases, the cost of a meal looks a lot more like a regular business expense than an entertainment expense.

Allan has a weekend business leading walking tours in Manhattan. A regular feature of each tour is a box lunch or snack pack for each participant, included in the price of the tour. In Allan´s case, the cost of lunch and snacks is 100% deductible, as Costs of Sales or Customer Supplies.

Likewise, for film or music critics, travel agents, food critics, certain costs that would ordinarily be 50% deductible as entertainment expenses are 100% deductible as regular business expenses. As always for costs of activities that people generally do for fun and pleasure, it is important to have abundant documentation of your profit motive and the relationship between the activity and the business. Calling yourself a film critic because you view lots of movies and tell your friends about them is probably not going to fly

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How to Deduct Entertainment Expenses

March 6, 2012 Leave a comment

 

Most business owners know that certain entertainment expenses are deductible under some circumstances, but judging by the large number of questions we get on this topic, I don´t think many people actually know the rules.

Like all business deductions, entertainment costs must be “ordinary and necessary” in order to qualify as tax deductible. If your business is a used furniture shop, it´s not very likely that the cost of taking one of your customers to dinner and a movie would be an ordinary and necessary business expense. On the other hand, it could be, if for example the customer you take out for the evening is furnishing a motel and is prepared to spend $45,000 on furniture.

The dictionary definition of entertainment is “something that amuses, pleases, or diverts,” activities that are pleasant, fun; in other words, entertainment is the opposite of job, labor, work. Congress and the IRS, along with most people in general, associate doing business with work — the opposite of entertainment. Therefore, in order for a business owner to convince IRS that she was having fun and working at the same time, the business owner has to satisfy a high standard of documentation (never mind that there are times when taking certain customers out to dinner is one of the very last things a business owner would choose to do for pleasure).

Sara is a financial planner who specializes in retirement planning for employees of small businesses. Emily owns a janitorial service that has 12 employees. For months Sara has been trying to get an appointment with Emily to show her how setting up a flex plan for her employees would make good financial sense for both the business and the employees, but Emily never has time. Finally, Sara says, “You have to eat lunch anyway. Why don´t you let me take you to your favorite restaurant, and we can talk about employee benefits over lunch.”

Here is the information Sara needs to record in order for the cost of taking Emily to lunch to qualify as a deductible business expense:

1. The location — Mavis´s Downtown Country Cooking
2. Names of people entertained — Emily (in “real life” you would want to include the person´s last name), owner of Clean as a Whistle Janitorial Service
3. Date — November 8, 2011
4. Business purpose — Discuss flex plan with business owner
5. Amount spent — $35

Treasury Regulations state that this information must be recorded in a timely manner — in other words, you should record the information soon after the entertainment event rather than waiting until the day before an IRS audit.

The location, date, and amount spent are already on the receipt Sara gets from the restaurant, so all Sara needs to do is write Emily´s name and the business purpose somewhere on the receipt and make sure the receipt is put into the proper place in her files.

Mavis´s Downtown Country Cooking is 7.5 miles from Sara´s office, so Sara also had a mileage deduction to record in connection with taking Emily to lunch. Some business owners find it convenient to keep a record of both entertainment costs and mileage in their appointment calendars. IRS auditors like to be able to cross check mileage and entertainment records against an appointment calendar or organizer. They are trained to look for inconsistencies, such as a receipt from McCormick & Schmick´s, November 8, 2012 claimed as a business entertainment expense “J. Smith — discussed potential referrals” and an entry on the calendar for November 8, 2006 that reads, “Sally´s birthday party — McCormick & Schmick´s 7:30”

 

 

 

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How To Document Vehicle Expenses for the IRS

March 2, 2012 Leave a comment

HOW TO DOCUMENT VEHICLE EXPENSES FOR YOUR TAX RETURN

You may not have kept perfect records in the past, but you can begin now to document your business vehicle use. If the IRS should audit tax return for prior years, when you were not keeping good records, you can sometimes use current records as supplemental documentation for the prior years. The ideal documentation for your business automobile mileage would be the following:

  • Mileage log clearly showing the date, address you drove to, and business purpose. Examples: (1) 2/21/2011, 548 North Main, purchase office supplies, odometer out: 24937, odomenter in: 24945; (2) 2/21/2011, 23 NE Loop 410, call on prospective client Smith Construction, odometer out: 24945, odomenter in: 24960
  • Oil change or repair receipts toward the beginning and end of the year, providing 3rd party substantiation of your total mileage for the year;
  • Calendar showing appointments that match your mileage log. Example: 2:00 Monday Feb 21, 2011 – John Smith, Smith Construction 23 NE Loop 410
  • Some (most) people are in a hurry when they get into the car to go to a business appointment. If they keep a mileage log at all, it will often be on a sporadic basis. It’s best to have a log, but if you do not have a complete log, you can still substantiate your mileage using a calendar and third party documentation of your total mileage. In addition to repair or oil change receipts, you can use receipts for gasoline purchased and calculate your total mileage using this formula: miles driven = gasoline purchases/average price per gallon x miles per gallon. For example, if you spent $2000 for gasoline for 2010 and the average price of gasoline during 2010 was $2.75, you purchased about 727 gallons of gasoline in 2010. If you car travels an average of 20 miles per gallon of gasoline, your approximate mileage for 2010 would be 727 x 20 = 14,540 miles.
  • Once you have proved your total mileage for the year, you will need to show how much of that mileage was for business purposes. The following documents are useful for this: (1) a calendar that shows your business appointments; (2) invoices sent to clients or customers for work performed at the client’s or customer’s location; (3) print-out of Mapquest or Google Maps route between your office and the location.
  • A narrative description of your driving habits can also be helpful. Example: My base of operations is my office, located in my home. Each morning, I answer my email and return phone calls. Then I drive to my first appointment. I usually call on 4 or 5 prospective new customers each day, Monday through Friday. I also call on 1 or 2 existing customers each day, to make sure they are happy with the services they are receiving. My sales territory covers all of San Antonio and the surrounding small cities. I drive an average of 55 miles each day calling on prospective and existing customers. I also drive to the bank to make deposits once a week, and drive to purchase office supplies once every 2 or 3 weeks. 

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