DEDUCTING TRAVEL EXPENSES

Larry, I am going to Las Vegas for a convention and I want to take my spouse. Can I deduct her expenses?

Lou

Lou, I presume that you own your own business. I have some really good information on this and other topics on our website in the General Tax Information section. In response to your question, click on the following link:
http://www.kopsaotte.com/salon/documents/DEDUCTINGSPOUSESTRAVEL.pdf

Larry Kopsa CPA

EXPENSING DEDUCTIONS

Here is a good summary of section 179. It looks like the authors are not optimistic about a $250,000 and a 50% bonus continuation to 2010. In addition to the following memo, check out this attachment: Section 179 Eligibility Checklist.

What Year Is an Asset Eligible for IRC Section 179 Expensing?
As accountants advising businesses who report for tax purposes under the cash method of accounting, each year we receive a flurry of questions regarding last minute transactions. This year was no exception and this release is a reminder to all of us of the rules regarding what it takes to claim a Section 179 deduction for fixed assets purchased in the year. The asset must be purchased and placed into service during the tax year to be eligible for the Section 179 Election to Expense.

Background
Congress has used Section 179 for economic stimulus purposes, often with dramatically different results from year to year. The timing of an asset’s eligibility not only affects the year of deduction, but also the amount. In view of the apparent decrease in the Section 179 limit, it’s appropriate to review the issues that affect eligibility and timing of Section 179 deductions.

2009 and 2010 Section 179 Deduction Limits
As we know, the Economic Stimulus legislation continued the expanded Section 179 deduction of $250,000 for years beginning in 2009. For tax years beginning in 2010, the limit has dropped to $134,000 (this is the 2007 limit of $125,000 indexed for inflation). In addition, the asset addition phase-out range drops back to $530,000 - $664,000 in 2010 (Rev. Proc. 2009-50).

Caution: Congress could choose to retroactively restore the expanded Section 179 deduction and 50% bonus depreciation for one more year. But at this point, with signs of economic activity improving and the draft of the 2010 “extender bill” omitting these provisions, it appears both of these depreciation incentives will be allowed to expire.

Be aware that a fiscal year pass-through entity would be eligible to claim up to $250,000 for its year ending in 2010. However, the individual 1040 reporting the pass-through Section 179 will be limited to $134,000. Any excess is a wasted deduction that is neither allowed in 2010 nor is a suspended deduction. There is no carryover provision for a Section 179 deduction that is in excess of the individual’s Section 179 dollar limit (Rev. Proc. 2008-54, Example 3).

As a quick reference to the many rules affecting this provision, we have attached an updated Section 179 Eligibility Checklist.

When Is a New Fixed Asset Purchase Eligible for the Election?
Two portions of IRC Section 179 determine the proper tax year for the deduction:

1. According to IRC Section 179(d)(1)(C), property is eligible for the first-year deduction only if it is purchased. “Purchased” means that the taxpayer has either paid for the asset or has a legal liability for the purchase of the asset.

2. According to IRC Section 179(a), the deduction is allowed for the year in which the property is placed in service. The asset has to be available to the taxpayer for its intended business use to qualify as being placed in service.

Both tests must be met for the asset to be eligible. The following examples illustrate these rules.

Example 1 – Section 179 Deduction in 2010
Tim Farmer had a long crop harvesting season this past fall. Since harvest is over, he has reviewed his operation and decided that a new grain dryer would speed up his harvesting operation and allow for a more timely harvest of his corn crop. The grain handling companies which sell crop dryers have pricing specials which end on December 31st.

If Tim writes a check for the dryer purchase on or before December 31st, he has met the purchase requirement for the Section 179 depreciation deduction. However, if the dryer will be manufactured in spring of the next year and delivered to Tim’s farm site in the summer of 2010, he has not met the placed-in-service requirement. Therefore, even though Tim has paid for the dryer during 2009, it is not eligible for depreciation or the Section 179 deduction until 2010, and a $134,000 Section 179 limit applies.

Example 2 – Section 179 Deduction in 2009
Assume the same facts as Example 1, except Tim buys and pays for a used portable grain dryer that is sitting on the dealer’s lot in December. If Tim has the dryer delivered and placed into his grain handling system so that it is available to dry corn before December 31st, then the dryer has been placed in service and it is available for his use. In this situation, Tim is eligible for the Section 179 deduction for the dryer even though he does not use it to dry corn until much later in the following tax year.

Example 3 – Section 179 Deduction in 2008
Jim Lately made the decision that a new combine would improve his farming operation during 2008. The equipment manufacturer had a promotional deal for no down payment and no interest until the following year on the purchase of this new model. Jim completed the paperwork to purchase the combine in September of 2008 and used it in his harvest during the fall of 2008. Jim had a legal liability to the equipment manufacturer’s finance division as of the purchase date in 2008, even though he did not expend any cash for the purchase of the combine that year.

In compiling his 2008 tax data, Jim overlooked the loan paperwork and did not mention to his tax preparer that he purchased the combine. In the preparation of his 2009 tax return, Jim and his tax preparer notice the first payments on the combine and recognize the oversight. According to the two eligibility tests, Jim did have a purchase during 2008 and the asset was placed in service during 2008. Therefore, the Section 179 election for the combine may only be made in his 2008 tax return (via the filing of an amended return). Jim is not eligible to make a 179 election in his 2009 return for this combine.

Glen Steiner and Rick Christiansen

SEX CHANGE NOW DEDUCTIBLE

Sex change costs, except those for breast augmentation, held deductible as medical expenses

O'Donnabhain (2010), 134 TC No. 4

The Tax Court has held that an individual could deduct as a medical care expense under Code Sec. 213 amounts paid for hormone therapy and sex reassignment surgery that were incurred in connection with a condition known as gender identity disorder, which the Tax Court found to be a disease. However, it found that breast augmentation surgery that the individual also had in connection with the disorder was cosmetic surgery and amounts paid for it were not deductible under Code Sec. 213(d)(9) .

Background. Code Sec. 213(a) permits a deduction for expenses paid during the tax year for medical care of the taxpayer, spouse or dependent; an expense is for medical care if it is paid for the diagnosis, cure, mitigation, treatment or prevention of disease. Amounts paid for “cosmetic surgery” or other similar procedures can't be taken into account as a medical expense deduction, unless the surgery or procedure is necessary to ameliorate a deformity arising from (or directly related to) a (1) congenital abnormality, (2) personal injury resulting from an accident or trauma, or (3) disfiguring disease. ( Code Sec. 213(d)(9)(A) ) “Cosmetic surgery” is any procedure that is directed at improving the patient's appearance and doesn't meaningfully promote the proper function of the body or prevent or treat illness or disease. ( Code Sec. 213(d)(9)(B) )

Facts. Rhiannon G. O'Donnabhain (the Tax Court petitioner) was born a genetic male with unambiguous male genitalia. However, she was uncomfortable in the male gender role from childhood and first wore women's clothing secretly around age 10. (Reflecting O'Donnabhain's preference, the Court used the feminine pronoun to refer to her throughout the opinion). Her discomfort regarding her gender intensified in adolescence, and she continued to dress in women's clothing secretly.

As an adult, O'Donnabhain earned a degree in civil engineering, served on active duty with the U.S. Coast Guard, found employment at an engineering firm, married, and fathered three children. However, her discomfort with her gender persisted. She felt that she was a female trapped in a male body, and she continued to secretly wear women's clothing.

O'Donnabhain's marriage ended after more than 20 years. After separating from her spouse in '92, her feelings that she wanted to be female intensified and grew more persistent. Eventually, she contacted Diane Ellaborn (Ms. Ellaborn), a licensed independent clinical social worker (LICSW) and psychotherapist, and commenced psychotherapy sessions in August '96. In early '97, after approximately 20 weekly individual therapy sessions, Ms. Ellaborn's diagnosis was that O'Donnabhain was a transsexual suffering from severe gender identity disorder (GID), a condition listed in the Diagnostic and Statistical Manual of Mental Disorders (4th ed. 2000 text revision) (DSM-IVTR), published by the American Psychiatric Association.

Medical professionals who treat gender identity disorder prescribe for its treatment in genetic males, depending on the severity of the condition, (i) administration of feminizing hormones; (ii) living as a female in public; and (iii) after at least a year of living as a female, surgical modification of the genitals and, in some circumstances, breasts to resemble those of a female (sex reassignment surgery).

Pursuant to this treatment regimen, O'Donnabhain was prescribed feminizing hormones in '97 and continued to take them through 2001. In 2000, after plastic surgery to feminize facial features, she began presenting full time in public as a female. In 2001 she underwent sex reassignment surgery, including breast augmentation surgery.

O'Donnabhain claimed a medical expense deduction for the cost of the surgeries, transportation and other related expenses, and feminizing hormones, for tax year 2001. IRS disallowed the deduction.

Court's holdings. The Tax Court held that O'Donnabhain's gender identity disorder is a “disease” within the meaning of Code Sec. 213(d)(1)(A) and Code Sec. 213(d)(9)(B) . It further held that her hormone therapy and sex reassignment surgery were “for the...treatment...of” and “[treated]” disease within the meaning of Code Sec. 213(d)(1)(A) and Code Sec. 213(d)(9)(B) , respectively, and consequently the procedures were not “cosmetic surgery” excluded from the definition of “medical care” by Code Sec. 213(d)(9)(B) . Rather, the amounts paid for the procedures were expenses for “medical care” that were deductible under Code Sec. 213(a) .

However, the Tax Court held that O'Donnabhain's breast augmentation surgery was directed at improving her appearance and that she had not shown that the surgery either meaningfully promoted the proper function of the body or treated a disease within the meaning of Code Sec. 213(d)(9)(B) . Accordingly, the breast augmentation surgery was “cosmetic surgery” within the meaning of Code Sec. 213(d)(9)(B) that was excluded from the definition of deductible “medical care” by Code Sec. 213(d)(9)(A) .

DEDUCTING GAMBLING LOSSES

Casual gamblers must net their winnings or losses on a daily basis when figuring their taxes, the Tax Court says.

"A couple played the slots on occasion. On one day, they hit a $2,000 jackpot and netted $1,100 for the day.

They lost a total of $2,264 on their other trips. In the Court’s view, the $1,100 in winnings is taxed as income and the offsetting $1,100 in losses can be claimed as an itemized deduction. However, since the couple took the standard deduction,they cannot write off the $1,100 in losses (Shollenberger, TC Memo. 2009-306)."

Remember, too, that gambling losses in excess of winnings cannot be deducted.

QUESTION ON DEDUCTING USED CLOTHING

I am cleaning closets and will be giving a lot of clothing to the Salvation Army. Can I deduct this off of my taxes?

Amid

Amid, good idea if you are itemizing your deductions, which is sometimes called the “long form.” If you do itemize then the fair market value of the clothing will be deductible. This would also include household items such as old furniture.

To be deductible, clothing and household items donated to charity generally must be in good used condition or better. If it is not in “good” condition you would need an appraisal if the value is over $500. I don’t know how to get an appraisal of old clothing, but those are the rules. You would also need an appraisal if the fair market value is over $10,000.

Larry Kopsa CPA

TAX BREAK FOR TIRADE?

Serena Williams, verbally attacked a line judge during the U.S. Open Championship and was hit with at $175,000 fine. The question is “can she deduct the fine?” Here is a interesting analysis. (Maybe this is just interesting to us tax people.)

Can Williams get a tax break for her tirade?

DEDUCTING SCHOOL EXPENSES

One of the most popular questions I see around this time of year is whether you can deduct the cost of:

• band uniforms and instruments
• school uniforms for public, private or parochial school
• athletic team uniforms school supplies
• field trips
• fill-in-the-blank school expense that is sucking money out of my wallet

The short answer is no. These expenses are considered personal expenses and are not deductible for federal income tax purposes for students in elementary and high school.

Larry Kopsa CPA

SOME JOB-SEARCH SPENDING CAN BE DEDUCTED FROM YOUR TAXES

Expenses incurred while looking for employment are often tax deductible, but you have to follow the rules laid down by the Internal Revenue Service. The first thing to consider is whether your search is targeted to a position similar to the one you last held. Career changers are out of luck when it comes to deducting job-search expenses. Under the "same occupation rule" you can claim expenses that you've incurred only in trying to find a job like the one you had before. The Wall Street Journal

DEDUCTIONS WHEN LOOKING FOR A JOB

Larry, thanks for all the great information. My wife just got transferred to Arkansas so in order to stay with her I need to find a new job. Are there any deductions for job hunting?

Theodore

Theodore, thanks for the kind words. I hope that you are successful in finding a new job. Here is the information that you need on job hunting expenses.

1. In order to deduct job search costs, the expenses must be spent on a job search in your current occupation. You may not deduct expenses incurred while looking for a job in a new occupation.

2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.

3. You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers as long as you are looking for a new job in your present occupation.

4. If you travel to an area to look for a new job in your present occupation, you may deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.

5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.

6. You cannot deduct job search expenses if you are looking for a job for the first time.These expenses are only deductible if you itemize your deductions (long form).

You also need to keep in mind that the tax laws also allow a deduction for moving expenses. Let me know if you have any questions on moving expenses.

It is a pleasure serving you.

Larry Kopsa CPA

DEDUCTING A BUSINESS CRUISE

Larry, one of my suppliers is sponsoring a cruise. During the cruise there will be business meetings for over 7 hours per day. I know that if my wife goes along I cannot deduct her costs because she is not an employee of my business. I also know that if I don't take her I will have severe issues at home. Anyway, is the cruise deductible?

Bill

Bill, you can deduct up to $2,000 per year of your expenses for attending conventions, seminars, or similar meetings held on cruise ships. All ships that sail are considered cruise ships.

You can deduct these expenses only if all of the following requirements are met.

1. The convention, seminar, or meeting is directly related to your trade or business.

2. The cruise ship is a vessel registered in the United States.

3. All of the cruise ship's ports of call are in the United States or in possession of the United States.

4. You attach to your return a written statement signed by you that includes information about:

a. The total days of the trip (not including the days of transportation to and from the cruise ship port),

b. The number of hours each day that you devoted to scheduled business activities, and

c. A program of the scheduled business activities of the meeting.

5. You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes:

a. A schedule of the business activities of each day of the meeting, and

b. The number of hours you attended the scheduled business activities.

Let me know if you have any other questions. It is a pleasure serving you.

Larry Kopsa CPA

CLIENT GIFTS

This may be a little late for this year, but keep it in mind for the future. It is customary to thank customers this time of year with a gift. As you might guess, once again the IRS has to stick its nose into our business. They have rules on how much you can give and still deduct. The biggest problem is that there is a $25 limit per client per year. This amount has not been changed since the 1970’s.

The downside is a dollar limit that makes the IRS look suspiciously like Ebenezer Scrooge. 25 bucks per person, max. (Bah, humbug!) Husband and wife count as one person. (Humbug again!)

How can you get around that limit? Consider these strategies:

Consider giving to groups of people, like "the Kopsa family" (Larry and Maggie ((husband and wife so 1)), Ryan ((son 1)), and Tony((son 1)), for a $75 total) or "the folks at Kopsa Otte CPA’s" (There are 25 of us, for a $625 deduction).

Consider giving a gift of entertainment, which you can treat as a gift (subject to the $25 limit) or an entertainment expense (subject to the 50% limit). For example, tickets to a ball game sell for up to $110 each. If I give two tickets, I can deduct them as a $50 gift or a $110 entertainment expense. That's an easy call. (Almost as easy as giving the tickets away instead of attending the game!)

Ad specialties with a value up to $4 each are deductible as advertising and don't count against the $25 per person annual limit for business gifts. Contest prizes you give to customers (but not employees) also qualify.

I know, I said it's better to give than receive. But why not receive that tax break for your holiday gift if it's out there?