Top 10 Investment Tax Blunders to Avoid

Oakland Tax Attorneys 

If you can avoid the top ten investment blunders, you will save money on your taxes and perhaps even increase the returns on your investments. We realize that a mid-year review of your tax situation may not be at the top of your “to-do” list, but think of it this way: devoting a few minutes now could save you big bucks at tax time.

By following these tips, you can reduce your taxes for the year and even increase the after-tax return on some of your investments:

1. Anticipate distributions from declining funds – Since mutual funds are required to distribute capital gains to shareholders, you might receive a taxable distribution even though there was a decline in the share price of your fund this year. By preparing yourself and setting aside cash, you can avoid scrambling to pay taxes in April.

2. Purchase shares after the next scheduled distribution – Don’t buy a mutual fund shortly before a capital gains distribution since a portion of your investment will almost immediately be handed back to you. This will have you owing tax on the distribution with less money to reinvest.

3. Be prudent with “tax-exempt” investments – Although the income from “tax-exempt” investments is generally nontaxable, funds will sometimes throw off capital gains distributions. This happens when the fund managers sell bonds, which can produce a taxable capital gain, and then buy other bonds. This can aggravate fund investors who don’t expect to pay taxes on these types of investments.

In addition, if you want the income to be tax-exempt for state income tax purposes, you need to make sure the fund is invested in your resident state muni-bonds since most states treat as taxable muni-bond interest derived from other states. Another common mistake is failing to change funds when you move from one state to another.

If you are subject to the alternative minimum tax (AMT), be aware that interest from “private activity” muni-bonds is tax-exempt for regular tax purposes but not for AMT purposes.

As part of the Affordable Health Care Act, starting in 2013 the net investment income of higher income taxpayers will be subject to the unearned income Medicare contribution tax, which is a 3.8% surtax on their investment income less investment expenses. For surtax purposes, gross income doesn’t include excluded items, such as interest on tax-exempt bonds, which weighs in favor of owning tax-exempt bonds.

4. Time your fund transfers wisely – Frequently, people sell one bond fund to buy another as a way of rebalancing their portfolio. However, for tax purposes, that represents a sale of a security and the purchase of another. Thus, you will need to account for the gain or loss from the fund sold on your tax return. This is generally an unpleasant surprise to those unaware of this rule, especially if there is significant gain to report on the sale. If there is a loss, selling it during the current year will allow you to utilize the loss now. However, if there is a gain, consider waiting until just after the first of the year so that you can defer the gain—but this strategy may not be appropriate for someone who can take advantage of the 0% long-term capital gain tax rate.

5. Contribute the maximum – If you maximize your retirement plan contributions, it will help maintain your current lifestyle years from now. In addition, it may also reduce this year’s taxable income.

6. Say “no” to tax-free investments in tax-sheltered plans – Instead of concentrating on annuities or municipal bonds, you’ll do better with high-yielding income and growth-oriented investments.

7. Sell a loser – There probably isn’t a stock market investor who isn’t holding a stock that is worth less now than when it was bought. Selling a loser in a taxable account can save you money and free up cash for investments with more potential. This is because the IRS allows investors to offset realized gains with realized losses. In addition, $3,000 in additional losses can be used to reduce your taxable income. Don’t sell for tax reasons alone, especially if you are confident that your dogs will turn into dream stocks. Just keep in mind that if a stock has dropped in price by 50%, it will need to gain 100% in order to break even.

8. Be aware of the limit on losses – If you are thinking of cashing in all your dogs, consider that losses are limited to offsetting realized gains and up to $3,000 in ordinary income. Although losses higher than this amount can be carried over for use in the future, they would be of no benefit to you this year.

9. Stay away from wash sales – If you would like to offset gains with losses, try and avoid “wash sales” since the IRS doesn’t allow you to recognize the loss on such sales. A wash sale occurs when a security is sold at a loss and then repurchased within 30 days before or after the date it was sold.

Don’t fret. One way you can realize losses and keep your portfolio balanced is to sell and buy back a security 31 days after the sale. Individuals who cannot wait for that period of time should purchase a similar security (not identical) to the one that was sold.

10. Check your cost basis when you sell – Although most people remember to include commissions on trades or mutual fund transaction fees when calculating cost basis, many fail to consider the dividend money that has automatically been reinvested, which results in taxpayers overpaying on taxes. Most commonly dividend reinvestment occurs with mutual funds but some companies also have dividend reinvestment plans for individual stockholders. Reinvested capital gains and dividends can add quite a bit to cost basis and make gains much smaller.

Review all your purchases when it comes time to sell. You will have a smaller taxable gain and a much better idea of your actual return on a fund.

As an investor, you want what’s best for your money. Be prepared and avoid the unnecessary headache at tax time.

Tax Deductions for Small Businesses

Oakland Tax Lawyers

Business owners – especially those operating small businesses – may be helped by the tax law that allows them to deduct up to $5,000 of their start-up expenses in the first year of the business’ operation.

Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.

As with most tax benefits, there is always a catch. Congress put a cap on the amount of the start-up expenses that can be claimed as a deduction under this special election. Here’s how:  If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months. If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar that start-up expenses exceed $50,000.

The election to deduct start-up costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date.

On Schedule C, the deduction is taken as part of the “Other Expenses” in Part V. If the entire amount of start-up costs isn’t deductible in the business’ first year, use Form 4562 to amortize the excess amount over 180 months.

Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest or research and experimental costs. Examples of qualified start-up costs include:

  • Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
  • Wages paid to employees and their instructors while they are being trained;
  • Advertisements related to opening the business;
  • Fees and salaries paid to consultants or others for professional services; and
  • Travel and other related costs to secure prospective customers, distributors, and suppliers.

For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for or preliminary investigation of the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.

Planning for Pension Distributions?

San Jose Tax Lawyers 

An individual may begin withdrawing, without penalty, from his or her qualified pension plans at the age of 59-1/2. There are several exceptions that will allow earlier withdrawal without penalty. Upon reaching age 70-1/2, you are required to take distributions from your plans or face a substantial penalty for failing to do so.

  • Impact of Your Marginal Rate – If you are able to plan your withdrawals, you can save considerable tax dollars. This is not always possible, but the basic premise is to take distributions and pay the resulting tax in years when your marginal rate is low. Also watch for years when, for a variety of reasons, your taxable income is negative and some amount of distributions could be taken tax-free if age 59-1/2 and over. The penalty only applies to those under 59-1/2.
  • Impact on Social Security – For retired individuals receiving Social Security benefits, planning IRA distributions can also be beneficial. Social Security itself is only taxable when the total of one-half of the taxpayer’s Social Security benefits plus the taxpayer’s other income exceeds $25,000 ($32,000 for a married couple filing jointly). Once this threshold is reached, every additional dollar of other income will cause 50% to 85% of the Social Security benefits to also become taxable. Therefore, if a taxpayer’s other income is under the threshold, it is generally good practice to withdraw just enough taxable IRA funds to bring the income up to the threshold amount, even if the funds are not needed in that year. They can be set aside for a future year when they might be used for some unplanned need or large purchase. However, this strategy may not work if IRA distributions are required to be made (see next section).
  • Minimum Distribution Requirements – The IRS does not allow taxpayers to keep funds in qualified plans indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the owner may have to pay a 50% penalty of the amount not distributed as required. Generally, distributions must begin in the year the plan owner reaches the age of 70-1/2.In most cases, the required minimum distribution can be figured using the “life” factor from the following table, which is divided into the value of the account as of the end of the preceding tax year. So, for example, an individual who reaches age 73 in 2011 and whose IRA had a value on December 31, 2010 of $50,000, would be required to withdraw $2,024.29 in 2011 ($50,000/24.7).

    UNIFORM LIFETIME TABLE
    Age
    Life
    Age
    Life
    Age
    Life
    Age
    Life
    Age
    Life
    70
    27.4
    80
    18.7
    90
    11.4
    100
    6.3
    110
    3.1
    71
    26.5
    81
    17.9
    91
    10.8
    101
    5.9
    111
    2.9
    72
    25.6
    82
    17.1
    92
    10.2
    102
    5.5
    112
    2.6
    73
    24.7
    83
    16.3
    93
    9.6
    103
    5.2
    113
    2.4
    74
    23.8
    84
    15.5
    94
    9.1
    104
    4.9
    114
    2.1
    75
    22.9
    85
    14.8
    95
    8.6
    105
    4.5
    115
    1.9
    76
    22.0
    86
    14.1
    96
    8.1
    106
    4.2
    77
    21.2
    87
    13.4
    97
    7.6
    107
    3.9
    78
    20.3
    88
    12.7
    98
    7.1
    108
    3.7
    79
    19.5
    89
    12.0
    99
    6.7
    109
    3.4

Deductions for Overnight Drivers

San Jose Tax Attorneys

Out-of-Town Travel:

Expenses accrued when traveling away from “home” overnight for job related reasons are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet etc.

Document your away-from-home expenses by noting the date, destination and business purpose of your trip. In addition, keep a detailed record of your expenses – lodging, public transportation, meals etc. Always list meals and lodging separately in your record. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. Keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.

Office Expenses:
Use this section to record miscellaneous expenses of supplies and services you are responsible for when you are on the road. For example, you may be required to fax or mail an important document back to your home office; such expenses are deductible if they are not reimbursed by your employer.

Supplies:
Generally, to be deductible, items must be ordinary and necessary to your job. If you are an employee, only amounts not reimbursable by your employer are deductible. Record separately from other supplies items costing more than $100 and having a useful life of more than one year. These items must be reported differently on your tax return than recurring everyday business expenses such as maps.

If you are required to wear a uniform, the cost and upkeep may be deductible. IRS rules specify that expenses for work clothing and its maintenance are deductible if: (1) the uniforms are required by your employer (if you are an employee); and (2) the clothes are not adaptable to ordinary street wear.

Communication Equipment:
Since special rules apply to deductions for cellular telephones and similar items (called “listed property” in the tax rules), it is important to track their business and personal use carefully. Such property potentially qualifies for larger current deductions when they are used more than 50% of the time for business. Keep your bills for cellular phone use and mark all business calls.

Fees & Dues:

Union or other professional dues are deductible. Amounts paid to a union that are meant to go toward defraying your personal expenses are not deductible. However, any portion of the union payments that goes into a strike fund is deductible.

Miscellaneous Expenses:

Use this section to record expenses that don’t easily fit in other categories. For example, if you look for a job in the same line of work, you may deduct the expenses. Such expenses could include mileage to interviews, resume preparation etc.

Deductions for Realtors

San Jose Tax Attorneys

Auto Travel:
Your auto expense is based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.

Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance etc. – and of any reimbursement you received for your expenses.

Out-of-Town Travel:
Expenses accrued when traveling away from “home” overnight on job-related and continuing education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include
transportation, meals, lodging, tips and miscellaneous items like laundry, valet etc.

Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.

Professional Fees and Dues:
Dues paid to professional societies related to your profession are deductible. However, the costs of initial admission fees paid for membership in certain organizations or social clubs are considered capital expenses.

Telephone Expenses:
The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business- related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business.

Continuing Education:
Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves skills in your profession. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.

Equipment Purchases:
Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $100. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses like business cards, office supplies etc.

Supplies & Expenses:
Generally, to be deductible, items must be ordinary and necessary to your real estate profession and not reimbursable by your employer.

Deductions for Business Professionals

Ainer & Fraker, LLP

Professional Fees and Dues:
Dues paid to professional societies related to your profession are deductible. However, the cost of initial admission fees paid for membership in certain organizations or social clubs are considered capital expenses.

Continuing Education:
Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills in your profession. The costs of courses that are taken to meet the minimum
requirements of a job, or that qualify you for a new trade or business, are NOT deductible.

Communication Expenses:
The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business- related. The costs of a second line (basic service and toll calls) in your home are also deductible if that line is used exclusively for business.

Auto Travel:
Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.

Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.

Supplies and Expenses:
Generally, to be deductible, items must be ordinary and necessary costs in your profession and not reimbursable by your employer.

Equipment Purchases:
Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $100. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as business cards or office supplies.

Out-of-Town Travel:
Expenses accrued when traveling away from “home” overnight on job-related and continuing education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.

Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.

Miscellaneous Expenses:
Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town, job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.

Deductions for Day Care Providers

San Jose Tax Attorneys

Auto Travel:
Your auto expenses are based on the number of qualified business miles you drive. Auto expenses for you as a day care provider could include your transportation:

  • to and from a class taken to enhance your day care skills;
  • on field trips with those for whom you are providing care;
  • for errands related to day care business (e.g. going to the bank to make a deposit of day care receipts);
  • to the store to shop for day care supplies; or
  • when chauffeuring day care attendees.

Capital Purchases:
Certain purchases for day care use may be so-called “capital items.” These items must be deducted on your tax return using different rules than are used for supplies and expenses. Capital items are those that normally last more than one year and cost more than $100 – typical examples would be cribs, playground equipment etc. Be sure to keep receipts for these items separate from receipts for general supplies.

Supplies and Expenses:
Generally, to be deductible, items must be ordinary and necessary to the operation of your day care business. Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $100. Normally, the costs of such assets are reported differently on your tax return than are other recurring, everyday business expenses like small toys or books. Try to get separate store receipts for the items you use for day care. For example, if you buy food for the day care attendees, don’t combine this purchase with the food purchases for personal use.

Business Use of Home:
Normally, the expenses you incur (other than home mortgage interest, taxes or casualty losses) related to your personal home are not deductible. However, when you regularly use your home for licensed day care, a portion of the cost of your home upkeep can be deductible – the deductible amount depends on both the number of square feet you use for day care AND the amount of time you routinely use various rooms of your home in the day care business.

Your day care records don’t need to detail the specific hours a room in your home is used for business. It’s enough to show that you regularly use a room for day care. For instance, say your home has one bedroom that is regularly used for afternoon naps for day care recipients – about two hours each day. Your day care center is open from 7:00 a.m. to 6:00 p.m. Even though nap time uses only two of the 11 hours your center is open, the bedroom is considered used for business for the entire 11-hour business day.

Deductions for Sales Reps

Oakland Tax Attorneys

Auto Travel:
Your auto expense is based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.

Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance etc. – and of any reimbursement you received for your expenses.

Out-of-Town Travel:

Expenses accrued when traveling away from “home” overnight on job related and continuing education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include
transportation, meals, lodging, tips and miscellaneous items like laundry, valet etc.

Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.

Professional Fees & Dues:
Dues paid to professional societies related to your profession are deductible. However, the costs of initial admission fees paid for membership in certain organizations or social clubs are considered capital expenses.

Continuing Education:
Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves skills as a sales representative. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.

Equipment Purchases:
Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $100. Normally, the costs of such assets are reported differently on your tax return than are other recurring, everyday business expenses such as business cards or office supplies.

Telephone Expenses:
The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business- related. The costs (basic fee and toll calls) of a second line in your home are also deductible, if the line is used exclusively for business.

Supplies & Expenses:
Generally, to be deductible, items must be ordinary and necessary to your business profession and not reimbursable by your employer.

Miscellaneous Expenses:
Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.

Deductions for Medical Professionals

Ainer & Fraker, LLP

Supplies & Expenses:
Generally, to be deductible, items must be ordinary and necessary to your medical profession and not reimbursable by your employer. Record separately from other supplies the cost of business assets that are expected to last longer than one year and cost more than $100. Normally, the cost of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as business cards or medical supplies.

Other Expenses:
Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town, job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.

Communication Expenses:
The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business.

Uniforms and Upkeep Expenses:
If you are required to wear a uniform in your medical profession, the cost and upkeep may be deductible. IRS rules specify that work clothing cost and the cost of its maintenance are deductible if: (1) the uniforms are required by your employer (if you’re an employee); and (2) the clothes are not adaptable to ordinary street wear. Normally, the employer’s emblem attached to the clothing indicates it is not for street wear. The cost of protective clothing (e.g., safety shoes or goggles) is also deductible.

Continuing Education:
Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) The education maintains or improves skills as a medical professional. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.

Auto Travel:
Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between work locations or daily transportation expenses between your residence and temporary work sites are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.

Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.

Out-of-Town Travel:

Expenses accrued when traveling away from “home” overnight on job-related and continuing-education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.

Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.

Professional Fees and Dues:
Dues paid to professional societies related to your medical profession are deductible. However, the cost of initial admission fees paid for membership in certain organizations or social clubs are considered capital expenses.

Deductions are allowed for payments made to a union as a condition of initial or continued membership. Such payments include regular dues but not those which go toward defraying expenses of a personal nature. However, the portion of union dues that goes into a strike fund is deductible.

Deductions for Entertainers

Ainer and Fraker, LLP

Continuing Education:
Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills in the entertainment profession. The costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.

Promotional Expenses & Supplies:
Generally, to be deductible, items must be ordinary and necessary to your profession as an entertainer. Record separately from other supplies items costing more than $100 and having a useful life of more than one year. These items must be reported differently on your tax return than other recurring, everyday business expenses.

If you incur expenses while looking for a job in your entertainment field, they may be deductible. You do not actually have to obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the main purpose of the trip is to job search, not pursue personal activities.

Telephone Expenses:
The basic local telephone service costs of the first telephone line provided in your home are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business.

Auto Travel:
Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations are deductible; include them as business miles. Expenses for your trips between home and a permanent work location, or between one or more regular places of work, are COMMUTING expenses and are NOT deductible.

Document business miles in a record book by the following: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance etc. – and of any reimbursement you received for your expenses.

Out-of-Town Travel:
Unreimbursed expenses accrued when traveling away from “home” overnight on job-related trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.

Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.

Equipment Purchases:
Equipment purchases such as musical instruments or telephone answering machines are shown differently on your tax return than are general job-related supplies. Keep documentation for these items separate from everyday expenses so that they may be easily identified when your return is prepared.