Tax Tips from Tax & Accounting Plus – Part 2

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DOCUMENTING BUSINESS USE OF YOUR PERSONAL AUTO!

If you use your personal vehicle for your work, you may be able to write off the costs on your tax return.  To qualify you must use your car in your own business.  You must maintain adequate records to prove your business use.  If you can meet these requirements, then your auto expenses may be deducted.

Substantiating or not adequately documenting the business use is where most taxpayers find themselves in trouble.  (The IRS is really focusing on this area during an audit.)  If you claim a business expense deduction for your vehicle without proper documentation, you can probably expect the IRS to disallow the deduction in an audit.  You shouldn’t assume the IRS would compromise and allow your deduction based solely on your testimony.  The best evidence is a detailed log with an entry for each trip; however, diaries, trip sheets, expense reports or similar written evidence is probably adequate. 

Ideally, the record should be prepared at or near the time of the business use.  The best way is to keep a logbook handy in your automobile to record your miles as they occur.  Also, there are some very good mileage tracker phone apps that are free or very inexpensive.

If you plan on taking an auto deduction this year, be prepared to answer the following questions for each auto when you file your tax return, in addition to your daily mileage log.

  1. Do you have evidence to support your deduction?
  2. Is your evidence written?
  3. What is the total business and total personal mileage for the year?
  4. What was the beginning and ending odometer reading for 2021?

There are generally two methods for computing your auto expenses; the standard mileage rate method and the actual cost method.  Normally, you can use whichever method gives you the largest deduction.  Whether you’re using the standard mileage method, 56.0 cents per business mile for miles driven, or you’re writing off your actual costs, you will need to keep your daily mileage log.  Make sure you have all these totaled & documented before you come to see your tax preparer.

STANDARD MILEAGE RATES

                                                                                              2022                     2021

                                                            Business               58.5 cents            56.0 cents

                                                            Medical                18.0 cents            16.0 cents

                                                            Moving                18.0 cents            16.0 cents

                                                            Charity                 14.0 cents            14.0 cents

                                                            Depreciation        26.0 cents            26.0 cents

Childcare Credit The American Rescue Plan Act of 2021 makes the following changes to the credit and exclusion. Refundable Credit: For the 2021 tax year only, the Childcare Credit is refundable. Increased Dollar Limit: For the 2021 tax year only, the $3,000 limitation on expenses paid for one qualifying person is increased to $8,000, and the $6,000 limitation on expenses paid for two or more qualifying persons is increased to $16,000. Increase in Applicable Percentage: Prior to 2021, the Childcare Credit equaled a percentage of expenses paid, ranging from 35% for taxpayers with AGI of $15,000 or less to 20% for taxpayers with AGI over $43,000.  Effective for the 2021 tax year only the 35% is increased to 50%, the $15,000 is increased to $125,000 and the 20% amount is replaced with phaseout percentages.

Child and Dependent Care Credit Percentages

If AGI is over              but not over                 Percentage is:

$                  0        –      $    125,000                         50%

$       125,000        –      $    183,000                 The credit rate declines by 1 percentage point for each

                                                                        $2,000 (or fraction thereof) above $125,000.

$       183,000        –      $    400,000                         20%

$       400,000       –      $    438,000                 The credit rate declines by 1 percentage point for each

                                                                        $2,000 (or fraction thereof) above $400,000.

Over $438,000                                                          0%                    

Exclusion: For the 2021 tax year only, maximum exclusion of Dependent Care Benefits reported in box 10, Form W-2 is the smallest of $10,500 ($5,250 if MFS and not considered unmarried), Qualified expenses incurred in 2021, Taxpayer’s earned income or the Spouse’s earned income.

Excess Benefits: If benefits received are more than the amount that can be excluded, the excess is included in taxable wages on line 1, Form 1040 labeled “DCB”. Forfeited benefits and benefits an employer allows to be used during a grace period in 2022 are not taxable: subtract them on line 14, Form 2441. Dependent care benefits are not subject to FICA and Medicare tax even if excess benefits are included in taxable wages on line 1, Form 1040.       

Reduced Credit: Any dependent care benefits excluded from income reduce the maximum credit available.

To be able to claim this credit, you must know the total amount paid to each childcare provider, the provider’s legal name and Social Security Number or Employer Identification Number, the provider’s address and phone number.

Office In Home Expenses will be allowed for the place of business which is used by the taxpayer for the administration or management activities of the taxpayer’s business if there is no other fixed location of the business where these activities are substantially performed.  The home office must still be used regularly and exclusively, but no longer needs to be the place where the income-producing activities take place.  You may use either the standard method or simplified option.

Substantiating Your Expenses.  The TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation.  However, for 2021 and 2022, taxpayers may deduct 100% of the cost of business meals that are purchased in a restaurant. Business meals purchased at any other venue are still subject to the 50% limitation, unless one of the other 100% provisions apply.

The taxpayer (or employee of the taxpayer) should be present and the food or beverages are not considered lavish or extravagant. Proper substantiation of your expenses is still required. You should substantiate each of the following four elements of your expense: 

1) Time & Place
2) Business Purpose
3) Dollar Amount
4) Business Relationship

In addition to recording this information you will need receipts, tickets or other supporting documentation for expenditures of $75.00 or more (other than lodging).