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An accountable plan is a method of reimbursing employees for their work-related costs without subjecting the payment to tax. If the plan meets certain requirements, reimbursements to employees are tax-free. The requirements are:

• The expense must be directly related to the employee’s job duties
• The employee must provide sufficient documentation to their employer for all expenses within a reasonable period
• The employee must return any excess reimbursement

If the IRS finds that your accountable plan did not meet all necessary requirements, it may consider reimbursements to be paid under a “non-accountable plan.” Any reimbursements under a non-accountable plan will have to be included in the employee’s taxable income and are subject to payroll taxes. The business would not be able to deduct the expense.

The Augusta Rule is an informal term for the provision outlined in Section 280A of the tax code. It is named after the Masters Golf Tournament in Augusta, Georgia, during which homeowners rent their homes for a significant amount of money for a short period of time (less than 15 days during the year) and are not required to report the rental income on their tax return.

If you rent your residence (primary or vacation home) for 14 days or less during the year to your business: 

• The income from the rental is not taxable to you.
• The rental expense is deductible by your business.

To take advantage of this provision, there are certain conditions that must be met:

• The rent charged should be fair market rent. Renting at an inflated rate can attract scrutiny from the IRS
• Documentation is essential. A formal rental agreement should be made, records of payments should be kept, and a documentation of the business purpose of the rental should be made.

These items are deductible if they are used EXCLUSIVELY for business purposes. They are not things you would wear outside of work

To qualify for this deduction, you must prove to the IRS that your clothes are for the workplace only and not for personal use. 

You do this by meeting three requirements:

1. The clothing is required or essential for your job.
2. The clothing is distinctive or protective.
3. The clothes are not suitable for everyday wear outside work.

Examples of these types of items that ARE tax deductible:

• Medical Scrubs
• Clothing with a company logo

Examples of these type of items that are NOT tax deductible:

• A men's suit. Suits can be worn for business or personal events.
• White shirt for a painter. White shirts can be used for either business or personal.

Cost of Goods Sold (COGS) are the direct costs associated with producing or acquiring the goods a business sells. It is the value of inventory sold during the tax year. It is technically not a “business deduction,” but is deducted from a business’s total revenue to determine its gross profit.

COGS generally includes: 

• Cost of materials used in production or products purchased for resale (including the cost of shipping the items to you)
• Packaging
• Direct labor related to producing or selling the goods
• Overhead costs directly tied to production, such as utilities for the manufacturing facility
COGS does NOT include:
• Shipping the product to customers
• Advertising
• Third party fees (e.g., Ebay, Paypal)

The formula for calculating COGS is:

• Beginning Inventory + Purchases (Materials, labor, overhead) – Ending Inventory

See IRS Publication 334 for more information: click here 

Exception for small business taxpayers: 

Small businesses (gross receipts ≤ $30 million for 3 prior tax years) can choose not to keep a beginning or ending inventory but may treat inventory as non-incidental materials or supplies. If this method is chosen, your need a system that accurately reflects how much you spent on the items you sold. 

It’s a red flag to switch somebody from an employee to subcontractor because the laws are specifically designed to protect employees from this happening. 

It’s to the disadvantage of an employee to become a subcontractor but it is advantageous to an employer.

Hence, laws have been developed to provide employees with protection.
Laws can vary significantly from state to state.

For simplicity, we'll use California as an example to illustrate these types of laws.

The Employment Development Department for the State of California released to business owners – a checklist of how to identify who is truly an independent contractor and who is an employee for your business.

They stated that the California Supreme Court adopted the “ABC test” to help employers and small business owners understand the difference.

This is the ABC test taken from the court:

An independent contractor must have ALL three following requirements:

“A. The individual is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

B. The individual performs work that is outside the usual course of the hiring entity’s business.

C. The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

If the individual does not meet ALL 3 requirements, they are NOT independent contractors and are, in fact, employees.

In addition to the above, this article might also be helpful to review:
Independent contractors - click here

The home office deduction, calculated on Form 8829, is available to both homeowners and renters. To qualify as a home office, there are strict requirements that must be met. The space must be used exclusively and regularly for your work. 

To qualify, at least one of the following must apply:
• An area in the home is exclusively and regularly used as the principal place of business
• An area in the home is used on a regular basis for storage of inventory or product samples
• An area in the home is used exclusively and regularly as a place to meet with patients, clients, or customers

There are two cases where the exclusive test does not need to be met:

• The home is used as a daycare facility*
• An area of the home is used on a regular basis for storing inventory or product samples

*NOTE: There are special calculations that must be made if your home is used as a daycare facility.
There are two methods of calculating your deduction: 1) the simplified method and 2) the regular (or actual expense) method. To calculate your deduction, you must first determine the business-use percentage of the home. This is generally done by dividing the square footage of the office space and dividing it by the total square footage of your home.

SIMPLIFIED METHOD:

You can deduct $5 for every square foot of your home office. The maximum deduction is $1,500 per year (a home office up to 300 square feet).

REGULAR (ACTUAL EXPENSE) METHOD

For the regular method, you can deduct both direct expenses and indirect expenses. Some examples of direct expenses are:
• Office supplies
• Computer equipment and software
• Office furniture
Indirect expenses are expenses that relate to your entire home. You can only deduct the portion of these expenses that are attributed to your home office space. They include:
• Mortgage interest
• Property taxes
• Rent
• Utilities
• Homeowner’s or renter’s insurance

Record-keeping is extremely important to substantiate the deduction. While record-keeping for the actual expense method is more tedious, it may allow you a greater deduction. In either case, your deduction cannot be greater than your business net income. If you use the actual expense method, you are allowed to carry over unallowed expenses due to income limitations. You are not allowed to carry over unallowed expenses if you use the simplified method.

The IRS requires loans to have an interest component. If you don’t charge enough interest or zero interest on a loan, the IRS considers it a “below-market loan” and could impute additional income to you, meaning you would be taxed on the difference between the interest you should have charged and the amount you actually charged. This would apply even if no interest were paid to you. 

All business loans should have an interest component that matches or exceeds the applicable federal rate (AFR).* Every month, the IRS publishes a list of current AFR, which reflect market conditions. 

For example, in May of 2024, the AFR for loans of less than 3 years, considered short-term, was 4.97%. If you loan someone money at no interest, or at any rate below 4.97%, you will pay tax on the imputed interest. Imputed interest is interest that the tax code assumes you collected but you didn’t actually collect. 

Example: 

Say you loaned someone $20,000 for one year at 0.1% interest. Over the course of the loan, you will receive $20 in interest ($20,000 x .001). If the AFR for that loan is 3%, then you should have collected $600 in interest ($20,000 x .06). The difference of $580 ($600 - $20) is the imputed interest and must be reported as interest income on your tax return.

Download this helpful guide to see how you can contact them:
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The general IRS rule is that laundry and dry cleaning can only be deducted if it is for clothing that meets ALL three criteria below:

•Required or essential for your job
•Distinctive or protective (e.g. has a company logo or complies with industry standards for worker protection)
•Not suitable for everyday wear outside work

There are certain circumstances under which laundry (and dry cleaning) would be a legitimate expense. The expense would have to be considered ordinary and necessary for the operation of your business. 

For example:

• If the actual clothing qualifies as a deductible expense (For instance, someone who works in home healthcare and is required to wear specific uniforms or scrubs for work can deduct the expense for laundering their scrubs.)
• If you are a massage therapist and you launder sheets and towels for clients
• If you run a daycare and you launder linens used in your daycare
• If you own a salon and you launder towels, capes, etc., for your clients
• If you are on a business trip, you can deduct laundry costs while on your business trip

To claim the deduction, you must keep accurate records. 

This includes:
• Tracking the number of loads of laundry related to your business
• Determining the cost per load based on the average cost of utilities (e.g., water, electricity, detergent)

The deductible amount permitted for a business’s food and beverage expenses can be confusing. In general, 50% of the expenses are deductible unless an exception applies that permits 100% of the expenses to be deductible. However, if the food and beverage expense is inextricably bundled with an entertainment expense, it may be nondeductible.

Below are typical business food and beverage expenses and the amount the business can deduct. The examples (and the result) come directly from Treasury Regulations.

The examples (and the result) come directly from Treasury Regulations.

Aaron takes his client Bubba out to lunch and spends $60. How much of the $60 is deductible?

50% of the food and beverage expenses are deductible, totaling $30.

Employee Lunch
Carla takes her employee Derek out to lunch and spends $70. How much of the $70 is deductible?

50% of the food and beverage expenses are deductible, totaling $35.

The examples (and the result) come directly from Treasury Regulations.

Eric holds a business meeting at a hotel, during which food and beverages are provided to attendees. He spends $250 on facility charges and $600 on food and beverages. How much of the $850 is deductible?

The total deductible expenses are $250 for the facility charges and $300 for 50% of the food and beverage expenses, totaling $550. 

The examples (and the result) come directly from Treasury Regulations.

Adrienne invited Barbara, a major vendor of her business, to a baseball game to discuss a proposed business deal. Adrienne spent $100 on tickets and $50 on food and beverages during the game. How much of the $150 is deductible?

The ticket cost is a nondeductible entertainment expense, and 50% of the food and beverage expense is deductible, totaling $25.

The examples (and the result) come directly from Treasury Regulations.

Carlita invited Daniel, a significant business customer, to a basketball game to discuss a new business line she is offering. She purchased suite tickets to the game, where they can access food and beverages. The cost of the suite tickets was $500, including the food and beverages, and the amount allocated to the food and beverages was not separately stated. How much of the $500 is deductible?

The entire ticket cost is a nondeductible entertainment expense because there is no separate statement of the food and beverage costs.

The examples (and the result) come directly from Treasury Regulations.

Frances, a sole proprietor, and her spouse, Susan, travel from New York to Boston to attend a series of business meetings related to her business. Susan is not an employee of the business and does not travel to Boston for business purposes.

While in Boston, Frances and Susan go out to dinner. They spend $200 on food and beverages, with the costs equally divided. How much of the $200 is deductible?

Susan’s meal expenses are nondeductible, while 50% of Frances’s meal expenses are deductible, totaling $50.

The examples (and the result) come directly from Treasury Regulations.

Greenglass provides food and beverages to its employees without charge at a company cafeteria on its premises, and the food and beverages are not a de minimis fringe under §132(e). Greenglass treats the full fair market value of the food and beverage expenses as wage compensation to the employees as determined under Treas. Reg. §1.61-21(j). How much of the food and beverage expenses are deductible?

Greenglass can deduct 100% of the food and beverage expenses because their value was taxable compensation to the employees.

The examples (and the result) come directly from Treasury Regulations.

Luis invites all his employees to a holiday party in a hotel ballroom. The party costs $2,500 and includes a buffet dinner and an open bar. How much of the $2,500 is deductible?

Since the holiday party is a recreational, social, or similar activity primarily for the benefit of non-highly compensated employees, both the facility costs and the food and beverage expenses are 100% deductible.

The examples (and the result) come directly from Treasury Regulations.

Modern Furniture provides employees with free coffee, soda, bottled water, chips, donuts, and other snacks in a break room. It spends $2,200 per year on these snacks. How much of the $2,200 is deductible?

The break room is not a recreational, social, or similar activity primarily for the employees' benefit, so Modern Furniture may deduct only 50% of the expenses for food and beverages provided in the break room, or $1,100.

The examples (and the result) come directly from Treasury Regulations.

Quest is an automobile service center that provides refreshments in its waiting area. Employees and customers consume the refreshments, and Quest reasonably estimates that customers consume more than 50% of them. Quest spends $2,800 per year on these refreshments. How much of the $2,800 is deductible?

Since customers primarily consume the food and beverages, Quest may deduct 100% of the food and beverage expenses, totaling $2,800.

The examples (and the result) come directly from Treasury Regulations.

Triad is a restaurant that provides food and beverages to its food service employees before, during, and after their shifts for no consideration on the restaurant premises. What percentage of these food and beverage expenses is deductible by Triad? Do the employees recognize income from the receipt of the food and beverages?

The food and beverage expense is 100% deductible to Triad since the restaurant sells food and beverages to customers in a bona fide transaction for an adequate and full consideration in money or money's worth; this includes restaurant or catering business employees.

The value of the food and beverages is also excluded from their income. A meal furnished to a restaurant employee or other food service employee for each meal period in which the employee works will be regarded as furnished for a substantial noncompensatory business reason of the employer, irrespective of whether the meal is furnished during, immediately before, or immediately after the working hours of the employee.

Generally, we recommend keeping basic personal tax records for three years. But there are many exceptions to that general rule.

For example, if you have invested in real estate (including your primary residence), you should keep records of the purchase and all improvements for at least three years after you dispose of the property.

Records for your mutual funds, stock, and IRA investments should be kept as long as you have the investment and then several years after.

And if you have a business, you should keep payroll tax records for a minimum of four years after the payroll tax form is filed.

The point is:

Don't clear out your tax records whenever you get the urge to declutter. Consider keeping well-organized and legible digital records so that you don't feel overwhelmed by a box of receipts and paperwork in the attic. When in doubt about a specific item, hold onto it until you are able to consult with us or someone else you trust.

Each state has its own contact information.

Download this helpful contact sheet to find the right information for you and your state:
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Travel expenses are allowed while you are away from home overnight for business purposes. You can deduct all your travel expenses if your trip was entirely business related. It is not necessary that you work every day while you are away from home. 

To be deductible, the travel expense must be ordinary and necessary. You must keep records of all expenses in a log, notebook, or other form of written record.

Example: 

A trip began on a Tuesday and ended 9 days later, on the following Thursday. You may not have performed work on the Saturday and Sunday that fell between your two work weeks. This is reasonable since the nature of the work may not have permitted you to work on the weekend.

To be deductible, the travel expense must be ordinary and necessary. You must keep records of all expenses in a log, notebook, or other form of written record. 

Some examples of deductible expenses are:

• Transportation (plane, train, bus, or car)
• Taxis (includes travel to and from the airport)
• Baggage
• Lodging
• Meals (50% deduction limit)
• Tips related to any of the above expenses

To be deductible, the travel expense must be ordinary and necessary. You must keep records of all expenses in a log, notebook, or other form of written record. 

Some examples of non-deductible expenses are:

• Travel that is primarily personal in nature
• Travel expenses for a spouse (unless there is a bona fide business purpose for the spouse to be there or the spouse is an employee)

If more days are spent at a location for personal purposes than for business purposes, none of the transportation of the expenses would be deductible. 

Example: 

John takes a trip that includes 5 business days and 2 personal days. The entire $500 airfare expense is deductible. However, if the trip included 5 personal days and 2 business days, no portion of the airfare would be deductible. Any hotels or meals for the working days would be deductible. 

NOTE: 

Round-trip transportation to a business destination within the United States is “all or nothing.” If the trip is primarily for business, it is 100% deductible. If the trip is primarily personal, none of it is deductible.
However, round-trip transportation to a business destination outside of the United States can be allocated between business and personal.

You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. You cannot deduct the travel expenses for your family.

If the convention is for investment, political, social, or other purposes unrelated to your trade or business, the travel expenses are not deductible.

Instead of meticulously tracking every meal and incidental expense, self-employed individuals can use the Federal Per Diem Rates as a reasonable estimate for their deductible meal and incidental expenses (M&IE). 

For example, the base M&IE rate for 2024 is $59 for each working day. A 75% deduction is allowed on the first and last day of travel. Certain cities may be allowed a higher daily rate based on its cost of living. 

For example, the city of Los Angeles has an M&IE rate of $74 for 2024. 

See the link below to research other cities:
Click here 

There are two factors to consider when taking automobile expenses as follows: 

• Business Percentage: The matter of business miles driven versus personal miles driven is essential to track because this is what determines the amount that can be expended through the business.
• Depreciation Expense: The amount of allowable depreciation expense taken varies on several factors of the vehicle. 

Regarding the 1st factor, the tax code allows auto expenses to be taken in one of two methods. One method is by taking actual expenses incurred. The other method is by taking the standard mileage rate.
In both methods, the calculations needed to come up with the total allowable expenses require that both business and personal mileage is kept track of. The ONLY exception to this is if your vehicle is used 100% for business purposes. Then you can take 100% of all expenses incurred. 

Here is a simple explanation of both methods:

• Actual Expenses: Track all costs associated with the vehicle including gas, oil, repairs, tires, insurance, registration fees, and deprecation (deprecation is explained in the second factor). Calculate Business Use Percentage by determining the percentage of total miles driven for business purposes. Then, multiply the total expenses by the business use percentage to get your deductible amount.
• Standard mileage rate: Take the IRS standard mileage rate for the year, found here Standard mileage rates | Internal Revenue Service, and multiple that by the number of business miles driven. 

If you choose the Actual Expense method, then you can take depreciation expense.
This brings us to our second factor of allowable depreciation expense (see below examples).

Here are examples of how depreciation expense is calculated based on vehicle types. 

1. Buy a New or Used SUV, Crossover Vehicle, or Van
Let’s say that on or before December 31, 2024, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four benefits:
1. Elect bonus depreciation of 60 percent
2. Elect Section 179 expensing of up to $30,500.
3. Elect MACRS depreciation using the five-year table.
4. Avoid the luxury limits that cap vehicle depreciation deductions.

Example. You buy a $100,000 heavy SUV, which you will use 90 percent for business use. Your write-off will look like this:
· $30,500 in Section 179 expensing
· $35,700 in bonus depreciation
· $4,760 in 20 percent MACRS depreciation, or $1,190 if the mid-quarter convention applies because you placed more than 40 percent of your MACRS assets in service in the final quarter of the year
So the 2024 write-off on this $90,000 (90 percent business use) SUV can be as high as $70,960 ($30,500 + $35,700 + $4,760).

2. Buy a New or Used Pickup
If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2024, then this newly purchased vehicle gives you four big benefits:
1. Bonus depreciation of up to 60 percent
2. Section 179 expensing of up to $1,220,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions
To qualify for full Section 179 expensing, the pickup truck must have
· a GVWR of more than 6,000 pounds, and
· a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Example. You pay $55,000 for a qualifying pickup truck that you use 91 percent for business. You can use Section 179 to write off your entire business cost of $50,050 ($55,000 x 91 percent).
Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, the tax code classifies it as an SUV. That’s not bad. The vehicle is still eligible for expensing of up to the $30,500 SUV expensing limit and 60 percent bonus depreciation. (See the example above for how the SUV treatment works.)

3. Buy an Electric Vehicle
If you purchase an all-electric vehicle or a plug-in hybrid electric vehicle, you might qualify for a tax credit of up to $7,500. You take the credit first, and then follow the rules that apply to the vehicle you purchased.

Either the option of leasing or financing a car has relative advantages. 

Leases are glorified rentals, and they will usually involve more rigid terms of use, but the benefit is that your monthly cost is typically lower. Financing/purchasing a car gives you the most flexibility and allows you to build equity in the car over time.

Consider the following factors with your personal circumstances in mind:

• How often will you use the car and how many miles do you think you will drive each year?
• If you aren’t sure, think you will drive more than 12,000 miles per year, or if you just want flexibility in this area, financing is the way to go.
• Do you want to make any modifications to the car, or will you be able to find something on the lot that will make you happy?
• If you want to spiff up the car with after-market modifications, financing is your best bet.
• Do you prefer to always have a newer car, paying minimal maintenance costs and lower monthly payments

If so, leasing can accomplish that for you.