Taxing Situations Record Keeping, Reimbursements, And Deductibility Of Certain Business Expenses

Each year around this time, questions arise from physicians looking for additional tax deductions, including vehicle expenses, meals, entertainment, and travel. While there are some tax advantages to be gained if you follow the rules, there appears to be some misconception about the magnitude of write-offs, particularly in the case of vehicle expenses.

 

Transportation and Car Expenses

Accountants generally recommend that medical practices not purchase or lease vehicles for its doctors, unless the doctors keep detailed logs that substantiate that each vehicle is used at least 51{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} for business, consistently, every year. Most doctors can’t show this. If you can substantiate 51{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} or more business use in one year, but not in a later year, there can be some serious tax consequences. Therefore, in lieu of tracking actual expenses, we often recommend doctors submit detailed monthly reports of business miles and get reimbursed from the practice at the IRS allowable rate per mile, which is currently 37.5 cents.

Required documentation includes keeping an account book, diary, log, expense statement, or similar record prepared at the time of the expenditure or vehicle use to show when the auto was used for business. Also required are the total business miles and the total miles driven during the year. Business mileage does not include commuting from home to the doctor’s office and back home each day. A log maintained on a weekly basis is considered an adequate record made at or near the time of the expense or vehicle use. Detailed records as to business travel are keys to full allowance — inadequate proof or absence of records usually leads to a partial, or even full disallowance.

Corporate Owned or Leased Vehicles

A corporation may pay auto expenses for corporate owned or leased vehicles which are used personally and deduct these expenses on the corporate books as long as the employee recognizes income to the extent of the non-business portion of these expenses. Deductible expenses include lease payments, interest, taxes, gasoline, oil, tires, repairs, insurance, depreciation, parking fees and tolls, licenses, and garage rent incurred for cars used in a trade or business.

Business usage is established through odometer readings. The employee recognizes income through what is called a W-2 ‘add-on.’ The employer must calculate the amount to be added to the individual’s W-2 based on a calculation that multiplies the personal- use percentage by the annual lease value (as determined by Internal Revenue Service tables) and adding an amount for fuel costs (if the employer pays the fuel charges) by multiplying the number of personal miles by 5 1/2 cents per mile. This amount is subject to payroll taxes.

One Note: Depreciation expense on luxury automobiles (most vehicles costing $16,000 or more) is capped at the following amounts:

Year 1 3,060
Year 2 4,900
Year 3 2,950
Year 4 & thereafter 1,775

Trucks and vans (including SUV’s) are provided their own set of caps which is slightly higher than the above limits.

One exception to these limits is vehicles with a gross vehicle weight rating (GVWR) of more than 6,000 pounds. (The GVWR is typicaly printed on the inside of the driver’s door.) Consequently, some of the larger sport utility vehicles are not subject to the depreciation caps. For example, if Owner A purchases a BMW costing $50,000 and Owner B purchases a Hummer costing $50,000 the allowable depreciation deductions are as follows:

BMW Hummer

Year 1 $10,710 $40,000 Year 2 4,900 4,000
Year 3 2,950 2,400
Year 4 1,775 1,440
Year 5 1,775 1,440
Year 6 1,775 720
Year 7
& thereafter 1,775 0

* Note: For vehicles with GVWR of more than 6,000 pounds placed in service prior to October 22, 2004, the amount of cost that may be expensed under Code Section 179 is up to $100,000

The above depreciation deductions assume 100{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} business use. If business use is less than 100{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}, the deduction allowed is reduced by the non-business percentage.

Personally Owned or Leased Vehicles:

Reimbursements to employees for the business portion of vehicle expenses are deductible by the corporation if there is an accountable plan. These reimbursements are not included in income of the employee. The reimbursements can be for actual expenses paid (which include lease payments, interest, taxes, gasoline, oil, tires, repairs, insurance, depreciation, parking fees and tolls, licenses, and garage rent incurred for cars used in a trade or business) or they can be based on the standard mileage rate where the corporation pays the employee an amount equal to the number of business miles multiplied by the standard rate and records this as automobile reimbursement expense.

An accountable plan requires the employee to submit all actual expenses (this includes all receipts for gas, insurance, repairs, etc., as outlined above) to the employer plus all mileage records, which substantiate the business use percentage.

Business Meals and Entertainment

It is perfectly legitimate for a business to have occasional business lunches (or dinners) with business associates and deduct half the cost, as long as you actually discuss business at the table, or the meal directly follows or precedes a substantial and bona fide business discussion. The term ‘business associates’ includes customers, clients, suppliers, employees, agents, partners, and even professional advisors. However, where the meals are shared too frequently, and where the parties in effect share the expenses (“you buy lunch today and I’ll treat tomorrow”), the fact that business is discussed at the table will not turn half the cost of the meals into a deduction.

These expenses are generally de-ductible at a rate of 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}. The 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} limit applies to food, beverages, taxes, tips, cover charges, concerts, shows, golf, fishing, hunting or other outings, and sporting and social events. To be deductible, the expenses must be documented and be directly related to or associated with the business. Documentation of business purpose includes recording the person entertained, the amount spent, the time and location, the business relationship, and notes as to the business discussion. Receipts must be retained for all deductions.

Certain items classified as meals and entertainment are excludable from the 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} rule, including on-premise meals provided to employees for the convenience of the employer, company dining rooms and cafeterias, and company-paid social or recreational activities that are primarily for the benefit of employees (holiday parties and summer outings). Also included are cab fares, parking, tolls and auto expenses incurred in the course of the entertainment and memberships and dues for professional organizations such as trade associations and chambers of commerce. Social memberships and country club dues paid on behalf of an employee may not be deducted, unless the employee on whose behalf they were paid recognizes the amount as income, subject to payroll taxes.

Travel:

Travel expenses are fully deductible when your business or job requires you to travel away from home. Expenses include air, train, taxi fares, automobile maintenance and operation expenses, hotel bills, charges for telephone calls, laundry and dry cleaning costs. No deduction is allowed for travel expenses paid for a spouse, dependent or other individual accompanying a person on business travel, unless the spouse or other person is an employee of the party paying the expenses, his or her travel has a bona fide business purpose and, the expenses are otherwise deductible. Travel documentation should include destination, people met with, and reason for meeting.

Lisa A. Patenaude, CPA, is a manager with the Health Care Services Division of Longmeadow-based Meyers Brothers, P.C., Certified Public Accountants and Business Consultants; (413) 567-6101