Q: I started a new business in 2013. Although it’s been very successful, grossing over $100,000 in 2014, I incurred an extraordinary amount of business travel, meals, and entertainment expenses (almost 40 percent of my income). I have receipts for everything, but I’m afraid that this will be a red flag for a possible audit, and I certainly don’t want to get on the wrong side of the IRS right from the start.
— T. H., via email
A: Congratulations on the successful launching of your new business! We agree that 40 percent does seem to be a particularly high ratio of travel and entertainment expenses, but on the other hand, there’s no “maximum” allowable for a venture like yours. If your expenses were incurred in the normal scope of your business, and the expenses were all related to the business (calling on potential clients, traveling to related conferences or training, interviewing suppliers, investigating locations, discussing business over a meal), you shouldn’t have any problems, especially since you have all your receipts. Just keep in mind the three D’s: dine, discuss, deduct. Remember that business meals and business entertainment expenses are only 50 percent deductible. You might be interested in knowing that the reason Congress instituted the 50 percent rule was to offset the fact that there was a “significant element of personal pleasure” involved in the meal or entertainment. We’re not sure where Congress has been dining lately, but we’ve been to a few restaurants where the element of personal pleasure is a lot less than 50 percent. Nevertheless, rules are rules.
Taxes on pension distribution
Q: In 2013, I retired and began receiving a pension with federal and state income taxes withheld. In 2014, due to my age, a minimum required distribution occurred. Somehow, no state income taxes were withheld and now I owe Indiana a lot of money plus a penalty for underpayment of taxes. On top of that, my itemized deductions also were impacted. Please address this situation in your column.
— P.M., via email
A: Many pension distributions are included in income, and readers of Tax Talk have been advised to set aside or have the pension company deduct federal and state income taxes. As you found out, the minimum required distribution that kicks in when a taxpayer reaches that milestone age of 70½ can generate costly surprises in the form of state income taxes that create a “Bermuda Triangle” for unwary taxpayers — state income taxes are owed; a penalty for underpayment of taxes is levied; and the itemized deduction help on the federal return has to (drum roll for fans of the Chicago Cubs) “wait’ll next year!”
So we’ll write it again. When any type of distribution is made from a pension plan, make sure the federal and state income taxes are handled, if possible, by the firm paying the pension. Be alert when a MRD occurs, since more often than not the MRD is paid only once per year and it’s easy to pocket/deposit the money and forget that the IRS and the state want or will eventually demand their share.
Tax Talk is written by Ken Milani, professor of accountancy at the University of Notre Dame, and Claude Renshaw, emeritus professor of business administration at Saint Mary’s College. It will appear in the Tribune’s Business section on Sundays until April 12. Send your questions via email to email@example.com or firstname.lastname@example.org, or snail mail to The Tribune at 225 W. Colfax Ave., South Bend, 46626. Questions cannot be answered personally, but Tax Talk will try to reply to as many as possible in the column.
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