Changes to 1040 | TaxConnections

27 Mar 2013

Fifteen Things To Watch Out For On Form 1040 Part III

A Thomson Reuters tax analyst explains what’s new, changed, or no longer available on the 2012 individual income tax return. 13 Mar 2013

Shared in Parts I, II and III.

Example 3.(i) Employer is a professional sports team. Employer requires its employees (players and coaches) to stay at a local hotel the night before a home game to conduct last minute training and ensure the physical preparedness of the players. Employer pays the lodging expenses directly to the hotel and does not treat the value as compensation to the employees.

(ii) Employer has a noncompensatory business purpose for paying the lodging expenses. Employer is not paying the lodging expenses primarily to provide a social or personal benefit to the employees. If the employees had paid for their own lodging, the expenses would have been deductible by the employees under section 162(a) as ordinary and necessary business expenses. Therefore, the value of the lodging is excluded from the employees’ income as a working condition fringe.

(iii) Employer may deduct the expenses for lodging the players and coaches at the hotel as ordinary and necessary business expenses under section 162(a).

Example 4. (i) Employer hires Employee, who currently resides 500 miles from Employer’s business premises. Employer pays for temporary lodging for Employee near Employer’s business premises while Employee searches for a residence.

(ii) Employer is paying the temporary lodging expense primarily to provide a personal benefit to Employee by providing housing while Employee searches for a residence. Employer incurs the expense only as additional compensation and not for a noncompensatory business purpose. If Employee paid the temporary lodging expense, the expense would not be an ordinary and necessary employee business expense under section 162(a) because the lodging primarily provides a personal benefit to Employee. Therefore, the value of the lodging is includible in Employee’s gross income as additional compensation.

(iii) Employer may deduct the lodging expenses as ordinary and necessary business expenses under section 162(a) and §1.162-25T.

Example 5. (i) Employee normally travels two hours each way between her home and her office. Employee is working on a project that requires Employee to work late hours. In order to maximize Employee’s availability to work on the project, Employer provides Employee with lodging at a hotel near the office.

(ii) Employer is paying the temporary lodging expense primarily to provide a personal benefit to Employee by relieving her of the daily commute to her residence. Employer incurs the expense only as additional compensation and not for a noncompensatory business purpose. If Employee paid the temporary lodging expense, the expense would not be an ordinary and necessary business expense under section 162(a) because the lodging primarily provides a personal benefit to Employee. Therefore, the value of the lodging is includible in Employee’s gross income as additional compensation.

(iii) Employer may deduct the lodging expenses as ordinary and necessary business expenses under section 162(a) and §1.162-25T.

Example 6. (i) Employer requires an employee to be “on duty” each night to respond quickly to emergencies that may occur outside of normal working hours. Employees who work daytime hours each serve a “duty shift” once each month in addition to their normal work schedule. Emergencies that require the duty shift employee to respond occur regularly. Employer has no sleeping facilities on its business premises and pays for a hotel room nearby where the duty shift employee stays until called to respond to an emergency.

(ii) Employer has a noncompensatory business purpose for paying the lodging expenses. Employer is not providing the lodging to duty shift employees primarily to provide a social or personal benefit to the employees. If the employees had paid for their lodging, the expenses would have been deductible by the employees under section 162(a) as ordinary and necessary business expenses. Therefore, the value of the lodging is excluded from the employees’ income as a working condition fringe.

(iii) Employer may deduct the lodging expenses as ordinary and necessary business expenses under section 162(a).

(d) Effective/applicability date. This section applies to expenses paid or incurred on or after the date these regulations are published as final regulations in the Federal Register. However, until these proposed regulations are published as final regulations in the Federal Register, taxpayers may apply the proposed regulations to local lodging expenses that are paid or incurred in taxable years for which the period of limitation on credit or refund under section 6511 has not expired.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.

Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)

Written by Harold Goedde | Posted in Federal • Individual • North America • Tax Policy

26 Mar 2013

Fifteen Things To Watch Out For On Form 1040 Part II

A Thomson Reuters tax analyst explains what’s new, changed, or no longer available on the 2012 individual income tax return. 13 Mar 2013

Shared in Parts I, II and III.

Tax breaks that no longer apply for 2012:

First-time homebuyer credit was eliminated in 2011, except for servicemen and certain other federal employees who had lived abroad in earlier years. For 2012, it has been eliminated for everyone.

The District of Columbia first-time homebuyer credit cannot be claimed for homes bought after 2011.

Explanation of Provisions

These regulations propose to amend the regulations under sections 162 and 262. The proposed regulations under section 162 provide that expenses paid or incurred for local lodging may be deductible as ordinary and necessary expenses of a taxpayer’s trade or business, including the trade or business of being an employee. The proposed regulations provide a safe harbor for certain local lodging at a business meeting, conference, or other activity or function. Other local lodging expenses may be deductible as business expenses depending on the facts and circumstances.

The proposed regulations under section 262 provide that a taxpayer’s costs incurred for local lodging are personal expenses unless the expenses are deductible under section 162. Comments are specifically requested on whether the section 262 regulations should be amended to provide that local lodging expenses are not personal expenses if they are deductible under section 212.

The proposed regulations also amend the regulations under section 262 to remove references to section 217 that are obsolete. Section 217 was amended by the Revenue Reconciliation Act of 1993, Public Law 103-66 (107 Stat. 417). Under the amendments, lodging when not traveling away from home and meals are not deductible as moving expenses.

Par. 2. Section 1.162-31 is added to read as follows:

§1.162-31 Expenses paid or incurred for lodging when not traveling away from home.

(a) In general. Expenses paid or incurred for lodging when not traveling away from home (local lodging) generally are personal, living, or family expenses that are nondeductible under section 262(a). Under certain circumstances, however, expenses for local lodging may be deductible under section 162(a) as ordinary and necessary expenses paid or incurred in connection with carrying on a taxpayer’s trade or business, including a trade or business as an employee. Whether local lodging expenses are paid or incurred in carrying on a taxpayer’s trade or business is determined under all the facts and circumstances. One factor is whether the taxpayer incurs the expense because of a bona fide condition or requirement of employment imposed by the taxpayer’s employer. Expenses paid or incurred for local lodging that is lavish or extravagant under the circumstances or that primarily provides an individual with a social or personal benefit are not incurred in carrying on a taxpayer’s trade or business.

(b) Safe harbor for local lodging at business meetings and conferences. An individual’s expenses for local lodging will be treated as ordinary and necessary business expenses if—

(1) The lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function;

(2) The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter;

(3) If the individual is an employee, the employee’s employer requires the employee to remain at the activity or function overnight; and

(4) The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.

(c) Examples. The provisions of this section are illustrated by the following examples. In each example the employer and the employees meet all other requirements (such as substantiation) for deductibility of the expense and for exclusion from income as a working condition fringe or payment under an accountable plan.

Example 1. (i) Employer conducts training for its employees at a hotel near employer’s main office. The training is directly connected with employer’s trade or business. Some employees attending the training are traveling away from home and some employees are not traveling away from home. Employer requires all employees attending the training to remain at the hotel overnight for the bona fide purpose of facilitating the training. Employer pays the costs of the lodging at the hotel directly to the hotel and does not treat the value as compensation to the employees.

(ii) Employer has a noncompensatory business purpose for paying the lodging expenses. Employer is not paying the expenses primarily to provide a social or personal benefit to the employees. If the employees who are not traveling away from home had paid for their own lodging, the expenses would have been deductible under section 162(a) as ordinary and necessary business expenses of the employees. Therefore, the value of the lodging is excluded from the employees’ income as a working condition fringe under section 132(a) and (d).

(iii) Employer may deduct the lodging expenses, including lodging for employees who are not traveling away from home, as ordinary and necessary business expenses under section 162(a).

Example 2. (i) The facts are the same as in Example 1, except that the employees pay the cost of their lodging at the hotel directly to the hotel, Employer reimburses the employees for the cost of the lodging, and Employer does not treat the reimbursement as compensation to the employees.

(ii) Employer is reimbursing the lodging expenses for a noncompensatory business purpose and not primarily to provide a social or personal benefit to the employees. The employees incur the expenses in performing services for the employer. If employer had not reimbursed the employees who are not traveling away from home for the cost of the lodging, the expenses would have been deductible under section 162(a) as ordinary and necessary business expenses of the employees. Therefore, the reimbursements to the employees are made under an accountable plan and are excluded from the employees’ gross income.

(iii) Employer may deduct the lodging expense reimbursements, including reimbursements for employees who are not traveling away from home, as ordinary and necessary business expenses under section 162(a).

Written by Harold Goedde | Posted in Federal • Individual • North America

25 Mar 2013

Fifteen Things To Watch Out For On Form 1040 Part I

A Thomson Reuters tax analyst explains what’s new, changed, or no longer available on the 2012 individual income tax return. 13 Mar 2013

Shared in Parts I, II and III.

While it looked as if the U.S. Congress would go over the fiscal cliff and allow many tax provisions to expire, in the end, Congress extended most of the expiring provisions. This means that 2012 return preparation will not be as difficult as it could have been. “But that doesn’t mean you can let your guard down on the Form 1040,” says Jeffrey Pretsfelder, CPA/Esq., a senior tax analyst at Thomson Reuters. “Like every other year, you must be on top of new or changed provisions on the 2012 form 1040 and provisions that were in effect last year but are no longer in effect this year.”

Here are the top new or changed items on the 2012 Form 1040:

New items and changes that apply whether or not the individual is a business owner:

2010 Roth IRAs and pension distributions. In 2010, a taxpayer could have rolled over monies from a regular Individual Retirement Account (IRA) to a Roth IRA, converted a regular IRA to a Roth IRA, or taken similar steps with a “designated Roth account,” and deferred the taxes that were due on the rollover, conversion, etc. Part of that deferred tax is due as part of 2012 tax.

Transfers from IRA to charity. The provision that excludes up to $100,000 of qualified charitable distributions (distributions to a charity from an IRA if the taxpayer is at least 70 ½ years old and meets other requirements) has been extended. If the taxpayer elects, a qualified charitable distribution made in January 2013 will be treated as made in 2012.

Local lodging expenses may be deductible.

New rules permit businesses and employees to deduct local lodging expenses under limited circumstances.

New limits on first-year write-offs for vehicles. While a part of the cost of a vehicle may be deductible in many circumstances, there are limits. First-year limits for vehicles first placed in service in 2012 are $11,160 for autos and $11,360 for light trucks or vans (if bonus depreciation rules apply) and $3,160 and $3,360, respectively (if bonus depreciation rules do not apply).

Adoption credit less favorable. “The maximum credit you can take for adopting a child decreased from $13,360 per child for 2011 to $12,650 per child for 2012, notes Pretsfelder. “And, if it is no longer refundable because your credit exceeds your 2012 tax, the credit will reduce your tax to zero, but the excess amount is not refunded to you (although you may be able to carry it forward to 2013).”

Child tax credit form changes. New Form 1040, Schedule 8812 replaces Form 8812 for computing the refundable child tax credit. The schedule also contains a new section which must be completed if claiming either the refundable or the nonrefundable credit for one or more children who have individual taxpayer identification numbers (ITINs) instead of social security numbers.

Education credit form changes. Form 8863, Education Credits, has a significantly different format for 2012. New Part III asks for additional information about each student for whom the taxpayer is claiming an education credit. And a separate Part III must be completed for each student for whom the taxpayer is claiming a credit.

Inflation adjustments. As is the case every year, there are inflation-related adjustments for 2012. For example, the standard deduction, the deduction for each exemption, and the amount a taxpayer can earn and still get an IRA deduction, all increased based on inflation.

Tax payment voucher is mandatory. In past years, filing of Form 1040-V, Payment Voucher, was voluntary for paper (versus e-filed) returns where tax was

New items and changes that apply to business owners:

Decrease in special depreciation allowance. Businesses that acquired qualified property in 2011 could, in many cases, claim a 2011 special depreciation allowance equal to 100 percent of the cost of the property. With limited exceptions, a business that acquired qualified property in 2012 can only take a special depreciation allowance equal to 50 percent of the cost of the property.

Self-employment tax’s reduced rate. The self-employment tax rate is 13.3 percent. This is the same rate as applied to 2011, but it is lower than previous year rates.

Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)