IRS DECREASES STANDARD AUTO MILEAGE REIMBURSEMENT RATES EFFECTIVE 1/1/10

The IRS has announced that effective January 1, 2010, the standard mileage rate for BUSINESS usage decreases from the current $0.55 to $0.50 per mile. Effective on the same date, the automobile reimbursement rate for deductible MEDICAL and MOVING expenses decreases from $0.24 to $0.165 per mile. However, there is no change in the reimbursement rate applicable to mileage incurred for CHARITABLE purposes. That remains at $0.140 per mile.

Seeking to reduce record keeping, the IRS has allowed taxpayers who use no more than four vehicles at the same time for business purposes, to use the standard mileage rate instead of requiring them to document the actual expenses for each vehicle.

Any of the standard automobile mileage rates are a “short cut” authorized by the IRS when taxpayers substantiate the cost of automobile usage. The flat mileage rate does not cover parking or tolls. The IRS considers that the substantiation and adequate accounting requirements for employer-reimbursed BUSINESS expenses, for example, are satisfied by employers and employees who merely use the $0.50 a mile rate (effective January 1, 2010). It is not necessary to provide sales receipts or other documentation, as long as the time, place, business purpose of the expense, and the number of miles traveled, are evident.

Fortunately, there is a simple method for travel expenses for employees and business owners that puts strict limits on your travel expenses, encourages employees to be frugal, and involves a bare minimum of tax complications. In a nutshell, the plan involves paying employees a flat daily or per-diem rate for meals, incidental expenses and lodging costs while they are out-of-town on company business.

If employees pay more for their meals and lodging than the per-diem rate, they must personally pay for the difference; if they pay less than the per-diem, they pocket the difference. Along with costs, recordkeeping is cut, too, if the per-diem rate does not exceed the per-diem rate that the federal government pays its employees traveling to the same destination as your employees. All employees need to do to substantiate the travel expenses for tax purposes, and keep the per-diem payroll and income tax free, is to submit a written log of the time, place, and business purpose of the travel. Receipts and to-the-penny recordkeeping of actual travel expenses are not required. The company may deduct 100 percent of the lodging portion of the per-diem and 50 percent of the meals and entertainment expense portion.

To make the per-diem program work, you need a list of the federal government's per-diem reimbursement schedule, which varies year to year as well as locality to locality. We'll be glad to make this schedule available to you, as well as full details on this trouble-free reimbursement plan.

A more simple version of the per-diem travel reimbursement program is available. Regardless of the actual government reimbursement rate for a particular locality within the lower 48 states, your company can reimburse travel to "low cost" travel destinations at one rate and use a higher rate for all "high cost" travel destinations. These so-called "high-low" rates are changed periodically; for the period beginning October 1, 2008, the regular per-diem rate is $158 and for "high cost" areas, it is $256 a day. New rates will apply after October 1, 2009.

The IRS has issued recent guidance on electronic storage of records.

Keep records of all of your gross receipts. They are needed so that you can properly report gross income from the business activity and self-employment taxes owed on your net earnings. Self-employment taxes are equivalent to social security taxes paid by both an employee and the employer.

You must keep proper track of all expenses that are potentially deductible. To this end, keep track of compensation paid to employees and independent contractors, repairs, rents, taxes and licenses, bank charges, business insurance, utilities, postage and shipping charges, and travel and entertainment expenses, among other items.

On the subject of travel and entertainment expenses, there is some good news. Documentary evidence of business travel and entertainment expenses is not necessary for expenditures under $75.

Keep permanent records of assets that you depreciate. Keep receipts of how much you paid for the property and records showing when you placed assets in service or changed them from personal to business use. Also, keep records of capital improvements.

If you use your car in business, whether you base your deductions on actual expenses or you use an IRS standard mileage rate, there are a number of records that you must keep. They include records of business miles and total miles, records showing when you started using your car in business and its basis, records of actual expenses if you do not use the standard mileage rate, and a number of other items regardless of which alternative you use.

Similarly, very specific and detailed recordkeeping is required when you use a portion of your home in your business. Records must show the part of the home that is used for business and that such use is exclusive. Records also are needed to show the depreciation and expenses for the business part of the home.

The IRS has issued a revenue procedure applicable to taxpayers who maintain books and records using an electronic storage system. The IRS defines an electronic storage system as a system that prepares, records, transfers, indexes, stores, retrieves and reproduces records by either imaging hardcopy records or transfers computerized books and records to an electronic storage medium. The IRS has issued guidelines to insure the integrity of the system and governing controls, inspections and quality assurance. Although the taxpayer may destroy paper records if it has a system within the IRS's guidelines.

Dear Client:

The IRS has issued the depreciation deduction limitations and lease inclusion amounts for vehicles purchased or leased in 2009. As you may know, there are two basic methods for computing vehicle expenses, the standard mileage rate (55 cents per mile for 2009) or the actual expense method. If you use the standard mileage rate method you may not depreciate your car or deduct lease payments. Under either method, if your vehicle is used for personal as well as business purposes, only expenses or mileage attributable to the business use are deductible.

If you use the actual cost method, you may take deductions for depreciation or lease payments, registration fees, licenses, gas, insurance, oil, repairs, garage rent, tolls, tires and parking fees.

Determining whether you should use the standard mileage rate or actual expense method, or whether to lease or purchase a vehicle may depend in part on the depreciation deduction limitations and lease inclusion amounts provided by the IRS. In addition, there are tax credits available for energy-efficient vehicles that should be considered when making these decisions.

Regardless of the option that offers the larger tax benefits, you should remember that the goal is to produce the lowest overall transportation costs.

For information regarding substantiating your vehicle deduction, please see blog entry "Recordkeeping"

Doug

Client,

First, do not worry about the limitations, IRS audit samplings or staying under government radar.  If you make donations, properly document them, and take the deduction that you are entitled to take..

For larger non-cash donations, such as your, gather and keep additional documentation so that if it is ever questioned, you can more than support your deduction beyond the documents that are given to you from the donee.

Additional documentation would be original receipts, photographs of items that were donated, written pricing comparisons in the newspaper, craigslist, etc....  This combined information is unquestionable prevailing substantiation during an IRS audit.

I hope that this helps

Doug