THE POCKET PROTECTOR
Jared G. Johnson CPA, PLLC                 336.790.5245                                   June 2009

                                                                                Timing Mistakes That Could Cost
 Summer Travel Tax Deductions                                                   You Thousands of Dollars
 Hot Summer Days, Cool Ways to Save $$$
                                                                                Sometimes we need to talk here about costly taxpayer
                                                                                mistakes that could have been avoided with some
 As the summer travel season is almost upon us, a portion of                    advance professional consultation. Like the recent case of
 your summer travel may be tax-deductible. If your travel is                    a securities firm owner doing business as an S
 primarily for business or for career-related education, then a                 corporation, both reporting on the calendar year. An S
 portion of the trip may be tax-deductible. As long as most of                  corporation's income is directly taxable to its owners, and
 your travel days are for business purposes, you can deduct the                 its losses pass through to owners for deduction on their
 cost of travel (airfare, trains, car), hotel, parking, taxi service,           tax returns. S corporations are like partnerships in this
 meals, etc. - Travel expenses.                                                 respect, and the problem we'll describe arises with
                                                                                partnerships, too.
 As defined by the IRS, travel expenses are the ordinary and
 necessary expenses of traveling away from home for your                        In the recent case, the S corporation had heavy losses
 business, profession, or job. An ordinary expense is one that                  during the year. Its owner filed for bankruptcy on
 is common and accepted in your field of trade, business, or                    December 3, 29 days too soon.
 profession. A necessary expense is one that is helpful and
 appropriate for your business. An expense does not have to be                  What do we mean "too soon"? When one files a
 required to be considered necessary.                                           bankruptcy petition, one's assets, with a few exemptions
                                                                                and exclusions, pass immediately to the bankruptcy
 The key factor is that your trip must be primarily for business.
                                                                                "estate", to be used to pay creditors who are, for the most
 Days of leisure can be added to a trip and still be considered
                                                                                part, unsecured creditors. In this case, the owner's S
 primarily for business. The more days and time per day spent
                                                                                corporation stock was such an asset passing to the estate.
 on business will help substantiate the trip. There are no set
                                                                                With it went an asset (the law calls it a "tax attribute") of
 rules on the days and time needed.                                             great value - the year's tax-deductible loss.
 Keep all of your documentation on the business purposes,                       In the owner's hands, the loss would have been enough to
                                                      continued on page 2       eliminate current tax and generate a big net operating
                                                                                loss. Such a loss can be carried to other years, eliminating
                                                                                or reducing tax in those years.
                                                                                But the owner didn't own the loss. An S corporation's loss
                                                                                for a year is determined when the year ends. At this year's
 1;   Summer Travel Tax Deductions                                              end, the S corporation stock was owned by the
 2                                                                              bankruptcy estate. By filing for bankruptcy before the
 1;                                                                             end of the year, the owner gave the bankruptcy estate the
      Timing Mistakes that Could Cost You Thousands of Dollars
 4    Tips on Tips                                                              The estate acquired the right to carry the year's loss to
                                                                                other years, including back to a prior year when the
                                                                                owner had profits. With this right, the estate could obtain
      **Thank you for subscribing to our newsletter!                            a refund for the taxes the owner had paid in a previous
      Please pass this along to a family member or a friend                     year, even if the owner had made no claim - and didn't
                                                                                know such a claim existed. Alternatively, the estate can
      who may benefit from this helpful information. Visit us                   carry the loss to future years to offset income arising
      on the web www.JaredGJohnsonCPA.COM **

                                                                                                                                     Newsletter 1
                            Summer Travel Deductions -Continued from page 1

including confirmations of appointments, emails, phone                        business destination. If you were provided with a ticket or
records, registration to conferences, etc. The days to travel                 you are riding free as a result of a frequent traveler or
to and from a business trip are considered part of the trip.                  similar program, your cost is zero. If you travel by ship,
This includes the weekend if it is impractical to come                        additional rules and limits apply.
home between weekday business meetings. Planning ahead
can make this happen.                                                         Taxi, Commuter Bus, Subway, and Airport Limousine
Traveling With Your Spouse                                                    You can deduct the fares for these and other types of
                                                                              transportation that take you between:
If a spouse goes with you on a business trip or to a                          1. The airport or station and your hotel, and
business convention, his or her travel expenses can only be                   2. The hotel and the work location of your customers or
deducted if your spouse is                                                    clients, your business meeting place, or your temporary
                                                                              work location.
    1.   Your employee,
                                                                              Baggage and Shipping Expenses
    2.   Has a bona fide business purpose for the travel,
                                                                              You can deduct the cost of sending baggage and sample or
                                                                              display material between your regular and temporary work
    3.   Would otherwise be allowed to deduct the travel                      locations.
                                                                              Car Expenses
To be an employee, your spouse must be on the payroll                         You can deduct the cost of operating and maintaining your
and payroll taxes must be paid. If your spouse is not an                      car when traveling away from home on business. You can
employee and travels with you on vacation, you can still                      deduct actual expenses or the standard mileage rate, as
deduct the cost of your room at the single occupancy per                      well as business-related tolls and parking. If you rent a car
day rate, rather than half of the rate. Meals could also be                   while away from home on business, you can deduct only
deductible, if you are paying for lunch or dinner for a                       the business-use portion of the expenses.
customer or business associate and that person's spouse,
                                                                              Lodging and Meals
the full cost of the meals might qualify under the 50%
                                                                              You can deduct your lodging and meals if your business
meal deduction.
                                                                              trip is overnight or long enough that you need to stop for
Example: Bill drives to Boston on business and takes his                      sleep or rest to properly perform your duties. Meals
wife, Joan, with him. Joan is not Bill's employee. Joan                       include amounts spent for food, beverages, taxes, and
occasionally types notes, performs similar services, and                      related tips. Additional rules and limits may apply.
accompanies Bill to luncheons and dinners. The
performance of these services does not establish that her                     Cleaning Clothes
presence on the trip is necessary to the conduct of Bill's                    You can deduct the dry cleaning and laundry expenses you
business. Her expenses are not deductible.                                    incur while away on business.

Bill pays $199 a day for a double room. A single room                         Telephone Expense
costs $149 a day. He can deduct the total cost of driving                     All business calls while on your business trip are
his car to and from Boston, but only $149 a day for his                       deductible. This includes business communication by fax
hotel room. If he uses public transportation, he can deduct                   machine, or other communication devices.
only his fare. Further, if Bill has dinner with a customer
and spouse, the meal may be deducted under the 50% meal                       You may deduct the tips you pay for any expense listed above.
With travel outside of the United States, the transportation                  Other Expenses
for business trips of one week or less, may be deducted.                      You can deduct other similar ordinary and necessary
However, only a portion of transportation costs for longer                    expenses related to your business travel. These expenses
trips are deductible.                                                         might include transportation to or from a business meal,
                                                                              public stenographer's fees, computer rental fees, or Internet
What Expenses are Deductible?                                                 access fees.

Here's what you can deduct when you travel away from                          
home for business.                                                            Please visit our website
Transportation Expenses                                              for additional
You can deduct Transportation Expenses when you travel                        tips, financial calculators and much more.
by airplane, train, bus, or car between your home and your

                                                                                                                                    Newsletter 2
                                                                                                    Timing Mistakes - continued from page 1

                                                               during bankruptcy from the owners' assets now held by the
                                                               The owner had argued that since he had held the stock
                                                               11/12ths of the year, he should be entitled to 11/12ths of the
                                                               year's loss. Not a bad argument, since the law prorates an S
                                                               corporation stockholder's share of the corporation's loss on a
                                                               daily basis throughout the year. But the tax rules for
                                                               bankruptcy trump those for prorating the loss. When the
                                                               estate took ownership of the stock on December 3, it received
THE BEST POSSIBLE DEAL WHERE MULTIPLE                          all the rights attached to that stock, including the right to
                                                               claim all the loss determined at year-end.
                                                               Note: The court acknowledged that the owner had made an
OBTAIN COMPETITIVE QUOTES FOR LONG                             honest mistake, so no penalties were imposed. That must have
                                                               been some relief. Still, the mistake squandered tens of
DISTANCE PHONE SERVICE.               FOR    OTHER             thousands of tax dollars.
                                                               Tip: Here are two ways the owner could have salvaged the
                                                               loss and its tax value:
ANY SAVINGS ARE AVAILABLE.                 CONSIDER                          1.   Wait until the new year, say January 2, to
                                                                                  file for bankruptcy.

                                                                             2.   Sell the S corporation stock, if possible,
                                                                                  before the bankruptcy filing. This way the
PAYMENTS.       CALENDAR        OF   EVENTS                                       owner could get his share of the year's loss
                                                                                  (once determined), prorated for the period
                                                                                  he owned the stock-here, about 11/12ths of
TAX DUE DATES:                                                                    the year's loss.
JUNE 10TH                                                      Note: The transfer of a debtor's assets to a bankruptcy estate
                                                               is tax-free and not a sale.
                                                               The same fate will befall a partner who files for bankruptcy
                                                               during a partnership's loss year. His or her partnership
YOU CAN USE FORM 4070.                                         interest, and that interest's share of partnership loss, will go to
JUNE 15TH                                                      the bankruptcy estate. The estate can carry the loss to other
Indivduals - If you are a U.S. citizen or resident alien
living and working (or on military duty) outside the United    Tip for Partners: As with the S corporation stockholder,
States and Puerto Rico, file Form 1040 and pay any tax,        waiting until year-end before filing will give the partner his or
interest, and penalties due. Otherwise, see April 15. If you   her share of the partnership's loss for the year. Rules for
want additional time to file your return, file Form 4868 to
obtain 4 additional months to file. Then file Form 1040 by     determining share of loss are trickier (than with S
October 15                                                     corporations) where a partner sells his or her interest before
                                                               the bankruptcy filing-too tricky to try to summarize here. 
Indivduals - Make a payment of your 2009 estimated tax if
you are not paying your income tax for the year through
withholding (or will not pay in enough tax that way). Use        An S corporation's income is directly taxable to its
Form 1040-ES. This is the second installment date for
estimated tax in 2009.                                            owners, and its losses pass through to owners for
                                                                          deduction on their tax returns.
Employers - Nonpayroll withholding. If the monthly
deposit rule applies, deposit the tax for payments in May.

Employers - Social security, Medicare, and withheld
income tax. If the monthly deposit rule applies, deposit
the tax for payments in May.

                                                                                                                             Newsletter 3
                                                 Tips on Tips
                                                 Do you work at a hair salon, barber shop, golf course, hotel or
                                                 restaurant or drive a taxicab? The tip income you receive as an
                                                 employee from those services is taxable income. Here as some tips
FINANCIAL PLANNING                               about tips:

TIPS FOR JUNE 2009                                    Tips are taxable. Tips are subject to federal income, Social
                                                       Security and Medicare taxes, and may be subject to state
                                                       income tax as well.
                                                      Include tips on your tax return. You must include all cash
                                                       tips you receive directly from customers, tips added to credit
Review your life, health, and disability               cards, and your share of any tips you receive under a tip-
insurance policies. (You reviewed your "asset"         splitting arrangement with fellow employees in your gross
policies in April.) Check with your employee           income.
benefits office as to what programs are
available. Make certain you have adequate             Report tips to your employer. If you receive $20 or more in
coverage. Call us 336.790.5245 to determine            tips in any one month, you should report all your tips to your
the appropriate amounts for your age and               employer. Your employer is required to withhold federal
income.                                                income, Social Security and Medicare taxes.
                                                 Keep a running daily log of your tip income. You can use IRS
                                                 Publication 1244, Employee's Daily Record of Tips and Report to
                                                 Employer, to record your tip income. 

                                                     Call us 336.790.5245 for more information, or check out IRS
                                                                Publication 531, Reporting Tip Income,

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                                                                                                              Newsletter 4

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