Monthly Tax Tip - December 2007

The 2007 tax return filing season is fast approaching and we would like to remind you of the following requirements.

Charitable Contributions

Toughened rules for certain contributions. For example, post-Aug. 17, 2006, contributions of clothing and household items that are not in good used condition or better can't be deducted. In addition, the IRS may deny a deduction for any contribution of clothing or a household item with minimal monetary value, such as used socks or undergarments. A deduction may be approved for clothing or a household item not in good used condition or better that has a more than $500 claimed value and is backed up by a qualified appraisal.

New substantiation requirements. A taxpayer won't be able to deduct a post-2006 contribution of cash, check, or other monetary gift unless he maintains as a record of the contribution a bank record or a written communication from the charity showing its name, the date of the contribution, and the amount of the contribution.

No charitable deduction is allowed for any contribution of $250 or more unless you substantiate the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization. You must have the receipt in hand by the time you file your return (or by the due date, if earlier) or you won't be able to claim the deduction. The acknowledgement must include the amount of cash and a description (but not value) of any property other than cash contributed, whether the donee provided any goods or services in consideration for the contribution, and a good faith estimate of the value of any such goods or services. If you received only "intangible religious benefits," such as attending religious services, in return for your contribution, the receipt must say so. This type of benefit is considered to have no commercial value and so doesn't reduce the charitable deduction available.

In general, if the total charitable deduction you claim for non-cash property is more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction is not allowed. In general, you are required to obtain a qualified appraisal for donated property with a value of more than $5,000, and to attach an appraisal summary to the tax return. A qualified appraisal isn't required for publicly-traded securities for which market quotations are readily available.

Transportation Expenses

Recordkeeping. If your deductible trip is by taxi or public transportation, save a receipt if possible or make a notation of the expense in a logbook, and record the date, amount spent, destination, and business purpose. If you use your car, note miles driven instead of amount spent. Note also any tolls paid or parking fees (with receipts). You will need to allocate your automobile expenses between business and personal use based on miles driven during the year. Proper recordkeeping must be maintained contemporaneously with the taxpayer’s business travel and is crucial in the event of an IRS challenge. An automobile log that is maintained on a weekly basis and accounts for each business use of the automobile during the week would be a record at time of use. An automobile mileage log created in preparation for an IRS audit is inadequate. Your deduction can be computed using (1) a standard mileage rate (48.5 cents for each business mile driven in 2007) plus tolls and parking, or (2) actual expenses (including depreciation, subject to limitations) for the portion of car use allocable to the business. For method (2), you will need to keep track of all costs for gas, repairs and maintenance, insurance, interest on a car loan, and any other car-related cost.

Business Meals and Entertainment

General Requirements:
(1) Ordinary and necessary business expenses. All business expenses must meet the general deductibility requirement of being "ordinary and necessary" in carrying on the business. These terms have been fairly broadly defined to mean customary or usual, and appropriate or helpful. Thus, if it is reasonable in your business to entertain clients or other business people, you should be able to pass this general test.

(2) "Directly related" or "associated with." A second level of tests specially applicable to meals and entertainment expenses must also be satisfied. Under them, the business meal or entertainment must be either "directly related to" or "associated with" the business.

(3) Substantiation. Almost as important as qualifying for the deduction are the requirements for proving that it qualifies. The use of reasonable estimates is not sufficient to stand up to IRS challenge. You must be able to establish the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. Obviously, you must set up careful and detailed record-keeping procedures to keep track of each business meal and entertainment event and to justify its business connection. For expenses of $75 or more, documentary proof (receipt, etc.) is required.

(4) Deduction limitations. Several additional limitations apply. First, expenses that are "lavish or extravagant" are not deductible. This is generally a "reasonableness" test and does not impose any fixed limits on the cost of meals or entertainment events. Expenses incurred at first class restaurants can qualify as deductible.

Remember, once the expenditure qualifies, it is only 50% deductible. Obviously, this rule severely reduces the tax benefit of business meals and entertainment.

State Developments

Reprinted below is a reminder from the Massachusetts Department of Revenue that all taxpayers must have health insurance.

"Reminder: Enroll in a Health Care Plan Now to Avoid Tax Penalties

Taxpayers will be receiving an important reminder in the mail about the requirement to have health insurance coverage by December 31, 2007. Those who cannot show that they have health insurance when they file their 2007 Massachusetts income tax return will be subject to a penalty of $219 per individual. Taxpayers are encouraged to enroll in a health plan by November 15, 2007, to meet this important deadline and to avoid the penalty charge.

The penalty for being uninsured will increase significantly in 2008, accumulating each month you do not have health coverage.

If you are uninsured, please visit the Massachusetts Health Connector for more information or to enroll in a plan. You may also contact a health insurance provider directly to sign up for insurance." (DOR Reminder, 11/12/2007)

Each Massachusetts resident who has health coverage should receive a
Form MA 1099-HC by his/her health insurance carrier. This form will be used to prepare MA Schedule HC to be attached to all Massachusetts resident income tax returns for 2007.

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