Thieving Thoughts

Recently I’ve worked with a number of clients who were the victims of employee theft.  While I like to emphasize prevention, this is so commonplace that it’s also worth visiting what to do if (when?) it happens to you.   Employee fraud is a huge problem, and in difficult economic times it’s not on the decline. In retailing alone, employee theft accounts for almost 44% of total losses.  That’s about 10% less than what stores lose to shoplifting.  Guess which one is easier to do?

Loss of property to theft is generally tax deductible.  As with everything else involving taxes, you have to be prepared in case the deduction is challenged.  For a theft loss to be deducted the event that caused you to lose property or money has to be illegal in your state.  A conviction is not required. The IRS is pretty broad in its definition of theft including:  blackmail, embezzlement, extortion, kidnapping and fraud on their list.  Employee fraud and theft usually qualifies.

In a rare show of common sense, you can deduct the theft loss in the year it is discovered, which doesn’t have to be the year in which it occurred.  However, you have to be prepared to prove that the property was yours, when you discovered it was lost, and that you didn’t just lose track of whatever went missing.  Also, if you are eligible for an insurance claim, or have some other possible means of recovery you need to do that first.  You can’t deduct the loss until it’s completely clear how much you have lost and that it’s permanent.

Other things to keep in mind are that inventory loss can be managed on your tax return by either raising the cost of goods sold or reducing the value of your inventory.  You don’t need to file a special form for either method.  Also, if you lose money on a stock due to accounting fraud or other malfeasance on the part of that company, that’s considered a capital loss instead of a theft loss.  Finally, if you’re the victim of a Ponzi scheme, your ability to deduct the loss is constrained by whether the transaction was part of your trade of business (in that case you’re fine) or a personal loss (this is worse).  If it's personal, you won’t get everything back, and you’ll probably want to hire an accountant to figure out how to calculate the deduction.

On that cheery note I’ll go back to tracking the Frankenstorm headed our way. Hopefully my next topic won’t be about deducting casualty losses.   

Miscellaneous Questions

I’ll be spending some time today working through expense sections of QuickBooks files that have titles like “ask my accountant” or “uncategorized expenses”.  Many of the items in those accounts won’t meet the criteria to be an expense for the taxpayer’s business, but they will be eligible for one of the more confusing personal deductions, known in the trade as “2% miscellaneous”. 

The 2% doesn’t refer to something small, as in “putting your 2-cents in”.  Instead, it’s a reference to the amount of expenses you need to have to start taking the deductions.  If the miscellaneous expenses are less than 2% of your adjusted gross income, then no deduction for you. Miscellaneous, on the other hand, means just what you think.  There is a diverse list of items  included as eligible for this deduction.  The IRS breaks the list into 3 categories:  unreimbursed employee expenses, tax preparation fees, and all other.   

Unreimbursed employee expenses are often misunderstood.  Key points to remember include that if you are not required to spend the money by your employer, you can’t get a deduction.  An example of this would be buying a computer used only for work that you can’t get done at the office -- but your employer didn’t ask you to do that.  If this applies to you, look for a new job rather than a new tax deduction.  Actually in this example you could do both because the search for a new job in the same field is deductible.

You can take a deduction if your employer partially reimburses your expenses.   Let’s say you get a travel allowance of $500, but your expenses were actually double that for a business trip.  You might be tempted to skip the hassle of getting the employer reimbursement and deduct the whole amount – it’ll help you hit the 2% threshold.  That would be a mistake.  To get the deduction, you need to ask for whatever reimbursement you can get and then report all the info on form 2106, Unreimbursed Employee expenses.

Some miscellaneous expenses aren’t subject to the 2% floor, so if you itemize, you can take them from the first dollar.  My favorite in this group is gambling losses that offset gambling winnings.  There’s tax policy in action, gamblers get the deduction first, but workers who spend their own money to meet employer goals have “eat” up to 2% of their AGI in expenses.  This makes me think it’s time to turn off my computer and head to Meadows. 

More Easily Missed Tax Breaks

The good news is that I found so many examples of often overlooked deductions that this turned into a 3 part post.  The bad news is those at the bottom of the list are less compelling.  Still, they may come in handy for a game of Trivial Pursuit.  Or you could answer a question on Quora.

If you are one of the lucky folks who did a refi in the past few years and you paid points, you are eligible for more than just a lower mortgage payment.  You can take the points divided by the term of the loan.  So if it’s a 15 year loan, that’s 1/15^th of the points each year.  Not much, but not nothing either.  Also if you pay off the loan, you get to take the remainder.

Most employers continue to pay your salary if you go on jury duty, but many of them also take the “pay” you get from going.  If you fall into that particular pool, you can take the jury compensation you didn’t get as a deduction.  This is another “above the line” chance to reduce adjusted gross income. One reason this gets overlooked is there’s no line on your 1040 marked jury duty pay.  You take it at the end of the section for deductions before you calculate adjusted gross income.

My next tip isn’t actually a deduction, but in the year where enhanced brokerage reporting starts to kick in it’s worth noting.  You pay taxes on reinvested dividend income, but many people forget to add this to their basis cost when stock is sold.  Adding that little bit extra either reduces taxes owed for gains or increases the loss you can put towards gains on your tax return.

Finally, don’t overlook that Uncle Sam is giving you a little extra time this year.  Individual and partnership returns aren’t due until April 17^th.  Corporations don’t get a break  -- they’re still due on the ides of March.  Remember if you file an extension it gives you more time to finish the return, but you still have to pay taxes you owe by the initial deadline. 

Taxidermy for Performing Artists?

This week I’m scheduled to speak at Point Park University on the subject of tax issues for artists.  Teachers there asked the PICPA to find someone to talk about the topic.  Let’s face it, artists have an uphill climb economically to start with, and yes it turns out their typical tax situation is more complex than most of us will face.

There are three areas where artists stand out from the crowd from a tax perspective.  Artists are more likely than not to:

• ·         have multiple income streams,
• ·         be both an employee and an independent contractor, and
• ·         be taxed in multiple jurisdictions.

 And you thought the threat of chronic poverty was enough to keep someone from wanting to be the next American Idol.

The discussion at the University will focus on income taxes.  Performers get income like most of us from employers or contracts, but they also can be compensated through barter arrangements (I’ll play at your wedding if you’ll cater my party) or get free products for appearances or endorsements.  All of that counts as compensation, and the IRS knows this better than most performers.

Then there’s the issue of what is deductible.  If an artist works as an independent contractor they can deduct the costs associated with the “business”.  Typically this will focus on supplies, research, travel and entertainment and rehearsal / work space in the home.  All of these are favorite topics for IRS auditors, who unlike the artists are doing tax stuff for a living.  So guess who usually knows more.

Another potential trap for artists is related to income fluctuations and paying enough taxes in the current year.  You’re supposed to pay taxes as you go.  For an employee that means your employer holds the taxes from your paycheck and for contractors you pay estimates of your taxes every quarter.  While this seems straightforward notice I used the word estimate as to what you pay.  Our Federal tax system is progressive, which means the more money you make, the higher tax rate you pay.  (This is not a time to get into Warren Buffet’s and Mitt Romney’s tax returns!)  If your employer withholds at the wrong rate because you have multiple jobs, you pay the penalties and interest for underpayment.  Same goes for calculating your estimates.  Changing income levels is a problem for may people, so the IRS does allow the “safe harbor” of essentially paying the same amount in taxes as you did last year until you file your return.  At that point you need to make sure you have enough money to pay Uncle Sam what you owe. 

One person who had particular problems with doing just that was Mark Twain. While there are more contemporary examples of artists with tax troubles, I couldn't resist Twain's take on the situation -- which unfortunately is still relevant. Hopefully some of the students I see this week will enjoy a version of Mark Twain's artistic success, but not his tax problems. 

Don't Miss These Deductions

More overlooked deductions on the menu this week.  For fun we’ll focus on what those of us inside public accounting call “above the line deductions”.   There are a number of reasons these are better than other kinds of deductions.  You can follow the link on above the line if you want more details -- the net impact is that they are hard to qualify for, but easy to take.  That’s because you don’t need to itemize to use them. While lots of people itemize, many people are better off with the standard deduction.  In particular young taxpayers often fall into the category of an easier return to file, but with fewer tax breaks.

One example of how starting out is a tougher time for taxpaying is your first job search.  Once you have a chosen profession, expenses for your job search can be deducted.  That’s not true for your first job hunt.  However -  moving to take your first job is not only deductible, but you can take it even if you don’t itemize.  The key qualification is that your new job is more than 50 miles away from your old home.  (You may need to read that a few times to get clear on what that means.)  Mileage deductions for moving have been changed.  If you moved in 2011 before July it’s 19 cents.  It went up to 23.5 cents for the remainder of the year.

If you own your own business and qualify for Medicare you get another deduction that doesn’t require you itemize.  (Accountants love these!) You can take the full premiums for Medicare Part B, Part D and any Medigap policy you use.  Unlike the typical medical expense deduction on Schedule A,  these premiums are deductible from the first dollar,  with no threshold to meet.  One important thing to check before you take this is, if you are covered under a spouse’s health insurance through an employer, then you can’t use this.  It’s only if you get your insurance through your business.

Members of the National Guard or military reserve who travel more than 100 miles and overnight to attend drills or meetings get to deduct the travel.  One again no itemizing required. (Yipee!) That said, I’m sure one reason this deduction gets overlooked is that it’s a little tricky to calculate.  You get to deduct your travel costs subject to federal maximums.  Follow the instructions carefully or better yet, call your accountant.  :-)