Answers to your tax questions on. . .claiming business expenses

January 25, 2002

Claiming business expenses

 

Answers to your tax questions . . .
On claiming business expenses

By Lawrence Farber
Contributing Writer

As an employee of a medical corporation, how do I claim deductions for business expenses, some of which were reimbursed?

If the corporation doesn't report the reimbursed amounts as income to you, claim only the unreimbursed ones. Otherwise, claim all your expenses.

But remember, you can deduct only 50 percent of what you paid for meals and entertainment. Use Form 2106 or 2106-EZ to figure the deductible part, then include it with any other miscellaneous expenses on Schedule A of your return. Your deduction equals the total of such expenses minus 2 percent of your adjusted gross income.

My wife worked for me part time last year, and we're covered by the family health plan I've set up as a fringe benefit for employees in my unincorporated practice. Can I claim the 60 percent self-employed health insurance deduction for her portion of the premium, as well as for mine?

Certainly, but you may be able to deduct all the coverage costs for both of you and your children. To be eligible, the insurance policy must be in the practice's name, and your wife must be a bona fide employee—meaning she performs significant services for reasonable pay. If you meet these requirements, include the entire expense on Schedule C. If you're eligible only for the 60 percent deduction, claim it as an adjustment to income on Form 1040.

Every morning while driving to my office, I make practice-related calls on my cell phone. Since this gives me more time for patient care in the office, can I claim a deduction for the cost of my daily trips?

No. Even though you're engaged in productive work, the IRS regards the cost of commuting—whether by car or public transportation—as nondeductible. The same would be true if doctor colleagues rode with you and you discussed practice matters en route. You can write off the cost of the business phone calls, though.

I bought an operating interest in an oil well last year and have an ongoing obligation to pay a share of the drilling costs. Can I deduct each year's payments on my annual return?

You can either deduct them annually, starting the first year you have the expenses, or amortize them over the 60 months that begin with the month you pay or incur them. Either way, you can deduct only costs that involve no salvage value and are related to drilling wells and preparing them for production (for instance, wages, fuel, and repairs). Claim annual deductions under "Other expenses" on Schedule C.

Last year, I acquired a small apartment building in a tax-free exchange for a similar property I'd owned since 1991. To sweeten the deal, I paid $50,000 cash. How do I depreciate my new building?

You depreciate the $50,000 over 27.5 years—the recovery period for newly acquired residential property. In addition, you continue to write off the undepreciated cost basis of your former building over 17.5 years—the recovery period remaining for that property.

Late last year, I spent $15,000 to equip a home office for a consulting business I'll start this year. Can I claim this cost on my 2001 return?

No. Only a proprietor of a business that was active in 2001 can write off the cost of equipment bought that year (up to $24,000). But you can depreciate the cost over five years beginning in 2002.

I promised to compensate my employees for vacation leave they didn't use during 2001, and I'll include the amounts due in their paychecks this year. Can I claim the payments on my 2001 return?

Maybe. Ordinarily, you can deduct vacation pay only in the tax year in which the employees received it. But it's deductible for 2001 if it was vested by year-end and is paid by mid-March 2002. Generally, vacation pay is vested if it's payable under an oral or written plan that you told your employees about before the tax year began, and if both the amount and your liability for it are certain.

I understand that the limit on depreciation of a new business car is $3,060 for 2001. Since I bought the car in July, does that mean I can't claim more than half—$1,530—on my 2001 return?

No. You can claim the full $3,060 if you used the car entirely for business, even though you didn't own it for the whole year. But if you sometimes drove the car for personal reasons, you must trim your 2001 deduction accordingly. If 20 percent of your use was personal, for example, you can deduct 80 percent of $3,060, or $2,448.

In 2002, the depreciation limit for the car is $4,900, multiplied by your percentage of business use for this year.

When I bought my practice last year, I paid the seller $60,000 for a five-year covenant not to compete. My accountant says I can amortize this expense, but over 15 years, not five. Is he correct?

Yes. In a recent case involving a five-year covenant, the Tax Court took the same view as your accountant. Former law, the judge said, permitted amortization over the life of the covenant, but present law specifies a 15-year amortization period for similar agreements and other "intangibles" such as patient records or goodwill.

I paid an accountant to examine the books of several companies I was interested in acquiring as possible sideline businesses, but later I decided not to go ahead with them. Can I deduct the accounting fees as a business expense?

No. You can't deduct the cost of your investigations, says the IRS, since you didn't become engaged in any business.

I'm driving a leased car and would like to avoid the complications of basing my business-use deduction on actual costs. Can I claim the IRS standard allowance of 34.5 cents per business mile instead?

Yes, assuming 2001 was the first year you used this car for business. But if you take the allowance on your 2001 return, you must continue doing so for the remainder of the lease term, even though the actual-cost method might give you a bigger benefit in the future.

 

In our next issue:
Answers to your tax questions on dividend and interest income.

 

Lawrence Farber. Answers to your tax questions on. . .claiming business expenses. Medical Economics 2002;2:29.