2008

• Tax$avers
• WealthBuilders
• Advantax

• Rental Property
• Self-Employment
• Home Office
• Clergy/Non-Profits
• Health Care
• Educators/Day Care

Rental Property

Owning and renting property is common for many individuals. While the rental income and/or capital gains from owned property can be a financially rewarding endeavor, the IRS rules and regulations can be very complex.

This Rental Income brochure summarizes the most common forms of rental income, allowable expenses and their tax treatment.

The Rental Property Tracking Worksheet should help you document your rental income and identify deductible expenses from rental activities.

Rental Property Tax Law

Special tax laws have been created within the Tax Code to address rental income and losses. Generally, rental income is deemed "Passive" income within the IRS. This is done to distinguish rental income from "Earned" or "Ordinary" income like your salary or wages. This "passive" activity requires separate tax forms be filed and it limits your ability to net losses on rental activity against other types of income like your wages. On the other hand, "Passive" income is not subject to employment taxes (Social Security and Medicare). However, not all rental activity must by its nature be passive. Exceptions are renting vacation property and rental activity in which you are actively involved. The rules are complex, so it is always a good idea to discuss your situation.

Rental Income

What is Rental Income?

Rental income is any amount of money you receive or accrue as payment for the use of property. You must include:

• rent payments
• payments made to you by your lessee (renter)
  for any of your expenses
• any payment to you by a lessee as consideration for abandoning the lease agreement
• property taxes paid by your tenant on behalf of the landlord
• deposits from your renters
• improvements made to the property by a lessee in lieu of rent payments -- These are included as gross income at the fair market value of the improvements at time of improvement

What isn't Rental Income?

There are some forms of income from rental property that may be excluded such as:

• Rental income if a property is rented less than 14 days per year (e.g. Vacation Home Rental)
• Improvements made by your Lessee while renting from you that will belong to your property when the lease expires or if the lease is terminated prior to expiration

Rental Expenses

Rental expenses directly related to the property that produces rent income are deductible from gross rental income to derive your adjusted gross rental income. Use the worksheet on the reverse side to assist you in identifying, tracking and documenting your gross rental income, deductions and adjusted gross income.

Other Rental Activity

Vacation Home Rental

Owning a vacation home can bring tax advantages for you, but the rules can be a little complex depending on the amount of personal and rental use of your home. It is best to review your vacation home plans on a regular basis to help maximize your tax advantages. Briefly, the rules are:

• If you don't rent out your vacation home, you can deduct mortgage interest and real estate taxes.
• If you rent out your vacation home for 14 days or less, you can deduct the mortgage interest and the real estate taxes and the rental income is tax-free. You may not deduct any expenses associated with renting out the home, however.
• If you rent out the home 100% of the time and there is no personal use, the vacation home is considered a rental property. In this case you may deduct interest, taxes, operating expenses, depreciation and possibly rental losses up to $25,000.
• If you rent out your vacation home for more than 14 days, and also use the home personally the rules regarding personal use and what you can deduct are very complex and should be discussed to determine your best tax opportunities.

Rental of Personal Property

If you rent personal (non-real estate) property through a trade or business:

• This rental income is treated as self-employment income and is subject to self-employment taxes of 15.3%
• You must record and file this income on a Self-employed Income Schedule, and not as Rental Income

If you rent personal property along with the rental of real estate the personal property rent is not subject to the self-employment tax. Other rent income excluded from the self-employment tax are:

• Rental income from a mobile home park
• Rental income from self-storage units
• When rental activity is not conducted as a trade or business on a regular and consistent basis

In these cases rent income is reported as Other Income.

Selling Your Rental Property

Any time you sell property you are required to calculate the gain or loss on the sale for tax purposes. When you sell property that you have rented, even if only part of the property was rented, the calculation of gain or loss becomes more complicated. Any depreciation taken on the property must be accounted for when determining the actual gain or loss. For instance, assume you sell a condo for $200,000 that you bought for $100,000; also assume you have rented the condo and depreciated $10,000 of the cost on your rental tax filings. Your taxable gain on the sale would be $110,000 ($200,000 minus $100,000 cost plus the $10,000 depreciation). Fortunately, long term capital gain tax rates are lower than in the past, but this depreciation recapture can be quite a tax surprise.

Rental Property Tracking Worksheet

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Self-Employed

Being self-employed can bring individuals great rewards and freedoms, yet it also brings great responsibility to ensure you comply with the rules and requirements of the IRS.

Are You Self-employed?

You are considered self-employed and subject to self-employment tax laws if you:

• carry on your own trade or business
• have a profit motivation for your business activity
• operate your business in a regular manner
• are a sole proprietor
• are an independent contractor
• work full or part-time in the business endeavor
• have a net profit of at least $400.00 (or have a net profit of $100.00 or more as an employee of a church electing exemption from Social Security Withholdings)

Self-Employment Tax

All self-employed must pay a self-employment tax in addition to income tax. The tax is 15.3% of net earnings and has two components; a 12.4% old age, survivors and disability insurance (OASDI) tax and a 2.9% component for hospital insurance (Medicare). The 12.4% OASDI portion is paid on net income (revenues less expenses) up to a set amount similar to social security. The 2.9% Medicare tax is paid on all net income. If you receive any wage income on which Social Security or Railroad Retirement taxes were paid then the self-employment tax income maximum is reduced by the amount of wages received. If self-employment income is below $400 no self-employment tax is due.

What is Self-employment Income?

• Income received from a trade or business you conduct on a continuous and regular basis less allowable deductions
• Payments received from your partnership for services rendered
• Income paid by insurance companies to retired insurance agents based on prior work such as unpaid commissions
• Real estate rental income if substantial services are rendered
• Extended earnings payments to an independent insurance agent
• Minister's housing allowances unless Form 4361 is filed to opt out of Social Security (not subject to income tax)
• Income from a church or church-controlled organization
• Income from independent contracting of services
• Income from street hustling, panhandling, and drug dealing
• Income from commercial fishing if working for a share of the catch
• Foreign earned income excluded from income tax
• Income from selling/distributing newspapers and magazines
• Business interruption insurance payments
• Crop-sharing income

What's Not Self-employment Income?

• Income received as an employee of another company
• Income paid to your child if under 18 and your business is a sole proprietorship or partnership
• Dividends and interest
• Gain or loss from sale or exchange of capital assets or disposition of property not included as inventory or held for sale
• Incentive pay to sales people in a dealership (auto dealer) but paid by the manufacturer
• Earnings and dividends of an S Corporation provided shareholders take a reasonable salary
• Income for services not performed on a continuous or regular basis (this is deemed a hobby)

Self-Employment Tax Traps

Each year the Treasury Department (IRS) publishes statistics on the types of returns that get audited and those returns with self-employment income are always at the top of the list.

To reduce your chances of an unexpected tax bill:

• Always keep self-employment activity and records separate from other expenses. Keep a separate checking and savings account for your self-employment activities. The IRS is very quick to deem expenses as personal (non-deductible) expenses if your bank account co-mingles expenses.
• Do not confuse hobby and rental income activity as self-employment activity. The tax code applies separate laws to these two activities. If in doubt....ask.
• Remember the IRS treats all profits as if they are wages subject to Social Security and Medicare taxes (self-employment taxes). This is true whether you wish to distribute or retain your profits. Consider using alternative corporate structures if you want to avoid some of this tax.

Deductions

One of the biggest tax advantages for self-employed is the ability to deduct your business expenses directly against your income- regardless of whether you itemize your deductions. You are not subject to the 2% of adjusted gross income threshold that applies to an employee's out-of-pocket business related expenses. As a self-employed individual, your business expenses reduce the amount of your income that is subject to the self-employment tax (FICA) while the unreimbursed business expenses of an employee do nothing to reduce their FICA tax.

Self-employed Health Insurance

Another major tax deduction provided by the IRS to the self-employed is the ability to deduct a large portion of your medical insurance costs. Under certain circumstances, if you hire your spouse as a bonafide employee and provide health insurance, 100% of the cost of the insurance may be deductible. Similarly, a written self-insured medical reimbursement plan may be a 100% deductible expense and enable you to provide tax free reimbursement of uninsured medical costs to employees for things like co-payments, prescriptions, vision and dental care.

Domestic Production Activity Deduction (DPAD)

Beginning in 2005, there is a special deduction on page one of Form 1040 for qualified domestic production activities. The deduction is 3 to 9% of net qualified income (limited to 50% of W-2 wages). If you manufacture product, grow crops or process tangible personal property your business may qualify. Common businesses include: farming, ranches, film/music/software development, construction, engineering and architectural services.

Self-Employment Worksheet

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Home Office

Today, more and more people are working from their homes. This is readily made possible due to technological advances such as the computer, cell phones, internet and e-mail. If you are running a business out of your home or thinking about starting an in-home business, the information in this brochure should be helpful in detailing when and how you can claim the tax deductions available to you.

Home Office Guidelines

Under liberalized guidelines for Home Office Deductions more people are eligible to deduct home office expenses. The rules allow workers such as plumbers, contractors and consultants, who primarily perform services away from home, to deduct their home office expenses. Prior to 1997 it was very difficult for home-based workers whose jobs routinely took them out of their homes to qualify for home office expense deductions.
While more details will follow, generally:

• Specific tests must be passed to take advantage of
  home office deductions
• There is a limitation on the amount of otherwise non-deductible expenses
• The term "home" includes a house, apartment, condominium, mobile home or boat. It includes structures on the property, such as an unattached garage, studio, barn or greenhouse
• The term "home" does not include any part of the property used as a hotel or inn

Deductibility Requirements

Not sure whether you can deduct your home office expense? You may deduct home office expenses if you meet these tests.

On-going Trade or Business Test

If the space is used in a trade or business on a regular and continuing basis:

• To provide daycare services
• As a place to meet with patients, clients or customers
• To store inventory for a wholesale or retail sales business and your home is the business' only fixed location
• In a separate structure which is not attached to your residence and is used exclusively for business
• As the principal place of business for your trade or business.

Importantly, you must present sufficient evidence to convince the IRS that business was conducted on a regular basis.

Tip: Management by an individual of his/her investment portfolio is not considered a trade or business.

Exclusive Use Test

• There can be no personal use (other than minimal personal use) of the home office portion of the residence at any time during the taxable year.
• The use of a portion of a room is acceptable as long as you can prove a particular portion of the room was used exclusively for business.
• There are exceptions to the exclusive use condition if:
  • inventory is kept for use in selling products at wholesale or retail.
  • the residence is the only fixed location of your trade or business; and the space is separately identifiable (a portion of a room regularly used is acceptable).

Separate Structures Test

• You can deduct expenses for a separate and free-standing structure, such as a studio, barn or garage if you use the structure exclusively and regularly in your business. The structure does not have to be your principal place of business or the place you meet patients, clients, or customers.

Place to Meet Patients, Clients or Customers

• The patients, clients, or customers must be physically present on the premises.
• Conversations with you by telephone do not constitute use of the premises by patients, clients, or customers.
• The use of the dwelling unit by patients, clients, or customers must be substantial and integral to the conduct of your business.

Principal Place of Business Test

• A taxpayer is deemed to have a principal place of business for each trade or business in which you engage.
• When you engage in a single trade or business at more than one location, the principal place of business is determined in light of the specific facts and circumstances of running the business.

One's best bet to insure the home office deduction without IRS challenge is to :

• Work in a separate structure or portion of your home
• Meet with customers at home
• Show that the most important business activities are performed at home
  

Administrative and Management Activities Test

Tax Relief Act of 1997 liberalizes home office use by retaining all of the pre-established conditions (e.g. regular and exclusive use, storage of inventory and samples, separate structure, a place to meet patients, clients, or customers) but adds that a home office also qualifies as a principal place of business if:

• The office is used on an exclusive and regular basis for the administration or management activities of any trade or business and,
• There is no fixed location of the trade or business where you conduct substantial administrative or management activities of the trade or business

Therefore, a home office deduction is allowed if a portion of the home is exclusively and regularly used to conduct administrative or management activities as long as you don't perform these duties at another location even though some administrative and management activities may be conducted by someone else at another location. This home office deduction is allowable even if you perform administrative or management activities outside the home in a non-fixed location (e.g. auto or hotel room) or if in another fixed location, the administrative or management activities are not substantial. This liberalization of home office deductibility benefits:

• Doctors and nurses whose job performance primarily occurs in the hospital
• Sales people when most of their time is spent in
  customers' offices
• Authors and writers whose time is mostly spent with publishers, on publicity tours or doing research outside the home
• Teachers who perform their duties at schools
  and universities
• Contractors, painters, plumbers and similar trades people who spend most of their time on job sites
• Employees who work out of their home for the convenience of their employer also qualify

Tip: Commuting costs may be a deductible business travel expense if the principal place of business becomes your home office.

If you are an employee

A home office deduction may be possible if:

• The business use of your home is for the convenience of your employer.
• Convenience of the employer is defined as a business necessity on which employment is based.
• Use for personal convenience is not an adequate qualification.

Figuring the Business Deduction

• Divide the area used for business by the total area in your home to determine the pro-rata share of rent, utilities, and other expenses.
• Capture depreciation based on the lower of either the adjusted basis or fair market value of your home at the time business use begins.

Caution: If the business is active less than a full year consider the time period in business for which the deduction is allowed.

• Costs incurred in repairing and painting directly in the business rooms are totally deductible. These same costs in the rooms which don't benefit the business room are not deductible but you may allocate business and non-business portions of these costs if the benefit is to both.
• Expense of lawn care and landscaping are not deductible.
• Telephone costs :
  • The basic costs for the main first line into your residence are not deductible.
  • Long distance business charges are deductible.
  • Deduct the business portion of additional line costs and rental of equipment.
• Deductions are limited to the gross income from business use of the home office (except for mortgage interest & property taxes).
• Deductions in excess of the current year's limitation may be carried forward.
• When sale of residence occurs, all depreciation for home office must be recaptured in sale of residence gain or loss calculations. So save those home improvement receipts.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Clergy and Non-Profits

Clergy

Members of the clergy are in many ways treated like non-clergy taxpayers, but there are special tax treatments that recognize their position as members of a church.

Income

General Rules of Income - for all taxpayers

U.S individual taxpayers are required to report as gross income all compensation for personal services in the year they receive it, no matter what the form of payment. This includes:

• Salaries/wages
• Bonuses
• Commissions
• Retirement pay
• Tips
• Profit sharing
• Director's fees
• Jury fees

In addition to the guidelines above, Clergy must report compensation such as:

• Marriage Fees
• Baptismal and Funeral Offerings
• Other Stipends received

Employee or Self-employed?

For tax purposes, members of the clergy may be treated as either employees (preferred by the IRS) or independent contractors. In either case, with approval from the IRS, clergy may decide to be made exempt from self-employment (Social Security and Medicare) taxes. If an exemption is claimed, no benefits are available to the clergy member under either program in retirement. So unlike other taxpayers who are required to pay Social Security and Medicare, clergy may choose whether or not to participate.

As an Employee:

• Clergy receive a W-2 statement of income from their employer (church) organization.
• As discussed, Social Security may or may not be withheld. A minister is always considered self-employed when it comes to Social Security, but the minister must file Form 4361 on a timely basis to opt out of Social Security withholdings.
• Federal income tax withholding is voluntary, but if it is not withheld, quarterly estimated tax payments must be made.
• Housing allowance is generally exempt from income as long as it is spent for housing related expenses.
• Only expenses that exceed 2% of income can be deducted.

As an Independent Contractor:

• Clergy receive a 1099 from organizations receiving their services.
• Self-employed tax return is filed (Schedule C).
• No withholdings are taken for Social Security, Federal income tax or State income tax as noted above.
• Any housing allowance is not included in income.
• All clergy-related business expenses may be deducted and are not subject to the excess of 2% income threshold.

Fringe Benefits

Fringe benefits given to clergy do not have to be included as income provided the clergy does not utilize them for personal use. If used for personal use, you must calculate the value of the percentage of your personal use. Such fringe benefits could be:

• Automobile
• Computers
• Entertainment
• Educational Benefits
• Airfare
• Travel Expenses
• Moving Expenses
• The rental value of a home furnished to an ordained minister is exempt from tax.
• A rental allowance provided to a minister by a church for the purpose of the minister renting a home is tax exempt.
• Any rental allowance included in a retired minister's pension payments is also exempt.
• Housing allowance income exclusions only apply to ordained, commissioned or licensed clergy. Any unused amounts must be reported as miscellaneous income.
• A housing allowance must be spent on housing related expenses or it is considered self-employed income subject to federal, state and self-employment taxes.
• A minister's housing allowance is not subject to income tax, but may be subject to the self-employment tax. For the housing allowance to be excluded from income, the church organization that employs you must officially designate the payments (in the minutes) as a housing allowance BEFORE payment is made.

Caution: Housing provided or a housing allowance paid to a member of the clergy for teaching or administrative services by a non-church affiliated college, university or other institution may not be excluded from income.

Tip: Have your church adopt an accountable business expense reimbursement plan. Without one, unreimbursed business expenses are only deductible in excess of 2% of your income and are limited on a pro-rata basis to the extent of any housing allowance received (Deacon Rule).

Accident and Health Plans

Ministers do not have to include as income the amount their church or religious organization pays for accident and health insurance on their behalf. This includes most reimbursements for out of pocket medical treatment or disability income.

Retirement Plans-403(b)s

Many religious, charitable, educational and public non-profit organizations offer deferred compensation retirement savings plans. These are commonly called 403(b) plans and are usually funded through the purchase of annuities or custodial accounts comprised of mutual funds.

Contributions made to qualified retirement plans of a church or religious organization:

• may be excluded from income
• will be taxed at withdrawal as ordinary income
• will incur a 10% penalty if withdrawn prematurely

Tip: Contributions made for a self-employed minister to a qualified retirement plan of a church or religious organization may be excluded from income.

Common Mistakes

Mortgage Interest

A minister is allowed to deduct mortgage interest and real estate taxes paid for a personal residence even if the funds paid are from a rental/housing allowance that is exempt from income tax.

Self-employment Tax

Duly ordained members of the clergy who have taken vows of poverty are not subject to the self-employment tax when they perform duties connected with their religious order.

Employees of a church electing exemption from Social Security Withholdings are considered self-employed and subject to the self-employment tax if their church income is more than $108.00.

This is a tax trap for many church employees whose wages are subject to the full 15.3% self-employment tax.

Withholding on Salary and Wages

Wages and salaries paid to members of a religious order for services performed for the order or any associated institution are exempt from mandatory withholdings.

Caution: Check whether tax withholdings are taken from your pay. It's voluntary. If not, you could be in for a big tax at the end of the year and possible penalties if you should fail to make quarterly estimated tax payments.

Non-Profits

Typically non-profit organizations are classified as tax-exempt charitable organizations under IRS code section 501(c)(3). They are organized for charitable purposes or for the mutual benefit of their members. Examples of such organizations include: charities, charitable trusts, professional associations, private foundations, local YMCAs, neighborhood churches and other religious groups and co-ops. Any net income directly related to their purposes are not taxed and may be retained by the organization for future operational needs.

Tax-exempt Status

Tax-exempt status must be applied for by filing Form 1023, 1024 or, in the case of a private foundation, Form 990PF. Although not taxed, these groups must file an informational return each year.

Public Disclosure

All non-profit tax-exempt organizations are required to allow public examination of their application for tax-exempt status and disclose their most recent informational returns.

Income Rules

Tax-exempt Income

The more common types of tax-exempt income include:

• Income from primary not-for-profit activities
• Tax deductible contributions
• Qualified member dues and fees
• Government grants for service to the public
• Rent from real property
• Income from research performed by a college, university or hospital for a person or the U.S. Government or it's agencies
• Gains or losses on sale or exchange of property
• Income from entertainment activities provided by the non-profit in connection with a fair or exposition
• Income of agricultural, horticultural, or labor organization for trade show participation to promote products and services
• Income from rental of a non-profit mailing list, name, logo or intangible asset is considered tax exempt royalty income provided:
  • the agreement states they are not forming a joint venture, partnership or agent relationship
  • the non-profit has limited responsibilities
  • the renter/licensor party keeps the books
  • the non-profit provides only inconsequential services to the business activity
• If members receive no significant benefits from their dues they may be treated as contributions not dues (income)
• All non-cash contributions must be assigned a Fair Market Value as of the date received
• All free use of service facilities or materials must be valued and reported separately on the information return
• If more than Fair Market Value is received for items sold in a fund raising campaign the excess is deemed a contribution

Taxable Income

Non-profits may earn unrelated taxable income from business activities. Any non-related business income must be filed on a taxable return (Form 990-T). This includes:

• All non-related business income and income from non-tax deductible contributions
• Rental income derived from the purchase of property that is debt financed by the non-profit and leased back by the seller
• Investment in a S-Corp. or private foundation

Losses where there is no profit motive may not be used to reduce income from any taxable activities.

Caution: With taxable income, non-profits are treated and taxed like corporations and are expected to pay quarterly estimated taxes.

Employee Income

Most employees of non-profit organizations, unless officially ordained ministers and/or religious clergy, must pay income tax on their wages, salaries and other forms of compensation.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Health Care Professionals

This brochure is designed to provide income tax information specifically pertinent to individuals who work in health care professions.

While in many ways the IRS treats health care professionals just as they treat taxpayers in other fields of employment, there are some special tax treatments and deductions worth discussing.

Income

Most health care professionals fall into two income earning groups. Either you are an employee or you are considered self-employed. Some individuals actually earn income as both an employee and as a self-employed individual.

Employee or Self-employed?

For tax purposes, workers in health care will be treated as either employees or as self-employed unless you work on a volunteer basis.

As an Employee:

• Your employer will withhold Social Security, Federal and State taxes and any amounts you may have elected for fringe benefits such as health care insurance, life insurance and savings plans.
• Any non-reimbursable expenses related to your work are subject to the 2% of adjusted gross income (AGI) threshold before any deductions are allowed.

Tip: Any excess expenses above your reimbursements may be an itemized deduction if they exceed 2% of your income.

As self-employed:

• Your 1040 tax return is filed as self-employed (Schedule C).
• You may receive a Form 1099 from each business client or customer who has engaged your service.
• Payments from individuals must be recorded as income.
• Generally no withholdings are taken for Social Security or Federal or State income tax.
• You will be subject to the self-employment tax of 15.3%.
• You will need to file quarterly estimated taxes to pay your federal, state and self-employment tax obligation.
• All business related expenses are directly deductible from your gross income without the 2% threshold.

Excludable income to employees

• Reimbursements to employees for purchase of required uniforms and other required personal equipment used solely for your work can be excluded from income.

Excludable Research Income

Income received for research may be exempt from income tax by health care facilities in several areas:

• Income of non-profit hospitals and medical research facilities for research conducted for any person or the U.S. Government and it's agencies or State governments
• Income of any primarily research-oriented organization the results of which are made freely available to the public
• Income of labor unions or agricultural or horticultural organizations that is used to establish a hospital, retirement home or similar facility specifically for the aged and infirmed

Allowable Deductions For Self-Employed

In addition to the typical deductions allowed for non-reimbursable expenses incurred by employees and business expenses of self-employed, health care professionals who are not employees may deduct the following expenses to the extent they are directly related to the practice of their profession such as:

• Auto expenses incurred in making calls and performing services
• Dues to professional organizations
• Lease or rent payments made for office/clinic space
• Lease payments for equipment and furniture
• Books, if their useful life is less than one year

  Tip: If the useful life of books, manuals and equipment is more than one year the expense is considered a capital asset and must be depreciated over the useful life of the item.

• Equipment purchased, with a useful life of less than one year
• Membership dues for professional organizations, associations and public service clubs (e.g. Rotary)
• Cost for professional journals
• Costs for professional information services and subscriptions
• Convention attendance expenses
• Business entertainment expense directly related to expansion of a medical practice
• Uniforms

Deductible Expenses as an Employee

If you are a health care professional who is an employee you may deduct non-reimbursed business expenses in excess of 2% of your adjusted gross income (AGI). Typical expenses include:

• Uniforms of nurses, orderlies and technicians, including cleaning and maintenance provided they are:
  • a requirement of the job
  • not adaptable for common wear
• Protective wear, such as gloves, masks and safety glasses
• Work shoes
• Union dues
• Trade association dues
• Education within your profession
• Work related travel expenses
• Convention/Trade Show attendance expenses
• Practice insurance

Reduced Deductions for High Incomes

Health care professionals with individual incomes over a certain adjusted gross income (AGI) threshold must reduce their allowable itemized deductions by 3% of the excess amount over the threshold times 1/3. No reduction is required for:

• Medical expenses
• Investment interest
• Casualty, theft and wagering losses

Note: The reduction can never be more than 53.3% of your itemized deductions. The reduction is applied after the disallowance of miscellaneous expenses below 2% of your income.

Non-deductible Expenses

• Club dues, other than professional organizations or associations, whether for pleasure or business
• Cost for professional libraries with useful lives of more than one year must be capitalized and depreciated over their lives
• Foreign convention attendance expenses
• A physician's staff privilege fee paid to a hospital must be capitalized and depreciated
• Commuting expense to and from place of work

Office in Your Home

Many health care professionals can now enjoy the tax benefits of deducting the cost of an in-home office. If you are a health care professional with an office in your home, you may deduct certain expenses if:

• You are operating an on-going trade or business
• The space is exclusively used for your profession
• The space is on your premises but in a separate structure
• You use the space to meet patients, clients or customers
• The space is the principal place of your business
• You use the space to store samples and/or inventory for your business
• You conduct the general administrative duties of your business in the space and there is no other fixed location to do so

The tax laws regarding home office use have recently been relaxed. With the new home office definition, many professionals who perform administrative duties in their home can now take home office deductions.

Cash vs. Accrual Method of Accounting

Most professional medical service businesses have traditionally used the Cash Method of accounting for keeping their books, preparing financial statements and filing annual tax returns. This method allows revenue, or income for services, to be recorded when payment is received, not when the payment obligation is established at time of the service. This cash basis method may not apply appropriately if you are selling any medical supplies, equipment, medications or supplements in your practice. When you have an inventory of purchased items that are sold later, the Accrual Method of accounting may be required. Combination methods of cash and accrual are also possible. Call if you would like clarification regarding your situation.

Tip: If your average gross revenues for the past three tax years is less than $1 Million, you can use the cash method of accounting, despite the fact that there is inventory present.

Cooperative Hospital Service Organizations

The IRS provides tax exempt charitable organization status to cooperative hospital service organizations who perform the following types of services to two or more tax-exempt (non-profit) hospitals including those hospitals owned and operated by the local, state or federal government:

• Purchasing supplies
• Purchasing insurance
• Laboratory services
• Billing services
• Collection services
• Personnel services
• Clinical services

With this status an informational return is filed, but charitable rules of taxation apply.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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Educators & Day Care Providers

This provides an overview of the deductions that may be allowable to educators and those studying to become educators. While in most cases the IRS treats educators like other taxpayers, there are some distinct tax benefits extended to those in teaching.

Income

Income in the form of salary and wages to educators who are employed by any public or private educational institution, medical teaching facility or community school district is generally taxable and subject to Social Security and Medicare tax.
Other common non-salary earned income and compensation may be classified as self-employed income. This income is not only subject to income tax, but also may be subject to a 15.3% self employment tax. Withholdings are rarely taken out of this self-employed income and quarterly estimated taxes should be paid for federal, state and self employment tax obligations.

Examples of typical self-employed educator income are:

• Substitute teaching income when employed as an independent contractor
• Payments for research studies
• Payments for clinical studies
• Speaker fees
• Author royalties and fees for published materials
• Consulting fees
• Endorsement and sponsorship fees

Excludable Income

Some forms of compensation to educators may be excluded from income. They include:

• Meals, when it is for the convenience of the employer
• Lodging, if on campus and if accepting the lodging is a requirement of the job
• Faculty Housing on an educational or medical research campus, if adequate rent is charged and/or valued as compensation
• Scholarship and Fellowship Grants to candidates for a degree at a qualified institution
• Tuition Reductions extended to educational employees
• Athletic Scholarship Grants to candidates for a degree and participation in athletics

Caution: Payments to individuals who teach or conduct research as part of their degree curriculum are not excludable from gross income and may be taxed.

Tip: Tax laws are liberalized regarding employer-provided meals. If provided for the convenience of the employer, they are not only excludable from income for teachers, but 100% (formerly only 50%) deductible for the educational institution.

Expenses

Deductible Expenses

A common mistake made by teachers is not keeping track of out-of-pocket expenses, including mileage deductions. How often have you purchased supplies for your classroom which were not reimbursed? Some of the most common deductible expenses include:

• Union dues, fees, benefit assessments
• Copies
• Computer supplies for the classroom
• Books for the classroom
• Research materials
• Supplies; pens, pencils, markers (for class)
• Teaching aids; pointers, transparencies, models, etc.
• Software
• Education expenses for maintaining or improving required skills
• Convention attendance expenses
• Education expenses to meet the minimum requirements of a job
• Certain education expenses to meet the requirements of a new job
• The cost and upkeep of a uniform including cleaning, if required for the job and not common attire
• All job hunting expenses, if in the same trade or business
• Unreimbursed expenses for:
  • tuition, books, lab. fees
  • professional society dues
  • professional journals fees

Also remember mileage, meals, and travel expenses. Mileage can be deducted whenever you go to or from your place of work from a non-home location or to another job.
Unfortunately, these expenses for salaried teachers are considered itemized deductions allowable only in excess of 2% of your income when combined with other expenses, but if you are treated as a self-employed contractor you may deduct 100% of such costs as business expenses.

Tip: Through 2007 (and potentially 2008 pending legislative action) up to $250 spent for out-of-pocket purchases of classroom materials may be deducted without itemizing. To qualify you must be a full-time K-12 educator. What can you do with excess expenses subject to a 2% of income threshold as a misc. itemized deduction? Donate! Collect your receipts, fill out a non-cash donation form and have your school acknowledge you donated the items to the school. If done properly, it reclassifies your expense as a charitable donation and avoids the 2% misc. deduction income threshold rule.

Tip: How can you tell whether you are considered an employee or self-employed? If you receive a W-2 they consider you an employee. If you receive a 1099 you are being viewed as a contractor (self-employed).

Non-deductible Expenses

• Commuting expenses (from home to school and back)
• Travel as education expenses
• Job hunting expenses, if it is for a first job
• Job hunting travel expenses, if personal activities predominate
• Job hunting expenses in a new career field
• Foreign convention attendance, unless directly related to current job performance and "reasonable in location"

Tip: Technical manuals and books with permanent value are considered capital expenditures that must be depreciated over their useful life, not fully deductible in the year purchased.

Home Office

Rules may enable a deduction for use of your home as an office if the area in your home is:

• Used exclusively for your career trade or business
• Used consistently
• If not in your home, then a separate structure from your home on your home's premises
• Your place of business to conduct meetings with business associates, customers and/or clients
• Used for the convenience of your employer
• Used as the sole place for you to conduct the administrative duties of your trade or business

This break is especially good for those who teach out of their home, such as tutors and music teachers.

Caution: The rules for business use of your home can be very complex and are highly scrutinized by the IRS. It's wise to seek advice on your particular situation.

Day Care Providers

As a subset of educators, day care providers warrant discussion regarding income, deduction of business expenses and the business use of your home.

First, you need to consider how you are viewed in the eyes of the IRS for your day care activity.

• Independent day care provider. You offer day care out of your home or a separate location. The IRS treats you as a "self-employed" worker.
• Employee. You work for a day care center, they pay your wages and withhold taxes. You receive a W-2 at the end of the year. The IRS treats you as an employee, just like other wage earners.
• Contract labor. Perhaps a day care center hires you on a spot basis and pays you a lump sum. At the end of the year you would receive a 1099. In this case you are considered "self-employed" by the IRS.

It is important to know how you are viewed in the eyes of the IRS to take full advantage of your tax situation.

Income

If you are an independent day care provider or contract labor, your income is typically self employed income and must be reported on a schedule C with your 1040 return. Your customers (parents) do not withhold any social security, federal or state taxes, so you are responsible to pay quarterly estimated taxes for your state, federal and self-employment tax (15.3%) obligations.
Conversely if you are an "employee", half of the self-employment tax is paid by the day care. Your share (7.65%) is withheld from your pay for social security and medicare.

Allowable Deductions

You may deduct your day care business related expenses and your use of your personal residence to provide day care services to children, elderly or handicapped if:

• You are a qualified, licensed or state certified provider
• You complete and file Form 8829
• The day care service is provided on a regular and consistent basis as your trade or business

Tip: It is recommended that a separate checking account be used to keep your day care expenses separate from other expenses.

A check list of the most common expenses includes:

• Supplies
• Food and snacks
• Advertising costs
• Cleaning and maintenance
• Laundry
• Equipment
• Insurance
• Business Mileage
• Play toys
• Clubs
• Furnishings
• Telephone
• Baby supplies
• Postage
• Payroll
• Fees for daytime activities
• Education expenses to meet state certification requirements eg. CPR and First Aid

Home Based Day Care Deductions

Common day care business-use-of-home deductions are calculated on the percentage of your home that is used for the day care services and include that portion of:

• Property taxes
• Mortgage interest
• Home owners insurance
• Maintenance
• Utilities

Note: Family (home-based) day care providers can use standard meal and snack rates versus actual costs in deducting meal and snack expenses for eligible children.
Business use of home expense calculations can be tricky. Call with questions particular to your situation.

This publication provides only summary information regarding the subject matter contained here. Please call with any questions on how this information may affect your situation.

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