Who Pays Taxes (and who doesn’t)?

The top 1% of individual filers paid 37.8% of all federal income taxes in 2013, the most recent year IRS has analyzed.  That’s down from 38.1% the previous year.  This group reported 19% of total adjusted gross income.  Filers need adjusted gross income of at least $428,713 to earn their way into the top 1% category.

The highest 5% paid 58.6% of total income tax and accounted for 34.4% of all adjusted gross income.  They each had adjusted gross income of at least $179,760.

The top 10% of filers, those with adjusted gross incomes of $127,695 or more, bore 69.8% of the income tax burden while bringing in slightly less than 46% of individuals’ total adjusted gross income.

The bottom 50% of filers paid 2.8% of the total federal income tax take.

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No Deduction Allowed for Substantial Use of RV

Jackson, Tax Court Memo. 2014-160

The taxpayer was an insurance agent who specialized in selling insurance policies specific to recreational vehicles (RVs).  To gain access to RV owners, the taxpayer was a member of several RV clubs.  The clubs held RV rallies which were primarily social events.  Only RV owners could attend these rallies.  Ownership was also required by certain RV parks, which often prohibited RV’s older than a certain age.

The taxpayer gathered sales leads at every rally.  He attached to his RV advertisement promoting his insurance business.  He invited potential customers to come to his RV and discuss the prospective client’s insurance needs.  It would often take months, if not years, for a relationship with a potential customer to develop into an actual sale.

The court stated there was no question the taxpayer used his RV for some personal purposes.  The taxpayer claimed, however, that he was entitled to deductions related to the business use of his RV.

The court acknowledged that the taxpayer actively sold insurance polocies during his time at the rallies, and that business activities conducted in using his RV generated a significant amount of revenue.  After reviewing the evidence in the record and considering the taxpayer’s testimony, the court concluded that the taxpayer spent two-thirds of his time during these rallies on business and one-third of his time for personal pleasure.  Thus, the primary use of the RV was for business, not pleasure.  However, none of the deductions for the business use was allowed because of IRC section 280A.

The Tax Court has previously ruled that an RV qualifies as a dwelling unit for purposes of the office-in-home rules under IRC section 280A.  Under the general rule, any personal use, including watching TV in the RV, makes the entire day a personal day.  IRC section 280A(c) has an exception to this general rule which allows a taxpayer to allocate costs to business use if a portion of the dwelling unit is “exclusively used” on a regular basis “as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business.”  The court said exclusivity is the key to this case.  The taxpayer did not use any portion of his RV exclusively for business.  Therefore, no deduction for the expenses allocated to the business use is allowed.

 

No Office-in-Home for Motor Home

Dunford, Tax Court Memo, 2013-189

A married couple lived in Illinois.  For 2005 and 2006, the tax years at issue, they filed a joint tax return with a Schedule C consulting business.  Most of the work was performed away from the taxpayer’s home in Illinois, sometimes working at or near client’s business locations.

For 2005, the taxpayers were away from home for half the year (the colder months), and for 2006, they were away the entire year.  During these periods, they traveled and stayed in their motor home.  The motor home had a sleeping area, a bathroom, and a kitchenette with a countertop.  Across the vehicle from the kitchen counter was a second countertop that was used as a desk, and on which the taxpayer had a computer and office supplies.

Throughout 2005 and 2006, the taxpayers traveled all across the U.S., but most of their travel time they were in Florida, California, and Nevada. The taxpayer’s three children also lived in Florida, Nevada and Quincy, Illinois, locations where the taxpayers spent significant time.  They kept no contemporaneous log that showed the business character of their travel. A reconstructed log of their travel that was entered into evidence in court often contradicted the documentary evidence of their whereabouts.  They had blended purposes, personal and business, for their travel, but their dominant motive for their travel plans was personal (the pleasure of being in the locations they chose and of being near their children).  Their clients reimbursed most of their travel expenses for airline, auto rental, standard mileage rate, per diem, meals, and office-related expenses.

The reimbursements included nearly all of the mileage they recorded in their activity log.  All of these reimbursements were deducted as travel expenses or meal expenses on Schedule C.  During the audit, the IRS did not dispute the deductibility of reimbursed expenses that the taxpayer’s had billed to their clients.  The disallowed deductions were for non-billed expenses.

Included in the expenses disallowed by the IRS were vehicle expenses including repairs and maintenance, depreciation, insurance, tax and licenses, and utilities.  These travel-related expenses were disallowed for at least one of the following reasons:

  •  The taxpayers used the motor home as a residence during 2005 and 2006, so IRC section 280A disallows the deductions.
  • The taxpayers had already claimed and been allowed deductions for their business use of their motor home and other vehicles based on the standard mileage rate, so that deductions for actual costs would be duplicative, and
  • The taxpayers failed to adequately substantiate their entitlement to many of their vehicle-related deductions.

IRC section 280A states that no deduction is allowed with respect to the use of a dwelling unit which is used by the taxpayer during the tax year as a residence, unless the business use of home exception is met.  IRC section 280A(c)(1) allows a deduction “to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis” for business.  The taxpayers did not prove that there was an identifiable portion of their motor home that was used exclusively for business purposes. The area they seemed to put forward as the home office was the countertop that was used as a desk.  But they did not make any showing of the percentage of the vehicle that constituted this area (it would be a very small percentage), and it is implausbile to suggest that, in the cramped quarters of a motor home, an unclosed area like the countertop would somehow be exclusively reserved to business activity.  Accordingly, the court ruled all deductions (other than deductions for interest expenses on Schedule A) claimed with respect to the use of their motor home were disallowed.

Actual expenses for the use of their motor home were also disallowed on the grounds that many would be duplicative to the standard mileage rate deduction that the IRS had already allowed based on the taxpayers billing their clients for reimbursement of travel expenses.  Actual expenses for the use of their motor home were also disallowed on the grounds that they failed to provide adequate substantiation for these travel costs.  A motor home is considered listed property, and deductions for business use of listed property require a higher level of substantiation than the taxpayrs provided.

 

 

IRS Announces 2016 Standard Mileage Rates

By Gary A. Hensley, MBA, EA

IRS, in Notice 2016-1, announced the optional 2016 standard mileage rates for taxpayers to use in computing the deductible costs of operating an automobile for business, charitable, medical, or moving expense purposes.

Highlights:

Business mileage:  The standard mileage rate for transportation or travel expenses for 2016 is 54 cents per mile (compared to 57.5 cents in 2015) for all miles of business use (business standard mileage rate).

Charitable mileage:  The standard rate for 2016 is 14 cents per mile (same as 2015) for use of an automobile in rendering gratuitous services to a charitable organization.

Medical care and moving:  The standard mileage for 2016 is 19 cents per mile (compared to 23 cents in 2015) for use of an automobile for medical care or as part of a move (for which the expenses are deductible under IRC 217).

Basis Reduction Amount

For automobiles a taxpayer use for business purposes, the portion of the business standard mileage rate treated as depreciation (when sold or traded in) is 23 cents per mile for 2012, 23 cents per mile for 2013, 22 cents per mile for 2014, 24 cents per mile for 2015, and 24 cents per mile for 2016.

Remember:  A taxpayer is not required to use the standard business mileage but instead may substantiate using actual allowable expense amounts if the taxpayer maintains adequate records or other sufficient evidence.