Tax Implications of Bitcoins

Back on March 25 the IRS issued IR-2014-36 entitled “IRS Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply.”  
The title pretty much says it all. Virtual currency, of which Bitcoins are a well-known example, is treated like regular currency although not legal tender in the U.S.
“General tax principles that apply to property transactions apply to transactions using virtual currency.  Among other things, this means that:

• Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
• Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
• The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
• A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.”

Payments described in the first two bullet items are reported at the fair market value of the virtual currency on the date of the payment. Reporting requirements mentioned in the last bullet item also use fair market value on the transaction date to determine whether the need for a report is triggered.
If you invest in a virtual currency, like Bitcoins, when you sell that investment you will have a capital gain or loss.
The full text of Notice 2014-36 is available as a PDF file here.
If you have questions about this or any other tax issue, give me a call (804-745-7157) or send me an email (bill@hollandbrowncpa.com).

Travel & Entertainment: Maximizing Tax Benefits

Tax law allows you to deduct two types of travel expenses related to your business, local and what the IRS calls "away from home."

1. First, local travel expenses. You can deduct local transportation expenses incurred for business purposes such as the cost of getting from one location to another via public transportation, rental car, or your own automobile. Meals and incidentals are not deductible as travel expenses, but you can deduct meals as an entertainment expense as long as certain conditions are met (see below).
2. Second, you can deduct away from home travel expenses-including meals and incidentals, but if your employer reimburses your travel expenses your deductions are limited.

Local Transportation Costs

The cost of local business transportation includes rail fare and bus fare, as well as costs associated with use and maintenance of an automobile used for business purposes. If your main place of business is your personal residence, then business trips from your home office and back are considered deductible transportation and not non-deductible commuting.

You generally cannot deduct lodging and meals unless you stay away from home overnight. Meals may be partially deductible as an entertainment expense.

Away From-Home Travel Expenses

You can deduct one-half of the cost of meals (50 percent) and all of the expenses of lodging incurred while traveling away from home. The IRS also allows you to deduct 100 percent of your transportation expenses--as long as business is the primary reason for your trip.

Here's a list of some deductible away-from-home travel expenses:

• Meals (limited to 50 percent) and lodging while traveling or once you get to your away-from-home business destination.
• The cost of having your clothes cleaned and pressed away from home.
• Costs for telephone, fax or modem usage.
• Costs for secretarial services away-from-home.
• The costs of transportation between job sites or to and from hotels and terminals.
• Airfare, bus fare, rail fare, and charges related to shipping baggage or taking it with you.
• The cost of bringing or sending samples or displays, and of renting sample display rooms.
• The costs of keeping and operating a car, including garaging costs.
• The cost of keeping and operating an airplane, including hangar costs.
• Transportation costs between "temporary" job sites and hotels and restaurants.
• Incidentals, including computer rentals, stenographers' fees.
• Tips related to the above.

Entertainment Expenses

There are limits and restrictions on deducting meal and entertainment expenses. Most are deductible at 50 percent, but there are a few exceptions. Meals and entertainment must be "ordinary and necessary" and not "lavish or extravagant" and directly related to or associated with your business. They must also be substantiated (see below).

Your home is considered a place conducive to business. As such, entertaining at home may be deductible providing there was business intent and business was discussed. The amount of time that business was discussed does not matter.

Reasonable costs for food and refreshments for year-end parties for employees, as well as sales seminars and presentations held at your home are 100 percent deductible.

If you rent a skybox or other private luxury box for more than one event, say for the season, at the same sports arena, you generally cannot deduct more than the price of a non-luxury box seat ticket. Count each game or other performance as one event. Deduction for those seats is then subject to the 50 percent entertainment expense limit.

If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. The amounts separately stated for food and beverages must be reasonable.

Deductions are disallowed for depreciation and upkeep of "entertainment facilities" such as yachts, hunting lodges, fishing camps, swimming pools, and tennis courts. Costs of entertainment provided at such facilities are deductible, subject to entertainment expense limitations.

Dues paid to country clubs or to social or golf and athletic clubs however, are not deductible. Dues that you pay to professional and civic organizations are deductible as long as your membership has a business purpose. Such organizations include business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards.

Tip: To avoid problems qualifying for a deduction for dues paid to professional or civic organizations, document the business reasons for the membership, the contacts you make and any income generated from the membership.

Entertainment costs, taxes, tips, cover charges, room rentals, maids and waiters are all subject to the 50 percent limit on entertainment deductions.

How Do You Prove Expenses Are Directly Related?

Expenses are directly related if you can show:

• There was more than a general expectation of gaining some business benefit other than goodwill.
• You conducted business during the entertainment.
• Active conduct of business was your main purpose.

Record-keeping and Substantiation Requirements

Tax law requires you to keep records that will prove the business purpose and amounts of your business travel, entertainment, and local transportation costs. For example, each expense for lodging away from home that is $75 or more must be supported by receipts. The receipt must show the amount, date, place, and type of the expense.

The most frequent reason that the IRS disallows travel and entertainment expenses is failure to show the place and business purpose of an item. Therefore, pay special attention to these aspects of your record-keeping.

Keeping a diary or log book--and recording your business-related activities at or close to the time the expense is incurred--is one of the best ways to document your business expenses.

If you need help documenting business travel and entertainment expenses, don't hesitate to call us. We'll help you set up a system that works for you--and satisfies IRS record-keeping requirements.

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For more useful tax information, please read our monthly newsletter.

Email: bill@hollandbrowncpa.com

Web page: http://www.hollandbrowncpa.com

The Tolling of Interstate 95

In my role as a Chesterfield Planning Commission member I was appointed, in January of this year, to the Richmond Area Metropolitan Planning Organization (or RAMPO). RAMPO exists to allocate federal highway money to specific projects in the Richmond area.

To do that, we need to know what highway projects are being funded from other sources so we don't duplicate efforts and stuff like that. Yesterday, we got an update on the tolling of I-95 proposed by Governor Bob McDonnell back at the start of his term. VDOT is moving forward on that idea. Their proposal is a single toll station in Sussex County north of Emporia collecting from traffic travelling in both directions. The toll would be $4.00 each way ($12 for 18 wheelers). To reduce avoidance tactics,  those leaving I-95 one or two exits before the toll station in each direction would pay $2.00 and those entering I-95 one or two on-ramps after the toll station would also pay $2.00. Thus, through travelers would, in theory, still pay $4 (or drive on local roads for even more miles). This plan is expected to generate $40 million per year.

There is a pot of federal money for maintenance of Interstate highways. Virginia gets money from that pot but if a toll is put on I-95, none of that Federal Interstate maintenance money can be spent on I-95. We will still get all those dollars but they will have to be spent only on the other Interstate highways in Virginia. So it appears as though the effect of tolling I-95 will decrease the amount of maintenance done on I-95 by $10 million and increase the maintenance on other Virginia Interstates by $50 million. That wouldn't be a bad deal except I-95 needs  more maintenance, not less.

But, there's an out according to the VDOT person making the presentation. Other federal highway money (he used bridge replacement as an example) isn't restricted to a specific set of highways but is often restricted in other ways as to how it can be spent. Another Interstate's maintenance activities could get a chunk of this $50 million being taken away from I-95 (say, $10 million used to replace a bridge) and transfer over to I-95 a similar amount (say, $10 million of bridge replacement money).

This is all well and good as long as I-95 needs more bridge replacement money than is currently planned to be spent on that highway. Well then, the VDOT guy would say, transfer safety money instead or some other specified use money to meet I-95's needs.

All well and good again as long as the restrictions on how these other pots of federal highway money can be spent don't keep enough of those dollars from being used on I-95.

 In short, $50 million per year currently planned for use on other Virginia highways will have to be spent on I-95. If that doesn't happen, the drivers paying tolls on I-95 will be funding maintenance of other Interstates in Virginia.

The VDOT proposal also calls for "open road tolling." That is, drivers will be expected to have transponders in their vehicles like EZ-Pass and to pay their tolls using that technology. As is the case on 895 and the Powhite Parkway, photos will be taken of toll evader's  license plates and they will receive a bill in the mail. Guess for yourself how many out-of-staters will respond favorably to that. (Don't forget, VDOT also wants to add a $1.00 per month fee for having a transponder in your car.)

Finally, I'm not persuaded that tolling I-95 is worth the costs. First, I find the projected toll revenues and operating costs to be optimistic at best. Second, the costs imposed on people in Sussex county to either pay $2 to $4 each way for local trips or to drive out of their way are ignored. Those costs, measured in dollars may be low in the greater scheme of things but they are significant to the people bearing those costs. Just ask Brandermill/Wood Lake residents who pay around $8 per day in tolls just to drive to and from work. (By the way, I don't whether people who live in Brandermill or Woodlake and work in downtown Richmond to have much sympathy for the potential plight of Sussex county commuters but, I expect those Chesterfield residents can guess the reactions of affected Sussex citizens.) Third, the qualitative costs of having additional traffic on US 301, US 1 and other local roads can't be measured in dollars so, even though they exist, those costs are ignored.

Public hearings haven't been scheduled yet but we're promised they will happen some day, real close to the time the application is due to the federal Department of Transportation.

For not much more information on tolling I-95, go to VDOT's Interstate 95 Corridor Improvement Program web page.

Manchester Growing

44 new apartments are being built in Manchester, a section of Richmond south of the James, by Urban Development Associates. The BizSense article mentions several other projects under way in that area.

Successful revitalization in south Richmond is crucial to revitalization efforts in adjoining areas of Chesterfield County.