Wednesday, May 18, 2016

Driver Per Diem to Pay or Not to Pay that is the Question

Arkansas Business Article

There are a lot of questions on the best way to manage per diem pay for truck drivers these days. Per diem, in this case, is a non-taxable reimbursement for meals and incidentals as it pertains to the trucking industry. Other types of per diem also include a lodging rate, which is based on the locale of the travel.
By allocating a portion of a driver's pay, you eliminate the payroll taxes on that portion and also the federal and state income taxes on that portion for the driver. You also reduce the amount of worker’s compensation premium that you pay. But be careful in this, because most work comp policies have a limit on how much per diem you can exclude from pay for work comp premium calculation purposes. Although 20 percent of the per diem paid is not deductible for the company, the savings on payroll taxes and work comp premium will exceed the tax on the 20 percent.
By Day or Mile?

Paying per diem by the day is a more accurate method of payment. It eliminates the need for testing the per diem on a periodic basis which is required to be performed if you pay by the mile.
If you are paying by the mile and you are not testing your per diem you need to start. Should you be subjected to an audit that is one of the first things the auditors will want to review. If you are paying by the mile there could be a chance, depending on the rate, that you could exceed the daily allowance, which is currently $63 per day. On any departure or arrival day you can pay up to 75 percent of the daily allowance. So in an ideal situation, when the driver leaves on Monday at 8 a.m. and returns Friday at 8 p.m., you can pay the driver two days at 75 percent of the daily rate and three days at 100 percent of the daily rate.
The payment of the per diem pertains to the amount of time the driver is away from his or her “tax home.” Also, by paying by the mile, you could lose out on the maximum savings you can receive by paying the per diem. For example, if you pay per diem at .08 cents per mile, your driver may go 600 miles in a 24-hour period (obviously an almost perfect scenario), that amounts to only $48. Technically the driver should get $63, so you have missed out on the maximum savings of paying the per diem. By paying by the day, you calculate the per diem at the end of the trip and that means no need to test it periodically.  

Tuesday, September 29, 2015

Fiscal Year 2016 Travel Per Diem Rates Now Available

Documenting business travel expenses causes administrative headaches for employers and employees alike. Typically, employees are required to collect receipts as they travel, noting the time, place and business purpose of each expenditure. They then must submit monthly expense reports that are subject to approval of their supervisors. Sometimes, administrative delays occur if documentation is incomplete or a supervisor questions the business purpose (or reasonableness) of an item. Employers must hold on to all of this documentation for several years in case the IRS questions business travel deductions. Isn't there any easier way to reimburse workers for their travel costs?

Alternative Substantiation Methods
Fortunately, the IRS offers simpler alternatives that may be worthwhile for some companies. Instead of reimbursing employees for their actual expenses for lodging, meals and incidentals while traveling, employers may pay them a per diem amount, based on IRS-approved rates that vary from locality to locality.
If your company uses per diem rates, employees don't have to meet the usual recordkeeping rules required by law. Receipts of expenses generally aren't required under the per diem method. Instead, the employer simply pays the specified allowance to employees, although they still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren't subject to income or payroll tax withholding or reported on the employee's Form W-2.

Important note: Per diem rates can't be paid to individuals who own 10% or more of the business.
Under the "high-low method," the IRS establishes an annual flat rate for certain areas with higher costs of living. All the locations within the continental United States that aren't listed as "high-cost" automatically fall into the low-cost category. The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include San Francisco, Boston and Washington, D.C. (See the chart below for a complete list by state.)
Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. The IRS also provides a $5 incidental-expenses-only rate for employees who don't pay or incur meal expenses for a calendar day (or partial day) of travel.

Recent Updates for 2016
The IRS recently updated the per diem rates for business travel for fiscal year 2016, which starts on October 1, 2015. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $275 for post-September 30, 2015, travel (consisting of $207 for lodging and $68 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $185 for post-September 30, 2015, travel (consisting of $128 for lodging and $57 for meals and incidental expenses). Compared to the prior simplified per diems, the high-cost area per diem has increased $16, and the low-cost area per diem has increased $13.
The following costs aren't included in incidental expenses:
  • Transportation costs between places of lodging or business and places where meals are taken, and
  • Mailing costs of filing travel vouchers and paying employer-sponsored charge card billings.
Accordingly, taxpayers using per diem rates may separately deduct, or be reimbursed for, transportation and mailing expenses.
The IRS also modified the list of high-cost areas for post-September 30 travel. The following localities have been added to the high-cost list:
  • Mammoth Lakes, Calif.,
  • Grand Lake, Colo.,
  • Silverthorne/Breckenridge, Colo.,
  • Traverse City/Leland, Mich.,
  • Hershey, Pa., and
  • Wallops Island, Va.
On the other hand, these areas have been removed from the previous list of high-cost localities:
  • Sedona, Ariz.,
  • Santa Cruz, Calif.,
  • New Orleans, La.,
  • Baltimore City, Md.,
  • Cambridge/St. Michaels, Md.,
  • Glendive/Sidney, Mont.,
  • Conway, N.H.,
  • Glens Falls, N.Y.,
  • Tarrytown/White Plains/New Rochelle, N.Y.,
  • Kill Devil, N.C., and
  • Williston, N.C.
Note: Certain tourist-attraction areas count as high-cost areas on only a seasonal basis. Starting on October 1, the following tourist-attraction areas have changed the portion of the year in which they are high-cost localities:
  • Napa, Calif.,
  • Telluride, Colo.,
  • Miami, Fla.,
  • Martha's Vineyard, Mass.,
  • Nantucket, Mass.,
  • Jamestown/Middletown/Newport, R.I.,
  • Charleston, S.C., and
  • Jackson/Pinedale, Wyo.
Rules and Restrictions
Companies that use the high-low method for an employee must continue to use it for all reimbursement of business travel expenses within the continental United States during the calendar year. The company may use any permissible method to reimburse that employee for any travel outside the continental United States, however.
For travel in the last three months of a calendar year, employers must continue to use the same method (per diem method or high-low method) for an employee as they used during the first nine months of the calendar year. Also, employers may use either:
1. The rates and high-cost localities in effect for the first nine months of the calendar year or
2. The updated rates and high-cost localities in effect for the last three months of the calendar year, as long as they use the same rates and localities consistently for all employees reimbursed under the high-low method.

Company Deductions
In terms of deducting amounts reimbursed to employees on the company's tax return, employers must treat meals and incidental expenses as a food and beverage expense that's subject to the 50% deduction limit on meal expenses. For certain types of employees — such as air transport workers, interstate truckers and bus drivers — the percentage is 80% for food and beverage expenses related to a period of duty subject to the hours-of-service limits of the U.S. Department of Transportation.
Example: A company reimburses its marketing manager for attending a July trade show in Chicago based on the $275 high-cost per diem. It may deduct $241 ($207 for lodging plus $34 for half of the meals and incidental expense allowance).

Contact a Tax Pro
IRS auditors often target business travel expenses. So, detailed recordkeeping is imperative. Per diem substantiation methods may simplify your recordkeeping requirements and minimize IRS scrutiny. Contact your tax adviser to determine if it makes sense for your company to use per diem rates to reimburse employees' business travel expenses.
The High-Cost Area List for 2016
Key City
CaliforniaMammoth Lakes (December 1-February 29)
Monterey (July 1-August 31)
Napa (October 1-October 31; May 1-September 30)
San Francisco
San Mateo/Foster City/Belmont
Santa Barbara
Santa Monica
Sunnyvale/Palo Alto/San Jose
ColoradoAspen (December 1-March 31; June 1-August 31)
Grand Lake (December 1-March 31)
Silverthorne/Breckenridge (December 1-March 31)
Steamboat Springs (December 1-March 31)
Telluride (December 1-March 31; June 1-August 31)
Vail (December 1-March 31; July 1-August 31)
District of ColumbiaWashington, D.C.
FloridaBoca Raton/Delray Beach/Jupiter (January 1-April 30)
Fort Lauderdale (January 1-March 31)
Fort Walton Beach/DeFuniak Springs (June 1-July 31)
Key West
Miami (December 1-March 31)
Naples (January 1-April 30)
Illinois Chicago (October 1-November 30; March 1-September 30)
Maine Bar Harbor (July 1-August 31)
MarylandOcean City (June 1-August 31)
Falmouth (July 1-August 31)
Martha's Vineyard (June 1-September 30)
Nantucket (October 1-December 31; June 1-September 30)
Michigan Traverse City/Leland (July 1-August 31)
New YorkLake Placid (July 1-August 31)
New York City
Saratoga Springs/Schenectady (July 1-August 31)
PennsylvaniaHershey (June 1-August 31)
Philadelphia (October 1-November 30; March 1-June 30; September 1-September 30)
Rhode IslandJamestown/Middletown/Newport (June 1-August 31)
South Carolina Charleston (October1-November 30; March 1-September 30)
Texas Midland
Utah Park City (December 1-March 31)
Virginia Virginia Beach (June 1-August 31)
Wallops Island (July 1-August 31)
WyomingJackson/Pinedale (June 1-September 30)
 — Source: IRS

Monday, September 29, 2014

Excellent Article on Per Diem in our newsletter this week.

Tuesday, September 03, 2013

A Closer Look at Home Office Deductions Working form home

Home office deductions can save taxpayers a bundle, if they meet the tax law qualifications. However, claiming expenses for a home office has long been a red flag for an IRS audit since many people don't qualify. But don't be afraid to take a home office deduction if you're entitled to it. You just need to pay close attention to the rules to ensure that you're eligible -- and that your recordkeeping is complete.
Beware: IRS Hot Button
The IRS often scrutinizes home office deductions claimed on tax returns. In one recent U.S. Tax Court case, many of the taxpayer's claimed expenses were disallowed once she became an employee. The case illustrates a number of issues that you should consider before deducting home office expenses.
Facts of the Case
Jean Marie Fontayne and her husband worked for Vitesse Semiconductor Sales Corporation. The husband was an employee, but Jean was a part-time independent contractor who worked from her home from January to July 2008.
After Jean's supervisor retired, his replacement hired Jean as a full-time employee in July 2008. As an employee, she was required to work from Vitesse's office at least two days a week and could work from home up to three days a week.
The taxpayers moved into their home in January 2008. Jean designated a room with a closet and a bathroom as her office space. Later that year, the taxpayers enlarged the home office. A contractor removed an office wall and replaced it 14 inches further into the living room.
In the home office area, the taxpayers replaced the carpet, re-tiled the bath, and added under-the-floor heating, a central vacuum, and a fireproof safe in the closet.
The Fontaynes reported a tentative profit from the business of $24,728 and expenses of $24,728 ($22,883 plus $1,845 for a casualty loss and depreciation) for business use of their home. That amount included direct expenses of $16,501 for repairs and maintenance, as well as an allocable portion of indirect expenses, such as utilities and homeowners insurance.
The taxpayers claimed that the office occupied 17.87 percent of their home (554 square feet in the home office divided by 3,100 feet in the total house). Their home office measurement included the hallway, entryway, room, bathroom and closet. In addition, the taxpayers calculated square footage from the outside of the house.
The IRS allowed deductions of just $1,113 for business use of home expenses. This included $391 of real estate taxes removed from Schedule A and re-characterized as home office expenses.
Tax Court Findings: The court agreed that the taxpayers qualified for home office deductions, for part of the year. The rest of the time, the court noted the taxpayer was an employee who wasn't required to work from home, although it might have made her more productive.
The taxpayers presented a letter from Vitesse stating Jean's part-time home office was beneficial for the company but wasn't required. Instead, she had to work at the company's location at least two days a week. The court ruled Jean didn't meet the "convenience of employer" requirement and disallowed home office deductions for the second half of the year.
The court also ruled the bathroom wasn't used exclusively and regularly for business. Neither was the closet, because Jean wasn't required to store inventory or other items for work. In addition, most of the claimed repairs were capital improvements, which couldn't be deducted.
Ultimately, the Court allowed a home office deduction for the first half of the year, when Jean was a contractor. The judge also scaled back on many of the taxpayers' computed direct and indirect expenses. (Fontayne, T.C. Summ. Op. 2013-54)
For Self-Employed Individuals
For self-employed individuals, a home office qualifies for deductions if it is used:
  • Exclusively and regularly as your principal place of business;
  • Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or
  • In the case of a separate structure, in connection with your trade or business.
There are also special rules for portions of a home used as a child care facility or for storage of inventory or product samples.
If you are self employed, have no other business location and perform the work at home, you should qualify. You can also qualify if you perform administrative or management activities in a home office and have no other fixed location where you can conduct such activities.
For example, suppose you're self-employed and take orders while visiting clients. Your only location for processing orders and following up on inquiries is your home office, so it likely qualifies for a tax deduction.
Regularly meeting customers or clients at a home office also qualifies it. The key word is regularly. Seeing customers twice a month is unlikely to meet the threshold.
The exclusive use requirement is also strictly interpreted. A spare bedroom converted into a home office will probably qualify, unless your relatives use the room when they come to visit.
For Employees
The rules for employees are stricter. An employee's home office qualifies if it is:
  • For the employer's convenience and
  • Required as a condition of employment.
To be a condition of your employment means it is necessary for you to properly perform your work. For example, suppose you're an engineer who inspects construction sites during the day and performs administrative tasks at night. If your employer's office is locked after hours, your home office would probably qualify for home office deductions if you use it to write up daily reports. In these types of cases, get a letter from your employer to substantiate the facts.
Crunching the Numbers
When computing your deduction, there are two types of expenses that are deductible -- indirect and direct. Indirect expenses are those that pertain to the whole house, such as utilities and homeowners insurance. Those are apportioned based on the percentage of the space used for business.
Some expenses -- such as housekeeping and gardening expenses or repairs to another room in the house -- don't qualify as an indirect expense and would not be deductible at all.
Direct expenses don't have to be apportioned. For example, if you have a separate electric line and meter for your home office, the full amount of the electric bill for that meter would be deductible.
New Simplified Option
Starting in 2013, you can deduct a simplified safe harbor amount of $5 per square foot up to a maximum of $1,500 (300 square feet). That's not overly generous, but it means you can itemize your full mortgage interest and real estate taxes on Schedule A of your personal tax return.
In some parts of the country, the effective savings of the new simplified option may be as much as if you claimed actual home office expenses. But if you live near a major metropolitan area, the simplified option might amount to a fraction of the actual expenses.
Keep in mind, the simplified option only makes the recordkeeping burden easier. It does not change the criteria for who can claim home office deductions. There's no simplified method for qualifying in the first place.
Pick One Method for the Year
Below is a chart from the IRS comparing the two options for claiming home office expenses. Once you choose a method for the tax year, you cannot change to the other method for the same year. If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business.
If you have questions about whether you qualify to claim home office deductions on your tax return, consult with your tax adviser.

New Simplified OptionRegular Method
Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposesThe same rules apply
Allowable square footage of business home use (not to exceed 300 square feet)Percentage of home used for business
Standard $5 per square foot used to determine home business deductionActual expenses determined and records maintained
Home-related itemized deductions claimed in full on Schedule AHome-related itemized deductions apportioned between Schedule A and business Schedule C or F
No depreciation deductionDepreciation deduction for portion of home used for business
No recapture of depreciation upon sale of homeRecapture of depreciation on gain upon sale of home
Deduction cannot exceed gross income from business use of the home, less business expensesThe same rules apply
Amount in excess of gross income limitation may not be carried overAmount in excess of gross income limitation may be carried over
Loss carryover from use of regular method in prior year may not be claimedLoss carryover from use of regular method in prior year may be claimed if gross income test is met in current year

Tuesday, April 30, 2013

Six Steps to Maximize Transportation Profits

Carriers know they should be more efficient and work smarter not harder. But sometimes they confuse increasing revenues with maximizing profits. Want to maximize profits instead of just increase revenues? Any carrier, of any size, can using these six steps.

Step one: Get smart.

Utilize technology to give your business an edge. The right equipment will provide cash and movement reports so you can stay on top of your business, as well as real-time updates on maintenance issues and driver performance. Technology is the one area where you do not want to save a buck. Months from now, you’ll hardly remember if you spent a little more than necessary, but you’ll kick yourself many times if you didn’t spend enough – especially if your competitors have capabilities you don’t.

Step two: Get tough.

Institute a fuel program, and then monitor it. Are you relying on your local or regional fuel salesperson to give you the best deal? How do you know what the best deals are? Cost plus? Retail minus? Better of? Bob Joiner of StrategEZ Fuel Network Solutions says carriers should contact fuel vendors regularly and negotiate the best prices possible. Deals shouldn’t stay in place year after year. Then carriers should track transactions to measure the results and make sure drivers are fueling at stops that are in the network. Many smaller carriers can’t afford a full-time fuel manager and assign this responsibility to another staff member, often the safety director. Safety directors have too important a job to ask them to take on this extra duty.

Step three: Get lean.

Make sure you aren’t wasting miles or keeping equipment you don’t need. Review your rates and your lanes in detail so you know where your trucks are going and so your customer service reps know what you need to turn a profit.  When your customer asks you to do more, ask yourself if that request would force you outside your standard routes. Maybe you should consider passing on the business.

Jimmy Starr, owner of Arkansas-based Woodfield Trucking, reduced his company’s fleets by 20 units about a year ago and now has 102 units. It was just too expensive to pay for trucks he wasn’t using and too hard to find qualified drivers to keep them moving. If the right business comes along, he’ll grow the fleet again, but he’s comfortable where he is.

Another place to look when trimming your company is excess staff. We’ve found that a carrier needs one non-driving employee, including owners, for every seven drivers.  If your company is way over the mark, review your processes and make sure you are not paying people just to shuffle paper around.  In reviewing the operations of a particular company, we found that very few loads were being booked during the morning hours, and then right before the end of the day, several loads miraculously would be entered into the system.  We concluded the company had too many dispatchers.  The company removed two and never missed a beat. 

Step four: Get green – and by green, I mean more fuel-efficient.

Gabe Stephens at CC Jones Trucking said his owner-operators spend up to $1,500 more a month on fuel using their older trucks than his company spends with newer trucks. One owner-operator got rid of his gas guzzler and is paying for his new rig with the difference in fuel costs alone.

To really save money, move the speedometer back to 62 miles per hour. A carrier driving 12 million miles a year that improves its fuel mileage from five to six miles per gallon would save, at $4 a gallon, $1.6 million a year. Stephens said, “I told somebody the other day, ‘When’s the last time you were on the interstate driving 65 to 70 miles an hour, and you had a truck pass you?’ he said. “If you think about it, it just doesn’t hardly happen anymore.”

Worried that you’ll lose drivers by doing that? Share some of those fuel savings with them. Bulkley Trucking out of Sulphur Springs, Texas, gives drivers incentives to improve their mileage. The company’s driver of the year averaged 9.1 miles per gallon and was awarded a Ford F-150 pickup truck in response. Thanks in part to its fuel efficiencies, the company’s profits and fleet size are increasing.

Step five: Get better maintenance processes.

Don’t skimp on maintenance – at all. Little things can cause big problems and review your utilization per shop personnel. This sometimes is a black hole where money goes in but nothing comes out. Accountability is the only way to stop the flow. Implement a repair order system, and if you already have one, make sure it is working as intended. Get shop reports weekly on equipment that needs to be repaired or is up for preventive maintenance, and have a person in management approve all repair and maintenance before it is performed. Check your production on your shifts, especially if you are running two of them. It could be that you need only one. 

Step six: Get a second opinion.

CPAs who really know the trucking industry can do more than balance your books and file your tax returns. They can help you save on all kinds of expenses. They also can provide projections whether you want to expand your business, cut back, or trade equipment. If leasing or purchasing is a question, let your CPA help you figure out the best approach based on your current tax and cash flow situation. Work with your CPA to make sure you are presenting your financial statements to your creditors in the best possible light.