In this Edition
March 21, 2023
Protect the “Ordinary and Necessary” Advertising Expenses of Your Business
PODCAST: Does Your Business Owe Tax to Another State?
Changes in SEC. 174 Make It a Good Time to Review the R&E Strategy of Your Business
Have a Foreign Account? File an FBAR
Reconsidering Your Personal Emergency Fund
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Protect the "Ordinary and Necessary" Advertising Expenses of Your Business |
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Under tax law, businesses can generally deduct advertising and marketing expenses that help keep existing customers and bring in new ones. This valuable tax deduction can help businesses cut their taxes.
However, in order to be deductible, advertising and marketing expenses must be “ordinary and necessary.” As one taxpayer recently learned in U.S. Tax Court, not all expenses are eligible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is one that’s helpful and appropriate for the business.
According to the IRS, here are some advertising expenses that are usually deductible:
- Reasonable advertising expenses that are directly related to the business activities.
- An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
- The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.
Facts of the Recent Case
An attorney deducted his car-racing expenses and claimed they were advertising for his personal injury law practice. He contended that his racing expenses, totaling over $303,000 for six tax years, were deductible as advertising because the car he raced was sponsored by his law firm.
The IRS denied the deductions and argued that the attorney’s car racing wasn’t an ordinary and necessary expense paid or incurred while carrying on his business of practicing law. The Tax Court agreed with the IRS.
When making an ordinary and necessary determination for an expense, most courts look to the taxpayer’s primary motive for incurring the expense and whether there’s a “proximate” relationship between the expense and the taxpayer’s occupation. In this case, the taxpayer's car-racing expenses were neither necessary nor common for a law practice, so there was no “proximate” relationship between the expense and the taxpayer’s occupation. And, while the taxpayer said his primary motive for incurring the expense was to advertise his law business, he never raced in the state where his primary law practice was located and he never actually got any legal business from his car-racing activity.
The court noted that the car “sat in his garage” after he returned to the area where his law practice was located. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.
This form of “signage,” the court stated, “is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car.” (TC Memo 2023-18)
Keep Meticulous Records
There are no deductions allowed for personal expenses or hobbies. But as explained above, you can deduct ordinary and necessary advertising and marketing expenses in a bona fide business. The key to protecting your deductions is to keep meticulous records to substantiate them. Contact us with questions about your situation.
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Matt Eckelberg, CPA
D 715.384.1995
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All About LLCs
In this episode, Jeff Dvorachek, a tax partner, takes a closer look at LLCs and shares what they are, how they differ from other business structures, and what you'll need to know when choosing the proper business structure for your new endeavor.
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Changes in SEC. 174 Make It a Good Time to Review the R&E Strategy of Your Business |
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It’s been years since the Tax Cuts and Jobs Act (TCJA) of 2017 was signed into law, but it’s still having an impact. Several provisions in the law have expired or will expire in the next few years. One provision that took effect last year was the end of current deductibility for research and experimental (R&E) expenses.
R&E Expenses
The TCJA has affected many businesses, including manufacturers, that have significant R&E costs. Starting in 2022, Internal Revenue Code Section 174 R&E expenditures must be capitalized and amortized over five years (15 years for research conducted outside the United States). Previously, businesses had the option of deducting these costs immediately as current expenses.
The TCJA also expanded the types of activities that are considered R&E for purposes of IRC Sec. 174. For example, software development costs are now considered R&E expenses subject to the amortization requirement.
Potential Strategies
Businesses should consider the following strategies for minimizing the impact of these changes:
- Analyze costs carefully to identify those that constitute R&E expenses and those that are properly characterized as other types of expenses (such as general business expenses under IRC Sec. 162) that continue to qualify for immediate deduction.
- If cost-effective, move foreign research activities to the United States to take advantage of shorter amortization periods.
- If cost-effective, purchase software that’s immediately deductible, rather than developing it in-house, which is now considered an amortizable R&E expense.
- Revisit the R&E credit if you haven’t been taking advantage of it.
Recent IRS Guidance
For 2022 tax returns, the IRS recently released guidance for taxpayers to change the treatment of R&E expenses (Revenue Procedure 2023-11). The guidance provides a way to obtain automatic consent under the tax code to change methods of accounting for specified research or experimental expenditures under Sec. 174, as amended by the TCJA. This is important because unless there’s an exception provided under tax law, a taxpayer must secure the consent of the IRS before changing a method of accounting for federal income tax purposes.
The recent revenue procedure also provides a transition rule for taxpayers who filed a tax return on or before January 17, 2023.
Planning Ahead
We can advise you how to proceed. There have also been proposals in Congress that would eliminate the amortization requirements. However, so far, they’ve been unsuccessful. We’re monitoring legislative developments and can help adjust your tax strategies if there’s a change in the law.
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Amanda Farley, CPA
D 920.337.4554
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Tax Tip Tuesday - Video Short |
Last Minute Tax Saving Deductions - Health Savings Account
This week, Samantha Meiners, Justin Steinbecker, and Aaron Bahr explain how you can use a Health Savings Account for last-minute tax-saving deductions this tax season.
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Have a Foreign Account? File an FBAR |
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Any U.S. person with a financial interest in, or signature or other authority over, any foreign financial accounts must file a Report of Foreign Bank and Financial Accounts (FBAR), subject to conditions. That is, if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year, the individual must file an FBAR by April 15 following the calendar year. Let’s explore more of the pertinent details.
Persons and Accounts
A “U.S. person” is generally a U.S. citizen, including a child. However, he or she may be an individual who’s a resident alien of the United States, District of Columbia, Native American lands (as defined in the Indian Gaming Regulatory Act), or the Territories and Insular Possessions of the United States.
Also qualifying as a U.S. person is an entity — including a corporation, partnership, trust or limited liability company — organized or formed under federal law or the law of any state, the District of Columbia, U.S. Territories and Insular Possessions, and Native American tribes.
A “foreign financial account” is a financial account located outside the United States. This includes the states themselves as well as the District of Columbia, U.S. Territories and Insular Possessions, and Native American land.
Note: An account maintained with a branch of a U.S. bank that’s physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that’s physically located inside of the United States isn’t a foreign financial account.
What Defines Interest
A U.S. person has a financial interest in a foreign financial account if that person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the U.S. person or another person.
Financial interest may also exist if the owner of record or holder of legal title is one of several listed entities. These include entities controlled by the U.S. person or an agent, nominee, attorney, or someone acting in another capacity on behalf of the U.S. person.
Penalty Amounts
Civil penalties for non-willful violations can exceed $10,000 per violation, adjusted for inflation. For willful violations, civil penalties can range up to the greater of $100,000, adjusted for inflation, or 50% of the amount in the account at the time of the violation. Contact us for more information.
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Tina Krugler, CPA
D 715.384.1974
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Reconsidering Your Personal Emergency Fund |
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Back in 2020 when the COVID-19 pandemic first hit, many people’s emergency funds were suddenly put to the test — assuming there was a fund at all. Now, three years later, and presumably with the benefit of some hindsight, you might want to reconsider your rainy-day savings. You’ve probably heard that, to guard against an emergency, you need to save enough to cover three to six months of living costs. But this rule isn’t as straightforward as it may sound.
An emergency cushion is indeed important — and it’s certainly better to be conservative rather than cavalier when estimating your financial requirements. However, believe it or not, there may be a danger to saving too much in certain savings vehicles. For example, if you put away substantially more than you’ll reasonably need in a low-interest savings account, you may lose money to inflation over time. Plus, you might miss out on opportunities to invest those funds in tax-advantaged retirement accounts or other assets.
Instead of blindly following a rule of thumb, tailor your emergency savings to your financial situation. A smaller emergency fund may suffice if, for instance, your spouse has a reasonably secure job, you have relatives who can provide financial assistance in a pinch, or there’s reason to believe that you’d be able to find other work quickly if you lost your job. Conversely, if you’re the sole breadwinner or you simply have a low tolerance for risk, a bigger emergency fund may be appropriate. Our firm can help you find the right balance.
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Holly Pett, CPA, EA
D 262.404.2109
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Hawkins Ash CPAs Opens 2024 Internship Selection |
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At Hawkins Ash CPAs, we’re passionate about fostering the next generation of public accounting professionals. Accounting college students chosen to participate in our Internship Program receive the full public accounting experience as they work side-by-side with senior staff to provide critical, timely tax and audit services to clients. Our interns receive the training and support needed to get the most out of their time. They enjoy in-office lunches and snacks and other fun, team-building activities.
In many cases, interns who enjoy their internship and want to pursue a career in public accounting are offered the opportunity to return for the next year's internship program or a full-time position as an associate.
Hawkins Ash CPAs is a Top 200 Firm in the nation with ten offices in Wisconsin and Minnesota. We are proud to offer local tax, audit, and accounting services to clients and compete on a national level. We offer big-city career options and experiences close to home. Our offices are in small to mid-sized safe Midwest towns. Our flexible work schedules and growth opportunities allow our team to develop personally and professionally through all stages of life.
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Student On-Campus Events
Our recruiter and accounting professionals will be attending the following college career fairs and on-campus events. At these events, students will grow their network and explore career opportunities. They will be available to answer any questions and help guide students through the application and interview process.
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April 12: Mock Interview and Resume Review Night |
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April 19: Small-Firm Night |
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April 26: Scholarship Awards Night: Meet & Greet |
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2023 Homegrown Success Career Fair |
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Heather Notbohm
D 262.404.2194
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More Resources from CPA-HQ |
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Buying a New Business Vehicle? A Heavy SUV Is a Tax-Smart Choice
Are you a business owner thinking about buying a vehicle to use in your enterprise? Here’s an option that may save you taxes this year.
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Do You Run a Business From Home? You May Be Able to Deduct Home Office Expenses
If you’re a business owner who works from home, you may be able to save tax with home office deductions. Here are the rules to qualify.
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Secure 2.0 Law May Make You Make Secure in Retirement
A new law was recently passed that will help Americans save more for retirement, although many of the provisions don’t kick in for a few years. The Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) was signed into law on December 29, 2022.
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