How to Report Gambling Winnings on Your Tax Return

Image courtesy of FreeDigitalPhotos.netRecreational gamblers must report their gambling winnings on line 21- Other Income on page 1 of Form 1040 U.S. Individual Income Tax Return.  The deduction for gambling losses is limited to the amount of winnings from wagering transactions I.R.C. § 165(d).  The gambling losses are reported as a miscellaneous itemized deduction on Schedule A.  Note, a taxpayer cannot take the standard deduction and still deduct his gambling losses.

The statute I.R.C. § 165(d) refers to gains and losses in terms of wagering transactions.  In order to calculate the gain or loss from wagering, the gambler would have to track each wager as a separate transaction and calculate the gain or loss per wager.  The Courts considered that interpretation as too burdensome and unreasonable according to IRS chief counsel advice memorandum A.M. 2008-011  December 5, 2008.  IRS chief counsel believes that the better view is that a casual gambler recognizes a wagering gain or loss at the time she redeems her tokens or cashes out of the slot machine. Wins that are left in the slot machine and used to continue wagering are not counted as income or winnings until the gambler cashes out and stops playing.

Shollenberger v Commissioner, T.C Memo 2009-306 determined that the Shollenbergers were recreational gamblers that should keep records of gambling wins and losses by sessions.  No court cases have defined the requirements of what constitutes a session, and the IRS has no clear ruling on the matter.  According to the Shollenberger case, on the day in question, they withdrew $500 from their joint bank account to take with them to the casino.  Mr. Shollenberger won $2,000 playing a dollar slot machine, and they each took $200 from his winnings to continue playing the slots.  They ended the day with $1,600, which they took to the bank and deposited the next day.  The IRS contended that the Shollenbergers should have reported the $2,000 jackpot as gambling income.  The court concluded that they net their winnings against the amounts wagered for that particular session of gambling.  The $2000 jackpot minus the original $500 minus the additional $400 wagered, resulted in a net taxable gambling gain of $1,100 for the session.  They should report $1,100 as gambling income on line21 Other Income of the Form 1040.  The Form W-2G that reported their gross winnings from the $2,000 jackpot should not be reported on line 21 as $2,000.

The IRS matches up the earnings reported on your tax return against the amounts reported to them from the Casino’s on Form W-2G.  If they do not match, you will most likely receive an IRS notice stating that you under reported your taxable income.  You should keep a log book of your wagering activity similar to a travel or mileage log book.

To help determine the beginning and ending of a session, consider the time, place, and activity.  Remember, when the chips are cashed in, that signals the end of the session.

Examples are as follows:

Time – When a gambler plays slot machines at the same casino for 2 days in a row, there are 2 separate sessions based on time.

Place – Playing the game on the same day at two different casinos is considered two separate sessions.

Activity – Changing from playing the slot machines to black jack would be considered changing activities and would be two different sessions.

Following is an example of a wagering log book and how the wagering gains and losses would be reported on your tax return.

Date

Location

Others present

Won

Beginning Cash

Winnings Wagered

Net Gain or (Loss) from Session

03/31/2014

River Spirit Casino

Joe Bob

$1500

$100

$600

$800

06/30/2014

Hard Rock Casino

Jim Bob

$2500

$200

$2000

$300

09/30/2014

Million Dollar Elm Casino

Jim Meister

$3500

$300

$3500

($300)

12/31/2014

River Wind Casino

Jimbo Rama

$4500

$400

$4500

($400)

2014 TOTALS

$12000

(Amount per

 W-2G)

$1000

$10600

$400

In the example log book above, the taxpayer should report gambling gains of $1100 on line 21 for Form 1040, and gambling losses on Schedule A Itemized Deductions of $700.  The net amount is $400 gain, but notice that the income amount on line 21 would have been $12000 of gross income if the taxpayer had reported the gross amount per the Form W-2G.  A taxpayer’s Adjusted Gross Income or AGI would be substantially higher if this session method were not used.  Because the AGI is used in numerous phaseout of deduction calculations, the taxpayer can be penalized by not having kept a good wagering session log book.

If you want to make sure you are legally optimizing how you report your gambling income on your tax return, please call (918) 212-9950.  We will prepare your return and make sure you don’t pay Uncle Sam more than his legal share of your gambling winnings!

Creating Bank Rules in Xero Beautiful accounting software

There are two types of bank rules in Xero

  1. Spend Money Rule – applies to debit transactions
  2. Receive Money Rule – applies to credit transactions

Spend Money Rule

We will now explain how to create a spend money rule in Xero that will divide an amount between two or more general ledger accounts. 

Let’s say you use your auto in your business and after tracking your mileage for the IRS in a log book, you determine the business use of your automobile is 75%.  Each time you buy gasoline at QuikTrip you don’t want to have to manually code the transaction.  You can setup a spend money rule that will automatically code 25% of the expenditure to owner’s draw, and the other 75% to automobile expense.

Click the “Go to banking” link from the dashboard, then click “Bank Rules”.  Click “Create Rule” and choose Spend Money Rule.

Line 1. When money spent on the bank statement matches [  ANY  ] of the following conditions…

Description,  Contains,  QT

Line 2. Set the contact…

Payee

Line 3. Automatically allocate fixed value line items…

no entry required

Line 4. With the remainder, allocate items in the following ratios…

Description = gasoline,  G/L Account = Automobile expense,  Percent = 75%

Add a new line, and input the following

Description = personal gasoline,  G/L = Owner’s draw,  Percent = 25%

Line 5. Set the reference…

Set this to either “from the reference” or “by me during bank rec”

Line 6. Target a bank account…

Choose your desired business bank account.

Line 7. Give the rule a title…

Name the rule something like “QT gasoline allocation”.

Next time a bank statement item is downloaded with QT in the description field, this rule will automatically code the amount to the correct general ledger accounts and percentages.  You just accept it and you’re done recording and reconciling the transaction.  It should save you at least 50% of the time required to do it manually each time.  You can setup bank rules for numerous scenarios and each time you setup a new bank rule, it saves you time from now on and the reconciliation process gets faster and faster.

Check back often for more ideas to streamline your use of Xero beautiful accounting software, or better yet subscribe to our newsletter.

Want to talk to someone about how Xero can help your business?  Call us at (918) 289-8212.

IRS Tax deduction for business use of automobile

What is needed to take a tax deduction for using your auto in your business?

There are two methods that you can use to calculate the tax deductible amount.

  1. Standard Mileage Rate
  2. Actual Expenses

Standard Mileage Rate  Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56.5 cents per mile for business miles driven.
  • 24 cents per mile driven for medical or moving purposes.
  • 14 cents per mile driven in service of charitable organizations.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

Actual Expenses  You cannot deduct amounts that you approximate or estimate.  You must have a record of the actual amount of each expense. Receipts, canceled checks, entries on your bank statement will all be sufficient to prove the amount of expense.  You also need to provide the business destination and purpose.

Business and personal use.  If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expense based on the miles driven for each purpose.

Auto Mileage Log Book   Keeping a mileage log book of your business miles and then comparing your business miles to all other miles driven will give you the business use percentage for the vehicle.  The IRS allows you to keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year.

 Example.

You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. There is no other business use of the car, but you and your family use the car for personal purposes. You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year.

Smartphone Mileage App  There are some really cool apps available for your smart phone that will use the built in GPS feature to automatically calculate your miles driven for a particular trip.

  • Use the iPhone GPS to accurately track miles traveled.
  • Create an acceptable IRS mileage log
  • Email the log file to yourself so you can add to a spreadsheet
  • Enter purpose and destination

For those of you currently using Xero Beautiful accounting software, once you know your business use percentage, you can setup rules in Xero to automatically code the personal use portion of expenses to owner’s draw and the business use percentage to automobile expense.  To learn more click here.

Affordable Care Act and Health-Care Reform

Health-Care Reform: Looking Back and Ahead

 

 

Three years ago, on March 23, 2010, President Obama signed the Affordable Care Act (ACA) into law. While several substantial provisions don’t take effect until 2014, many of the Act’s requirements already have been implemented, including:

  • Insurance policies must allow young adults up to age 26 to remain covered on their parent’s health insurance.
  • Insurers cannot deny coverage to children due to their health status, nor can companies exclude children’s coverage for pre-existing conditions.
  • Lifetime coverage limits have been eliminated from private insurance policies.
  • State-based health insurance Exchanges intended to provide a marketplace for individuals and small businesses to compare and shop for affordable health insurance are scheduled to be implemented by October 1, 2013.
  • Insurance policies must provide an easy-to-read description of plan benefits, including what’s covered, policy limits, coverage exclusions, and cost-sharing provisions.
  • Medical loss ratio and rate review requirements mandate that insurers spend 80% to 85% of premiums on direct medical care instead of on profits, marketing, or administrative costs. Insurers failing to meet the loss ratio requirements must pay a rebate to consumers.
  • The ACA provides federal funds for states to implement plans that expand Medicaid long-term care services to include home and community-based settings, instead of just institutions.
  • The ACA provides funding to the National Health Service Corps, which provides loan repayments to medical students and others in exchange for service in low-income underserved communities.
  • Medicare and private insurance plans that haven’t been grandfathered must provide certain preventive benefits with no patient cost-sharing, including immunizations and preventive tests.
  • Through rebates, subsidies, and mandated manufacturers’ discounts, the ACA reduces the amount that Part D Medicare drug benefit enrollees are required to pay for prescriptions falling in the donut hole.

Major provisions coming in 2014

Several important provisions of the ACA are due to take effect in 2014, such as:

  • U.S. citizens and legal residents must have qualifying health coverage (subject to certain exemptions) or face a penalty.
  • Employers with more than 50 full-time equivalent employees are required to offer affordable coverage or pay a fee.
  • Premium and cost-sharing subsidies that reduce the cost of insurance are available to individuals and families based on income.
  • Policies (other than grandfathered individual plans) are prohibited from imposing pre-existing condition exclusions, and must guarantee issue of coverage to anyone who applies regardless of their health status. Also, health insurance can’t be rescinded due to a change in health status, but only for fraud or intentional misrepresentation.
  • Policies (except grandfathered individual plans) cannot impose annual dollar limits on the value of coverage.
  • Individual and small group plans (except grandfathered individual plans), including those offered inside and outside of insurance Exchanges, must offer a comprehensive package of items and services known as essential health benefits. Also, nongrandfathered plans in the individual and small business market must be categorized based on the percentage of the total average cost of benefits the insurance plan covers, so consumers can determine how much the plan covers and how much of the medical expense is the consumer’s responsibility. Bronze plans cover 60% of the covered expenses, Silver plans cover 70%, Gold plans cover 80%, and Platinum plans cover 90% of covered expenses.

Cloud Accounting News

Cloud Accounting News
Volume 1, Issue 1

 
Three. Two. One. Xero.

Xero Certified Advisor Logo
 
As one of the few Xero Certified Advisors in the USA, we’re excited to debut our new monthly article designed to help you learn more about Xero, a hot new cloud accounting system that we support.  Today’s article will introduce you to the accounting software service and describe two of our favorite benefits. 
 
What Is Xero?
 
Xero is an online accounting application that is an alternative to using QuickBooks, Sage, MYOB, or another small business accounting software.  It allows a small business to invoice, bill, and track their bank balance, among other features.  The standard accounting functions of general ledger, accounts receivable, and accounts payable are included in Xero. 
 
You access Xero online, and all your files and the software are stored online.  There is nothing to install, no software to upgrade, and no files to back up or pass to your accountant since it’s all accessible as long as you have an Internet connection, a browser, and the account login credentials. 
 
The More, the Merrier
 
One of our favorite parts of Xero is they allow unlimited users at no additional costs.  You’re not penalized for having multiple bookkeepers, multiple employees, or just a lot of friends!
 
Both QuickBooks and Sage charge by the number of users, so this is a huge competitive strategy for Xero.  It makes sense when you think about it for an online product, because an increase in the number of users does not necessarily correlate with additional vendor costs.       
 
Beautiful Bank Feeds
 
The highest payback feature in Xero is its daily bank feeds.  Data entry is cut to almost nothing because all of your banking, PayPal, and credit card transactions automatically feed into Xero. 
 
You don’t have to pay your bank a software fee for this either.  It’s free.  Xero accesses the banking data either directly with your bank or (in the case of most U.S. banks) through a company called Yodlee which provides the feeds. 
 
The bank feed is super simple to set up.  All you do is choose your bank name from a drop down list, enter your user ID and password for your online bank account, and that’s it.  The transactions are entered automatically.  If something goes wrong with your bank or the feed, you can always easily import the transactions via a standard import file. 
 
Is Xero Right for Your Business?
If you’re already on Xero, congratulations.  Our future articles will include how-to’s and fun features about Xero and its family of add-ons.
 
If you’re wondering if Xero is right for you, then it’s best to discuss this with an accounting professional that knows your existing software system, your business needs, and the capabilities of Xero.  We’ll be happy to have that conversation with you. 
 
A few of the types of clients that are perfect for Xero include:
 
·       Clients who need very limited accounting features
·       Clients in services industries where there is no inventory
·       Clients that wait until tax time and get the entire year caught up in one swoop
·       Clients who hate the software they are currently using
·       Clients who are currently using Excel and re-entering everything
·       Clients who keep everything in a shoebox
 
If you fit into one of these categories or are just curious, be sure to reach out and give us a call at (918) 289-8212 so we can find out whether Xero is right for your business.