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West Virginia Society of Certified Public Accountants900 Lee St. E. Suite 1201Charleston, WV 25301

January 2015

Dear Members of the West Virginia Legislature:

The West Virginia Society of Certified Public Accountants is pleased to provide you with this WV Legislators Tax Guide. Our Federal Taxation Committee prepares the Guide specifically for you, members of the 2015 West Virginia Legislature.

Many areas of tax law affect you as a member of the West Virginia Legislature. This Guide is designed to serve as a reference tool to help answer your questions concerning federal and state income tax. It is an excellent source of information on records you should maintain and expenses which are deductible with respect to your Legislative service.

If you have any questions regarding the information in this Guide, or if you need additional assistance, please feel free to call our office in Charleston, and we will have a member contact you to answer your questions. Also, for further information about the West Virginia Society of Certified Public Accountants, or to view this tax guide now available online, simply visit our website at www.wvscpa.org.

The WVSCPA commends each of you for your willingness to serve the citizens of West Virginia. We recognize the contribution of time and effort required to be a Legislator, and we thank you.

Respectfully,

WV Society of CPAs

Gayle E. Mason Danny R. Simms, CPA, Chairman President Federal Taxation Committee

Phone: 304/342-5461 Fax: 304/344-4636 Email: [email protected] Website: www.wvscpa.org

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ACKNOWLEDGEMENTS

The West Virginia Legislators Tax Guide was prepared by The West Virginia Society of CPAs. It is published by the Federal Taxation Committee of The West Virginia Society of Certified Public Accountants and its Political Action Committee, WVSCPA/PAC.

Political Action Committee Board of Trustees

Jack Rossi, Chairman Robert Astorg, Treasurer

Douglas Bicksler Mark Chandler Floyd Harlow Don Nestor

Thad Obecny John Perry

Brian Wadsworth

Federal Taxation for Public Practice

Julia R. Abbott Tomas G. Brewer Barry L. Burgess

Steven M. Carr, Vice Chair Jack R. Felton, Jr.

Chadwick A. Morris Martha M. Nepa

Anthony D. Rager Danny R. Simms, Chairman

Robert R. Simpson, Jr. Amanda K. Thompson-Abbott

Brent T. Walls James M. Witt

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INTRODUCTION

As employees of the State of West Virginia, Legislators are entitled to a deduction on their Federal Income Tax Returns for expenses that are ordinary and necessary in the performance of their duties. The nature of the expenses determine whether they are treated as deductions before adjusted gross income, rather than itemized deductions subject to limitation. The appropriate form for reporting these expenses is Form 2106, Employee Business Expenses.

This Guide strongly emphasizes the importance of recordkeeping. The burden of proving the appropriateness and extent of deductibility is on you as the taxpayer. Therefore, it is imperative that you keep sufficiently detailed records. Failure to adequately support an otherwise valid deduction can result in its disallowance. Specific information must be maintained in order for you to claim business travel deductions relating to automobiles, as well as business meals and entertainment expenses. The recordkeeping section of this Guide provides additional details on these requirements.

For your convenience, we have included a Legislators Expense Log, which you can remove from the Guide, copy as needed and record notes as expenses are incurred. When you gather tax information at the end of the year, you will have an “expense booklet,” which can be provided to your Certified Public Accountant for use in preparing your tax return.

This Guide focuses on your position as a Legislator and is not intended to cover all tax matters related to your tax return. Items of a personal nature, such as medical expenses, charitable contributions, or other tax matters unrelated to your position as an elected official are not covered. You may wish to consult your Certified Public Accountant who can assess your situation and advise you as to the proper treatment of these expenses in your particular case.

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CONTENTS

ABOVE THE LINE DEDUCTION FOR GOVERNMENT OFFICIALS 1

TAX HOME AND SPECIAL RULES UNDER IRC SECTION 162 2 • SECTION 162(h) ELECTION 2

SUBSTANTIATING DEDUCTIONS 5 • Expense Limitations 6 • Recordkeeping Chart 7 • Retention of Records and Receipts 7 • Travel 8 • Business Meals and Entertainment 10 • Business Gifts 13

QUESTIONS & ANSWERS WHAT LEGISLATORS WANT TO KNOW 14

• Recordkeeping 14 • Campaign Contributions and Expenditures 18 • Expenses Related to Legislative Duties 21 • Reporting Requirements 24 • Automobile and Travel Expenses 25 • Office Expenses 31 • Telephone Expense 35 • Newsletter Fund 36 • Advertising Expense 37 • Entertainment and Meal Expenses 37

RECORDKEEPING REQUIREMENTS FOR TRAVEL, ENTERTAINMENT AND GIFTS

Center Pullout

2015 LEGISLATORS EXPENSE FORM Center Pullout

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ABOVE THE LINE DEDUCTION FOR GOVERNMENT OFFICIALS

The Taxpayer Relief Act of 1997 added a special benefit for government officials who are compensated in whole or in part on a fee basis. Excess business expenses that are reimbursed through a non-accountable or per diem plan may be deducted to arrive at adjusted gross income. Report the allowable expenses on Form 2106. The amount on line 10 will carry to line 24 of Form 1040.

Without this special rule, business expenses are treated as miscellaneous itemized deductions subject to the limitations of normal employee business expenses. The 1997 Act allows government officials to receive a benefit from their business expenses even if they do not itemize. Under the provision, excess business expenses reduce adjusted gross income, which also makes them deductible for the Alternative Minimum Tax. Further, this benefit reduces West Virginia income taxes. Since West Virginia does not use itemized deductions to calculate taxable income, normal employee business expenses would not be deductible for West Virginia Income Tax purposes.

The General Counsel for the Internal Revenue Service has issued CCA 199939001 in which they advised that State Legislators are not eligible for this benefit. You should consult with your Certified Public Accountant to determine the applicability of this position to your circumstances.

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TAX HOME AND SPECIAL RULES UNDER IRC SECTION 162

Ordinarily, an employee taking a job in Charleston for an extended period of time would not be able to deduct the cost of meals and lodging. These expenses would not be deductible even if the employer provided a per diem amount for those expenses, and even though the per diem payments are required to be reported as taxable income. That is because expenditures for meals and lodging in pursuit of a trade or business are deductible only if the trip takes the taxpayer away from his “tax home.” An individual’s “home” for tax purposes is his place of business, employment, station, or post of duty, even though his family residence is located in a different place.

State Legislators who normally reside in the Charleston area or less than 50 miles from the Capitol are subject to these same rules and cannot deduct their living and commuting expenses. However, travel costs from the Legislator’s other business location in the Charleston area to the Capitol may be deductible.

SECTION 162(H) ELECTION

This special provision of the Internal Revenue Code allows a taxpayer who is a State Legislator at any time during the tax year an election to treat his residence within the legislative district that he represents as his tax home. He will thus be considered to be “away from home” on each legislative day. The election is available only to a Legislator if his residence is (1) within his legislative district and (2) is more than 50 miles away from the Capitol.

The election is made by written statement attached to the income tax return (or amended return) for the tax year for which the election is made. The election is an annual election and must contain the following information:

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1. The name, address, and taxpayer identification number of the electing taxpayer,

2. Identify the election, 3. Indicate that it is made under Code Sec. 162(h), 4. Provide the information necessary to show that the taxpayer is

entitled to make the election.

The election might look something like this:

State Legislator’s Election to Treat Residence as Tax Home

John Q. Legislator 123 Fourth Street

Any Town, WV 26999

Taxpayer, a state senator, elects to treat his residence as his tax home pursuant to Code Sec. 162(h). His place of residence is within the XXnd district, which is the legislative district that he represents. The residence is more than 50 miles from the Capitol of the State of West Virginia.

If the election is made, the Legislator is deemed to have expended for living expenses an amount equal to the greater of the daily per diem allowed federal employees while away from home but serving in the U.S., or the state daily per diem, but not over 110% of the federal per diem, multiplied by his legislative days. He will also be considered to be away from home in pursuit of a trade or business on each legislative day. A legislative day is defined, for purposes of the election, as any day during any taxable year on which the legislature:

...was in session, including any day in which it wasn’t in session for a period of four consecutive days or less, or

...wasn’t in session, but the Legislator’s physical presence was formally recorded at a meeting of a committee of the legislature.

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If a state Legislator makes the Code Sec. 162(h) election, any excess of the amount allowable as a deduction for travel expenses away from home over the amount actually reimbursed by the state or a third party must be allocated between meals and lodging in accordance with the ratio of meals and lodging under the federal per diem reimbursement rules applicable to the Legislator’s Capitol at the end of the Legislator’s tax year. For this purpose, the amount allowable for meals under the federal per diem reimbursement rules is the amount of the federal per diem allowable for meals and incidental expenses reduced by $2 per legislative day.

By way of Illustration: Assume that the federal per diem reimbursement for Charleston, WV is $85, consisting of $55 for lodging and $30 for meals and incidental expenses. If you stay overnight while working in Charleston, and are reimbursed, for example, $85, you are deemed to have also spent $85. If, however, you commute back and forth from your home, and you are paid a per diem of, for example, $45, your offsetting deduction will only be $33, because you are deemed to have spent an amount equal to the greater of the federal per diem, or the state per diem, but not more than 110% of the federal per diem (110% of $30 is $33.) This 110% rule is only available to State Legislators; for most employees the amount of the expenses that is deemed substantiated is the lesser of the per diem allowance received or the federal per diem for the locality in which they are working.

If you live outside a 50 mile radius of the Capitol and your deductible expenses exceed the amounts reimbursed by the State, you may deduct this larger amount reduced by the reimbursement received. If, however, you determine that the expenses are either equal to the reimbursements or the excess is so small as to be insignificant, then you are not required to report anything at all. Alternatively, if you live within 50 miles of the Capitol and your reimbursements are included on your W-2, it is important to keep track of and deduct all allowable expenses in accordance with the instructions on the Form 2106.

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SUBSTANTIATING DEDUCTIONS

All elements of travel, entertainment, and gift expenditures must be proven. If you can prove the elements of time, cost, place, and business relationship for the expenditure, but fail to prove its business purpose, generally no deduction will be allowed.

A written statement of the business purpose of an expenditure generally is required, but the degree of substantiation of the business purpose will vary according to the facts and circumstances in each case. If the business purpose of an expenditure is clear from the surrounding facts and circumstances, a written explanation will not be required.

Substantiation of travel, entertainment, and business gift expenditures should be kept in an account book, diary, statement of expense, or similar record, supported by adequate documentary evidence, that is sufficient to establish the elements for the expenditures. For example, entries on a desk calendar, not supported by evidence, are not proper substantiation.

You are not required to record information in your account book or other records that would duplicate information shown on a receipt as long as your records and receipts complement each other in an orderly manner. Neither are you required to record amounts your employer pays directly for any ticket or other travel item.

However, if you charge these items to your employer (through a credit card or otherwise) you must make a record of the expenditures. Your records must be timely. Although contemporaneous records are no longer required, you should record the elements of an expenditure in your account book or other record at or near the time of the expenditure, to ensure your allowance of the maximum deduction for these expenses.

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EXPENSE LIMITATIONS

The deductible portion of meals and entertainment is limited to 50% of total allowable expense. For meals, the taxpayer must be present to receive the deduction. These expenses must be directly related or associated with business.

Club dues are deductible only if they fall into one of the following categories:

1. Business leagues, trade associations, and chambers of commerce;

2. Boards of trade and real estate boards; 3. Professional organizations; and 4. Civic or public service organizations such as Kiwanis, Lions,

Rotary, Civitan, and similar activities.

Dues for all other clubs, including business, social, athletic, luncheon, and sporting clubs are not deductible. Specific business expenses (e.g., meals) incurred at a club are deductible only to the extent they are directly related to or associated with a business activity

No deduction will be allowed for approximations or estimates, or for expenses that are lavish or extravagant.

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RECORDKEEPING CHART

Your records may be in almost any form, but they must be sufficient to substantiate the elements of your expenditures. The Recordkeeping Chart provided in the center of this booklet sets forth the information necessary to substantiate your expenditures for travel, entertainment and gifts.

The requirements to substantiate entertainment expenses “directly related” and “associated with” the active conduct of your business are listed in Column (3) of the chart, without parentheses. If an entertainment expenditure is claimed as an expense “associated with” rather than “directly related to” the active conduct of your business, the entertainment must be directly preceded or followed by a substantial and bona fide business discussion. In this “associated with” situation, additional factors, shown in parentheses in Column (3) must also be proven.

RETENTION OF RECORDS AND RECEIPTS

A receipt is ordinarily the best evidence to prove the amount of an expenditure and is required for all expenses greater than $75 and for all lodging expenses, regardless of cost.

If you do not have receipts to support an expenditure, then you must substantiate that expense:

1. With your own statement, either written or oral, containing specific detailed information; and

2. With other supporting evidence sufficient to substantiate the expenditure.

If your statement includes the description of a gift, states the cost, time, place or date of an expenditure, the corroborative evidence must be either documentary or direct evidence. Documentary evidence can be receipts, paid bills, or similar evidence. Direct evidence could be a statement in writing or the oral testimony of persons entertained. It could also be oral testimony of a witness, detailing information about the expenditure. If the evidence of an expense is due to the business relationship of persons

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entertained or the business purpose of an expenditure, the corroborative evidence may be circumstantial.

There are also special rules for cases when, because of the inherent nature of the situation in which an expenditure is made, you are unable to obtain a receipt. This also includes situations beyond your control, such as loss of the receipt by fire, flood, or other casualty.

You must retain the records and related documentary evidence in support of travel, entertainment, and gift deductions during the period that your tax return is subject to audit. Normally, this period is three years from the date of filing your return or the due date of the return, whichever is later. However, the statute of limitations is longer if you consent to an extension or if there has been a substantial omission from gross income. There is no statute of limitations in cases of fraud.

TRAVEL

You must prove the following elements:

1. The amount of each separate expenditure for travel away from home, such as the cost of your transportation or lodging. The daily cost of your breakfast, lunch, dinner, and other incidental elements of such travel may be totaled if they are set forth in reasonable categories such as meals, gasoline and oil, and taxi fees.

2. The dates of your departure and return home for each trip, and number of days spent on business away from home.

3. The destination or the locality of your travel, described by name of city, town, or similar designation.

4. The business reason for your travel or the business benefit derived or expected to be gained from your travel.

5. Deductions for travel expenses for a spouse, dependent, or other individual accompanying a person on business travel are disallowed unless:

(a) The spouse, dependent, or other individual is an employee

of the person paying or reimbursing the expense;

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(b) Their travel is for a bona fide business purpose; and (c) Their expenses are otherwise deductible.

6. If your place of residence is within the legislative district

which you represent and is over 50 miles from the State Capitol building, you can elect to claim a per diem amount for living expenses incurred in your capacity as a state Legislator instead of the actual expenses as outlined above. By making this election with the tax return for the taxable year that the expenses are claimed, the following conditions are deemed to exist:

(a) Your place of residence within the legislative district that

you represent shall be considered your home, (b) You shall be deemed to have expended for living expenses

an amount equal to the amount determined by multiplying each of your legislative days by the greater of:

• The WV State employee per diem reimbursement rate not to exceed 110% of the Federal Government executive branch employee per diem rate, or

• The Federal Government executive branch employee per diem rate for travel away from home but serving in the United States.

(a) Your legislative days shall include:

• Any day the Legislature was in session (including any day in which the Legislature was not in session for a period of four consecutive days or less), or

• The Legislature was not in session but your physical presence was formally recorded at a meeting of a legislative committee.

This election limits your substantiation requirements to proving that the Legislature or committee was in session and that you attended.

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BUSINESS MEALS AND ENTERTAINMENT

You must prove the following:

1. The amount of each expenditure for entertaining must be listed separately, except for incidental items, such as taxi fares and telephone calls, which may be totaled on a daily basis.

2. The date the entertainment took place. 3. The name, address or location, and the type of entertainment,

such as dinner or theater, if the information is not apparent from the name or destination of the place.

4. The reason for the entertainment or the business benefit derived or expected to be gained from entertaining. Except for certain business meals, information about the nature of any business discussion or activity that took place should be retained.

5. The occupation or other information about the person or persons entertained including name, title, or other information sufficient to establish the business relationship to you.

A business meal which is “directly related to” or “associated with” the active conduct of a taxpayer’s trade or business is deductible subject to the 50 percent rule. The so-called “quiet business meal” is not deductible.

In order for a business meal or entertainment expense to be classified as “directly related,” four conditions must be met:

1. The taxpayer must expect to receive a specific business benefit from the meal or entertainment.

2. The principal nature of the expense must be the active conduct of the taxpayer’s trade or business.

3. The taxpayer must actually engage in business discussion during the meal or entertainment.

4. The meal or entertainment expense was for the taxpayer, his business guest or guests, and their spouses.

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For a meal or entertainment expense to be classified as “associated with,” it must directly precede or follow a substantial and bona fide business related discussion. Also any costs that are “lavish and extravagant” will not be deductible.

You may deduct your expenses for entertaining directly preceding or following a substantial and bona fide business discussion on the grounds that the entertainment was associated with the active conduct of your trade or business if you prove the date, duration and location of the business discussion, the nature of the discussion and the business reason for or any business benefit derived or expected to be gained from the entertainment. Also, you must identify the person or persons entertained who participated in the business discussion.

The 50 percent limitation applies to the meal or entertainment cost plus related expenses such as tips and cover charges. The cost of parking or transportation to and from the business meal or entertainment is not subject to the 50 percent rule. Meals incurred while on travel status are considered business meals but only if the taxpayer eats alone or with non-business connected persons and claims a deduction for his meal only.

Each separate payment is usually considered a separate expenditure. Thus, if you entertain a constituent at dinner and then take him to the theater, the dinner expense and the cost of the theater tickets are separate expenditures and must be recorded separately in your records. Some items may be totaled in reasonable categories. You may make one daily entry for such categories as taxi fares, telephone calls, meals while traveling away from home, gasoline and oil and other incidental costs of travel. Tips may be grouped with the costs of the services rendered to you. You are not required to total the tips, but may record them separately if you desire.

Other items should be totaled. Concurrent or repetitious expenses of a similar nature occurring during the course of a single event will be considered a single expenditure. Therefore, if you pay separately for each serving of refreshments, such as at a cocktail lounge, the total paid for the refreshments will be treated as a single expenditure.

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Documentary evidence is required to support all expenditures for lodging while traveling away from home and for any other expenditure of $75 or more. However, if evidence is not readily available for transportation charges, it will not be required. Documentary evidence is a receipt, paid bill or similar evidence sufficient to support an expenditure.

Documentary evidence ordinarily will be considered adequate to support an expenditure if it discloses the amount, date, place and essential character of the expenditure. For example, a hotel receipt is sufficient to support expenditures for business travel if it contains the name and location of the hotel, the dates you stayed there, and separate amounts for charges such as lodging, meals, and telephone. Similarly, a restaurant receipt is adequate to support an expenditure for a business meal if it contains the name and location of the restaurant, the date and amount of the expenditure, and, if a charge is made for an item other than meals and beverages, there is an indication that such is the case.

A cancelled check, without other evidence to show that the check was for a business purpose, is not adequate to support a deduction.

Confidential information relating to an element of an otherwise deductible expenditure, such as the place, business purpose, or business relationship, need not be set forth in your account book, diary, or other record, if the information is recorded elsewhere at or near the time of the expenditure and is available to fully substantiate that element of the expenditure. If you entertain a large number of people, you do not have to record each name where a readily identifiable class of individuals is involved. It will be sufficient if you designate the class. However, if the identity of a class is not sufficient to identify the persons entertained, then an individual designation of each person will be required.

You must treat each season or series ticket as a separate item and allocate the cost of the season ticket accordingly. You must also keep records as to whether each ticket is used as a gift or as entertainment.

If you rent a skybox for more than one event, your deduction will be limited to the face value of non-luxury box seat tickets held for sale to the general public multiplied by the number of seats in the skybox. Any amounts in excess of face value paid to scalpers, ticket agencies, and brokers are not deductible.

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BUSINESS GIFTS

You must prove the following elements:

1. The cost. 2. The date of the gift. 3. The description of the gift. 4. The business purpose for giving the gift or any business

benefit derived or expected to be gained from giving it. 5. The occupation or other information about the person

receiving the gift, including name, title, or other information sufficient to establish the business relationship to you.

The name of the recipient of a business gift does not always have to be recorded. A more general designation will be sufficient if it is evident that you are not attempting to avoid the $25 (this is federal law) annual limitation on the amount that can be deducted for gifts to any one individual. For example, if you purchase a large number of inexpensive tickets for local high school basketball games and distribute one or two tickets to each of a large number of constituents, it will usually be sufficient to record a general description of the recipients of the tickets.

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QUESTIONS & ANSWERS WHAT LEGISLATORS WANT TO KNOW

RECORDKEEPING

Q. How must travel, entertainment, and other business expenses be substantiated? Which elements of an expenditure must be substantiated?

A. The table below is a summary of records you need to prove each expense. You must be able to prove the elements listed across the top portion of the chart. You prove them by having the information and receipts (where needed) for the expenses listed in the first column.

How to Prove Certain Business Expenses If you have expenses for . . .

THEN you must keep records that show details of the following elements . . .

Amount Time Place or Description

Business Purpose Business Relationship

Trav

el

Cost of each separate expense for travel, lodging, and meals. Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc.

Dates you left and returned for each trip and number of days spent on business.

Destination or area of your travel (name of city, town, or other designation).

Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Relationship: N/A

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How to Prove Certain Business Expenses If you have expenses for . . .

THEN you must keep records that show details of the following elements . . .

Amount Time Place or Description

Business Purpose Business Relationship

Ente

rtain

men

t

Cost of each separate expense. Incidental expenses such as taxis, telephones, etc., may be totaled on a daily basis.

Date of entertainment. (Also see Business Purpose.)

Name and address or location of place of entertainment. Type of entertainment if not otherwise apparent. (Also see Business Purpose.)

Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. For entertainment, the nature of the business discussion or activity. If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity. Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal.

Gift

s

Cost of the gift. Date of the gift. Description of the gift.

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How to Prove Certain Business Expenses If you have expenses for . . .

THEN you must keep records that show details of the following elements . . .

Amount Time Place or Description

Business Purpose Business Relationship

Tran

spor

tatio

n

Cost of each separate expense. For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year.

Date of the expense. For car expenses, the date of the use of the car.

Your business destination.

Purpose: Business purpose for the expense. Relationship: N/A

You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You must generally prepare a written record for it to be considered adequate. This is because written evidence is more reliable than oral evidence alone. However, if you prepare a record on a computer, it is considered an adequate record.

Q. Must each of the above elements be substantiated?

A. Yes. If any one is not, the entire expenditure may be disallowed.

Q. Are estimates of amounts acceptable?

A. No. You cannot deduct amounts that you approximate or estimate.

Q. Is there a limit on the amount of travel and entertainment expense?

A. No; however, amounts deemed to be lavish or extravagant will be disallowed.

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Q. What constitutes adequate documentation?

A. Generally, you must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense.

Q. Is documentary evidence required for each expenditure individually?

A. No. Documentation is required to support all expenditures for lodging while traveling away from home and for any other expenditure of $75 or more. Here such evidence is not readily available for transportation charges, it will not be required.

Q. Would a cancelled check be adequate evidence?

A. A canceled check, together with a bill from the payee, ordinarily establishes the cost. However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose.

Q. What substantiation is required for supporting business use of a personal automobile?

A. The rules require that adequate records or sufficient evidence be maintained to corroborate the deduction or credit. To meet the adequate records requirement an account book, diary, statement of expense, or other similar record and documentary evidence, which together are sufficient to establish each element of an expenditure, must be maintained. The elements to establish are the amount, time, place, and business purpose. To establish the business use of a personal automobile, records must be sufficient to establish the number of business miles and percent of business use.

Q. How should substantiation of travel, entertainment, and business gift expenditures be maintained?

A. The substantiation of the elements discussed above should be recorded at the time the expense is incurred in an account book, diary, statement of expense or similar records, and supported by

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adequate documentary evidence. Although contemporaneous records are no longer required, records prepared at a date subsequent to the expenditures may lack sufficient accuracy to provide credibility to the degree required.

CAMPAIGN CONTRIBUTIONS AND EXPENDITURES

Q. Are campaign receipts and expenditures subject to Internal Revenue Service review?

A. Yes. Contributions are not income to a candidate unless they are diverted to his or her personal use. To be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns. However, interest earned on bank deposits, dividends received on contributed securities, and net gains realized on sales of contributed securities are taxable and must be reported on Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations. Excess campaign funds transferred to an office account must be included in the officeholder's income on Form 1040, line 21, in the year transferred.

Q. Is it permissible to commingle political funds with personal funds?

A. No. If funds are commingled, so as to make tracing impractical, the entire fund will be presumed devoted to personal use and deemed taxable income to the candidate.

Q. How are proceeds derived from fund-raising dinners or testimonial dinners accounted for?

A. The accounting and reporting for dinner proceeds are the same as for campaign contributions.

Q. Are contributions of property, such as stocks or bonds, recorded the same as cash?

A. Yes. The fair market value on the date of the contribution should be acknowledged as the amount of the contribution.

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Q. What types of expenditures may be paid from campaign contributions?

A. Expenditures properly payable from campaign contributions include the following amounts:

1. Authorized expenditures in connection with the campaign for office.

2. For ordinary and necessary expenses incurred in connection with duties of the candidate.

3. For contributions to an organization described in section 170(c) of the Internal Revenue Code.

4. For transfers without limitation to a national, state, or local committee of a political party.

5. For donations to state and local candidates subject to the provisions of state law.

6. For other purposes not prohibited by law.

Q. What is the tax status of the unexpended balances of political funds refunded to contributors?

A. For tax purposes, unexpended balances of political funds which are repaid to known contributors are not considered to be either expended or diverted and, therefore, are not taxable income to the candidate. Unexpended balances of political funds may be contributed to or for the use of another political organization, transferred to the general fund of the U.S. Treasury or of any state or local government, or transferred to or for the use of an exempt public charity, without being considered to be expended or diverted and, therefore, are not taxable to the candidate.

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Q. What reporting is required of a political committee, organization, association or fund formed for the purpose of managing campaign contributions and expenses of a candidate?

A. Such an entity, whether or not it is tax-exempt, must file Form 1120-POL if it has any political organization taxable income. The return is due on or before the fifteenth day of the third month after the end of the taxable year. Certain political organizations must file Form 990 or Form 990-EZ if its gross receipts are $50,000 or more during the tax year unless it meets one of the exceptions ($100,000 for a qualified state or local political organization). The following political organizations are not required to file Form 990:

i. A state or local committee of a political party; ii. A political committee of a state or local candidate; iii. A caucus or association of state or local officials; or iv. A political organization required to report under the Federal

Election Campaign Act of 1971 as a political committee (as defined in section 301(4) of such Act).

In addition, any organization classified as a political organization under Section 527 of the I.R.C. is subject to additional reporting requirements. Please consult your CPA for further information regarding these requirements.

Q. What items would be reported and subject to tax on the 1120-POL?

A. All receipts and expenditures must be reported on Form 1120-POL. As discussed above, campaign receipts are not subject to tax. Dividends, interest, rents, royalties, and capital gains are subject to tax.

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Q. What accounting records are required for political funds?

A. Detailed substantiating records should be kept by the political candidate or other custodian to enable the candidate to account accurately for the receipt and disbursement of political funds. Otherwise, receipts may be taxed on an individual return, which means that campaign expenses would be nondeductible. As discussed above, if political funds are commingled with the personal funds of the political candidate so as to render tracing or identification impractical, the political funds will be presumed to have been diverted to personal use at the time of commingling.

Q. What is the tax rule regarding presumption against unrestricted gifts?

A. The Internal Revenue Service will presume, in the absence of evidence to the contrary, that contributions to a political candidate are political funds which are not intended for the unrestricted personal use of the candidate. If, in fact, the funds were intended for the unrestricted personal use of the political candidate, the candidate must substantiate this claim.

Q. Are my campaign expenses deductible for tax purposes?

A. Campaign expenses paid from the candidate’s private resources are considered nondeductible personal expenses regardless of the results of the election. Such expenses would include the cost of attending political conventions, contributions to the party which sponsored the candidacy, expenses of campaign travel, campaign advertising, expenses of successfully defending a contested election, filing fees, or the cost of legal fees paid in litigation over redistricting.

EXPENSES RELATED TO LEGISLATIVE DUTIES

Q. What are some typical business expenses I can deduct on my tax return?

A. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and

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accepted in your given trade or business. A necessary expense is one that is helpful and appropriate for your given trade or business. An expense does not have to be indispensable to be considered necessary.

Expenses you are likely to incur as a member of the Legislature are as follows:

1. Office expenses relating to your position as a member of the Legislature, including: (a) Office supplies (stationery, postage, pens, etc.) and small

equipment such as calculators, adding machines, answering machines, and coffee pot.

(b) Monthly fees to an Internet provider. Setting up a website and monthly maintenance fees to host and update the site.

(c) Pagers, cellular phones, and answering service, if used primarily for business purposes.

(d) Office furniture and decorative items, including framed art, professional certificates, and other items relating to your position as a Legislator.

(e) Computer equipment, printers, faxes, file cabinets, and other office equipment.

2. Travel, meals, and entertainment expenses associated with the performance of legislative duties. Note that generally only 50% of business meals and entertainment expenses are deductible.

3. Out-of-pocket expenses in excess of allowances provided by the state of West Virginia, for office rent, staff salaries, business travel, etc.

4. Impairment related expenses incurred to allow you to work as a Legislator. This would include any special apparatus, modifications to business equipment or modifications to your office that would accommodate any physical disability that limits one or more major life activities, such as blindness, deafness, an impaired ability to walk, speak, or perform manual tasks.

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5. Dues to professional, trade, and community organizations joined because you are a member of the state Legislature. Included would be organizations that you normally would not have joined, but are now a member of as a matter of policy. These dues would be deductible because the organizations are instrumental to your position as a Legislator. Examples would be dues to civic organizations in your community and political organizations. Dues to organizations that serve a personal benefit, such as fitness or country clubs, are not deductible. However, if you can demonstrate a valid business use and purpose, dues to organizations to which you normally belong may be deductible as well.

6. Books, newspapers, magazines, and other publications relative to your position as a state Legislator. Included would be special weekly papers in your district, special publications relating to politics, the state, or related areas of government, or other books and publications that are necessary to improve yourself as a Legislator. If the publications are purchased on a normal basis and for personal reasons, the costs would not be deductible.

7. Christmas cards sent to precinct workers, leaders in the community, and others associated with you in politics would be considered an advertising expense directly related to your business as a member of the Legislature. The cards, envelopes, and postage, as well as a family photograph included in the Christmas card, would all be deductible expenses.

8. Business gifts under $25, or small promotional items such as pens, desk sets, and coffee mugs given as a gift.

9. The cost of newsletters sent to constituents is a tax deductible expense.

10. Fees paid to Certified Public Accountants for all services relating to business.

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REPORTING REQUIREMENTS

Q. How should I report my expense reimbursement?

A. It depends upon where you live.

1. If you live within 50 miles of the Capitol building, the State of West Virginia will include your reimbursements in your W-2 wages and all related expenses are reported on Form 2106 and Schedule A subject to 2 percent AGI limit. You should follow the instructions for Form 2106.

2. If you live outside the 50 miles and elect to commute, the State of West Virginia will reimburse you for mileage at the allowable rate per mile, plus a per diem for meals and incidental expenses. Depending on how far you live from Charleston, this reimbursement could exceed the amount of expenses you may claim. You should report your expenses on Form 2106, lines 1 through 6 and show the amount of the reimbursements received from the State on line 7. If the reimbursements exceed the expenses, this is additional income that needs to be reported on Form 1040, line 7. If the expenses are greater than the reimbursements, you may deduct them on Form 2106 and Schedule A subject to the 2 percent AGI limit. You should follow the instructions for Form 2106.

Q. When I am in Charleston for long periods of time, I find it necessary and desirable to have my spouse and children come to Charleston. Can I deduct the cost of their travel, lodging and/or meals?

A. No, unless your spouse is also an employee of the State. This same rule applies if your spouse accompanies you on a trip to a legislative conference.

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AUTOMOBILE AND TRAVEL EXPENSES

Q. How do I report mileage or automobile expenses related to my legislative duties?

A. Since you are considered an employee of the State, all mileage or automobile expenses are reported on Form 2106, Employee Business Expenses. You should keep a journal documenting mileage and all automobile and travel expenses incurred.

Q. How do I deduct the automobile expenses for traveling to and from Charleston?

A. Your deduction for automobile expenses can be based on either the Federal standard mileage rate or your actual automobile expenses (depreciation, gas and oil, repairs and maintenance, insurance, etc.). If you use actual expenses, you can compute the business use expense by dividing your business miles by your total miles driven during the year and then multiplying the resulting percentage by the total expenses.

Q. What is the standard mileage rate and how does it work?

A. The Internal Revenue Service’s standard mileage rate for 2013 was 56.5 cents per mile. The standard mileage rate for 2014 is 56.0 cents per mile and for 2015 it is 57.5 cents per mile. The standard mileage rate is used in place of actual operating expenses. The standard mileage rate may not be used for an auto if it was previously depreciated using a method other than straight-line or if a Section 179 deduction was claimed for it.

Q. If I choose to deduct my actual automobile expenses, what expenses am I allowed to include?

A. You may deduct gas, oil, repairs, regular maintenance, insurance, depreciation, vehicle rentals, registration and licensing, tires, inspection fees and towing fees. Remember to deduct from your total expenses, any insurance payments made to you for repairs to your automobile.

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Q. What if I lease, rather than buy, a vehicle? How are my lease payments deducted?

A. When you lease a vehicle without transfer of ownership at the end of the lease, the payments are deducted on Form 2106 just like other out-of-pocket expenses with one exception. If you lease a “luxury auto,” you have to reduce your deduction for vehicle lease payments by an amount called the “inclusion amount.” The inclusion amount is based on the fair market value of the vehicle and the lessee’s business use. These factors and the “inclusion amount” are found in IRS Tables.

Q. How do I calculate depreciation on a vehicle that I own?

A. If a car is a “luxury auto,” it must be depreciated following certain rules. These maximum depreciation deductions are based on 100 percent business use. If the actual business use is less than 100 percent, the limits must be reduced proportionately. However, business use must exceed 50 percent to be eligible to use these accelerated methods of computing depreciation. The following are the annual depreciation dollar caps for passenger autos (trucks and vans are slightly different) which are subject to the luxury-auto limits for passenger autos placed in service during 2012, 2013, and 2014.

Year 2012 2013 2014

Year #1 $3,160 $3,160 $3,160

Year #2 $5,100 $5,100 $5,100

Year #3 $3,050 $3,050 $3,050

Year #4 $1,875 $1,875 $1,875

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At the time of publication, no legislation had been passed to extend the bonus depreciation deduction. Please consult your tax advisor regarding recent legislation which may have extended the bonus depreciation deduction.

The IRS has special rules for certain vehicles, vans and SUV’s. It is recommended that you seek competent advice regarding your unique situation. These special rules are complex and are partially explained below.

Any truck or van that is a qualified non-personal use vehicle is exempt from the luxury auto depreciation limitation even if the gross vehicle weight is not more than 6,000 lbs. This rule is effective for vehicles placed in service after May 6, 2003.

Q. Which method results in the greater deduction for me —actual expenses or the standard mileage rate?

A. The standard mileage allowance is applied to the actual business mileage driven. To determine which method is best, it is necessary to summarize your actual automobile expenses, and then compare the deductible portion of these expenses to the standard mileage allowance. You are allowed to report auto expenses following whichever method creates the largest deduction, except that you cannot change from actual cost to standard mileage during the life of the vehicle once you begin using the actual expense method.

Q. What happens if my business use of my automobile is 50 percent or less?

A. If business use of your automobile is 50 percent or less, the straight-line method of depreciation must be used. Under this method, you depreciate the automobile over 5 years, or 20% per year. However, for the first and last year you only take half a year’s depreciation. In other words, you deduct 10% in year one, 20% in years two, three, four and five and 10% in year six. The maximum depreciation in any year is still the amounts listed above for luxury autos.

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Q. If I use the standard mileage deduction, are there other automobile expenses I can deduct along with the standard mileage deduction?

A. Yes. Parking fees and tolls may be deducted on Form 2106. State and local taxes paid on the purchase of a car are not deductible. The personal property taxes can be deducted on Schedule A. Regardless of business use, interest incurred on car loans is personal interest and non-deductible.

Q. What types of automobile expenses can I deduct?

A. Travel expenses on legislative business within your district as well as out of district are deductible. Examples include: transportation costs to and from speaking engagements and meetings related to legislative business; travel costs incurred in making investigations concerning proposed or pending legislation; travel costs to and from legislative sessions.

Q. How do I track my expenses?

A. A detailed memorandum, log or diary of such travel expenses must be kept according to the requirements noted in the record keeping section of this guide. Records include the date, time, place, purpose of the expense and amounts of each expenditure. Generally, you must have receipts for all lodging and for any expense over $75.00.

Q. What about travel expenses incurred in attending meetings during a political campaign for reelection?

A. Treasury Regulation 1.212-1(f) specifically states that campaign expenses are not tax deductible. Because of this, it is very important for you to distinguish between those expenses that are campaign related and those expenses that can be directly attributed to the business of serving your constituency.

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Q. I have an office in my home district. Can I deduct transportation expenses from my home to this office?

A. No. The mileage from your residence to your regular place of business is commuting expense and is not deductible.

Q. I received a traffic violation ticket because I was rushing to be on time for a session or a committee meeting. Is the fine a deductible expense?

A. No, a traffic violation fine is a penalty, and, therefore, it is not a deductible expense.

Q. If I use a bus or plane to get to Charleston, can I deduct these expenses?

A. Yes, costs of airfare and busses are deductible. However, you cannot claim both the mileage deduction you would have incurred had you driven and the cost of the bus fare or airplane ticket. If you use a bus, airplane or other means of transportation, these expenses should be reported on Form 2106.

Q. If I car-pool with another Legislator, do I still claim a tax deduction for the mileage even though I did not drive my car?

A. No, when you ride with someone else, you cannot claim any mileage expenses for that day’s travel. However, if you pay for part of the travel costs, you are entitled to claim a deduction for those costs you paid.

Q. While staying at a hotel in Charleston for the Legislative session, I need to drive or take a taxi to the Capitol each day. Can I deduct this as a business expense?

A. Yes, since Charleston is not considered your tax home, business transportation between your hotel and the Capitol or other business related locations is not considered commuting. Consequently, you may deduct such transportation expenses.

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Q. The State pays me certain allowances for travel and other expenses. Do these allowances create additional income for me?

A. These allowances, which are intended to reimburse you for certain business expenses incurred as a State Legislator, must be included in income. However, you may deduct your employee business expenses while away from home (Form 2106), including transportation, 50% of meals and entertainment expenses, as well as other ordinary and necessary business expenses. Income in excess of deductible expenses is taxable income to you.

Q. If my reimbursement equals my deductible expense, do I have to report income and expenses?

A. No, reporting is not required if you meet certain criteria. As previously stated, to be in compliance with the federal income tax regulations, you must include these allowances in your income and you are allowed to deduct related expenses. However, Treasury Regulations Section 1.162-17(b) provides that if an employee accounts for expenses to his employer and if the reimbursement equals expenses, no additional reporting is required. However if your reimbursement is included in your wage statement (W-2), you must report the expenses in order not to be penalized.

Q. What happens if my expenses are more than my reimbursement?

A. The excess of expenses over reimbursement is reported on Form 2106. The excess of all business expense is then carried to Schedule A pursuant to the instructions for that form.

Q. If I sell my car or trade it in on a new one, will I have to report a gain or loss?

A. If you trade your old car in for a new one, the adjusted basis of the old car is added to the cash paid for the new car to determine the depreciable basis of the new car. No gain or loss is recognized on the transaction as long as you meet the like-kind exchange rules. (The adjusted basis of the old car is its remaining un-depreciated value.)

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If you sell the old car and buy a new one, gain or loss is recognized on the sale of the old car by calculating the adjusted basis of the vehicle net of the sales proceeds. The purchase price of the new car becomes the depreciable basis of the new car.

Generally, gain to the extent of depreciation claimed on the old car will be taxed as ordinary income, not to exceed the gain recognized on the sale. However, because of the limited depreciation deductions allowable on automobiles, the adjusted basis of the old car may be more than the trade-in value. If this is the case, it may be to your advantage to sell the old car and claim the loss on the sale rather than trade it in on the new car.

If the standard mileage rate has been used for any year, depreciation will be considered to have been allowed at the rate shown in the table below:

Year

Depreciation

Rate per Mile Year

Depreciation

Rate per Mile

2003-2004 16 cents 2010 23 cents

2005-2006 17 cents 2011 22 cents

2007 19 cents 2012-2013 23 cents

2008-2009 21 cents 2014 22 cents

OFFICE EXPENSES

Q. Can I deduct any costs of an office located in my home as a business expense?

A. For years beginning after 1998, deductions will be allowed for a home office if it is the principal place of business based on:

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1. The relative importance of the activities performed at each business location; and

2. The time spent at each location 3. In the case of an employee the use must be for the convenience

of the employer

If the home office is used for administrative or management activities for a trade or business, then deductions will be allowed for the home office, as long as there is no other fixed location where these administrative or management activities are conducted.

Depending on the facts and circumstances of your individual situation, you may or may not meet the principal place of business test detailed above. You should consult with your CPA to assist you with questions about your entitlement to a home office deduction.

Q. Specifically, what can I deduct as a home office expense?

A. If the test described in the previous answer can be met, to the extent a separate section of the home or apartment is used for your Legislator’s duties only and there is no private use whatsoever of that portion, you may deduct utilities and insurance related to maintaining an office in your home, apportioned on the percentage of square footage of your home or apartment that is exclusively used as an office. Also, any maintenance expenses to keep up this particular room or area may be deducted as a business expense for that particular year. Examples of such items would be cleaning and painting.

Carpentry work to install bookcases or other improvements of this nature and installing carpeting in this particular room would be a capital expenditure subject to depreciation.

If you are renting a home or an apartment, the percentage of space devoted exclusively to business is applied to your annual rent to determine the deduction.

If a portion of a home is used exclusively for business purposes and was purchased after December 31, 1986, depreciation will be

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calculated under the Modified Accelerated Cost Recovery System (MACRS) for commercial use. Under MACRS, the cost recovery period is currently 39 years.

However, depreciation is calculated based on the cost of your home after deducting the land cost. If a portion of your home is used exclusively for business purposes, depreciation is limited to the percentage of business space to total space. Tables of MACRS percentages are provided by the IRS for use in determining the annual depreciation charge.

A Legislator whose “tax home” is outside the Charleston area but who owns a house or apartment in the Capitol area for use during the sessions may be subject to the special rules under IRC Sections 280A (limitations on certain expenses incurred in connection with business use of home) and 183 (activities not “engaged in” for profit). You may wish to consult your CPA regarding these special rules.

Q. What about office furniture and equipment?

A. Office furniture and equipment such as desks, file cabinets, calculators, and similar items used by a Legislator may be depreciated and the business portion of the depreciation expense deducted.

For property placed in service after 1986, the Modified Accelerated Cost Recovery System (MACRS) will usually apply and such items will generally be classified as five or seven year property. Instead of the MACRS deductions, you may use the Alternative Depreciation System (ADS) by electing to claim either straight-line or 150 percent declining balance (Section 168) MACRS deductions over the ADR “class life” recovery period to avoid the Alternative Minimum Tax adjustment.

More importantly, you may elect under Code Section 179 to treat the cost of certain personal property placed in service during the year as an expense rather than as a capital expenditure subject to the MACRS rules. At the time of publication, the Section 179 limitation on expensing of depreciable business assets is $25,000 plus an adjustment for inflation (yet to be determined) for qualified

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property placed in service during 2014. The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income that is derived from business. There are also limits if your total investment in qualified property exceeds $200,000 in 2014. Please consult your tax advisor regarding recent Section 179 legislation which may have modified these thresholds.

Q. How do I handle salaries paid for administrative and clerical assistance?

A. Salary or wage payments are another deductible expense you may incur. If you hire someone to assist you in Legislative matters and handling constituent complaints, such as a full-time or part-time secretary, the compensation paid is deductible. As an employer you must obtain a federal employer identification number, pay all required employment taxes, and file the related reports. If you have student or volunteer help working on local legislative matters and you do not incur any out-of-pocket expense, there is no tax deduction and they are not employees.

Q. What if I have a Legislative assistant in my home district, but pay only a token amount each month; am I required to go through the process of filing payroll tax returns and withholding payroll taxes?

A. In most situations, all amounts paid for services are subject to the payroll tax laws. However, there are some exceptions such as in the case of an independent contractor. Specific tax publications and regulations provide guidance to determine whether or not a service provider is an employee or independent contractor.

Q. Instead of, or in addition to, an office in my home, I maintain a rented office in my district for the purpose of serving my constituency. What expenses can I deduct on my tax return for the cost of maintaining this office?

A. If the office is being used exclusively for Legislative purposes, all expenses related to this office (such as rent, utilities, depreciation on improvements and equipment, etc.) are deductible. Care must be exercised if the office is used for political purposes during campaign periods. Expenses must either be excluded or prorated if

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the office is also used for campaign purposes. If campaign contributions for maintaining the office exceed the cost of operating the office, you may incur taxable income. Detailed records should always be maintained. You should keep a detailed record of all receipts from sources other than yourself to determine whether or not your expenses exceed your income or vice versa. If expenses exceed funds from these other sources, and such expenses are, in fact, campaign expenses, then these specific expenses are not deductible. (See questions and answers in next section.)

TELEPHONE EXPENSE

Q. Can I deduct the cost of my personal residence telephone in my district? I use it for calling and receiving calls from constituents and for other State business.

A. The basic cost of the telephone is an expense that you would incur whether or not you were a member of the Legislature, and is, therefore, a personal nondeductible expense. Calls charged in excess of those covered by the basic rate are a deductible expense if they are business calls. If you have a telephone installed exclusively for business use, the entire cost of this telephone would be deductible. Long distance telephone calls and telegrams that relate to Legislative business are a deductible expense. An answering service or a tape recording device for telephone messages is also deductible if related directly and exclusively to your legislative duties.

Q. Can I deduct the cost of a cellular telephone? I use it for calling and receiving calls from constituents and for other State business.

A. Yes, but only if you keep adequate records. Cellular telephones were “listed property” and deductions related to “listed property” were subject to special scrutiny by the IRS before 2010. The Small Business Jobs Act of 2010 removes cellular telephones and similar telecommunications equipment from the definition of listed property for tax years beginning in 2010. Taxpayers must substantiate by written records any deductions taken. This record

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would normally be a contemporaneous written log of telephone activity. The appropriate measure for the proportion of business use is “time” unless otherwise approved by the IRS. Therefore, you would allocate the total cost of the cellular phone based on the minutes used for business purposes versus the minutes of personal use.

NEWSLETTER FUND

Q. What is a newsletter fund?

A. A newsletter fund is a fund permitted by Section 527(g) of the Internal Revenue Code, enabling a candidate or political office holder to establish and maintain a fund exclusively for the preparation and circulation of a newsletter.

Q. How is a newsletter fund accounted for?

A. A newsletter fund is treated as an exempt political organization. The assets in the fund must be maintained in separate accounts and used solely to prepare and circulate the newsletter. Cost of preparing the newsletter includes the cost of secretarial services, printing, addressing, and mailing the newsletter. Annually, Form 1120-POL must be filed with the IRS if the fund has any political organization taxable income.

Q. Is a newsletter fund subject to tax?

A. A newsletter fund is subject to tax similar to a political organization. However, if assets of a newsletter fund are used for any purpose other than the exempt function, such amounts shall be treated as expended for the personal use of the individual who maintains the fund and are taxable to him.

Q. What about unexpended balances of a newsletter fund?

A. The unexpended balances of a newsletter fund may be contributed to or for the use of another newsletter fund, transferred to the general fund of the U.S. Treasury or of any State or local government, or transferred to or for the use of an exempt public

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charity, without being considered as having been diverted for the individual’s personal use and deemed as taxable income.

ADVERTISING EXPENSE

Q. Because I am a member of the Legislature, I am sometimes called upon to pay for ads in trade journals, ad books, or magazines put out by various organizations in my district. Can I deduct the cost of these ads?

A. If these expenditures by you are made to organizations that would qualify as a charitable contribution under Section 170 of the IRC, you may deduct them as contributions. Where these ads are paid for by you and are a necessary part of your business in order to maintain relations with your constituency and also in order to promote your name (which is necessary to an elected official so people are aware of who you are), then this type of expenditure may be deducted as a business expense on your tax return. If these ads appear during a re-election campaign period in which you are involved, it would probably be best to exclude the cost of these ads from your tax-deductible items (because such campaign expenses are not deductible). Ads appearing during your campaign should be paid for by campaign contributions.

Q. As a member of the Legislature, I am requested (and required, in effect, because of my position) to attend many dinners within my district. Can I deduct the cost of these dinners?

A. Yes, if you pay for your dinner. Incidentally, any cost incurred to attend such dinners (travel expenses, parking fees, etc.) are also deductible.

ENTERTAINMENT AND MEAL EXPENSES

Q. I meet a constituent regarding a legislative problem. We have lunch or some other meal together and I pick up the check. Is this a deductible expense?

A. Yes. Make an entry in your expense diary as to who, why, where, when and how much. Retain receipts for any expenditure of $75

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or more. The amount allowable as a deduction for business meal and entertainment expenses is limited to 50 percent of such expenses, subject to certain exceptions. The percentage reduction rules reflect Congress’ belief that business meals and entertainment inherently involve an element of personal living expenses, the deduction of which provides an unfair federal tax subsidy to taxpayers able to take advantage of these deductions.

Q. I occasionally entertain other elected officials, such as city council members, mayors and members of Congress, primarily for the purpose of maintaining communication with them and to explore common problems. Can I deduct this expense?

A. Yes. The criteria for deducting entertainment costs are that such expenditures have a business purpose and that you and the persons entertained have a business relationship. If the business discussion does not take place during the entertainment, it must at least directly precede or follow the entertainment. Observe the substantiation rules described in previous sections of this Guide. In addition, if the entertainment involves anything other than a meal in surroundings conducive to a business discussion, include in your diary the time, place, duration and description of the nature of the business discussion. Entertainment expenses generally are also subject to the 50% limitation.

Q. I am a member of a country club and take business associates and constituents there to eat and play golf. What part of my dues and usage charges are deductible?

A. If the usage of the facilities meets the entertainment guidelines and/or business meal provisions outlined in the first two questions, the actual expenditures are deductible subject to the 50 percent limitation. You must, of course, keep the required documentation to show who, why, where, when, and how much to support the deduction. Club dues and fees for organizations such as business, social, athletic, luncheon, sporting, airline, hotel, and golf clubs are not deductible at all.

The general information in this publication is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction, and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties

The West Virginia Society of CPAs hopes this publication will be of help to you. Also, we would appreciate you taking a moment to send us any comments you may have regarding this publication.

Please return a copy of this page to:

West Virginia Society of CPAs 900 Lee Street E., Ste. 1201

Charleston, WV25301

or by fax at (304) 344-4636

West Virginia Society of

Certified Public Accountants 900 Lee Street E., Ste. 1201

Charleston, WV25301

(304) 342-5461

www.wvscpa.org