Purpose for party could net you tax deduction

I recently hosted a party at my home and invited
several business associates and potential clients'Am I allowed a tax deduction
for the expense of the party? If so, how do I show this on my tax
return?

M.C., Fishers

You must be able to show a clear business purpose for your soiree if you plan to try to deduct the costs you incurred'The expense must be "ordinary and necessary" in your line of business, which means that the amount you spent must be customary for your type of business, and the expense must be appropriate and helpful in developing and maintaining your business.

Only the extra amount you spend for the party is deductible'For example, if you serve drinks in glasses that you already own, the cost of the beverages is deductible, but not the cost of the glasses'Or if you served food that you already had in your freezer, that cost won't be part of your deduction'In addition, your deduction is limited to 50% of the amount you spent.

Keep excellent records as to whom you invited and their business relationship to you'To the extent that your guest list contains potential clients, keep a record of future business derived as a result of this gathering.

The deduction is considered a miscellaneous deduction and goes on your Schedule A with other itemized deductions'Miscellaneous deductions of this type are limited to the amount by which they exceed 2% of your adjusted gross income'Unless your income is quite low, or you have other miscellaneous deductions, you may not have enough expenses to qualify for the deduction at all.

If you are self-employed, the deduction will go on your business form (your Schedule C, for example).

We received a check for $1,200 from the telephone company because they sold their satellite system, and they sent a check and a W-2 form'I'd like to not cash this check until next year because I don't want to pay the taxes this year'I have 90 days to hold the check'I want to cash it in January 1999'Can I do this? J.H., Coatsville, IN

If the check is in your possession before the end of the year, and you have the right to cash it before the end of the year, the income is considered taxable in 1998, even if you don't cash the check until 1999'And if you choose not to cash the check at all? You must still include the $1,200 in your 1998 income and pay tax on the money with your 1998 tax return.

I'm a little surprised that this income is being reported to you on a W-2 form'The W-2 forms are for reporting wages from employment'If you did indeed receive a W-2 form, The IRS will expect you to include the $1,200 with your regular wage income on line 7 of your tax return, and you should attach a copy of the W-2 form to your tax return.

The income should have been reported to you on a 1099 form'If the form you received is a 1099, you don't need to attach that form to your tax return'In the case of the 1099, you should show the $1,200 as "Other Income" on line 21 of your tax return'You will not be able to use a 1040A or 1040EZ to show this miscellaneous income from a 1099 form'You must file the 1040 form.

If you pay federal taxes on your social security income, can you take the amount of federal income tax that you pay on social security as a deduction on your state taxes? If so, where do you enter the amount on your state form? Can you go back three years and amend other state returns? J'T., Indianapolis

Unlike our friendly neighbor, Illinois, a state that really gives its retirees a tax break, Indiana is pretty hardcore about taxing retirement income'Most retirement income is taxable in Indiana, to the same extent as it is on your federal return, however Social Security and Railroad Retirement benefits are not taxed in Indiana (note that you must file Schedule 1 with your Indiana return to remove these items from your income subject to Indiana tax)'There is no Indiana deduction allowed for federal taxes paid on social security or any other type of income

You may like these other stories...

IRS audits less than 1 percent of big partnershipsAccording to an April 17 report from the Government Accountability Office (GAO), the IRS audits fewer than 1 percent of large business partnerships, Stephen Ohlemacher of the...
Legislation coming out of Washington just might reduce homeowners' burden for disaster insurance. It's a topic very much on everyone's minds since the mudslide in Oso, Washington. The loss of human life was...
Divorce is hard, and the IRS isn't going to make it any easier. The IRS generally says "no" to tax deductions that might ease the pain of divorce. In certain circumstances, however, you might be able to salvage...

Upcoming CPE Webinars

Apr 22
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
Apr 30
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.