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Prepared for Montana Legislators by the Montana Society of Certified Public Ac countants Tax Guide for MONTANA LEGISLATORS 2010/2011
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Prepared for Montana Legislators by the Montana Soc i e t y o f Cer t i f i ed Pub l i c A ccoun tan t s
Tax Guide
for Montana LegisLators
2010/2011
Dear Montana Legislator,
The Montana Society of Certified Public Accountants is pleased to provide you the 2010/2011 edition of TAX GUIDE FOR MONTANA LEGISLATORS. It is designed to answer questions you may have about federal and state taxes and how they affect you as a member of the Montana legislature.
This publication is an excellent road map that will help guide you when preparing your income tax returns. It is designed to explain what business records you must maintain in your unique position as a lawmaker and how political campaigns and functions fit into the tax picture. And now in this electronic format we are able to continuously update it for changes in both state and federal statutes.
If you have any questions about the information contained in this booklet, please contact a CPA in your district or the Montana Society of CPAs. We will be happy to have a member contact you.
Throughout this publication you will see links in blue. These links will take you directly to a CPA’s email, an IRS form or to a specific page within this publication. It is designed to be as convenient as possible for you to use. Whether a legislative year or not, this pub-lication is always available on our website at www.mscpa.org.
Our members recognize and appreciate the contributions you are making to this great state. We commend you for your willingness to serve and hope you will find this publica-tion a valuable tool.
Sincerely,
Ronald Yates, Jr Jane EganPresident Executive Director
PO Box 138 • 33 S. Las t Chance Gu lch , S te 2B • He lena, MT 59624 406/442-7301 • 800-272-0307 • www.mscpa.org
Table of Contents
MSCPA Board of Directors ................................ 4
MSCPA Committee Information ........................ 5
Committee Contacts ........................................... 5
Tax Return & Payment Due Dates ..................... 6
Introduction ........................................................ 7
Automobile & Travel Expenses ......................... 8
Entertainment & Meal Expenses ..................... 10
Living Expenses ............................................... 10
Office Expenses ............................................... 11
Telephone Expenses ......................................... 12
Other Expenses ................................................ 12
Advertising Expenses ....................................... 13
Campaign Contribution & Expenditures ......... 13
Income & Reimbursements .............................. 14
State of Montana Income Taxes ....................... 14
Newsletter Fund ............................................... 15
Recordkeeping ................................................. 15
Recordkeeping Requirements .......................... 16
IRS Forms and Instructions ............................. 17
This publication is available on the Montana Society of CPAs website www.mscpa.org
During the legislative session this publication can be found by clicking the “Legislator Information” link on the home page. Between sessions it may be found by moving your cursor over the Legislative Activity menu on the top of the home page.
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MSCPA Board of Directors
Marilyn Bartlett, CPA Employee Benefit
Management ServicesPO Box 21367
Billings, MT 59104-1367406.652.0828
Ex-OfficiOSEcrETary/ TrEaSurEr
Denise Ulberg, CPA Montana Office of Public instructionPO Box 202501
Helena, MT 59620-2501406.444.1960
Paul Nisbet, CPA Vann’s inc.
3623 Brooks StMissoula, MT 59801-7359
Teresa Beed, PhD, CPA uM School of Business
Dept of accounting & finance Gallagher Business Building Missoula, MT 59812-1216
406.243.6494 [email protected]
Richard Tamblyn, CPA Newland & co Pc
PO Box 3006 Butte, MT 59702-3006
PrESiDENT PrESiDENT-ElEcT
David Sutherland CPA Stahlberg & Sutherland Pc, cPas
100 cooperative Way Ste 100 Kalispell, MT 59903
David Sather, CPA David Sather cPa
701 E Main St lewistown, MT 59457-1966
Ron Yates, CPA Eide Bailly llP
PO Box 7112 Billings, MT 59103-7112
Russ Spika, CPA Spika & Bantz cPas
505 W Main St Ste 201 lewistown, MT 59457
Gordon Thompson, CPA Hamilton consulting Group
PO Box 2200 Havre, MT 59501-2200
406.265.6724gordon@hamiltonconsulting-
group.com
Mike Williams, CPA Guza Newberg & Hubley 1934 Stadium Dr Ste a
Bozeman, MT 59715-0672 406.586.0281
Vickie Tischendorf, CPA Galusha Higgins & Galusha
PO Box 340Bozeman, MT 59715
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MSCPA Committee Information
Committee Contacts
State Taxation Committee MembersDuane Moulton, Bozeman, Chair
Mike Williams, Bozeman, Board Liaison
Don Bagley, Missoula
Tony Ennenga, Kalispell
Scott Gage, Cut Bank
Tara Hill, Sidney
William Hughes, Butte
Betsey Hussey, Helena
Walt Kero, Missoula
John Myers, Great Falls
Ross Norman, Great Falls
Clint Ohman, Helena
Michele Prater, Bozeman
Barbara Pulley, Missoula
Sharon Rhodes, Missoula
John Steinhoff, Helena
Robert Turner, Helena
Dan Vuckovich, Great Falls
Ron Yates, Billings
Legislation and Governmental Affairs Committee MembersGeorge Olsen, Helena, Chair
Mike Williams, Bozeman, Board Liaison
John Beltrone, Missoula
Jeremy Goetz, Billings
Dwaine Iverson, Shelby
Joseph Shevlin, Helena
Krystal Stewart, Helena
Robert Turner, Helena
Shirley Warehime, Helena
The CPAs on these commitees are available as resources on
the topics of:Tax Simplification •
unemployment Taxes•
individual income Tax•
Property Taxation•
corporate income Tax •
Professional liability issues•
Tax initiatives for Economic •Development
George S. Olsen, CPA, Chair Galusha Higgins & Galusha Pc
910 N last chance Gulch Helena, MT 59624-1699
406.442.5520
Baiba Eastlick, CPA, Chaircampbell & associates
2505 S russell Missoula, MT 59801
406.728.9288
Duane Moulton, CPA, ChairHolmes & Turner Pc
1283 N 14th ave Ste 201 Bozeman, MT 59715
406.587.4265
Federal Taxation Committee MembersBaiba Eastlick, Missoula, Chair
Russ Spika, Lewistown, Board Liaison
Hal Clevenger, Missoula
Andy Durkin, Butte
Jared Gage, Billings
Brad Gastineau, Billings
Dave Gilmer, Missoula
Pam Guschausky, Great Falls
Kevin Hubley, Bozeman
Steve Lethert, Laurel
Adam Malloy, Billings
Justin Mosness, Helena
Brian Olsen, Helena
Kent Swift, Missoula
Ian Todd, Kalispell
Jim Toland, Eureka
Norm Williamson, Missoula
Legislation & Government Affairs Committee
State Taxation Committee
Federal Taxation Committee
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2010-11 Tax Return & Payment Due Dates
January 17 Individuals. Make a payment of your estimated tax for 2010 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). use federal form 1040-ES and Montana form iT (not yet available online). This is the final installment date for 2010 estimated tax. However, you do not have to make this payment if you file your 2010 return (federal form 1040 and Montana form 2) and pay any tax due by January 31, 2011.
January 17 Farmers and fishermen. Pay your esti-mated tax for 2010 using form 1040-ES. you have until april 16 to file your 2010 income tax return (form 1040). if you do not pay your estimated tax by January 17, you must file your 2010 returns and pay any tax due by March 1, 2011, to avoid an estimated tax penalty.
January 31 fourth quarterly return of taxes withheld by employer (timely deposits having been made) for calendar year 2010.
January 31 Individuals who must make estimated tax payments. if you did not pay your last installment of estimated tax by January 17, you may choose (but are not required) to file your income tax return (federal form 1040 and Montana form 2) for 2010 by January 31. filing your return and paying any tax due by January 31 prevents any penalty for late payment of the last install-ment. if you cannot file and pay your tax by January 31, file and pay your tax by april 15.
March 1 Farmers and fishermen. file your 2010 income tax return (form 1040 and Mon-tana form 2) and pay any tax due. How-ever, you have until april 15 to file if you paid your 2010 estimated tax by January 17, 2011.
March 15 Corporations. file a 2010 calendar year income tax returns (form 1120, 1120S and Montana forms clT 4 or clT-4S) and pay any tax due. if you want an automatic 6-month extension of time to file the re-turn, file form 7004 and deposit what you estimate you owe, if any.
April 15 individual income tax/self-employment tax returns for calendar year 2010.
Partnership returns form 1065 and Montana form Pr-1 for calendar year 2010. Payment of first installment of individual’s estimated tax for calendar year 2011.
Payment of first installment of corporation’s estimated tax for calendar year 2011.
June 15 Payment of second installment of individual’s estimated tax of calendar year 2011.
Payment of second installment of corporation’s estimated tax for calendar year 2011.
September 15 Payment of third installment of individual’s estimated tax for calendar year 2011. Payment of third installment of corporation’s estimated tax for calendar year 2011.
December 15 Deposit of fourth installment of corporation’s estimated tax for calendar year 2011.
January 16, 2012 fourth quarter estimated tax payments are due for tax year 2011
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Introductionas employees of the State of Montana, legislators are enti tled to deduct expenses
on their federal and Montana in come Tax returns that are ordinary and necessary in pursuit of the performance of their duties. Deductions from adjusted gross income are reported on Schedule a, form 1040, and are avail-able only if deductions are itemized. The appropri ate form for reporting these expenses is form 2106, Employee Business Expenses.
running throughout this presentation is an important em phasis on record keeping. The burden of proving the appro priateness and extent of deductibility is on the internal revenue Service; however, it is still imperative that sufficiently detailed records be kept by the taxpayer to refute a position the internal revenue Service may take. failure to adequately support a de duction can result in its disallowance. a taxpayer can sub stantiate em-ployee business expenses by providing adequate records or sufficient evidence corrobo rating the taxpayer’s own statement.
This guide is not intended to cover all tax matters related to an individual’s tax return. items of a personal nature, such as medical expenses, interest, and charitable contributions, or tax matters unrelated to your position as an elected official are not covered. a question and answer format is used to provide specific answers to ques-tions concerning income tax laws as they relate to your unique position as a member of the legislature.
Basic to the determination of the deductibility of certain traveling expenses while away from home is the determina tion of what is considered “home” for tax purposes. “Home” as used by the internal revenue Service is not necessarily synonymous with domicile or residence. a taxpayer’s “tax home” has to be determined in light of all facts and circum stances relative to a particular taxpayer. if, for example, your duties as a state legis-lator require your presence in Helena most of the year or, your income for the year as a legislator is your main source of income, Helena, as your principal place of employment, would probably be determined your “home” for travel expenses purposes. The result of such determination would be that your living expenses while in Helena would not be deductible. However, you may be able to deduct travel ing expenses incurred on overnight business trips to the area which you represent even though that is where you maintain your family residence.
a state legislator may elect to use his/her residence in his/her legislative district as his/her “tax home.” This election is not available if the legislator lives within 50 miles of the capitol building. State legislators who nor-mally reside in the Helena area can not deduct their commuting expenses.
The answers in this tax guide generally assume that the income earned or the amount of time spent by the legislator in Helena in relation to the income earned or time spent in the city or town of residence or other busi-ness does not result in Helena being classified as his/her “tax home.” Thus, the answers will not apply to legislators who normally reside and work in the general vicinity of Helena, including those whose “tax home” is Helena.
you may wish to consult your certified Public accountant who can assess your situation and advise you as to the treatment of these expenses in your particular case.
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The instructions for form 2106 (included in Exhibit a) contain instructions for allocating your reimbursements be-tween meals and entertainment and other business expens-es. any excess of allowable employee business expenses over the amount reimbursed are allocated among meals and other travel expenses in accordance with the ratio of meals and other travel expenses to the total expense. The unreim-bursed amount is deductible as a miscellaneous itemized deduction to the extent that they exceed 2% of the adjusted gross income. Only 50% of otherwise allowable meals expense are includable as an itemized deduction.
Q How do i report my mileage or automobile expenses on my tax return?
A You are considered an employee of the State. All mileage expenses or automobile expenses are reported on Form 2106, Employee Business Expenses
Q How much can i deduct for the auto mileage i in cur traveling to and from Helena?
A The State pays each legislator certain specified allow‑ances for expenses. In order to assure compliance with the Internal Revenue Service regulations, you should submit Form 2106 with your tax return showing the total allowances received and not reported on W‑2 and all expenses incurred. Any excess of allowance over expenses is included in income, while any excess of ex‑penses over allowances is deducted from income if you itemize deductions on Schedule A. Your deduction for automobile expenses can be either in the form of a mile‑age allowance or you can itemize your actual automo‑bile expenses. To itemize, total the automobile expenses (depreciation, gas and oil, repairs and maintenance, in‑surance, etc.) and apply your business percentage. The business percentage is computed by dividing your total business miles by total miles driven during the year.
The Federal standard mileage rate for 2010 is 50¢ (this amount will be updated when the 2011 rates are released.)
Q What other mileage expenses can i deduct?
A A member of the Legislature usually incurs a great deal of mileage expense while in his/her legisla tive district. All travel costs to meetings where you speak or which are important to attend because of your position are tax deductible. A memoran dum of such mileage should be recorded. This mileage can become substan‑tial, particularly for those individuals whose districts are geographi cally widespread. The legislator may
be required to travel several miles from one town to another and attend civic functions, political functions, or other meetings related to his/her legislative duties. You may deduct the cost of nonreimbursed transporta‑tion between two places of business (State legislature or another business or occupation) pro vided such trips are necessary to discharging busi ness at both locations. In addition, mileage costs incurred in making an investiga‑tion to ascertain facts concerning possible legislation are deducti ble.
Q What about mileage expenses incurred while go ing to meetings during a political campaign for my reelec-tion? although i am running for reelec tion, l still feel it is important to attend these meet ings to explain to my constituents the activities of the legislature.
A The Internal Revenue Code specifically states the campaign expenses are not tax deductible. Be cause of this, it is very important for the legislator to distinguish between those expenses which are directly related to a campaign for reelection and those expenses which can be directly attributable to serving the legislator’s constituency. (See ques tions under Campaign Contribu‑tions and Expendi tures subheading).
Q if i use another mode of transportation to get to Helena such as a bus or airplane, can i deduct these expenses in addition to my mileage ex pense?
A You cannot claim simultaneously both the mileage you would have incurred had you driven an automobile to Helena and the cost of the bus fare or airplane ticket. If you use a bus, airplane or other means of transpor‑tation to Helena these expenses should be detailed on Form 2106. The result will be that the expenses incurred in excess of reimbursement will be deductible or the reimbursement in excess of such expense will be taxable income to you.
Q On occasion i ride with another legislator to He lena. Do i still claim a tax deduction for the mile age for that particular day, even though i did not drive my own car?
A When you ride with someone else and do not incur any transportation expense yourself, you cannot claim any mileage expense for that trip.
Q While away from home, staying in Helena for the leg-islative session at a hotel, etc., i am required to drive or take a taxi to the capitol each day. can i deduct this as a business expense?
Automobile and Travel Expenses
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A Yes. Since Helena is not considered your tax home, busi‑ness transportation between your hotel and the Capitol, etc., is not considered commuting. Consequently, you may deduct such transportation expense.
Q i received a traffic violation ticket because i was rush-ing to get to Helena to be on time for a session or a committee meeting. is the fine a tax deductible expense?
A No. A traffic violation fine is a penalty and therefore not a deductible expense.
Q i have an office in my home district. can i deduct mile-age from my home to this office?
A No. The mileage from residence to place of business is not deductible, this is considered a nondeductible com‑muting expense.
Q The State pays me certain allowances for travel and other expenses. Do these allowances create additional income to me?
A These allowances, which are intended to reimburse you for certain expenses incurred as a State legislator, must be included in income. However, you may deduct your travel expenses while away from home, transportation expenses and other ordinary and necessary business ex‑penses, including entertainment (subject to limitations), incurred during the year.
Q The internal revenue Service allows me to deduct a standard mileage allowance or to itemize all of my automobile expenses and then to take a portion of those expenses based on the percentage that my busi-ness mileage bears to the total mileage during the year. Which method results in the greater deduction for me?
A The Internal Revenue Service’s standard mileage allow‑ance is 50¢ per mile (January 1 ‑ December 31, 2011). Therefore, it is necessary to itemize your automobile expenses and then compare the to tal to the standard mileage allowance to deter mine which method is most beneficial.
Q if i choose not to use the standard mileage allow ance method for computing automobile ex penses, specifically what expenses am i allowed to deduct?
A See Form 2106 and its instructions for a listing of au‑tomobile expenses. Actual expense deductions require significant records and work. Please see page 5 of Form 2106 Instructions for details.
Q Since i receive expense allowances from the State, would it not be best to just disregard the al lowances entirely and assume that they are com pletely offset by expenses and, therefore, not report anything?
A In order to assure compliance with Internal Reve nue Service regulations, you should include these allowanc‑es in your income and deduct related expenses. If your allowances exceed your actual expenses, you have an excess reimbursement which will be included in taxable income. If your expenses exceed your allowances, you have a deduction in computing taxable income.
Q if i itemize my automobile expenses in the first year of use, can i use the standard mileage allowance the fol-lowing year?
A No. If you use the mileage rate, you are consid ered to have made an election to exclude the car from any expensing option.
Q How do i report my mileage or automobile ex penses on my tax return?
A You are considered an employee of the State. All mileage expenses or automobile expenses are re ported on Form 2106, Employee Business Ex penses. These expenses are deductible only to the extent that they exceed 2% of adjusted gross income.
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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, 50 percent is deductible for 2010/2011. Make an entry in your expense diary as to who, why, where, when and how much and retain receipts for any expenditure of $75 or more.
Q i occasionally entertain other elected officials, such as city council members, mayors and congressmen, 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 pur pose and you and the persons entertained have a business relationship. If the business discus‑sion does not take place during the entertainment, it must at least directly precede or follow the enter tainment. Observe the substantiation rules described in the answer to the preceding question and, in addition, if the entertainment involves anything other than a meal in surroundings con‑ducive to a business discussion, include in your di ary the time, place, duration and description of the nature of the business discussion. Fifty percent of the expenditures are deductible.
Q if i have a legislative assistant in my district who works for only a token amount each month, am i required to go through the process of filing payroll tax returns and with-holding 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 contrac‑tor. Since each situation is decided on its particular facts and circumstances, you may wish to consult your Certified Public Accountant to evaluate the situation for you.
Q i maintain a rented office in my district for the purpose of serving my constituency. What expenses can i deduct for the cost of maintaining this office?
A If the office is being used exclusively for legislative pur‑poses, all expenses related to this office–rent, utilities, depreciation on improvements and equipment, etc.–are deductible. However, to the extent that the office is used during your campaign for strictly political purposes, that portion of the total expense is not deductible. Campaign contributions may be used to offset these campaign office expenses.
Office ExpensesQ under what circumstances can i claim expenses of my
home as a business expense?
A Generally, no deduction will be allowed with re spect to expenses of a legislator’s personal resi dence unless a por‑tion of the residence is used exclusively and regularly as the legislator’s princi pal place of business and the State does not pro vide an office or other fixed location for the use of the legislator. Significant changes have occurred re‑garding the law in respect to the office‑in‑home deduction. We recommend you contact your tax advisor to determine if you may be eligible for the office‑in‑home deduction.
Q can i deduct salary paid for administrative and clerical assistance?
A Yes. Salary paid in connection with your business is a de‑ductible expense. If you hire someone, such as a full‑time or part‑time secretary, to assist you in legislative matters and handling constituent ques tions and complaints, the compensation paid is deductible. If you pay salaries, you must obtain Federal and Montana identification num‑bers and report and pay payroll taxes. For details on the proper accounting and tax reporting of payrolls, you may wish to consult your Certified Public Accountant.
Entertainment and Meal Expenses
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Q What may i deduct for living expenses incurred in a hotel, motel or apartment while attending sessions in Helena?
A You are allowed to deduct the actual rental pay ments, in‑cluding any taxes, service charges, utilities, etc., that you may incur. If facilities are shared with others, you may deduct only your share of these expenses. This is the case even though the facility is not used during a part of the month (year) as long as it is maintained in order to fulfill your duties as a member of the Legislature. In any event, the actual expenses should be supported by documentary evidence.
Q can i deduct a standard amount for meals and lodging when i am in Helena?
A for lodging, the only amount you can deduct while in Helena is the actual cost. There is no standard amount for lodging (note: but see special rule for legislators who make the Sec. 162(h) election to be treated as away from home when in Helena). for meals and incidentals you can use a per diem amount of $56 ($51 for food and $5 for incidentals) for travel on or after October 1, 2010. as with all business meals, the actual deduction for the business meal portion of the per diem ($51) must be reduced by 50%. Thus, the actual per diem deduction for meals and incidentals, after the 50% reduction, amounts to $31 ($26 + $5). Expenses which are deductible include lodging (dis-cussed previously) and cost of breakfast, lunch, dinner-and snacks while in Helena over night. if you prepare
your own meals, the cost of groceries, etc., is a deduct-ible expense. incidental expenses, such as laundry and
cleaning, are also deductible. again, adequate records with documentary support are required to be maintained. (See questions under Recordkeeping, page 16.)
Q My principal employment is that of being a State legislator. i have no other substantial source of income and i reside in Helena a significant portion of the year. i represent a district 150 miles re moved from Helena and maintain my personal family residence there. The time i devote to my employment as a legislator while living at home is considerable, but less than the time i spend work ing in Helena. What expenses can i deduct?
A The Internal Revenue Service would consider your “tax home” to be Helena. Under these circum stances, you would not be entitled to deduct any of your living expenses while in Helena. However, since the district you represent is recognized as another post of duty, you may deduct certain liv ing expenses while in your district
overnight on legislative business. Additionally, the cost of your transportation between Helena and your district is tax deductible when incurred for legislative pur poses.
Q What may i deduct if i elect to use my residence in the legislative district as my “tax home?”
A When this election is made the legislator is deemed to be away from home when in Helena. Nevertheless, the advis‑ability of so electing needs to be considered in light of the following.
(1) The legislator’s residence already may have qualified as his/her tax home under the general rules discussed in the Introduction on page 7.
(2) Under the election, living expenses are limited as discussed below even though the actual ex penditures may be greater.
(3) If the election is made, the legislator is deemed to have been away from home for the number of days the legislature was in session (whether or not physically present) plus the number of days the legislature was recessed for four days or less.
The meal portion of the daily per‑diem allowance $51) must be reduced by $50%. Thus, the actual per diem de‑duction for meals, lodging and incidental expenses, after the 50% reduction for meals, is $112.
It should be noted that the election affects only living ex‑penses while other expenses continue to be subject to the general rules, i.e., away from home, etc.
Q can i deduct the expense of meals i have pur chased for constituents and other persons who have come to Helena where legislative business is involved?
A Yes, 50 percent of the cost of meals paid for by you is an allowable deduction as long as that expense is related to your legislative business.
Q i am in Helena for long periods of time. Occasionally i find it necessary and desirable to have my spouse (and/or children) visit me. can i deduct the cost of their transpor-tation to Helena and their motel and meal costs?
A You may not deduct these costs unless you can establish that your spouse’s (and/or children’s) presence served a bona fide business purpose. The same rule applies if your spouse accompa nies you on any business trip.
Living Expenses
continued on page 12
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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 you would incur whether or not you were a member of the Legisla‑ture, and is therefore a personal nondeductible expense. Calls charged in excess of those covered by the basic rate are a deducti ble expense if they are business calls. If you have a telephone installed exclusively for business use the entire cost of this telephone would be de ductible. Long distance telephone calls and tele grams that relate to leg‑islative business are a deductible expense. An answering service or a tape recording device for telephone messages is also deductible if related directly to the business.
Q can i deduct the cost and use of my cell phone?
A To the extent the cell phone is not your personal telephone (you have another phone for personal use) and the phone is utilized for legislative purposes, you can deduct the cost of the phone to the extent allowed under the de‑preciation rules under the Internal Revenue Code. You can also deduct the monthly charges associated with the phone to the extent it is used for legislative purposes.
Q What other expenses can i deduct on my tax return?
A Other deductible expenses you are likely to incur as a member of the Legislature are as follows: (These expenses are re‑ported on Schedule A ‑ Itemized Deductions. The deductibility of these ex penses is limited to the amount exceeding 2% of Adjusted Gross Income.)
1. Stationery, postage and office supplies relating to your position as a member of the Legisla ture.
2. Dues to organizations you have joined be cause they are helpful to you as a State legislator. Examples would be civic and political organiza tions. Dues to organizations of which you were a member before being elected to public office are deductible if business related. Dues paid to social, athletic and sporting clubs are no longer deductible.
3. Publications, including books, newspapers and magazines, which you purchase to assist you in your work as a legislator. Expenses of this nature incurred for personal reasons are not deductible.
4. The cost of Christmas cards for persons bear ing a business relationship to you.
5. Cost of newsletters sent to constituents.
6. Fees paid to Certified Public Accountants for services relating to business and income taxes.
7. Computers and internet access fees
Other Expenses
Q as a member of the legislature, i am often called on to buy ads in trade journals, magazines, etc., published by various organizations in my district. can i deduct the cost of these ads?
A Yes. It is important that a public official support worth‑while business and community activities in his/her district, and it is necessary that he keep his/her name before the public. However, it is ad visable that any ads taken during a re‑election campaign be paid for by campaign contribu tions, since they probably would not be deducti ble if paid from personal funds.
Q as a member of the legislature, i am asked to purchase a ticket for and attend many dinners within my district. can i deduct the cost of these dinners?
A Yes, 50 percent of the cost of the dinners and 100 per‑cent of the incidental costs, such as transpor tation and parking.
Advertising Expenses
Q While in Helena on certain special occasions, such as St. Patrick’s Day. i will have a gathering of fellow legislators and other individuals connected with the legislature. can i deduct the expense of this gathering as a business expense?
A If the gathering can be shown to have a business purpose, then it would qualify as a business de duction. You should maintain adequate records with documentary support and indicate the busi ness purpose and the persons in attendance.
Living Expenses (continued)
Telephone Expenses
13
1. Used for generally recognized campaign ex penses regardless of when such expenses were in curred;
2. Contributed to the national, state or local committee of the candidate’s party; or
3. Used to reimburse the political candidate for out‑of‑pocket campaign expense paid by him dur‑ing a current campaign, or, if he is not cur rently campaigning, during his/her last previous campaign.
Q What is the tax status of unexpended balances of political funds refunded to contributors?
A For tax purposes, unexpended balances of politi cal funds which are repaid to known contributors are not considered to be either expended or di verted and, therefore, are not taxable income to the candidate.
Q in what other ways may unexpended balances of politi-cal funds be disposed of without being tax able to the
candidate?
A 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 govern ment, or
transferred to or for the use of an exempt public charity, without being considered to
be ex pended or diverted and, therefore, are not tax able to the candidate.
Q What reporting is required of a political commit tee, organization, association or fund formed for the purpose of managing campaign contribu tions and expenses of a candidate?
A See the instructions to Federal Form 1120‑POL and con‑sult your Certified Public Accountant.
Q What items would be reported and subject to tax on the 1120-POl?
A See the instructions to Federal Form 1120‑POL and con‑sult your Certified Public Accountant.
Q are campaign receipts and expenditures subject to inter-nal revenue Service review?
A Yes, The Internal Revenue Service has ruled that cam‑paign contributions and political gifts used solely for the expenses of an election campaign or similar purpose are not taxable income to the candidate. Any contributions that are used for personal purposes must be included in the candidate’s taxable gross income.
Q is it permissible to commingle political funds with per-sonal funds?
A No. If funds are commingled so as to make tracing imprac‑tical, 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 pro‑ceeds are the same as for campaign contribu‑tions; see below.
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.
Q can the contributors to my campaign make a tax deduc-tion on their Montana tax return?
A Yes, up to $100 per taxpayer as an itemized deduction. Their cancelled check to the campaign serves as their receipt.
Q are campaign expenses deductible for tax purposes?
A Campaign expenses paid from a candidate’s pri vate resources are considered nondeductible personal expenses regardless of the result of the election. Such expenses would include the cost of attending political conventions, contributions to the party which sponsored the candi‑dacy, expenses of campaign travel, campaign advertis ing, expenses of successfully defending a contested election, filing fees, or the cost of legal fees paid in litigation over redistricting.
Q What types of expenditures may be paid from campaign contributions?
A Expenditures properly payable from campaign contribu‑tions include amounts:
Campaign Contributions & Expenditures
continued on page 14
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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 can‑didate to account accurately for the receipt and disburse‑ment of political funds. Otherwise, receipts may be taxed on his/her individual return, and campaign expenses would be nondeductible. If political funds are comingled with the personal funds of the political candidates and render tracing or identification impractical, the political funds will be presumed to have been diverted to personal use at the time so commin gled.
Campaign Contributions & Expenditures (continued)
Q i have received my form W-2 that reflects my salary as a Montana legislator. What items are included in the amount shown as taxable income?
A The five items that are included in the taxable income reported on your Form W‑2 are (1 ) the salary paid to you for 90 days of the regular session, (2) the salary paid to you for a special session, if any, (3) the salary paid to you for interim commit‑tee meetings claimed on travel claims, (4) the sal ary paid for leadership‑ approved meetings claimed on travel claims, and (5) the expense al lowance of $103.69 (this number will be updated in December 2010) per day during the regular legisla‑tive session (as well as for days spent in special session). This per diem is paid seven days per week unless the legislature recesses for more than three days, then resumes when the legislature reconvenes.
Q Which payments that i received from the legisla tive council or from other agencies are not in cluded on my W-2?
A Reimbursements for vouchered expenses that are turned in to a state agency are not included on your Form W‑2 and are not deductible.
Income & Reimbursements
Q are all of the business related expenses discussed in this book deductible on my state income tax return?
A Yes. The expenses shown on Form 2106 are deducted, provided you itemize deduc‑tions on your State return.
Q are there any other adjustments to income or de ductions which are a consideration only on the Montana income tax return?
A Yes. After Federal adjusted gross income is en tered on Form 1040, the amounts used are en tered on the Montana form. There are numerous adjustments that must be made to federal ad justed gross income to arrive at Montana taxable income (see instructions of Montana State Income Tax return for details).
State of Montana Income Taxes
Q What is the tax rule regarding presumption against unre-stricted gifts?
A The Internal Revenue Service will presume, in the absence of evidence to the contrary, that contri butions to a politi‑cal candidate are political funds which are not intended for the unrestricted per sonal use of such recipient. If, in fact, the funds were intended for the unrestricted personal use of the political candidate, he must be able to substan‑tiate this claim.
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Q What is a newsletter fund?
A A newsletter fund is a fund established and maintained by an individual to prepare and circulate his/her newsletter. The fund can be set up by the holder of any Federal, State or local elective pub lic office. Candidates for any such office can also estab‑lish a newsletter fund, as can individuals who have been selected to public office but have not yet started their term in office. After an individual has left office, the news‑letter fund provision is not available to him unless he again becomes a candidate.
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. Costs of preparing the newsletter include the cost of secretarial services and the cost of printing, address ing and mailing the newsletter.
Q is a newsletter fund subject to tax?
A A newsletter fund is subject to tax similar to a po litical organization as discussed in answers to pre vious questions.
Q What about unexpended balances of a newslet ter 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 govern ment, or transferred to or for the use of an exempt public charity, without being considered as hav ing been diverted for the individual’s personal use. However, transfer of unexpended assets to a political organization which is not a newsletter fund will be considered as being diverted for the individual’s personal use and deemed as taxable income to him or her.
Newsletter Fund
Q How must travel, entertainment and other business expense be substantiated?
A Who: Person who traveled, persons entertained, etc. What: Amount of each separate expenditure. When: Time of travel, entertainment or use of facility. Where: Place. Why: Business purpose of each expenditure. See Exhibit A. The substantiation of the elements discussed above should be recorded contemporaneously in an account book, diary, state‑ment of expense or similar record and supported by adequate docu mentary evidence. Adequate documentary evidence is a receipt, bill marked paid or similar evidence. Merely maintaining a record of expenditures is insufficient. A canceled check will not by itself support a deduction without other evidence (i.e., payee’s bill) demonstrating the business pur pose.
Q are estimates of amounts acceptable?
A No. The amounts must be recorded exactly.
Recordkeeping
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Exhibit A
Recordkeeping Requirements for Travel, Entertainment and Gifts
Factors to be Proven in Substantiating Elements in Column 12
Expenditures for TravelAway from Home
amount of each separate expendi-ture for transportation, lodging and meals. Permissible to total inciden-tal expenses in reasonable catego-ries, such as gasoline and oil, taxis, daily meals for traveler, etc.
Dates of departure and return for each trip, and number of days at-tributable to business activities.
Destination by name of city or other appropriate designation.
Not applicable.
Business reason for travel or nature of business benefit derived or ex-pected to be derived.
Not applicable.
1Elements to beSubstantiated
Amount(WHAT)
Time(WHEN)
Place(WHERE)
Description
Business Purpose(WHY)
Business Relationship (WHO)
3Expendituresfor Entertainment
amount of each separate expenditure. incidental items such as taxis, tele-phones, etc. may be totalled on a daily basis.
Date of entertainment of use of a facility for enter-tainment. (Duration of business discussion.)
Name and address or simi-lar designation or place of use of a facility in connec-tion with entertainment. Type of entertainment if not otherwise apparent. (Place of business discussion.)
Not applicable.
Business reason or nature of business derived or expected to be derived. Nature of business discus-sion or activity if entertain-ment is other than “business meals.”
Occupations or such other information, such as names or other designations, about persons entertained which established their business relationship to taxpayer. (identification of persons entertained who participat-ed in business discussion.)
4Expenditures for Gifts
cost of gift.
Date of gift
Not applicable.
Description of gift.
Business reason for making the gift or nature of business derived or expected to be derived.
Occupation or other information, such as name or other designa-tion, about recipient which establishes business relationship to taxpayer.
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Links to IRS Forms & Instructions
Form 2106 Employee Business Expenses form 2106 instructions for form 2106
Form 1040 Individual Income Tax Return form 1040 Montana form 2 Schedule a
Form 1040 EZ Income Tax Return for Single and Joint Filers with No Dependents form 1040 EZ Montana form 2 EZ
Form 1120-POL US Income Tax Return for Certain Political Organizations form 1120-POl
Form 7004 Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns form 7004
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Montana Society of Certified Public AccountantsPO Box 138
33 S. Last Chance Gulch, Suite 2BHelena, MT 59624
406/442-7301 800-272-0307
www.mscpa . o r g
