Sometimes we need to talk here about costly taxpayer mistakes that could have been avoided with professional consultation. Take the recent case of a securities firm owner doing business as an S corporation. An S corporation's income is directly taxable to its owners, and its losses pass through to owners for deduction on their tax returns. S corporations are like partnerships in this respect, and the problem we'll describe arises with partnerships, too.

In the recent case, the S corporation had heavy losses during the year. Its owner filed for bankruptcy on December 3, 29 days too soon.

What do we mean "too soon"? When someone files a bankruptcy petition, their assets, with a few exemptions and exclusions, pass immediately to the bankruptcy "estate," to be used to pay creditors who are, for the most part, unsecured. In this case, the owner's S corporation stock was such an asset passing to the estate. With it went an asset (the law calls it a "tax attribute") of great value: the year's tax-deductible loss.

In the owner's hands, the loss would have been enough to eliminate current tax and generate a big net operating loss. Such a loss can be carried to other years, eliminating or reducing tax in those years.

But the owner didn't own the loss. An S corporation's loss for a year is determined when the year ends. At this year's end, the S corporation stock was owned by the bankruptcy estate. By filing for bankruptcy before the end of the year, the owner gave the bankruptcy estate the loss.

The estate acquired the right to carry the year's loss to other years, including back to a prior year when the owner had profits. With this right, the estate could obtain a refund for the taxes the owner had paid in a previous year, even if the owner had made no claim - and didn't know such a claim existed. Alternatively, the estate can carry the loss to future years to offset income arising during bankruptcy from the owner's assets now held by the estate.

The owner argued that since he had held the stock 11/12ths of the year, he should be entitled to 11/12ths of the year's loss. This is not a bad argument, since the law prorates an S corporation stockholder's share of the corporation's loss on a daily basis throughout the year. But the tax rules for bankruptcy trump those for prorating the loss. When the estate took ownership of the stock on December 3, it received all the rights attached to that stock, including the right to claim all the loss determined at year-end.

Note: The court acknowledged that the owner had made an honest mistake, so no penalties were imposed. That must have been some relief. Still, the mistake squandered tens of thousands of tax dollars.

Tip: Here are two ways the owner could have salvaged the loss and its tax value:

Wait until the new year, say January 2, to file for bankruptcy.

Sell the S corporation stock, if possible, before the bankruptcy filing. This way the owner could get his share of the year's loss (once determined), prorated for the period he owned the stock - here, about 11/12ths of the year's loss.

Note: The transfer of a debtor's assets to a bankruptcy estate is tax-free and not a sale.

The same fate will befall a partner who files for bankruptcy during a partnership's loss year. His or her partnership interest, and that interest's share of partnership loss, will go to the bankruptcy estate. The estate can carry the loss to other years.

Tip for Partners: As with the S corporation stockholder, waiting until year-end before filing will give the partner his or her share of the partnership's loss for the year. Rules for determining share of loss are trickier than with S corporations, where a partner sells his or her interest before the bankruptcy filing - too tricky to summarize here.

If you're at all unclear on how filing a bankruptcy petition could impact your taxes, let us know. We can advise you on the best course of action.

The foregoing is provided by the Bosma Group which specializes in serving small and medium sized businesses.  The Bosma Group was founded with the vision of allowing emerging businesses access to same world-class expertise formerly only available to Fortune 1000 companies.

As defined by the IRS, travel expenses are the Ordinary and Necessary expenses of traveling away from home for your business, profession, or job. An Ordinary expense is one that is common and accepted in your field of trade, business, or profession. A Necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.

The key factor is that your trip must be primarily for business. Days of leisure can be added to a trip and still be considered primarily for business. The more days and time per day spent on business will help substantiate the trip. There are no set rules on how many days and how much time per day need to be spent on business for your trip to be considered business related.

Keep all the documentation for business-related travel, including confirmations of appointments, emails, phone records, registration to conferences, etc. The days spent traveling to and from a business trip are considered part of the trip. This includes the weekend if it is impractical to come home between weekday business meetings. Planning ahead can make this happen.

Traveling with Your Spouse

If a spouse goes with you on a business trip or to a business convention, his or her travel expenses can only be deducted if your spouse

1. is your employee,
2. has a bona fide business purpose for the travel, and
3. would otherwise be allowed to deduct the travel expenses.

To be an employee, your spouse must be on the payroll and payroll taxes must be paid. If your spouse is not an employee and travels with you on vacation, you can still deduct the cost of your room at the single-occupancy-per-day rate, rather than half the rate. Meals could also be deductible. If you are paying for lunch or dinner for a customer or business associate and that person's spouse, the full cost of the meals might qualify under the 50% meal deduction. Let us know if you're unclear on this deduction; we can give you the details.

What Expenses Are Deductible?

Here's what you can deduct when you travel away from home for business.

Transportation Expenses
You can deduct Transportation Expenses when you travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, additional rules and limits apply.

Taxi, Commuter Bus, Subway, and Airport Limousine Fares
You can deduct the fares for these and other types of transportation that take you between

• the airport or station and your hotel, and
• the hotel and the work location of your customers or clients, your business meeting place, or your temporary work location.

Baggage and Shipping Expenses
You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.

Car Expenses
You can deduct the cost of operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.

Lodging and Meals
You can deduct your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. Additional rules and limits may apply.

Cleaning Clothes
You can deduct the dry cleaning and laundry expenses you incur while away on business.

Telephone
All business calls while on your business trip are deductible. This includes business communication by fax machine or other communication devices.

Tips
You may deduct the tips you pay for any expense listed above.

Other Expenses
You can deduct other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, or Internet access fees.

Ask Us if you have any questions about business travel this summer; just give us a call or send us an email.

The foregoing is provided by the Bosma Group which specializes in serving small and medium sized businesses.  The Bosma Group was founded with the vision of allowing emerging businesses access to same world-class expertise formerly only available to Fortune 1000 companies.

Goals are essential for establishing direction, defining actions, and measuring progress. Similarly, it is critical that businesses be able to plan and execute. Over the years I’ve had many discussions on this topic and it continues to be an area of challenge for both individuals and organizations. It’s obviously an area at which we need to improve, so here are some hints that I hope will help you be even more successful with your goal planning and execution:

1. In defining your goal, make sure it is SMART(Specific, Measurable, Attainable, Realistically High and Time-based). Also, make sure it is documented in a form that is easy for you and others to use.