Posts Tagged ‘Business Owners’

Tax Deductions for the Business Use of A Car

Saturday, February 12th, 2011

If you  are using your personal automobile for business purposes, either as an employee or a business owner, you should understand the requirements for claiming this deduction.  IRS Publication 463 (“Travel, Entertainment, Gift and Car Expenses”) provides all of the important guidelines.  You can also use your search engine or go to the IRS website (http://www.irs.gov) and search using “car expenses” to obtain a list of Tax Topics that will provide additonal information and guidance.  Among the important topics to review, depending on your situation, are:

  • Local and travel and travel away from your business home
  • Categories of travel – personal, commuting, and business
  • Standard mileage rate vs. actual expenses (including the major expense categories for the deduction)
  • Leasing a car (special rules apply)
  • Disposition (sale, trade, etc) of the car
  •  Parking fees and tolls, tax credits
  • Advertising on the car
  •  Transporting tools and instruments
  •  Union member’s trips from the union hall
  •  Work location (temporary, multiple, no regular place, Armed Forces reservists)
  •  Car pools
  •  Office in the home
  •  Requirements for car expenses

Insofar as the acceptable deduction expense methods are concerned, you are allowed to use either 1) the actual expenses which were incurred during the tax year or 2) the IRS standard mileage rate ( $ .51/mile in 2011).  This rate is applicable for any and all automobiles.

There are two methods which can be used to determnine the deduction for your business driving costs: the actual expense method or an IRS-set standard mileage rate.    

  • Actual expense method.  You should keep accurate receipts and records for all of your automobile expenses.   Business  costs must be kept separate from personal and commute costs;  
  • Standard mileage rate. If accurate recordkeeping is too difficult you may also use this method to determine your deductible costs. The standard mileage rate replaces the “actual expense method” for determining the costs of gasoline, oil, repairs, lease payments (if you lease), depreciation (if you own), and other car-related expenses.

 However, if you meet the recordkeeping requirements, you are allowed to use the method which provides the highest tax deduction.  However, there are seven situations in which you can not use the standard mileage method – (See “Standard Mileage Rate Not Allowed at http://www.irs.gov/publications/p463/ch04.html#en_US_publink100033930)  

Tax Tips:

  1. If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then in later years, you can choose to use either the standard mileage rate or actual expenses.
  2.   If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that is after 1997. 
  3.   You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. You cannot revoke the choice. However, in later years, you can switch from the standard mileage rate to the actual expenses method. If you change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation.
  4. Documentation – Your automobile and vehicle records should be created (updated) during the actual time that you are on a trip.  You may use a handritten vehicle trip log, Excel spreadsheet, special purpose form etc.  However, be sure that your information includes, at a minimum,  all of the following:
  • The date of the trip
  • The odometer reading (both beginning and ending)
  • The business purpose of the trip
  • The destination to which you traveled

 Keep all of your records for at least three years after the due date of your tax return.  If you file your tax return early,  the clock will still start on the original statutory due date (usually March 15th for certain businesses or April 15th for individuals and other entities).  If you requested a six-month automatic extension of the time to file, then the clock will start at the later date (September 15th or October 15th).

Questions?  Contact the IRS (1-800-829-1040),  your tax preparer,  or your CPA.

Should I Continue To Use Tax Software or Should I Contact A CPA????

Thursday, January 13th, 2011

Are you now in this situation?  I’ve been using   ______________  (fill in the name of your tax software) for several years and I am  considering engaging a CPA to prepare my tax returns each year.   Why should I engage the services of a CPA?  What facts should I consider in making this decision?

 □       Education – CPAs are required to complete a rigorous academic program before becoming qualified to sit for the CPA exam.  Most states now have a 150 semester hour requirement.  Therefore, your CPA probably has at least a Master’s degree.

 □       Certification – after completing the academic program all CPAs must successfully pass all four parts of a very demanding 20-hour professional exam.  This exam has been described as being on par with, or even tougher,  than the attorneys state bar exam.  After the completion of the exam the CPA candidate must petition the state board of public accountancy for certification.  The certification process includes a thorough criminal background investigation and a detailed review of all of the candidate’s academic and professional qualifications.  Most states require that the candidate have at least two years of experience in actual practice, one year of which can be satisfied if the candidate has a Master’s degree.

 □       Regulation – after being licensed to practice by the state board the CPA is required to continuously maintain the highest standards of professional ethics.  The academic requirements never end.  Every CPA is required to complete at least 120 hours of Continuing Professional Education (CPE) every three years and must be recertified by the state board of accounting every 1-2 years, depending on the state.  Additionally, certain CPAs who perform the attest function are required to have their practice operations reviewed by another CPA firm (Peer Review) every three years.  The results are sent to the state board of accounting.  If your CPA is a tax preparer he/she is also regulated and monitored by the Internal Revenue Service plus the state and local taxing authorities. Effective in October 2010, CPAs now are required to obtain and annually renew their Prepare Tax Identification Number (PTIN).  This number must appear on all of the tax returns that they prepare.

 □       Experience – your CPA will have spent years in developing and acquiring a wealth of technical knowledge to continuously ensure that the depth and breadth of his knowledge exceeds the demands of his/her clients. The demands of public practice are so demanding that many will specialize in the services that they offer (i.e. tax, audit, management consulting) just as their colleagues in medicine and the law have done.

 Your CPA will be prepared to review all of your financial records and files to determine the requirements for compliance with the appropriate tax laws, plus where opportunities exist to minimize your tax liability.  In a complex situation,  tax research will be required by the CPA  to determine the requirements that must be fulfilled prior to taking a specific tax position on your behalf. This includes knowing the required written documentation for each deduction or expense. He/she understands all of your rights under the law and will also be prepared to assist or represent you if any of your tax returns are audited. 

 Your CPA is also an “advisor” who can assist you in the management of your financial affairs, tax and estate planning, some legal assistance, starting a new business, improving the financial performance of an existing business, etc.

Finally, I use the following criteria when discussing this situation with any new client:

1.  If you understand all of the relevant tax law provisions and requirements for preparing your tax return using tax software, you should continue to prepare your own tax return;

2.  If there are unique requirements for the past tax year and you just need to have a few questions answered, contact me and I’ll answer your questions.  There are usually no charges unless more than 2-3 hours of my time will be required;

3.  For whatever the reasons, if I can assist you in the preparation of your tax returns each year I’d like to discuss the opportunity with you.  My goal every year is to save you more in income taxes, based upon my knowledge of the tax laws, than the fee that I am charging you for the preparation of your tax return.

Additional information on this subject from the Internal Revenue Service is presented below: (more…)

Are You Planning to Start A New Business??

Wednesday, January 12th, 2011

The news media continues to report (with some variances) that our national unemployment rate is around 9.6%-9.8%.  This number is defined as those unemployed Americans who are actively seeking new employment.  By definition it excludes those persons who wish to work but have ended their search in frustration etc and those who lack the job skills demanded by the local job market.  In a nutshell, the “actual” unemployment rate is much higher than the “reported” rate.  For a myriad of reasons former employees may decide to start their own business rather than return to the work force.  If you are thinking along these lines then the information in this article may be of interest to you.

Although they are not all-inclusive (there are many more), the key points that I wish to present are:

  • Business Form – among the first decisions to make is “What business form is best for my business?”  Among the choices are 1) Sole Proprietorship, 2) General Partnership, 3) Limited Partnership, 4) Corporation, 5) Sub-Chapter S Corporation, 6) Limited Liability Company (LLC), and 7) Limited Liability Partnership (LLP).  Important considerations include:  ease of formation, liability of the owners, management structure, transferability of ownership, and taxation.  Consult with an attorney who specializes in this area.  The legal fees are probably minute compared to the benefits that you will receive;
  • Accounting Period and Methods – Is the calendar year best for your new business or is another 12-month period more appropriate?  Should you select the “Cash” basis for reporting revenue and expenses or is the “Accrual” method more appropriate?  Read through IRS Publication 538 (“Accounting Periods and Methods”) first and then consult with your CPA;
  • Accounting Software – you must record all business transactions in a timely and consistent manner.  You also want to have several key financial reports (Balance Sheet, Profit and Loss, General Ledger etc) available to you regularly to determine 1) where you were, 2) where you are now, and 3) where you are going.   You’ll need also these reports for your supplies, customers, and vendors.  Your business will always be subject to “on-demand” audits by all of the taxing authorities and you must have records to support your reports.  Many very small business owners prefer QuickBooks for simplicity, ease of use, etc. Others prefer more sophisticated software such as Sage’s Peachtree.  There are also other packages that are available.  Consult with your CPA;
  • Pricing Your Product or Service – failing to always have and know this information is almost a guarantee for your business to fail.  There are four components of every product and service: 1) direct material, 2) direct labor, 3) overhead (G&A), and 4) profit.  The value of each will be continuously changing every day that your business operates. Your accounting software will provide the information but you need to know how to extract the data.  If you use your Internet search engine, you’ll find that there is never a point in time or milestone in which a business can be assured of its longevity.  Any business can fail at any time, even if it has been in business for over 100 years.  Again, your CPA will be your best “quasi-business partner”;
  • You Wear Many “Hats” – as the business owner, even though you may hire someone as the manager,  you are ultimately in charge of 1) Sales, 2) Marketing, 3) Human Resources, 4) Accounting, 5) Product/Service Development, 6) Logistics/Supply Chain Management, 7) Technical Support, and 8 ) Customer Service.  It’s a 24X7 responsibility!
  • Continuously Increase Your Knowledge- regardless of the number of years that you have been in business you’ll never know all that you need to know.  Before you open the doors, read the following IRS publications from cover to cover: 334 – “Tax Guide for Small Businesses, 463 – “Travel, Entertainment, Gift & Car Expenses”, 535 “Business Expenses”, and if appropriate 587 “Business Use of the Home”.  Talk with other business owners who provide similar products and services.  Join a “network” of these owners or an association.  Identify colleagues who have the knowledge which you don’t have and consult with them regularly.  Find a mentor for your business.

The informaton below provides additional points to know and consider: (more…)

2011 Standard Mileage Rates

Friday, December 3rd, 2010

Taxpayers are allowed to deduct the “ordinary” and “necessary” expenses which are incurred throughout the year in conjunction with the operation of a trade or business. Individual taxpayers can deduct certain vehicle operating costs for self-employment activities, transportation to/from medical facilities related to obtaining medical care (services), moving purposes (if certain tests are satisfied), and in conjunction with donations of time and/or services to qualified charitable organizations.  No deduction is allowed for any portion of the cost of operating an automobile attributable to personal use.

 Self-employed and individual taxpayers have the option to 1) maintain and keep detailed records of actual automobile expenses or 2) utilize the standard per mile rates promulgated by the Internal Revenue Service.  The applicable standard mileage rate for charitable, medical, or moving expense miles is in lieu of all operating expenses (including gasoline and oil) of the automobile. The costs for  depreciation or lease payments, insurance, and license and registration fees are not deductible, and are not included in the charitable or medical and moving standard mileage rates. These costs are included in the business mile rate. Taxpayers may separately deduct parking fees and tolls attributable to the use of the automobile for charitable, medical, or moving expense purposes.

 The IRS has recently published the standard mileage rates for 2011 that are applicable to 1) business miles driven, 2) miles driven for medical and moving expense deductions, and 3) miles driven in support and services that are provided to charitable organizations: (more…)

Home Business Use (Home Office) Deduction

Wednesday, March 17th, 2010

The real (actual) unemployment rate is as high as 15% in some areas of the United States.  Job opportunities are limited.  Many former employees have decided to start their own businesses rather than become an employee again.  They often operate their business from their home.  Anecdotally, Hewlett Packard began its operations in the founder’s garage.  If qualified, making a decision regarding whether to claim the expenses for the use of your home for your business operations is a continuing issue and problem for both American taxpayers and the Internal Revenue Service.  As you may have already concluded, there are far too many instances of fraud and abuse by those taxpayers who are clearly not entitled to the deduction.  It is also a potential “red flag” area that could cause your tax return to be examined and audited.   

There are several situations that may exist in one of three categories:  1)  Fully qualified (entitled), 2) Partially qualified (not meeting one or more of the requirements, and 3)  Not  qualified.  Then the major considerations (factors) become whether or not you are claiming the expenses on your tax return.   From a practitioner’s perspective we must ask our clients about their specific situation and assist the client in determining whether or not the deduction (expenses) should be claimed.  While the Internal Revenue Service does provide general guidelines (which are also provided in this article) these guidelines can not be expected to cover every possible situation.  IRS Publication 587 (“Business Use of Your Home”)  provides additional information and guidance and should also be carefully reviewed.

IRS Topc 509 (Business Use of The Home) is provided on the “Information Center” page of this website.  To review the information in this article now on the business use of the home, click on this link.

Recent guidance from the Internal Revenue Service is provided below from IRS Tax Tip 2010-53: (more…)