Archives- Business
Determining Qualified Business Expenses
Be sure to deduct every legitimate expense
Amounts you spend in the course of conducting business are generally deductible from the gross income of that business. This includes any start-up expenses. You can claim amounts spent for items ordinary and necessary in your trade or business as a deduction against your income. Otherwise, the amounts are amortized, depreciated, or expensed depending on the nature of the purchases. The IRS scrutinizes entertainment and meal expenses more than others because of the potential for abuse. You’ll need to keep track of the business that was discussed during these events. Other expenses such as cellular phones, computers, and cars are specially classified as listed property because they can be used for both personal use and business use. The IRS requires you to keep written documentation of the business use of your car and computer, plus meals and entertainment expenses, so be sure to keep accurate records. Expenses must be directly related to your trade or business to qualify as a deduction; amounts spent on items that may help you indirectly do not necessarily qualify. However, to reduce your taxable profit, be sure to deduct every legitimate expense that you can reasonably prove. Take advantage of your tax preparer’s expertise throughout the year to assist you with tax planning opportunities as they arise.
Automobile Expenses
Which is better—deducting the standard mileage rate or actual expenses?
With the increasing cost of gas, it might be a good idea to revisit which tax deduction is the most beneficial—claiming 50.5 cents(1/1/08 to 6/30/08) and 58.5 cents(7/1/08 to 12/31/08) per business mile or your actual vehicle expenses. Claiming the standard mileage rate is easier. All you have to do is keep track of your business miles and multiply them by the current rate. In addition to the standard mileage rate, you may also deduct the costs for parking and tolls. Plus, if you are self-employed, you can deduct the interest paid on your car loan. Claiming actual expenses may result in a larger deduction, but requires a lot more diligence in your record keeping. First, keep all receipts for gasoline, oil, repairs, and tires. Also, track any amounts paid for licensing and registration, insurance, garage rental, leasing, parking, tolls, and rentals. Sales tax and luxury tax are not deductible, although the amounts you pay can be added to the cost of your car and recovered through depreciation. Regardless of what method you choose, the expenses are limited to your business use. Therefore, you must document the total miles and the business miles for the year to calculate the business-use percentage.
Reimbursing Your Employees for Business Expenses
What method should you choose?
Attracting and keeping good employees is a goal in any business. One way to make life easier for your employees is to have an easy to use reimbursement plan. Travel, transportation, moving, and educational expenses are common reimbursable expenses. As the employer, you have the option to set up an accountable or nonaccountable reimbursement plan. Under either plan, you can deduct many of the business expenses paid to or for employees. However, the plan you choose can make a big difference to your employees. Qualified items that are reported under an accountable plan are not included in the employee’s wages. Under this plan, you issue a check to the employee, who accounts to you for the expenses and returns the excess advance, if any. You take the deduction for the business expense, but the expense never shows up on the employee’s W-2. For a meal expense, the employee must provide you with the time, place, and business purpose. You are allowed to give and deduct the meal per diem amount given to the employee. If the meal per diem is within the federal guidelines, no income is reported on the employee’s W-2, even if he or she doesn’t spend the entire amount. Keep in mind that you and your relatives are not allowed to use the per diem method. Under a nonaccountable plan, you grant a certain amount of money to the employee to cover business expenses. The employee’s W-2 income includes the expense money. You deduct the expense money as wages paid to the employee. The employee can deduct the allowable business expenses on his or her personal return, subject to a limit. Tax wise, the accountable plan is generally easier and more advantageous for the employee.
Into Tax Deductions
Make interest payments work for you, not against you
You can deduct business-related interest on your business return if you used the borrowed funds to purchase business supplies, equipment, services, etc. Co-mingling business and personal expenses makes it difficult to determine what amount of the interest is business versus personal. If this happens, the IRS may consider the entire amount as nondeductible personal interest and disallow the deduction. Therefore, keep all business purchases made with loans and credit cards clearly separate from your personal expenses. Use a separate bank account and credit card for your business to make it easier. Also, make sure to tell your tax professional if you use home equity debt for business expenses. He or she will be able to determine how much of the interest you can elect to deduct directly against self-employment income.
Thinking of Selling Your Corporation?
Carefully review your options before making a decision
When it comes time to sell your corporation, you have two options. You can either sell the corporation stock or have the corporation sell the assets and distribute the proceeds. The tax implications of the two sales are very different. If you choose to sell the stock, you are the seller. The corporation is not affected by the transaction. The new owner steps into your shoes as the shareholder and takes over the existing corporation. If your share of the proceeds exceeds your basis in the stock, you’ll have a capital gain to report on Schedule D. If the corporation sells its assets, the corporation may close it doors. The assets could be sold to one person who intends to operate a business similar to yours, but does not want your corporation. The corporation return will reflect the sale of the assets. When the corporation liquidates, your share of the cash will be reported on Form 1099-DIV as a liquidating distribution. You’ll use Form 1099-DIV to report the sale of your stock on Schedule D. Selling the assets of the corporation could result in double taxation. The sale of the assets is taxable to the corporation and the liquidating distribution is taxable to the shareholder. If you are selling the corporation stock for a loss, you may qualify for special tax treatment. It’s a good idea to review the tax consequences of the sale with your tax advisor before making a move.
Do You Know How Much Your Business Is Worth?
Tips for placing a value on your business
There are several reasons why you should know the value of your business. If you are planning to sell your business, the general rule is that you should sell it for fair market value. In many instances the term “fair market value” is somewhat ambiguous. In the simplest sense, fair market value is what a willing buyer would pay a willing seller, with each party knowing all the pertinent facts. There are several acceptable methods for determining the fair market value of a company. The most common three methods use (1) the value of the company’s assets, (2) the earning power of the company, or (3) the stock value, assuming the company is a corporation. When determining the value of the corporation’s stock, you must research the sale of stock for a substantially similar business. If you have been operating the company for many years, you have built up a reputation for providing good service. This goodwill is a valuable asset and should play an important role in determining a fair asking price for your business. The fair market value of the business is also relevant if you plan to transfer the company to a family member. If the transfer is for less than fair market value, the IRS considers the transaction as part sale and part gift. Inter-family transfers are more closely scrutinized, making an accurate valuation even more important.
Starting Your Own Business?
Here are a few quick tips to help you reduce taxes
Open a separate business checking account. Many small business owners don’t realize the complications that can arise from using their personal checking account to pay for business expenses. If business expenses are mixed in with personal expenses, the IRS may disallow them. When you set up a business checking account at the bank, be prepared to submit either your social security number (SSN) or an employer identification number (EIN). Your SSN will do if you plan on establishing a sole proprietorship and do not have employees or a retirement plan. If you plan on operating a partnership or corporation, you’ll need to submit an EIN. Keep track of expenses you incur before you start your business. Expenses incurred once you decide to start a business, but before business operations actually begin, are deductible up to $5,000 in the first year of business. The rest is deductible over a 180-month period after your business opens its doors.
July 15, 2008 Quick Tax Tips
1. The Stimulus Act increases the expense deduction for business equipment
purchased in 2008 to $250,000.
2. Instead of deducting the actual expenses for the business use of your vehicle,
opt for the standard mileage rate. In 2008, you can deduct 50.5 cents for each
business mile you drive. The rate was increased to 58.5 cents as of July 1, 2008.
3. The Social Security wage base increases to $102,000 in 2008, up from $97,500
for 2007. This means that you are no longer required to withhold social security tax
for employees after meeting this threshold. However, you are required to withhold
Medicare taxes regardless of the amount of wages paid.
4. If you are disposing of property used in your business, you may want to consider
a like-kind exchange to defer the taxable gain on the sale.
5. If your business owns a vehicle that is available for an employee’s personal and
business use, the vehicle is nevertheless considered used 100 percent for business
on the business tax return. The personal-use percentage is included on the employee’s
W-2 as additional compensation.
6. Employer-provided education assistance benefits of $5,250 provided under
a written plan are excludable from wages. The education doesn’t need to be
job-related to qualify.
7. If you are planning to start a SIMPLE retirement plan for your employees or
yourself, do it now. The deadline for setting up a SIMPLE plan is October 1,
except for new employers coming into existence after October.
July 8, 2008
The IRS continues to make strong progress in a number of key enforcement areas.
The IRS is showing consistent improvements in areas critical to maintaining a fair,
efficient tax system while bringing billions of additional dollars into the Treasury.
At the same time, the agency continues to improve service to taxpayers.The IRS
enforcement efforts increased again in fiscal year 2007. For instance, during 2007
the IRS audited 84 percent more returns of individuals with incomes of $1 million
or more than during 2006. Overall, enforcement revenue reached $59.2 billion,
up from $48.7 billion in 2006 and nearly $34.1 billion in 2002.
July 1, 2008
The IRS has moved the extended due date for partnership, estate & trust tax returns
from October 15 to Sept 15 to avoid overlapping with the extended due deadline for
individual taxes, effective January 2009.
