Small Business Tips

Taxes Post Archive
Featuring articles related to the topic of taxes including IRS policy, IRS deadlines, tax codes, tax reduction strategies, estimating taxes, witholdings, credits, deductions, legislation, income tax backets, preparing for audits, avoiding audits and more.
IRS Offers Business Tax-Tips CD

April 15th is still more than six months away but the IRS is helping entrepreneurs prepare early by releasing its 2006 Small Business Resource Guide CD-ROM last week.

The free, interactive CD provides critical tax information for small businesses, including forms, instructions and publications. The CD provides valuable business information from a variety of government agencies, non-profit organizations and educational institutions.

The CD contains essential start-up information needed by new small businesses. The design of the CD incorporates file formats and browsers that can be run on virtually any desktop or laptop computer.

Small businesses can order up to five copies for free at the IRS Web site. To get your copy of the CD, call (800) 829-3676 or visit www.irs.gov/businesses/small/page/0,,id=7128,00.html


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By Chris Brunner
Monday, March 13th, 2017 @ 12:03 AM CDT

Taxes |

Reducing Taxable Income with Retirement Funds

Taxes stink. Ah, but as citizens of this wonderful country we must pay our dues for services. Most business owners know that the more you make the more you are taxed.

The best way to reduce your taxable income and greatly benefit yourself at the same time is through retirement funds, such as a 401(k) plan. I recently started a Solo 401(k) for myself and can place up to $44,000 a year into it, reducing my taxable income by this amount each year.

Your 401(k) can mean the difference between paying the government or creating a future for you and your family.

How should a 401k be balanced?

Money magazine suggests these allocations:

1) Aggressive–for those with 35 or more years until retirement

50%–large cap stocks
15%–mid cap stocks
15%–bonds
10%–small cap stocks
10%–international stocks

2) Moderate–for those with 20 years until retirement

35%–large cap stocks
35%–bonds
10%–mid cap stocks
10%–small cap stocks
10%–international stocks

3) Conservative–for those within 10 years of retirement

40%–bonds
30%–large cap stocks
10%–mid cap stocks
10%–international stocks
10%–cash

Read more about 401(k) plans:

• Forbes.com – A Way To Max Your Tax Savings
• U.S. Dept. of Labor – 401(k) Plans For Small Businesses
• About.com – Maximizing Your 401k Plan
• SmartMoney.com – The Solo 401(k)


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By Chris Brunner
Monday, March 6th, 2017 @ 12:19 AM CDT

Taxes |

Alternative Minimum Tax

This year, it’s estimated that millions of Americans will pay the Alternative Minimum Tax, also known as AMT. The AMT requires some people to pay more than regular income tax.

Congress enacted the AMT in 1969 following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid zero federal income tax on their 1967 tax returns. In inflation-adjusted terms, those 1967 incomes would be roughly $1.17 million in today’s dollars. Source: TaxFoundation.org

11 things that may cause an AMT liability:

• Excessive Exemptions
• Standard Deductions
• State and Local Taxes
• Interest on Second Mortgage
• Medical Expenses
• Miscellaneous Itemized Deductions
• Various Tax Credits
• Incentive Stock Options
• Long-Term Capital Gains
• Tax-Exempt Interest
• Tax Shelters

Read more about these AMT liability factors

A major flaw in the AMT:

The Alternative Minimum Tax is NOT adjusted for inflation. This means that with each year that passes, more and more people will be affected by this double taxation. This includes people who were not originally targeted for this tax — middle and upper-middle income families.

If left unchanged, the AMT is estimated to penalize nearly 15 percent of taxpayers by 2010–some 12 million Americans in total.

Recommended Reading:

• IRS.gov – AMT Assistant
• Fairmark.com – Alternative Minimum Tax Guide
• Smartmoney.com – The Alternative Minimum Tax
• TurboTax.com – Alternative Minimum Tax FAQ


Image Source: National Center for Policy Analysis


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By Chris Brunner
Saturday, February 18th, 2017 @ 12:08 AM CDT

Taxes |

IRS Payments by Credit Card

Starting this year, business owners will be able to pay employment taxes — Forms 940 and 941 — with plastic.

For the first time this tax season, business owners who paid $1,500 or more in wages in any quarter of the previous year will be able to make federal business-tax payments on their American Express, Discover, MasterCard, or Visa, the Internal Revenue Service announced on Jan. 5.

On top of collecting air miles and other bonus points on their cards, small-business owners could cover employment taxes with a credit card payment, then — depending on cash flow — could hold-off on paying the balance on the cards until later in the month.


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By Chris Brunner
Thursday, February 16th, 2017 @ 12:01 AM CDT

Taxes |

Estimating Income Tax

Income tax amounts to the other half of total taxes owed each year by small business owners. How much you owe is determined by how much you made after expenses and deductions.

This post will show you how to estimate your income taxed owed in equation form.

First, you should determine what tax bracket you will fall into. Your tax bracket is used to estimate the amount of additional tax you’ll pay if your income increases – or the amount you’ll save if you can claim a deduction.

For instance, you are married filing jointly and your taxable net earnings is $55,000.00. You will be taxed at the 15% rate.

Don’t forget: The IRS allows you to deduct half of your estimated self employment tax away from your net earnings.

The equation for estimating your income tax looks like this:

(((Net Earnings – (SEtax / 2)) – Income Min. Limit) * Tax Rate) + Minimum Tax

So assuming your estimated net earnings is $55,000 @ 15% (before deducting SEtax) the equation would be figured as:

((($55,000.00 – ($7,771.25 / 2)) – $14,600.00) * .15) + $1,460.00
((($55,000.00 – $3,885.63) – $14,600.00) * .15) + $1,460.00
(($51,114.37 – $14,600.00) * .15) + $1,460.00
($36,514.37 * .15) + $1,460.00
$5,477.16 + $1,460.00

Income Tax = $6,937.16

With net earnings of $55,000, your estimated total tax owed (incl. self employment tax) would be:

Itax + SEtax = Total Estimated Tax Owed

$6,937.16 + $7,771.25 = $14,708.41

Disclaimer: Tax results submitted to the IRS should be figured by a qualified accounting professional. This method is only for estimating what you will owe to be better prepared.

Recommended Reading:

Your Tax Bracket
Your Income Tax Bracket


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By Chris Brunner
Saturday, February 11th, 2017 @ 12:01 AM CDT

Taxes |

Estimating Self-Employed Tax

Yesterday I spent a good part of the afternoon attempting to estimate my tax liability for 2005 while looking ahead to 2006.

As all small business owners know, self-employment tax is a major part of your total tax liability each year. It represents 15.3 percent of your net earnings from self-employment as reported on Schedule SE.

The tax consists of two portions:

12.4% for Social Security – $11,160.00 maximum (2005).
2.9% for Medicare – no maximum.

According to the IRS, net earnings from self—employment generally represent 92.35% of your net income. eHow.com offers this equation for estimating self-employment tax:

Net Income * .9235 = Net Earnings
Net Earnings (up to $90,000 in 2005) * .124 = SStax
Net Earnings (no limit) * .029 = MCtax

SStax + MCtax = SE Tax

Assume your company earned $55,000 net income. Your estimated self-employment tax is figured as:

55,000 * .9235 = $50,792.50
50,792.50 * .124 = $6,298.27
50,792.50 * .029 = $1,472.98
$6,298.27 + $1,472.98

SE Tax = $7,771.25

Disclaimer: Tax results submitted to the IRS should be figured by a qualified accounting professional.

Recommended Reading:

IRS.gov – Self-Employment Tax Discussion
TurboTax.com – Self-Employment Tax


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By Chris Brunner
Friday, February 10th, 2017 @ 12:00 AM CDT

Taxes |

IRS Publication 17 – Tax Guide

IRS experts have pulled together an overview of common tax issues in one convenient place – Publication 17, Your Federal Income Tax.

From stock sales to student loans, this 300-page publication holds the answers to many of your questions.

To get a copy, visit www.irs.gov/publications/p17/index.html or call 1-800-TAX-FORM (1-800-829-3676).


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By Chris Brunner
Thursday, February 9th, 2017 @ 12:00 AM CDT

Taxes |

Year-End Tax Planning Steps

In the month of December what do you think about… family, food, shopping? At this important time of the year, many business owners don’t give their tax situation a second thought.

What can you do to maximize your tax savings before clock strikes midnight on December 31st?

Barbara Weltman of Inc.com offers these 10 steps:

Step 1: Add to your revenue.
Step 2: Pay off accounts receivable.
Step 3: Make capital investments.
Step 4: Stock up on supplies.
Step 5: Distribute profits.
Step 6: Save for retirement.
Step 7: Make charitable donations.
Step 8: Get slow movers off your books.
Step 9: Adjust your estimated taxes.
Step 10: Get ready for new 2006 tax laws.

Source: 10 Steps to Year-End Tax Planning

Recommended Reading:

MotleyFool – Year-End Tax Planning Tips, Part I
MotleyFool – Year-End Tax Planning Tips, Part II
Google.com Search – “Year End Tax Savings”


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By Chris Brunner
Wednesday, February 1st, 2017 @ 12:00 AM CDT

Taxes |

Fair Tax Legislation

Like most small business owners, I cringe when paying taxes. It’s my duty as an American citizen, however, I question if taking such a large chunk of what I earn is the right way.

Enter the Fair Tax legislation also known as H.R.25.

The Fair Tax repeals the income tax, employment tax, and estate and gift tax. A national sales tax of 23% on the use or consumption in the United States of taxable property or services would be implemented. In other words, only the money you spend would be taxed.

1) Liberation of skilled workers.

Burns argues that income taxes fall hardest on skilled men and women who work hard in, and sometimes own, America’s small businesses. The burden of time and fees is the single largest thing that keeps these workers from accumulating wealth.

These workers are not represented by anyone in Congress, whether Democrat or Republican. Our laws are written by special interests that range from the AARP to the nameless lobbyists who tack on special tax breaks that benefit a single company or industry. That’s the way it is. It is an entirely corrupt system.

2) If you don’t spend your income, everyone benefits from it.

By not spending the money you earn, you are saving it. This extra cash flow will open up new capital for our economy. It would provide new cash for bank deposits, inventory for stores and manufacturers, and capital for equipment. Without the drain of taxation, a larger supply of capital would force down interest rates.

3) Greater equity in taxation.

The only true winners in our current tax system are the lobbyist who represent self-interest groups at the ultimate expense American small business owners like you and I. Both political parties fail to recognize that the worlds of work and entitlements are on a collision course.

Recommended Reading:

FairTax.org – Americans for Fair Tax
The FairTax Book by Neal Boortz
Thumbnail Sketch of the FairTax


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IRS Audit Triggers

By Chris Brunner
Tuesday, January 31st, 2017 @ 12:00 AM CDT

Taxes |

What IRS Auditors Look For

As an entrepreneur, you may have or know someone who has been audited by the IRS. If an audit is in your future, stay calm and understand what the auditor will be looking for…

1) Did you report all of your business sales or receipts?
2) Did you write off personal living costs as business expenses?
3) Does your lifestyle square with your reported income?
4) Did you take cash or otherwise divert income without declaring it?
5) Did you write off personal auto expenses as business?
6) Did you claim personal costs as business expenses?
7) Are you filing payroll tax and making tax deposits for employees?
8) If you hire people you call “independent contractors,” are they really employees?

What Auditors Look for When Examining a Business

Recommended Reading:

Top 20 Tips for Surviving an Audit
How to Reduce the Chance of an Audit
Audit Technique Guides by Industry


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By Chris Brunner
Friday, January 27th, 2017 @ 12:03 AM CDT

Taxes |

IRS Redesigns Form 941

The Internal Revenue Service recently unveiled the redesign of Form 941, Employer’s Quarterly Federal Tax Return.

The redesigned form features an improved layout, plain language instructions, simplified deposit reporting and paid preparer identification. The form is also scannable, which the IRS expects will reduce transcription errors.

“… The IRS wants to simplify its forms,” said IRS Commissioner Mark W. Everson. “The new Form 941 will help achieve that.”

Form 941 is used to report wages, tips and other compensation paid, as well as Social Security, Medicare and income taxes collected.

IRS Unveils Redesigned Employment Tax Return


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By Chris Brunner
Tuesday, January 24th, 2017 @ 12:07 AM CDT

Taxes |

Finding a Good Accountant

Ah, it’s that time of year again. Time to start worrying about getting your taxes filed. And if you own a business, taxes can be a really stressful burden. If you do your taxes yourself or have a friend/family member help, you may want to consider hiring a CPA. Having a CPA do your taxes can be much more relaxing and take some of the burden off your shoulders.

First, it may help to know what a CPA is (if you don’t already). It stands for “Certified Public Accountant,” though it may be more appropriate to call them Certified Professional Advisors, because their roles in aiding your business will often go beyond your accounting.

Continue Reading: “Finding a Good Accountant”


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By Michelle Cramer
Saturday, December 10th, 2016 @ 12:02 AM CDT

Money, Operations, Taxes |

Last Minute Tax Tips

As if you haven’t heard it enough, the deadline for filing 2006 tax returns is April 17th this year. And, just to add to the stress, that is only 5 days away. For those of you who haven’t filed your returns yet, or haven’t even started, here’s some last minute tax advice:

Take Your Time
Though the deadline for filing may be haunting your dreams at night, avoid taking shortcuts or fudging numbers, even as estimates, to get your taxes completed quicker. Though the consequences may not be immediate, speeding through your returns will only cost you the pain and suffering of a possible audit down the road. Take your time and calculate each number appropriately. It’s worth the extra effort.

Maximize Deductions
Now, when I say “maximize” I don’t mean make stuff up to get a bigger deduction. What I do mean is to make sure that you are getting all of the deductions you deserve. Some deductions can easily be overlooked, such as the home office deduction or your mileage for going to the post office or a meeting location. Another not-so-obvious deduction is retirement savings. Check out my previous post, The Right Way to Write-off Business Expenses, for more tax deduction possibilities and rules.

Double and Triple Check Your Work
Before signing on the dotted line, double and even triple check all of your calculations. According to BusinessWeek.com, most of the mistakes on tax returns are simple addition and subtraction errors, and they lead to most of the inquiries the IRS makes.

Another option is to use a tax calculating program, rather than yourself and an adding machine, such as TurboTax, which is designed for both personal and business tax returns. In fact, I’ve used TurboTax for the last four years and have been very pleased with the results, especially the audit check, which double checks your return for any problems that might trigger an audit before concluding the process.

File an Extension
If you just don’t feel like you will be able to get your returns completed and postmarked by April 17th, you can file an extension by filing out IRS Form 4868 and submitting it by the deadline instead. Your extension will be for six months, so your returns will be due by October 15th.

It’s important to know that you should submit an estimated payment of the taxes you will owe with the Form 4868. Otherwise you will have to pay a fine and interest on October 15th. It’s important that the estimated amount you pay is no more than $1,000 from what you will actually owe when your returns are submitted. Less than $1,000 short will mean an additional fine, so it is better to over estimate.

If you run into problems or have questions about your return, help is available. The IRS has a toll-free help line at 800-829-1040 or you can access helpful articles on the IRS Website.


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By Michelle Cramer
Friday, July 29th, 2016 @ 12:00 AM CDT

Taxes |

National Minimum Wage on the Verge of Increasing

It’s been over 10 years since the national minimum wage was increased. Ten years! I find that simply astounding. The cost of living has gone up in that amount of time, without a doubt, but the income that many families generate hasn’t budged. There is something very wrong with that picture and the Senate is pushing for a change.

The plan is to increase the current minimum wage of $5.15 per hour to $7.25 in three increments over the next two years. I like the idea of easing into the change, so that small businesses can adjust accordingly. The Senate bill also includes some tax breaks for small business to ease the transitional pain, while hitting up the large corporate businesses for more money to balance things out.

The bill currently under examination will no longer allow corporations to deduct the cost of jury verdicts or out of court settlements in lawsuits, generating an estimated $540 million over the next ten years. A beautiful plan if you ask me. Even though I work for a law firm that represents local corporations, I think that a corporation that is found guilty of wrong doing in a jury trial should not be allowed to deduct the funds it has to pay out from the judgment. It seems to defeat the purpose of punishment.

Also, the tax-defered portion of severance or retirement packages given to former corporate executives will be limited. Instead of all $210 million like former Home Depot Chaiman-CEO Bob Nardelli received (don’t even get me started on that one) being tax deferred, the amount defferable would be limited to $1 million a year or a figure equivalent to the five year average of the receipient’s taxable salary. Another brilliant idea, especially since it is expected to generate $810 million in revenue over the next 10 years.

What’s funny to me is that those in the Senate who are against the minimum wage increase claim that the beneficiaries would likely only be teenagers with part-time jobs, rather than the working poor. Uh, hello, I beg to differ! As one whose husband stocks shelves in a grocery store to help pay for college, I am well aware of the fact that the minimum wage increase would be highly beneficial to our income.

Additionally, there are plenty of people working at McDonald’s that do so full time to support a family who would benefit from the increase. I used to work in day care, and even those teachers are barely paid just over minimum wage (around $6 an hour), at least where I’m from. Explain to me how these people wouldn’t benefit?

The House version of the bill doesn’t include tax breaks for small businesses (boo), but they plan to address those issues in a separate bill. This will cause a bit of a slow down between House and Senate in getting the bill passed on to the President, but ultimately I think both the increase and tax breaks will become law. Congress would be imbeciles not to pass them. It’s simply time for it.

Minimum Wage Increase Chart

Minimum Wage Increase Chart

Source:
• AOL Small Business: Minimum Wage Bill Divides Businesses


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By Michelle Cramer
Sunday, July 3rd, 2016 @ 12:06 AM CDT

Money, Taxes |

Preparing for an IRS Audit

Unfortunately, no matter how hard you try, sometimes you might make a mistake on your tax returns and the IRS will audit your business. Most audits are prompted by large losses in your business over a number of years, which would lead the IRS to wonder how you’re producing an income.

Typically, IRS audits are face-to-face, but about one-third of them are letters from the IRS asking for an explanation regarding a specific item on your tax return. Audits can be regarding your entire return or just a portion that the IRS has questions about.

If you receive a letter requesting an explanation, first consult whoever prepared your return. If it was prepared by someone who is not a professional accountant, you should consult one to find out the best way to handle it. Respond in writing, on your company’s letterhead, and provide copies of all related documentation. Always send any correspondence with the IRS by certified mail, so that you can confirm the package was received.

If you have to face the IRS in a personal meeting, make sure that you obtain representation by either a lawyer or CPA (Certified Public Accountant). Don’t try and take care of the situation by yourself, as there are probably many laws and regulations you aren’t fully aware of. You can also have the meeting video taped, but you must give the IRS ten days written notice if you choose to do so.

Logically organize all of your records regarding the issue(s) in question, categorically and chronologically. Neatness and organization will build your credibility with the auditor. Also, be sure that you only bring documentation related to the items that the IRS wants information about. Extra documentation is burdensome and unnecessary, and you don’t want to volunteer information about your taxes if they don’t ask about it.

At minimum, you will need to provide the following documentation:
• bank statements and cancelled checks
• receipts
• print-outs and disk copies of electronic records and logs
• appointment books, calendars and/or journals
• worksheets showing your calculations for each item
• an extra copy of all documentation

It’s important that you keep your cool and don’t get overly defensive, as that might make you seem guilty to the IRS auditor. You may even want to prepare some notes for yourself to remember events and explanations. When you’re in the meeting and under that kind of pressure, you can often simply go blank or stumble over words. Having notes on what you want to convey to the auditor will help you to keep things straight in your head.

After the meeting is over, the auditor will provide a written report regarding his conclusions and what additional taxes, if any, you owe. Keep in mind that, if the meeting and result are unsatisfactory, there is an appeals process available. This is where having a video tape of the meeting will come in handy, especially if the auditor was not willing to hear you out. There is also an appeals process available for any liens, levies or property seizures resulting from an audit, including appeals for hardship reasons.

Overall, if you are prepared and organized and can show that the issue at hand was a legitimate and unintentional mistake, then you will probably only face paying additional taxes. If nothing else, you will have definitely learned from the experience.

Sources:
• Inc.com: Preparing for an Audit
• WorldWideWeb Tax: How to Prepare for an IRS Audit


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By Michelle Cramer
Wednesday, June 15th, 2016 @ 12:01 AM CDT

Taxes |

The Right Way to Write-Off Business Expenses (Part 2)

PART 2 – HOME OFFICE AND MISCELLANEOUS

As a continuation of yesterday’s post, below are some additional tax deductions you should handle carefully.

Home Office
If you work from home, you can only write-off the percentage of your bills related to the area dedicated solely to your business. For accuracy, which is something the IRS appreciates, hire a contractor to measure your home office space professionally and provide the square footage that your home office occupies.

Once you have the measurements, figure out what percentage of your home is dedicated to your business. You can then write-off that percentage of your mortgage/rent, utility bills, etc. Keep in mind, however, that this area of your home must be used exclusively for your business. If it is, in any way, used for personal matters (i.e., your home computer is used for both business and personal), then you cannot right off percentages of your household bills.

Home Computer
If your home computer is used for both personal and business matters, then the expense of the computer is not deductible. Instead, you will need to keep a log of the time you use it for business purposes, much like with your home office. Then, determine a percentage of your time in which you use the computer for business and that is how much of the computer is deductible.

Another option would be to invest in a laptop that you use for business purposes only. This will allow for the entire expense of the laptop to be deductible.

Phone Bills
If you have a home office, phone bills do not fall under the category of bills you can write off a percentage of. As long as your phone, whether a mobile or landline, is not used a lot for personal calls, then you can write off the entire bill.

However, if you use the phone for both, then you will have to be sure and get an itemized bill from the phone company and indicate which calls, both incoming and outgoing, were business related. It’s a good idea to also indicate which client each call was related to.

The best and easiest way to avoid extra time and effort is to simply purchase a separate cell phone or get a separate phone line in your home for business calls only. If you opt for the separate cell phone, you can also write-off the phone itself.

Clothing/Uniforms
As a general rule, if you can wear it outside of your job, such as a new suit you wore for work but also to church or a funeral, then it is not deductible. However, if you perform as a clown for children’s birthday parties, then your clown costume is deductible. Another example would be the costume a Las Vegas showgirl might wear.

These are just a handful of the vast expenses that you might be able to write-off each year. It’s a good idea to consult with a professional accountant if you are not familiar with all the regulations. It’s better to spend a little extra money getting some help the first few times than to make a mistake and get audited.

Part 1: Travel Expenses and Vehicle Usage

Source:
• Entrepreneur.com: Top Tax Write-Offs That Could Get You in Trouble

Recommended Readings:
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• TheStreet.com: Top Business Write-Off Audit-Triggers
• About.com: 5 Year-end Small Business Tax Tips


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By Michelle Cramer
Tuesday, June 14th, 2016 @ 12:00 AM CDT

Taxes |

The Right Way to Write-Off Business Expenses (Part 1)

PART 1 – TRAVEL EXPENSES AND VEHICLE USAGE

Write-offs can be headache when it comes to preparing income tax returns for your business. They are often what causes a business to be red-flagged by the IRS because there are so many regulations and many small business owners just aren’t sure how to do it right. I will be addressing this in two parts, simply because there are so many different items to cover.

Here are some pointers on how to handle a couple of the most common tax write-offs correctly.

Travel Expenses
With any travel expenses that you plan to write-off, you will need to be able to prove that the travel was directly related to your business, such as a product convention or meeting with a client.

Flight costs typically aren’t a problem, even if you always fly first class. It’s the limo from the airport to the hotel that would be cause for concern. Meals are deductible at a rate of 50% of the bill. If you are taking client to dinner, you will need to be able to show that you discussed business at the meal.

This is where a journal or electronic log really comes in handy. When traveling on business, be sure to document your daily events, like which clients you spoke to, where and when you met and what you discussed. Should your business ever be audited, the IRS will require you to produce such a journal.

Family vacations are not a tax deduction, unless your family members are part of your business. You have to justify that by holding business meetings or by all parties attending a business convention while on the trip. If you go to the Bahamas and lay on the beach all five days, chances are you really shouldn’t try to write that off.

Vehicle Usage
If a vehicle is used exclusively for your business, then generally you can deduct the entire expenses for operation of the car. However, the standards of “exclusive use” are hard to meet. It’s more likely that your vehicle is used for both personal and business and you will, therefore, have to determine what operation expenses are considered deductible.

Generally, travel between two business destinations is considered a deductible operation of the vehicle. This can mean travel from your home office to the post office to deliver mail or the supply store to get office supplies. This also includes travel from one client’s location to another’s and back to your place of business.

Travel to work locations that are different from that of your regular place of business also count. However, travel from your home to your regular place of business on a daily basis is NOT deductible, even if you have your business advertised on the side of your car.

Generally, travel deductions using a vehicle are calculated by mileage. Again, in your journal, indicate the odometer reading upon departure from a business location and upon arrival at your new business destination. Also indicate how this travel relates to your business.

Part 2: Home Office and Clothing

Sources:
• Entrepreneur.com: Top Tax Write-Offs That Could Get You in Trouble
• TraderStatus.com: Travel Expenses, Meals & Entertainment

Recommended Readings:
• Google Answers: Tax Write Offs When Self-Employed
• TheStreet.com: Top Business Write-Off Audit-Triggers
• About.com: 5 Year-end Small Business Tax Tips


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By Michelle Cramer
Monday, June 13th, 2016 @ 12:00 AM CDT

Taxes |

IRS Audit Triggers

IRS Audit

Part of being a self-employed business owner is the requirement for a lot of record keeping. Incomes and expenses probably make up the majority of those records, simply because it is necessary in order to keep up with the IRS and their grueling and complex rules governing taxes on the income your business generates. If you don’t meet their expectations, your business could be red-flagged and even audited, and that’s something I’m pretty sure we all want to avoid.

So, how do you avoid it? First and foremost, you must keep accurate records. Estimates and assumptions about the income and expenses associated with your business will only draw attention to you. Your best bet is to write everything down, each and every day, even if it seems insignificant.

There are a number of things that trigger the IRS into examining your business practices more thoroughly. They are:

1) Not Filing
This is probably the most obvious trigger, and you would expect it would often be avoided. But many business owners, especially those who are just starting out, fear they won’t have the funds to pay the taxes they will owe. So they simply don’t file returns. Bad idea. It’s better to file and owe back taxes than to go to jail for not filing at all.

2) Overpaying Family Members
If a family member works for you, be sure that you pay them according to their actual responsibilities and experience and at a rate comparable to the rest of the job market. Don’t pay them more than they’re worth just because they’re family.

3) Income Boost
If your income for the current year is excessively higher than previous years, the IRS will want to know why. The reason may be legitimate, like the fact that the demand for your business skyrocketed. But keep in mind that the IRS will then expect your return to show additional expenses in order to meet that increase in demand.

4) Inconsistencies
Make sure your federal tax return is consistent with your state tax return; that the income and expenses match down to the last penny. If there are differences, even subtle ones, you’ve caught their eye.

5) Bad Accountant
The IRS has a checks and balances system with which they keep tabs on accountants and other tax preparers. If a preparer is doing something wrong, not only will they get audited, but so will all of their clients. This means you. So check your accountant’s references thoroughly before hiring him.

6) Extreme Expenses
If you have an itemized expense on your tax return that just doesn’t match up with your income, the IRS will notice. For example, if you’re claiming an income of $30,000 and itemizing a $5,000 desk for your home office… well, it’s pretty obvious that something’s not right and the IRS will want to follow-up.

7) Write-offs
As every business owner knows, incorrect write-offs are one of the largest triggers for an audit. If what you’re writing off doesn’t match what is expected of your business practices, the IRS will probably want an explanation. There are so many rules regarding write-offs that it’s a whole other topic in itself, which I will address tomorrow.

Bottom line: pay attention and be thorough when it comes to your income and expenses throughout the entire year. Don’t wait until January to put everything together for the previous year, but keep record as you go. This will help you to avoid mistakes that trigger audits.

Also, be smart. Don’t try to find loopholes and “work the system.” That’s what gets business owners in trouble. The IRS is cracking down on small business these days, so it’s best to just stick to the rules, even if it hurts a little.

Source:
• Entrepreneur.com: Top Tax Write-Offs That Could Get You in Trouble
• WorldWideWeb Tax: How to Avoid an IRS Audit


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By Michelle Cramer
Sunday, June 12th, 2016 @ 12:00 AM CDT

Taxes |

IRS Puts Small Business Under the Microscope

There’s a new(er) IRS commissioner in town, and he’s doing some extra cleaning. Mark Everson, who took office in March of 2003 has made security his main focus of the IRS. And now small business is facing increased scrutiny.

Enforcement is taking the main stage due to the tax gap currently sitting at about $345 billion. This amounts to all the money that is missing due to non-filers and those who claim the wrong income and don’t pay correctly.

Small business audits more than doubled in 2005, an increase to 17,867 from 7,294 in 2004. Some small business owners have voiced a strong disagreement with the audits, claiming it unfair that small businesses are being targeted and will face penalties for small or unintentional mistakes. Large business owners also have the advantage of the financial ability to hire highly-paid accountants to fend off those mistakes.

Everson feels that a focus on small business will help to minimize the national deficit and avoid possible tax increases in the future. 80% of the tax gap is a result of under-reported income and the majority of culprits tend to be small businesses.

Some experts believe that the funds the IRS is using for enforcement could be better spent on educating the public on an increasingly complex tax code. After all, chances are that the IRS may not even see the revenue they expect to find in small business audits to make up for the funds spent to find it.

Everson claims that there is nothing to fear if you are doing your best to report your income and expenses accurately come tax time. Nothing to fear, that is, except for the time an audit takes away from your business.

Sources:
• MarketWatch.com: Last-minute tax tips for Schedule C filers
• GovEXEC.com: IRS enforcement activities bring in record revenue


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By Michelle Cramer
Wednesday, June 8th, 2016 @ 12:01 AM CDT

Taxes |