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April 21, 2008
Claiming a Deduction for your Home Computer
Does your teenager play video games or research term papers on the same home computer that you use for business purposes? If so, you cannot claim a full deduction for the computer. Instead, you have to make a good faith allocation between personal use and business use. Some sort of a log is the best form of documentation. Having the log prepared real-time provides a far superior that is the most likely to avoid further digging by an examining agent.
April 14, 2008
Looking for Tax Advice?
Ask your tax advisor now what you should be thinking about taxes for the coming year. The forms are fresh on your mind and your situation is fresh on the mind on your advisor. Make a list now of issues to work on, even if your tax preparer suggests a May meeting to discuss specifics.
March 17, 2008
Depreciating Computers and Cell Phones
As an employee, there are two criteria that must be met before you can claim a depreciation (or Section 179) deduction for use of a computer or cell phone. First, the use must be for the convenience of the employer. Second, the use must be required as a condition of you employment.
Convenience of the employer means that you are using the equipment for a substantial business purpose of your employer. Regular use on the job will generally meet this criteria. Required as a condition of employment means that you cannot properly perform your duties without it. It doesn’t mean that your employer explicitly requires the purchase, and it isn’t enough for your employer to provide a written requirement. The requirement is a facts and circumstances determination.
February 11, 2008
How Long to Retain Expense Records
Taxpayers must be able to support all deductions for as long as a tax return is subject to audit. Usually, that means that all activity logs and receipts for expense items must be kept for at least three years after the date on which the return is filed reporting the expenditures as tax deductions. This requirement does not apply to employees who turn over their expense records to their employer in exchange for expense reimbursement. Employees should, however, keep duplicate copies if they deduct expenses in excess of amounts reimbursed by the employer.
December 31, 2007
What makes travel deductible?
Transportation expenses include the cost of getting to and from your destination. Transportation costs relative to a business trip are deductible whether or not you stay overnight. Other expenses incurred during the course of a business trip, such as meals and lodging, are deductible when you are required to be away from home overnight (or long enough to require sleep). Meals required as a result of overnight travel are deductible, but only at 50% of the actual cost of the meals.
December 24, 2007
Hidden Advantage to Mortgage Refinance
Are you considering a refinance to lower your interest rate? There may be a tax advantage as well. If you paid points on your old mortgage that are being deducted over the life of the mortgage, they become deductible as interest when the loan is repaid. That would be the case if you previously refinanced or if this house was not your principal residence.
December 17, 2007
Best Tax Advice – Solid Records
The best advice you can receive from your tax advisor is to keep solid records. If you have business expenses, you need to keep receipts. For business mileage, you need a log. For entertainment expenses, you need explanation of purpose. All of these records must be prepared at the time you incur the expense to build the best defense from an audit.
December 10, 2007
Need More State Withholding?
Look carefully at your expected liability. You can generate deductions this year by paying your state income taxes by December 31. This can be critical if your income is unusually high this year, since the AMT could wipe out your deduction if paid next year. Consider having your employer withhold additional amounts in December to avoid the additional paperwork of estimated tax payments.
December 3, 2007
Consider the Time Value of Money
As we approach year-end, there will be more focus on tax planning. As you look at accelerating deductions to lower this year’s taxes or accelerating income to take advantage of a low current year tax bracket, consider the time value of having cash sooner rather than later. Spending $1,000 in December versus January might be a great move to get a current year deduction, but spending the cash several months early may not. Paying taxes at a lower rate in an earlier year might make sense, but run the numbers because you may be paying taxes a full year before you need to.
November 26, 2007
Identify Your Needs for Business Equipment
Year-end is approaching fast, and you could use a sizable tax deduction. You will need to purchase certain new equipment early next year. It could make sense to purchase the equipment now and put it into use before year-end. Up to $125,000 can be deducted in a single year under Section 179 for purchases of equipment that would otherwise be depreciated over a period of 5 or 7 years. There are limitations, such as the limitation of the amount to the total taxable income of that particular business. And remember, the equipment must be put into use – not just purchased.
November 19, 2007
Acceleration of Income into Current Year
Income should generally be delayed to future periods because of the time value of the tax dollars. There are situations, however, that deserve a careful analysis:
· You expect to be in a higher bracket the next year
· You have status as head-of-household or surviving spouse that ends this year
· You have plans to get married next year
If you fit one of these situations, have your tax advisor run the numbers to see if you would benefit from acceleration of income.
November 5, 2007
Does Bunching Make Sense?
Miscellaneous itemized deductions and medical expenses commonly fall under the 2% or 7.5% level and become useless. These deductions are often, however, subject to bunching. For example, putting two elective medical procedures in the same year can create a usable deduction where putting the procedures in separate years would yield none. It might even make sense to borrow money to pay off a hospital bill in order to get the deduction into a single year.
October 29, 2007
Act Before Year-End on Equipment Purchases
Buying equipment prior to year-end can yield immediate deductions. Provided your business has profits, up to $125,000 in equipment purchases can be written off in the year the equipment is put into use. Additional equipment can yield six months of depreciation deduction, if the mid-quarter rule does not kick in. Check with your tax advisor to see if you can gain from early purchase of equipment.
October 22, 2007
Monitoring your HealthCare Account
Many employers maintain dependent-care or health-care "flexible spending arrangements". Most are calendar year plans, which puts a year-end deadline for spending that qualifies for reimbursement. Finding ways to spend the money is critical because any funds left in these accounts at the end of the plan year are forfeited. There is no refund or carry over to next year.
October 1, 2007
Unreimbursed Employee Business Expenses
If you have employee business expenses that aren’t reimbursed by your employer, talk to your employer about restructuring your compensation. If you can reduce your salary and have an equal amount of business expenses reimbursed, you will come out ahead on an after tax basis. The salary dollars you forego will no longer be subject to the FICA tax and the expense dollars that you are reimbursed no longer get limited by the 2% of Adjusted Gross Income limitation. Plus, your employer incurs no additional costs. The potential downside to watch for is that a lower base salary could have a negative influence on future wage increases.
September 17, 2007
Sales Tax in Remote States
Does your business in North Carolina have to collect sales tax from customers in Kentucky? That depends on whether your company has a physical presence in Kentucky. The legal term is “nexus”. Nexus can be established by having a branch in a state, by having an employee in a state or by simply sending sales personnel into a state to solicit business. Once you establish nexus in a state, sales transactions are subject to the tax rules in that state. If you don’t have any physical presence in a state, then you have no requirement to collect sales tax on shipments made into that state. Businesses making sales through the mail, over the phone or over the Internet only collect tax on sales shipped to states where they have a physical presence.
September 10, 2007
Tax Treatment of an LLC
An LLC (Limited Liability Company) is formed as a separate entity under state law for the purpose of limiting the personal liability of its owners from debts of the business. Federal tax law does not provide a separate set of tax rates and rules for an LLC. Instead, the members of the LLC can elect to have the LLC taxed as a partnership or as a corporation. Thus, an LLC is clearly an option worth considering by entrepreneurs embarking on a partnership. One member LLC’s electing to be taxed as a partnership report results on Schedule C, just as it the business were a sole proprietorship.
August 13, 2007
Charitable Contributions and Your Business
Should you make a charitable contribution personally or make it from your business? Most of the time, business owners should make cash contributions personally. Charitable contributions in a C Corp are subject to very tight limitations, and even in a pass-through entity it makes sense to track personally motivated expenditures separate from normal business expenses. There are, however, exceptions. Take the case of a Schedule C or partnership business that is contributing its profits on a sale to the charity that is making a purchase. The owner could make a cash contribution equal to the profit, or the business could sell the goods at cost. For income tax purposes, the net result is a push, but by having the business sell the goods at cost, the business owner avoids subjecting the donated profits to the 15.3% self-employment tax.
August 6, 2007
Fixing an Error on your Return
Have you ever filed your tax return and then found the receipts for a tax deduction that you forgot to claim? The error can be corrected by filing an amended return on Form 1040X (or Form 1120X for corporations). You have 3 years from the due date of the return to make the change. Should you amend?
The decision to amend a return must consider the increased scrutiny that the return will receive and the increased risk of an audit. Gray area deductions should be weighed against the magnitude of the amendment in deciding whether to file. This caution is based on the fact that amending will cause a live person at the IRS to pull the original return and consider the nature and magnitude of the change. Whenever a live person looks at your return, your risk of audit goes up.
But – if you left a big deduction on the table (or if you forgot to report some income) the Form 1040X should be filed. Maybe a better idea would have been to extend the original return to allow adequate review time before it was filed the first time.
July 22, 2007
Substantiating Your Travel & Entertainment
The most common question is “What records do I need to keep?” The answer is really quite simple: whatever it takes to validate your deduction. In a practical sense, that means maintaining an activity log in addition to keeping receipts. An adequate activity log will show the date, time and place that each expense was incurred, the business purpose of each expenditure and the business relationship of each person entertained. It will also reflect mileage amounts for business use of an automobile. Receipts are also required for lodging, transportation charges and all other expenditures over $75. Even when expenditures are under $75, receipts provide much stronger support for your deductions.
July 15, 2007
Allocating between business and non-business
If you entertain business and non-business individuals at the same event, you must divide your entertainment expenses between business and non-business. You can deduct only the business part. If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro-rata basis.
June 18, 2007
Importance of Your AGI
AGI (Adjusted Gross Income) is a term that we all know and love – it shows up on Line 37 of your Form 1040 for the year 2006. Congress phases out many tax breaks based on your AGI (for example, Personal Exemptions, the Child Tax Credit, Roth IRA’s and Education Credits). You can save thousands by holding down your AGI. For employees, participating to the max in your Flexible Spending Account or 401(K) reduces AGI. For self-employeds, business expenses, health insurance and Keogh contributions hold down AGI. To see how this works, look at Flexible Spending Accounts. You can take medical bills, which would be Itemized Deductions (if they exceed 7.5% of AGI) and turn them into an actual reduction of AGI through reduction of reportable wages.
June 11, 2007
Estimated Tax & Penalties
Most taxpayers pay their taxes through withholdings taken from their paychecks. However, self-employed taxpayers or taxpayers with income from sources other than wages find themselves paying quarterly estimates. If the estimates aren’t large enough, the IRS can assess penalties for underpayment. If you are in this situation, you need to understand the rules – because there are exceptions that avoid or reduce the penalty.
For starters – your estimates can be based on last year’s total tax. If your income increases you will owe taxes next April, but so long as you have paid in 100% of last year’s tax (110% for high earners) in four equal quarterly estimate payments, you will be OK on penalties.
If your income is down and it doesn’t make sense to overpay, then you can make estimate payments each period based on income actually earned in the period. When you file your tax return, you will need to complete Form 2210 to provide details of how you applied to Annualized Income Method to make an adequate estimate payment each quarter.
June 4, 2007
Review the Documentation of Your Charitable Contributions
Did you know that your cancelled check isn’t enough to support a charitable contribution is the amount is $250 or more? The law now requires a written acknowledgement from the charity that spells out the amount of the contribution or describes a contribution of property. You’re OK if you gave 3 separate checks of $100 each, but a single contribution of $300 requires the written acknowledgement. Review your records now and request any acknowledgements that may be missing from your file. The IRS is tough on attempts to provide substantiation after an agent has raised the issue in an audit. The letter from the charity will spell out the value of any goods or services you received in exchange for your contribution – which will reduce the amount of your deduction.
May 21, 2007
Kids with Investment Income?
Should you have your child (under age 14) file a separate return – paying tax at your marginal rate, or simplify the filing by including a Form 8814 in your return and paying the additional tax yourself? Don’t answer until you run the numbers. It may seem simple, but adding investment income to your Form 1040 can hurt by causing additional limitations on certain types or deduction or it can help by making more investment interest deductible.
May 14, 2007
Mixing Religion and Education
The IRS continues to prevail in disallowing any portion of amounts paid for students to attend religiously oriented schools. In a recent case, the parents claimed that 55% of the students’ time was spent in religious rather than secular education and deducted 55% of the cost. The Courts upheld the IRS position that the tuition payments were in line with comparable private school tuitions and that no portion was a contribution.
April 30, 2007
Be Specific with Your Broker
Selling stock? With the roller coaster market, you likely have shares at widely different cost basis. Before you sell, think about which shares you prefer to sell and be specific in instructing your broker. You can choose to sell the shares that yield the least gain, but if you are not careful in designating the shares you could end up with a less favorable result from the IRS.
April 9, 2007
Should I Extend My Return?
Many tax payers fear an extension will increase government focus on their returns. Professional advisors often say just the opposite, encouraging their clients to avoid the primary processing cycle. The IRS says both of these views are unfounded. Our advice is simple. Don't rush your return. If you're finished in time to adequately review, then go ahead and file. If you rush, the probability of errors or overlooked deductions goes way up. Form 4868 is a simple form that buys four months to adequately complete and review your return. You must, however, go ahead and pay any amount you expect to owe.
April 2, 2007
Manage Your Audit Risk
Afraid of an IRS Audit? A few simple rules should reduce your chances of being audited. First, don’t prepare a return that begs for special handling. BE NEAT and CHECK YOUR MATH. When returns can’t be machine read or when they have math errors, they require handling by a live person. Any time a live person handles your return, there is an increased risk of audit. We recommend that you use a software package such as TurboTax to prepare your return. There may still be errors, but there won’t be simple math errors and the return will be neat. Another point is accuracy. Precise amounts indicate that you were attentive to details. Round numbers are an indication that support may be flimsy.
You also may have a high audit risk resulting from Schedule C losses being deducted against income from W-2 wages. This is a red flag, but it is a deduction you should claim if you are entitled. The key here is adequate documentation and supporting your claim with a solid business plan. You may get audited, but your business plan will go a long way to overcome an IRS assertion that your business is just a hobby.
March 19, 2007
Job Search Expenses
Finding a job can be difficult and expensive. For many, the costs are deductible. The main requirement is that you be seeking employment in the same occupation. That means that seeking a first job or changing careers will not qualify. You can also lose out if there has been a long break since your last employment. If you qualify, the deductions can include the cost of travel, resume preparation, agency fees and other directly related costs. Be sure to keep documentation, especially with respect to the meetings that required travel.
March 12, 2007
Deducting Fees for Tax Preparation
Most taxpayers know that fees for tax preparation are deductible. However, we see many self-employed business owners leave deductions on the table. Why? Because they report the entire fee as a Schedule A itemized deduction, subject to the 2% floor. To the extent that fees can be allocated to Schedule C, E or F, they become fully deductible and may even reduce self-employment taxes.
March 5, 2007
Traveling with your family?
No deduction is allowed for travel expenses with respect to a spouse or dependent, unless: a) the spouse or dependent is an employee of the taxpayer; b) the travel is for a bona fide business purpose; and c) the expense would otherwise be deductible. If a family member is traveling with you and their travel is not deductible, then your deductible cost is the amount that would have been spent had you been traveling alone. For example, automobile travel would be deductible in full since the second passenger does not add cost. If a motel costs $75 single and $90 double, then $15 would not be deductible.
February 26, 2007
What is a business day for travel purposes?
A business day includes the following:
A day when substantial business activities are conducted
A day spent traveling to a business destination in a reasonably direct route
A weekend or holiday that is sandwiched by business days
A weekend stay-over for the purpose of saving on transportation costs
February 12, 2007
What is a business trip?
For domestic travel, a business trip is one for which business is the primary purpose. If 50% or more of the days are deemed to be business days, the taxpayer can be reasonably assured that the trip has a business purpose. Transportation costs are totally deductible for a business trip and totally non-deductible for a personal trip (except for specific costs related directly to a business meeting).
For international travel of less than a week, the rules are basically the same. For international travel of more than a week, 75% of the days must be spent on business, or the costs must be allocated based on the number of days.
February 5, 2007
Caution in Claiming Home-Office Deductions
Deductions for a home-based business are now easier to claim, but exercise caution when turning your residence into business property. This is especially important if you might sell the home at a profit within two years. The exclusion available for profits on sale of a principal residence does not apply to any portion of the home that has not been a residence for at least two of the previous five years.
January 29, 2007
Commonly Overlooked Deduction
Many taxpayers refinanced their mortgages last year, and many of those had previously refinanced. Points paid on a refinance cannot be deducted early like they can on a purchase – they must be amortized. But when the loan is repaid, the remainder of the points can be claimed. Check your records to see if you have previously undeducted points that can now be claimed.
January 22, 2007
Home Office Deduction?
The qualifications for claiming a home office deduction are not as tough as the used to be, but there are still a series of rules. To qualify, you must use a distinct portion of your home regularly and exclusively:
· As your principal place of business for the particular trade or business or
· As a place to meet or deal with your clients in the normal course of your trade or business.
If you are an employee, the use must also be for the convenience of your employer.
January 8, 2007
New Mileage Rates
If you reimburse your employee for business mileage or submit your own mileage for reimbursement, the IRS standard rate just increased to 48.5 cents per mile from 44.5 cents per mile. For the average driver at 20,000 miles per year, that’s a loss of a $800 tax deduction.
October 30, 2006
Substantiating a Travel Deduction
All lodging expenditures require a receipt
All non-lodging expenditures over $75 require a receipt
Keep a contemporaneous tax diary, showing:
- Schedules of amounts spent
- Dates of departure and return
- Number of days spent doing business
- Details of places traveled
- Explanation of business reason for travel
Most taxpayers will benefit from retaining all receipts, even those under $75, since receipts will remove doubt.
October 2, 2006
Combine pleasure trips with business trips!!
A little planning and scheduling around your business trips can put you in the right location for a little R&R. The following types of trips often provide an opportunity to enjoy the local scenery.
* Out of town seminars
* Job hunting
* Repairs to rental property
* Management of rental property
* Meetings with business colleagues and business prospects
September 11, 2006
Trade association meetings
You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations. These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. The expenses of your attendance must be related to your active trade or business. These expenses are subject to the 50% limit on entertainment expenses.
August 28, 2006
Lavish or extravagant expenses
You cannot deduct expenses for entertainment that are lavish or extravagant. An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts.
August 21, 2006
A Meal as a Form of Entertainment
Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. A meal expense includes the cost of food, beverages, taxes, and tips for the meal. To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. Expenses are not deductible when a group of business acquaintances take turns picking up each others' meal or entertainment checks without regard to whether any business purposes are served.
January 16, 2006
Catch-up on Withholding
Forget to make estimate payments on your self-employment income? If you also have a traditional job, you can make up part of the difference by increasing the amount of tax withheld on your last paycheck of the year. You can have withheld as much as the rest of your salary for the year by filing a new W-4 form with your employer, and the IRS will treat the amount as if it were withheld throughout the year.
December 5, 2005
Political Contributions
Even sophisticated taxpayers often believe that political contributions are a deductible expense. The aren’t. A number of years ago, there was a very limited deduction available to individuals, but that deduction was been long gone. The bar on deductions includes advertisements in convention bulletins or admissions to programs that benefit a political party or candidate.
December 13, 2004
Trying to Shift Expenses
Even when cash is not available to accelerate deductions into the current year, there may be opportunity to shift the expense. Consider using plastic. Medical expenses and charitable contributions are deductible when charged to a taxpayer’s credit card rather than when he pays the credit card company.
February 16, 2004
Are you Ready for E-Filing
The IRS, like many other government offices, is incurring additional costs to handle the mail after the occurrences of this past fall. E-filing was already a good idea, but many taxpayers who were previously hesitant are now being convinced to file electronically rather than mailing their return. If you are interested, ask your tax preparer or consider filing your return using CompleteTax. Click on our Prepare Your 1040 button to see about filing your Federal and state tax returns for just $29.95.
December 30, 2002
What’s up with Section 529?
We usually frown on calling tax issues by their number, but certain tax issues are commonly referred to that way – Sec 179, 401(k) and now Sec 529. Section 529 is the College Saving Plans that are sponsored by many states. They just got a lot better. Starting with 2002, withdrawals from these plans are tax-free. Check them out at www.collegesavings.com.
May 13, 2002
Education Credits Reach Higher Income Families
The Hope Credit provides a credit equal to 100% of the first $1,000 and 50% of the second $1,000 of qualified expenditures for first and second year college students. The Lifetime Learning Credit provides a credit equal to 20% of the first $5,000 of qualified expenditures. However, the credits are phased out at relatively low income levels, making it useless for many families. Tax preparers have generally presumed that the credits could only be claimed on the parents’ return when a child was eligible to be claimed as a dependent. Recent proposed regulations from the IRS make it clear, however, that when the parent foregoes the dependency deduction, a child can claim the credit on his/her own return. For college students with summer jobs or investment income, and especially for families with more than one child in college, this new interpretation can save hundreds of dollars. Run the numbers to determine whether the family as a whole is better off with the parent claiming a dependent or with the child claiming a credit.
April 30, 2001
Filing Requirement for Dependent Children
Minor children can be claimed as dependents on their parents’ returns, which means they get no personal exemption against their own income. Since most children don’t have itemized deductions, the only deduction typically available is the “standard deduction”. The filing requirement kicks in when income exceeds the standard deduction. For a child with no “earned” income, the standard deduction is $700 for tax year 2000. For a child with wages or other earned income, the standard deduction can be more, figured at the amount of earned income plus $250 (with a $700 floor and $4,400 ceiling).
Keep in mind when filing a return for a child under the age of 14, unearned income over $1,400 is taxed at the parent’s tax rate. If the child under age 14 has no income other than interest and dividends, there is a provision allowing the child’s income to be included on the parent’s return in lieu of filing a separate return for the child.
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