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Vehicle Business Deductions

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Vehicles—Business Use Under certain circumstances a taxpayer can claim a deduction for using their vehicle for business purposes. If you use your car for business purposes, you ordinarily can deduct car expenses using either the standard mileage rate or actual expenses.
 
Use of a vehicle qualifies as business use under all of the following.

  • Getting from one workplace to another in the course of a taxpayer’s business or profession when the taxpayer is traveling within the city or general area that is the taxpayer’s tax home.
  • Going to a business meeting away from the taxpayer’s regular workplace.
  • Getting from home to a temporary workplace when the taxpayer has one or more regular places of work.
  •  
    These temporary workplaces can be either within the area of the taxpayer’s tax home or outside that area. Temporary Work Location A temporary work location is a work location that is realistically expected to last, and does in fact last, for one year or less.
     
    Commuting from home to a temporary work location is deductible only if the taxpayer has one or more regular work locations, or the temporary work location is outside the taxpayer’s tax home area.
     
    It is important to keep complete records to substantiate items reported on a tax return. In the case of car and truck expenses, the types of records required depend on whether the taxpayer claims the standard mileage rate or actual expenses.
     
    To claim the standard mileage rate, appropriate records would include documentation identifying the vehicle and proving ownership or a lease and a daily log showing miles traveled, destination and business purpose.
     
    For actual expenses, a mileage log helps establish business use percentage. Taxpayers should also retain receipts, invoices and other documentation to show cost and establish the identity of the vehicle for which the expense was incurred. For depreciation purposes they need to show the original cost of the vehicle and any improvements as well as the date it was placed in service.

    Protecting Your Business From Scams

    No Scam
    Fraudulent activity is on the rise
     
    Approximately 1 in 18 Americans have their identities stolen each year. Among the many identity theft scams is an emerging hoax in which cybercriminals obtain remote control of computer systems to hack into sensitive employee information to steal identities. Thieves will then use a stolen social security number to file a tax return and claim a fraudulent refund. Criminals may also use stolen employer identification numbers to create false Forms W-2 to support refund schemes. This threat is particularly relevant to office settings, so be sure that you and your employees are using proper precautions at work to avoid being victimized.
     
    Scammers use a variety of methods to enter computer systems, often through the use of malicious software, such as viruses, worms, Trojans, adware, spyware and ransomware. This threatening software has the potential to not only impact you, but your employees and business clients as well.
     
    To protect yourself and your office from malicious software, all of your employees should have anti-virus software installed and maintained on their computer at all times. When selecting an anti-virus program, be sure to only install it from sources you trust. You may also want to consider placing certain IT restrictions on employees regarding what types of software they can install.
     
    You’ll want to review any software that your employees use to remotely access your network and that your IT vendor uses to support your systems and remotely trouble¬shoot technical problems. Remote access software is a potential target for scammers to gain entry and take control of a device.

    Business Tax Due Dates for 2016 Returns

    As tax season approaches, remember these deadlines
     

    Taxes 1040 w CalculatorAs you’re preparing for the 2016 filing season, keep the due dates below in mind. Penalties for missed deadlines can be significant. Please note: As a result of various Congressional provisions, some of the dates differ from last year.
     

    You’ll also want to note that the extension deadline for Form 1065 remains September 15, as it has a longer extension period—a maximum of six months—rather than the current five-month extension.
     

    Form
    Name
    C Corporations (Form 1120)
    S Corporations (Form 1120S)
    Partnerships (Form 1065)
    Sole Proprietorships (Form 1040)

    2017 Filing Due Date
    April 18*
    March 15
    March 15
    April 18*

    Previous Due Date
    March 15
    No change
    April 15
    No change

     

    *Due to the observance of Emancipation Day in Washington, D.C., the 2017 filing date is April 18, rather than April 15, for these particular forms.

    Start-Up Costs: What’s deductible?

    tax planningBusiness start-up costs are deductible in the taxable year in which an active trade or business begins. Start-up expenses may include training wages, pre-opening utilities, rent, advertising, depreciation and any exploration costs. If you are starting a business, you’ll want to separate certain expenses to ensure they get the proper tax treatment. The two categories of start-up expenses are:

    • Expenses you incur in exploring and setting up the business. You may deduct up to $5,000 of start-up costs in the first year. The remaining expenditures are amortized over 180 months, beginning in the first year your business begins.
    • Expenses you incur from the time the business officially begins. These are currently deductible.

     

    Before the IRS will allow you to claim a deduction, your business activity must actually commence. If a business has yet to engage in its core business activity, the IRS will likely disallow any start-up expense deductions.

    Starting a Business: Where to begin

    start a businessIf you have an entrepreneurial spirit and dream of becoming your own boss, you may eventually look into starting your own business. Many people have the desire and solid ideas for starting a business venture, but may either lack the courage to take the first step or simply don’t know where to start. Here are a few things to keep in mind that may help guide you in taking those first steps.
     
    Develop a business plan. A business plan is important for obtaining a business loan to set up operations. It acts as a blueprint of your operations for the coming years. Make sure the plan covers the type of business, product or service offered, the type of customers, pricing, start-up capital, revenue and expense forecasts and marketing plans.
     
    Registering a business. You’ll need to decide if you’re going to start a business alone (as a sole proprietor) or with others (as a partnership). Some states will allow you to simply start a business; others require you to register the type of business and follow certain guidelines before opening the doors.
     
    Tax considerations. Most businesses need an employer identification number (EIN) to file tax returns. To obtain an EIN, you’ll have to file Form SS-4, which you can get from me, the IRS or the Social Security Administration. Your state may also require a state ID and/or sales tax number. If you need more information on obtaining these ID numbers, please let me know.
     
    Employees. If you plan to have employees, it’s important to know that you’re generally responsible for payroll taxes, social security taxes, Medicare taxes and unemployment taxes. You’ll also need to collect federal and state withholdings (where applicable) and the employee’s share of social security and Medicare taxes.
     
    Start-up costs. You may need to separate some expenses, such as:
     

    • Those you incur in exploring and setting up the business. In general, you may deduct $5,000 of start-up costs. The remaining expenditures are amortized over 180 months, beginning in the first year your business begins.
    • Those you incur from the time the business officially begins (currently deductible).

     
    Other considerations. Before starting a business, it’s also important to consider the following:
     

    • Record keeping
    • Business location
    • Capital expenditures
    • Liability and asset protection
    • Fringe benefits
    • State and local requirements

     
    If you have any questions on these topics, or any of the other topics covered, we’d be happy to provide you with further information.

    Self-Employed Health Insurance Deduction

    self-employmentAre you eligible?
     
    If you’re self-employed and paying your own health insurance, you may be eligible for a large tax deduction. Those who can claim the deduction include:
     

    • Small businesses, sole proprietorships, qualified joint ventures or farmers reporting income on Schedule C, Schedule C-EZ or Schedule F.
    • Partners with self-employment earnings reported on Schedule K-1.
    • Shareholders who were paid wages reported on Form W-2 and who own more than two percent of the outstanding stock of an S corporation.
    • Taxpayers who used an optional method to figure net earnings from self-employment on Schedule SE.

     
    Keep in mind that the deduction is not available if you’re eligible to participate in an employer-subsidized health plan maintained by your employer or your spouse’s employer.

    Automobile Expenses: Do you use your car for business purposes?

    car for businessIf you use an automobile for business, you may be able to receive a tax deduction to lower your income tax. Deducting auto expenses requires diligent recordkeeping and accurate calculations. There are two ways to calculate your auto deductions:

    • Actual expenses. Track all eligible deductions, such as the cost of gas, oil, repairs, insurance, maintenance, tires, washing, licenses and depreciation or lease payments.
    • Standard mileage rate. Instead of tracking the above expenses, track the business mileage you accrue and use a standard rate. For 2015, the standard mileage rate is 57.5 cents per mile.

     
    Whether you own or lease your vehicle, both of these methods are viable options. Taxpayers who wish to use the standard mileage rate in lieu of actual expenses for computing deductible vehicle expenses must elect to do so in the first year of business use. Switching to the standard mileage rate in a later year is not an option.
     
    To receive these deductions, you must keep accurate records of the miles incurred for business, dates of business use, destinations and the business purpose. You’ll also need to note the odometer readings at the beginning and end of the year to determine the total miles for all uses. If records are not accurate enough and you are not able to substantiate your claim, the IRS may disallow a deduction for mileage.
     
    Please note that you cannot deduct commuting mileage—that is, mileage from your home to your regular job. However, if you’re self-employed and maintain an eligible office in your home, you can deduct the mileage to and from your clients, as well as between jobs. You can also deduct mileage between jobs or to a temporary assignment. If you don’t have a regular place of business, you can only deduct your transportation expenses to a temporary location outside of your general area of employment.

    9 Tax Audit Red Flags

    riskTax season is right around the corner and the best time to prepare yourself for what’s to come is before the year ends. Here are some common red flags for you to consider this filing season:
     
    1) High Charitable Donations – The IRS calculates an average amount taxpayers should give to charity based on their income level. If you give more than most (like many of you Dave Ramsey followers do) it could be brought into question. Be sure to not overstate your donations and keep adequate backup. For non-cash donations you should use values from sources like www.itsdeductible.com to valuate your gift.
     
    2) Home Office – We have all heard that the home office deduction can be a big red flag, but it doesn’t mean you shouldn’t take it if you qualify. Just be sure to verify your situation with your tax preparer and document, document, document. If you are worried about miscalculation, remember you can always use the new simplified version which is $5 per square foot.
     
    3) High Income – Making a good living is great, but not when you look at your chances of being audited. The higher your income, the more likely you are to be audited. An article by CNN states that most American’s only face a 1% audit chance, but if you make over $1m it jumps to 9%, over $5m jumps to 18%, and over $10m jumps to 27%.
     
    4) Dependents – If you are separated or divorced, be sure to have IRS approved documentation of who will claim the child which years so you have backup if this ever occurs. If the child is raised by someone other than you, such as a grandparent, they may try to claim the child as well so before filing be sure to have proof that the child does qualify as your dependent.
     
    5) Overseas Money – Did you know that if you have money outside the country you need to report it to the IRS? If you have $10,000 in cash or other assets (ex. property) you are required to file additional paperwork with your tax return. The fines are 50% of the offshore balance, or $100,000.
     
    6) Earned Income Credit – The EIC has been known to be abused by taxpayers, so the IRS is working to make sure it is only given to those who deserve it. If your family qualifies for the EIC, be sure to keep records of all documentation requested on your annual checklist.
     
    7) Auto Expenses – We say this until we are blue in the face, but here it is again: You must keep a mileage log if you deduct any kind of auto expenses or mileage, even if your vehicle is “100% business.” If you deduct gas expenses instead of standard mileage, it is going to be a red flag to the IRS. Don’t wait to be audited on this; it is easier to start you log now than it will be to recreate it later.
     
    8) Hobby – If you have a business that reports a loss year after year, the IRS may want to audit you to determine if your business should actually be treated as a hobby. The general rule is your business must have a profit for 3 of the last 5 years. If not, it is likely a hobby.
     
    9) Unreported Income – This sounds like common sense, but you would be surprised at how often taxpayers forget they had income from stock sales, dividends, bank interest, or 1099’s. The IRS receives record of all of these, so if you forget to report one they are going to know about it. Many times this information isn’t received in the mail until late February, so if you fall into this situation, you may not want to file you taxes right away just to be sure!
     
    Our best advice is to seek help from a tax professional to help prepare yourself for some of these audit risks.

    Five Easy Ways to Spot a Scam Phone Call

    watch out for scamsThe IRS continues to warn the public to be alert for telephone scams and offers five tell-tale warning signs to tip you off if you get such a call. These callers claim to be with the IRS. The scammers often demand money to pay taxes. Some may try to con you by saying that you’re due a refund. The refund is a fake lure so you’ll give them your banking or other private financial information.
     
    These con artists can sound convincing when they call. They may even know a lot about you. They may alter the caller ID to make it look like the IRS is calling. They use fake names and bogus IRS badge numbers. If you don’t answer, they often leave an “urgent” callback request.
     
    The IRS respects taxpayer rights when working out payment of your taxes. So, it’s pretty easy to tell when a supposed IRS caller is a fake. Here are five things the scammers often do but the IRS will not do. Any one of these five things is a sign of a scam. The IRS will never:
     

    1. Call you about taxes you owe without first mailing you an official notice.
    2. Demand that you pay taxes without giving you the chance to question or appeal the amount they say you owe.
    3. Require you to use a certain payment method for your taxes, such as a prepaid debit card.
    4. Ask for credit or debit card numbers over the phone.
    5. Threaten to bring in local police or other law-enforcement to have you arrested for not paying.

     
    If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what to do:
     

    • If you know you owe taxes or think you might owe, call the IRS at 800-829-1040 to talk about payment options. You also may be able to set up a payment plan online at IRS.gov.
    • If you know you don’t owe taxes or have no reason to believe that you do, report the incident to TIGTA at 1.800.366.4484 or at www.tigta.gov.
    • If phone scammers target you, also contact the Federal Trade Commission at FTC.gov. Use their “FTC Complaint Assistant” to report the scam. Please add “IRS Telephone Scam” to the comments of your complaint.

     
    Remember, the IRS currently does not use unsolicited email, text messages or any social media to discuss your personal tax issues. For more information on reporting tax scams, go to www.irs.gov and type “scam” in the search box.

    What Type of Entity Should My New Business Be?

    man thinkingIn our office we get this question often. Unfortunately, this is more of a legal question. We can, however, help you weigh the pros and cons of the financial impacts each could have on your small business.
     
    1) Sole Proprietor – For most startup companies, a sole proprietor is what you will be. At first, income is sporadic and expenses may even outweigh income. When you are a sole proprietor, the IRS treats all of this as personal income, and you and the business are one in the same; there is no business tax return and no payroll. This means that you will pay your normal tax rate on this income (10% to 39.6%), PLUS self-employment tax (15.3%) which is simply Social Security and Medicare.
     
    2) Partnership – A partnership is two or more people splitting the responsibilities and benefits of a business. A partnership has a separate business return, and the partners split the income based on their ownership percentages. The business tax return generates a K-1 form that each partner will report on their personal tax return. This is usually just charged ordinary tax, with exception of guaranteed payments. There is still no payroll in a partnership, so these are simply an agreed upon withdrawals between the partners, which are charged self-employment tax (15.3%).
     
    3) Limited Liability Company – An LLC is a legal designation for sole proprietors or partnerships that can protect your personal assets from business liability. The ins and outs of the LLC can be discussed with an attorney, but for tax purposes you are still treated exactly like a sole proprietor or partnership.
     
    4) S-Corporation – An S-Corp can be one shareholder, or many. It has stricter recordkeeping requirements and active members are required to take a reasonable salary (what you would pay someone else to do your job). It is unwise to consider becoming an S-Corp until you steadily have enough profit to support a reasonable payroll (which we recommend is close to the Social Security maximum of $117,000). It is not recommended to start out as an S-Corp, as you can always switch in the future. Similar to a partnership, the business will give the shareholders a K-1 form and you will pay ordinary tax on the business income. There is no SE tax because through payroll you have already paid half of the Social Security and Medicare taxes, and the business has paid the other half. After your business has become more mature, an S-Corp designation can create substantial tax savings.
     
    5) C-Corporation – A C-Corp is the only business entity that pays its own income taxes, although the shareholders do pay tax on any stock dividends received. The “big businesses” we see on the stock exchange have this type of structure. The payroll and stock requirements are similar to an S-Corp, but most business are not fit for this type of setup as there are many formalities to follow.
     
    Remember that you need to keep your business and personal activities completely separate to be able to have the protection of a corporation, even at the LLC level. We strongly recommend consulting an accountant and an attorney if you plan to start a business, change your structure, or do not understand your current setup.
     
    **This article should not be used to determine business structure; an accountant and an attorney should be consulted.

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