IRS

When Can an Automobile be Expenses to my Business?

August 21, 2012 by mrice

Operating a business can be expensive, making every allowable deduction count when it comes to tax time. Luckily, a business is typically allowed to deduct a wide variety of expenses associated with the operation of the business, including vehicle expenses. As a general rule, any time you use your vehicle for business related reasons, the expense is deductible. Vehicles, for purposes of the deduction, include cars, vans, panel trucks and pickup trucks. As with all Internal Revenue Service, or IRS, rules there are some important points that you must understand in order to claim the business use of your vehicle deduction.

Record keeping is of paramount importance when claiming a business use of your vehicle deduction. Start when the vehicle is placed in service. If your vehicle is used for both personal and business purposes, keep a detailed record of the mileage for each trip. Regardless of whether the vehicle is used solely for business purposes, or for both personal and business use, also keep records of gas, license fees, repairs and anything else related to the use of the vehicle.

Two methods for determining your deduction amount are allowed — the standard mileage rate method and the actual expense method. Before deciding which method to use, figure out the deduction using both methods to determine which offers the largest deduction. Although either method may be used, the method you choose to use in the first year that your vehicle is placed in service for the business will impact your options in future years.

The standard mileage rate is simple to calculate. You simply multiply the miles claimed for the year as business miles by the current rate per mile. The rate per mile changes on a regular basis so be sure you know the current rate.

The actual expense method requires you to add up all the costs associated with the vehicle for the year such as gas, license plate fees, tires and tune-ups and then multiply that figure by the percentage of use assigned to the vehicle for your business. If the vehicle is used solely for the business, then there is no need to multiply the total expenses by a percentage.

TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.

Planning for Possible Changes to Estate and Gift Taxes for 2013

August 13, 2012 by mrice

Estate planning has evolved into an art form over the last century. The days when a simple Last Will and Testament sufficed to distribute estate assets upon your death are long over. Without a carefully thought out estate plan, you could lose over half of your estate assets to estate taxes. Although gifting assets during your lifetime is an option, the gift tax can also take a significant bite out of your estate assets without careful planning. This year, both the estate and gift tax rates are at historically low rates. Likewise, the estate tax and gift tax exemption amounts are at all time highs. Both of these are currently set to change for 2013 unless Congress acts before the end of the year. If your estate will be affected by the changes, now is the time to consult with your estate planning attorney about how best to handle the upcoming changes.

The estate tax is levied on a decedent’s estate if the total estate assets at the time of death exceed the estate tax exemption amount. For 2012, the estate tax exemption amount is set at $5.12 million. That means that only estate assets over $5.12 million would be taxed if an individual died this year. For assets that exceed the exemption amount, they are currently taxed at a rate of 35 percent.

The current rate and limit are both set to expire at the end of 2012 and return to the previous tax rate of 55 percent and the previous exemption amount of just $1 million. To put this in perspective, imagine that you have an estate valued at $7 million. If you die this year, $1.88 million will be subject to the estate tax at a rate of 35 percent for a total tax liability of $658,000. If the rate and limit return as scheduled for 2013, the same estate would incur a tax bill of $3.3 million.. Every dollar paid in estate taxes is a dollar less left to your loved ones.

Although the average taxpayer is not impacted by estate taxes at the 2012 exemption amount, many more will be affected if the amount is reduced to just $1 million. If you are one of those people, be sure to talk to your estate planning attorney about estate planning tools that can be used to help minimize estate taxes upon your death.

The gift tax faces the same potential scenario for 2013. The gift tax lifetime exemption amount is also currently set at $5.12 million at a rate of 35 percent. It too will return to a lifetime exemption amount of $1 million with gifts over that amount taxed at 55 percent. A taxpayer may also take advantage of the yearly gift tax exclusion rules which allow you to make as many gifts of up to $13,000 to as many beneficiaries as you wish each year free from gift taxes. In addition, yearly gifts made pursuant to the gift tax exclusion do not count toward your lifetime exemption limit. If gifting is part of your overall estate plan, be sure to talk to your estate planning attorney to decide whether you should gift more this year than originally planned or wait to see what ultimately happens to the gift tax.

Home Office Deductions for Small Business Owners

July 28, 2012 by mrice

Home Office Deductions

Whether your small business is run out of your home because there is no need to rent office space, or because you are just getting it off the ground and cannot afford a separate office yet, home office deductions can save you a substantial amount in taxes at the end of the year. Knowing what you are entitled to deduct, and keeping well organized and detailed documentation of those potential deductions, is crucial to taking advantage of the tax benefits of keeping a home office.

Qualifying for the Deduction — The first thing you must determine is if your home office qualifies for the home office deduction. There are two tests that must be passed to qualify your home office. First, you must regularly and exclusively use part of your home for your business. This could be an extra bedroom, a garage or a family room you have converted into an office. Second, you must use your home office as your principal place of business. This does not mean you cannot have another separate place where you conduct business, but your home must be used “substantially and regularly” for your business.

What Can Be Deducted–Home office deductions fall into either a direct or indirect expense. Direct expenses are expenses that most businesses incur, such as advertising, supplies, attorney fees, and wages. As a general rule, the full amount of a direct expense is deductible. Indirect expenses are things related to running or keeping up your home. Expenses such as utility bills, home owners insurance and repairs fall into the indirect expense category. These expenses are calculated by determining the percentage of your home used for your home office and then multiplying the expense by that percentage. For instance, if you use 20 percent of the total area of your home for your home office, and your utility bills for the year were $3,000, then you could deduct $600 for your home office portion of the expense ($3,000 x .20 = $600)

By keeping track of all your direct and indirect expenses throughout the year, you should find that your tax obligation is substantially less at the end of the year.

Retirement Savings options for Small Businesses

July 19, 2012 by mrice

Getting a small business up and running is its own challenge, and no matter how much you love your business you won’t be able to keep it up forever. Eventually, you’ll want to retire, and even if you only have a few employees it’s likely they will want to retire too. So, as a small business owner what can you offer your employees and yourself to move them closer to retirement?

401K – While a 401K option is usually thought of in terms of something offered by large corporations, you can set up a 401K plan as part of your small business. Many people hear 401K and think that the employer has to match contributions, but that isn’t the case. If you can afford a match, great, if not it still gives employees a way to make regular contributions totalling up to $16,500 for those under 50 years, and $22,000 for those over 50. 401Ks come in both the regular and Roth varieties, letting you decide whether it is best for you to be taxed up-front with a Roth 401K or later on with a regular 401(k). 401(k)s are also good in case of an emergency, since loans are available in a pinch. Of course, there are tax implications, and plenty of paperwork to file with the IRS.
SEP- SEP (Simplified Employee Pensions) IRAs are a good choice for many small businesses because they are relatively easy to manage. For these plans, employees do not contribute to the plan and contribution limits are around the same amount as they are for a 401(k). Unless you are able to make large contributions, employees may want to set up a separate IRA of their own, but it’s something that gets the ball rolling in the right direction. With a SEP there is less of a safety net before that retirement day actually comes. No loans, early withdrawals, or catch up contributions are allowed, but there are also fewer IRS regulations to worry about, which can be a big relief to a lot of small business owners.
SIMPLE IRA – Just because the name says “simple” doesn’t mean that it is, but the SIMPLE IRA isn’t rocket science either. SIMPLE stands for Savings Insentive Match for Employees. In this plan, employers are required to match contributions, although those contributions are far less than 401(k) or SEP options, only $11,500 is allowed for a SIMPLE IRA. There are also fewer reporting requirements with the SIMPLE IRA as well.

Of course, whatever you choose to offer by way of retirement plans for your employees or for yourself will depend a lot on the state of your business, what you can afford, and how much you are willing to invest in your employees future.

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2012 Small Business Tax Law Changes:What you need to know

May 30, 2012 by mrice

Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

2012 Small Business Tax Law Changes: What You Need to Know

New year. New tax law changes. 2012 doesn’t see a ton of tax law changes, but there are several you need to be aware of. Let’s dive right in, shall we?

Write-offs. If you lease or finance used or new machinery or equipment during 2012, you won’t be able to write off as much as you could last year. In 2012, businesses can deduct $139,000 (down from $500,000 in 2011) of the full purchase price (maximum purchase price of $2 million) of leased or financed equipment under Section 179 of the Internal Revenue Tax Code. Off-the-shelf computer software used in business in 2012 is also available for the Section 179 deduction.

Bonus Depreciation. The first year bonus deduction of new equipments is cut in half: it drops to 50 percent in 2012, down from 100 percent in 2011.

Payroll taxes. The temporary payroll tax cut originally designed to stay in place until February 29, 2012 has been extended through the end of the year. This means employees will continue to see a payroll tax cut of two percentage points through the remainder of the 2012 calendar year. The reduction will continue to hold the Social Security tax withholding rate at 4.2 percent of wages, down from 6.2 percent.

Qualified retirement plans contributions. Up from its 2011 limit of $49,000, employers can contribute up to $50,000 (and receive a tax deduction) to SEPs and profit-sharing plans in 2012. The limit for pension plans (defined benefits plans) benefits is $200,000 in 2012, up from $195,000 in 2011.

Tax-free transportation for employees. For 2012, companies can pay tax-free parking expenses of $240 per month per employer. This is up from $230 in 2011. However, the limit on monthly assistance for van pooling and monthly transportation passes drops from $230 a month in 2011 to $125 in 2012.

Expired R&D credit. Intended to provide deductions for small businesses and startups for research expenses, the R&D credit has expired. However, Congress has reinstated it retroactively in the past, so there’s a possibility it may come back for 2012. Keep a look out.

Worker classification. As part of its “fresh start” initiative, the IRS unveiled a new program entitled the Voluntary Classification Settlement Program (VCSP) to allow employers to reclassify misclassified independent contractors as employees voluntarily for federal employment tax purposes. In exchange for the voluntary reclassification, the IRS will offer a reduced employment tax liability of 10 percent, no interest or penalties, and no employment tax audit.

What’s the Bottom Line?
It’s a good idea to meet with your tax advisor early in the year to review the 2012 tax law changes. This will not only help you save on 2012’s tax bill, but budget more accurately for the remainder of the year.

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“One more Chance!” The IRS does it too

January 18, 2012 by mrice

As a parent, I have, on more than one occassion, painted myself in a cornor by giving one of my kids just one more chance. Inevitably they have called my bluff. So then its decision time, offer one last chance (my wife calls this picking your battles) or pull the trigger on some draconian punishment, such as “20 minutes in your room” or “no DS”, etc, etc. Well, it is comforting to know that the IRS does this too. Especially to taxpayers with offshore assets.

In early 2011 the IRS Commissioner announced the Offshore Voluntary Disclosure Initiative (OVDI), saying:

“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing. This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.” (emphasis added)

It is VERY INTERESTING to note that this is the THIRD program of its type. How many times can you dangle to the carrot and offer some level of amnesty? Well, as the previous programs brought in over 4 BILLION dollars in revenue with very little taxpayer cost, I guess you don’t fix what ain’t broke!