deductions

The Chances of an IRS Audit are Low, But Business Owners Should be Prepared

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Many business owners ask: How can I avoid an IRS audit? The good news is that the odds against being audited are in your favor. In fiscal year 2018, the IRS audited approximately 0.6% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, audit rates are historically low.

There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, completing your returns in a timely and accurate fashion with our firm certainly works in your favor. And it helps to know what might catch the attention of the IRS.

Audit red flags

A variety of tax-return entries may raise red flags with the IRS and may lead to an audit. Here are a few examples:

  • Significant inconsistencies between previous years’ filings and your most current filing,
  • Gross profit margin or expenses markedly different from those of other businesses in your industry, and
  • Miscalculated or unusually high deductions.

Certain types of deductions may be questioned by the IRS because there are strict record-keeping requirements for them • for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or […]

By |September 30th, 2019|audit, business, irs|0 Comments

The Tax Implications of a Company Car

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The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. This benefit results in tax deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the non-tax benefits of driving the cars!) Even better, recent tax law changes and IRS rules make the perk more valuable than before.

Here’s an example

Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You expect to drive the car 8,500 miles a year for business. You also expect to use the car for about 7,000 miles of personal driving, including commuting, running errands and weekend trips with your family. Therefore, your usage of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so […]

By |September 4th, 2019|deduction, deductions, expensing, New Tax Laws|0 Comments

Take a Closer Look at Home Office Deductions

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Working from home has its perks. Not only can you skip the commute, but you also might be eligible to deduct home office expenses on your tax return. Deductions for these expenses can save you a bundle, if you meet the tax law qualifications.

Under the Tax Cuts and Jobs Act, employees can no longer claim the home office deduction. If, however, you run a business from your home or are otherwise self-employed and use part of your home for business purposes, the home office deduction may still be available to you.

If you’re a homeowner and use part of your home for business purposes, you may be entitled to deduct a portion of actual expenses such as mortgage, property taxes, utilities, repairs and insurance, as well as depreciation. Or you might be able to claim the simplified home office deduction of $5 per square foot, up to 300 square feet ($1,500).

Requirements to qualify

To qualify for home office deductions, part of your home must be used “regularly and exclusively” as your principal place of business. This is defined as follows:

  1. Regular use. You use a specific area of your […]
By |August 6th, 2019|business, deduction, deductions, New Tax Laws|0 Comments

Deducting Business Meal Expenses Under Today’s Tax Rules

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In the course of operating your business, you probably spend time and money “wining and dining” current or potential customers, vendors and employees. What can you deduct on your tax return for these expenses? The rules changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs.

No more entertainment deductions

One of the biggest changes is that you can no longer deduct most business-related entertainment expenses. Beginning in 2018, the TCJA disallows deductions for entertainment expenses, including those for sports events, theater productions, golf outings and fishing trips.

Meal deductions still allowed

You can still deduct 50% of the cost of food and beverages for meals conducted with business associates. However, you need to follow three basic rules in order to prove that your expenses are business related:

  1. The expenses must be “ordinary and necessary” in carrying on your business. This means your food and beverage costs are customary and appropriate. They shouldn’t be lavish or extravagant.
  2. The expenses must be directly related or associated with your business. This means that you expect to receive a concrete business benefit from them. The principal purpose for the meal must be business. […]
By |April 19th, 2019|business, deduction, deductions, expensing, irs, New Tax Laws|0 Comments

Seniors: Medicare Premiums Could Lower Your Tax Bill

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Americans who are 65 and older qualify for basic Medicare insurance, and they may need to pay additional premiums to get the level of coverage they desire. The premiums can be expensive, especially if you’re married and both you and your spouse are paying them. But one aspect of paying premiums might be positive: If you qualify, they may help lower your tax bill.

Medicare premium tax deductions

Premiums for Medicare health insurance can be combined with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your individual tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, co-insurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.

Fewer people now itemize

Qualifying for […]

By |April 9th, 2019|deduction, deductions, medicare|0 Comments

Vehicle-Expense Deduction Ins and Outs for Individual Taxpayers

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It’s not just businesses that can deduct vehicle-related expenses. Individuals also can deduct them in certain circumstances. Unfortunately, the Tax Cuts and Jobs Act (TCJA) might reduce your deduction compared to what you claimed on your 2017 return.

For 2017, miles driven for business, moving, medical and charitable purposes were potentially deductible. For 2018 through 2025, business and moving miles are deductible only in much more limited circumstances. TCJA changes could also affect your tax benefit from medical and charitable miles.

Current limits vs. 2017

Before 2018, if you were an employee, you potentially could deduct business mileage not reimbursed by your employer as a miscellaneous itemized deduction. But the deduction was subject to a 2% of adjusted gross income (AGI) floor, which meant that mileage was deductible only to the extent that your total miscellaneous itemized deductions for the year exceeded 2% of your AGI. For 2018 through 2025, you can’t deduct the mileage regardless of your AGI. Why? The TCJA suspends miscellaneous itemized deductions subject to the 2% floor.

If you’re self-employed, business mileage is deducted from self-employment income. Therefore, it’s not subject to the 2% floor and is still deductible for 2018 […]

Some of Your Deductions May Be Smaller (or Nonexistent) When You File Your 2018 Tax Return

While the Tax Cuts and Jobs Act (TCJA) reduces most income tax rates and expands some tax breaks, it limits or eliminates several itemized deductions that have been valuable to many individual taxpayers. Here are five deductions you may see shrink or disappear when you file your 2018 income tax return:

1. State and local tax deduction. For 2018 through 2025, your total itemized deduction for all state and local taxes combined — including property tax — is limited to $10,000 ($5,000 if you’re married and filing separately). You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000.

2. Mortgage interest deduction. You generally can claim an itemized deduction for interest on mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. […]

By |February 19th, 2019|deduction, deductions, New Tax Laws|0 Comments

Investment Interest Expense is Still Deductible, But That Doesn’t Necessarily Mean You’ll Benefit

As you likely know by now, the Tax Cuts and Jobs Act (TCJA) reduced or eliminated many deductions for individuals. One itemized deduction the TCJA kept intact is for investment interest expense. This is interest on debt used to buy assets held for investment, such as margin debt used to buy securities. But if you have investment interest expense, you can’t count on benefiting from the deduction.

3 hurdles

There are a few hurdles you must pass to benefit from the investment interest deduction even if you have investment interest expense:

  1. You must itemize deductions. In the past this might not have been a hurdle, because you may have typically had enough itemized deductions to easily exceed the standard deduction. But the TCJA nearly doubled the standard deduction, to $24,000 (married couples filing jointly), $18,000 (heads of households) and $12,000 (singles and married couples filing separately) for 2018. Plus, some of your other itemized deductions, such as your state and local tax deduction, might be smaller on your 2018 return because of TCJA changes. So you might not have enough itemized deductions to exceed your standard deduction and benefit from itemizing.
  2. You can’t have incurred the interest to […]
By |February 1st, 2019|deductions, investment, New Tax Laws|0 Comments

Many Tax-Related Limits Affecting Businesses Increase for 2019

A variety of tax-related limits affecting businesses are annually indexed for inflation, and many have gone up for 2019. Here’s a look at some that may affect you and your business.

Deductions

  • Section 179 expensing:
    • Limit: $1.02 million (up from $1 million)
    • Phaseout: $2.55 million (up from $2.5 million)
  • Income-based phase-ins for certain limits on the Sec. 199A qualified business income deduction:
    • Married filing jointly: $321,400-$421,400 (up from $315,000-$415,000)
    • Married filing separately: $160,725-$210,725 (up from $157,500-$207,500)
    • Other filers: $160,700-$210,700 (up from $157,500-$207,500)

Retirement plans

  • Employee contributions to 401(k) plans: $19,000 (up from $18,500)
  • Catch-up contributions to 401(k) plans: $6,000 (no change)
  • Employee contributions to SIMPLEs: $13,000 (up from $12,500)
  • Catch-up contributions to SIMPLEs: $3,000 (no change)
  • Combined employer/employee contributions to defined contribution plans (not including catch-ups): $56,000 (up from $55,000)
  • Maximum compensation used to determine contributions: $280,000 (up from $275,000)
  • Annual benefit for defined benefit plans: $225,000 (up from $220,000)
  • Compensation defining “highly compensated employee”: $125,000 (up from $120,000)
  • Compensation defining “key employee”: $180,000 (up from $175,000)

Other employee benefits

  • Qualified transportation fringe-benefits employee income exclusion: $265 per month (up from $260)
  • Health Savings Account contributions:
    • Individual coverage: $3,500 (up from $3,450)
    • Family coverage: $7,000 (up from $6,900)
    • Catch-up contribution: $1,000 (no change)
  • Flexible Spending Account contributions:
    • Health care: $2,700 (up from $2,650)
    • Dependent care: $5,000 (no change)

Additional rules apply to these […]

By |January 22nd, 2019|business, deduction, deductions, retirement, tax planning|0 Comments

Is There Still Time to Pay 2018 Bonuses and Deduct Them On Your 2018 Return?

There aren’t too many things businesses can do after a year ends to reduce tax liability for that year. However, you might be able to pay employee bonuses for 2018 in 2019 and still deduct them on your 2018 tax return. In certain circumstances, businesses can deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company).

Basic requirements

First, only accrual-basis taxpayers can take advantage of the 2½ month rule. Cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned.

Second, even for accrual-basis taxpayers, the 2½ month rule isn’t automatic. The bonuses can be deducted on the tax return for the year they’re earned only if the business’s bonus liability was fixed by the end of the year.

Passing the test

For accrual-basis taxpayers, a liability (such as a bonus) is deductible when it is incurred. To determine this, the IRS applies the “all-events test.” Under this test, a liability is incurred when:

  • All events have occurred that establish the taxpayer’s liability,
  • The amount of the liability can be determined with reasonable accuracy, and
  • Economic performance […]
By |January 8th, 2019|bonus, deduction, employer, tax, tax deadlines|0 Comments