AFS Blog

Business Owners – Record Year End Mileage

It’s not too late to record your year end mileage to get that tax deduction for 2016 and start your mileage record for 2017.  Either estimate the Dec 31 mileage or use today’s mileage as your 2016 and and 2017 beginning.  What is important is you write it down!!

Even if you are not a business owner but are an employee who doesn’t get reimbursed for mileage, this needs to be done.

When you file your taxes to claim this deduction, you will need to know both business mileage and personal mileage.  Make sure you keep a log of your business mileage.  (Total mileage is needed because we usually have to report percentage of miles driven that are business.) We offer pocket calendars which you can keep in your car for this purpose or there are a number of phone apps to help you keep these records.

If you claim a mileage deduction, you will certify on your tax return that you have records and they are written.  (You may not be aware of this if your tax preparer just checks the certification boxes without comment).  If you are audited and don’t have records, or your records are insufficient, you will lose the deduction.  IRS wins most of these audits because of poor documentation on the taxpayer’s part.

So, right now, go check your mileage and write it down.  If you are an AFS client, email it to us, we will put it in your file.

Use more than one car for business?  Make sure you get mileage on both!

AFS – USE THE BEST FOR LESS

Tax “Saving” Arguments that Never Work

The IRS was nice enough to compile a list of arguments that will never work.  They are considered “frivolous”.  The courts tend to agree and both tend to look at these strategies as willful attempts to evade or defeat taxes, often leading to increased penalties and even jail time.

Here are 10 of the most common frivolous arguments:

  1. The filing of a tax return or payment of federal tax is voluntary
  2. Taxpayers can reduce their federal tax by filing a “zero” return that reports no income and no tax liability
  3. Compensation received for personal services isn’t income
  4. Military retirement pay isn’t income
  5. Only foreign source income is taxable
  6. The IRS isn’t a US agency
  7. The taxpayer isn’t a citizen and therefore isn’t subject to federal income taxes
  8. The taxpayer isn’t a “person” under the tax law and therefore isn’t subject to federal income taxes
  9. Various constitutional amendments permit the taxpayer to avoid taxes
  10. Form 1040 instructions and regulations don’t have an OMB control number as required by the Federal Paperwork Reduction Act

Normally, if you don’t file and don’t pay your taxes, the IRS eventually catches up to you and you will pay failure to file and failure to pay penalties plus interest.  The penalties at worst could be up to 47.5% of your unpaid taxes and the interest charged right now is less than 4%.

However, as stated above, the IRS considers the use of a frivolous argument, and the list here is a partial one, and frivolous arguments are frequently viewed as fraudulent.

The worst case is fines up to $100,000 and jail time of 5 years.

Short of that, there are other penalties that can be assessed.

  • An ‘accuracy-related’ penalty equal to 20% of your underpayment if your underpayment is due to negligence or disregard of the tax rules.
  • Penalties of up to 75% of the tax due for fraudulent failure to file an income tax return
  • Penalties of up to 75% for underpayment due to fraud
  • A $5000 penalty for frivolous returns or other submissions (for example, requests for hearings)
  • A penalty of 20% of the excessive amount in an erroneous claim for a refund or credit
  • A $25000 penalty for making frivolous arguments in tax court

Tax protestor arguments usually claim that you can ignore the plain language of the law.  They will say the IRS isn’t legitimate or you are somehow not subject to the rules.

Real tax strategies work within the law.  Deductions or strategies are used that the tax code or the IRS itself has blessed.

If you are faced with someone promising what seems too good to be true, ask for tax law citations that back up their case.

You know how it works.  If it is too good to be true, it isn’t.

AFS – USE THE BEST FOR LESS

How to Lose 2 Valuable Deductions in One Step

2 of the most valuable deductions for home businesses are the mileage deduction and the home office expense deduction.  Both of these can be lost by not understanding one simple rule, and that is your home office must be used exclusively for your business.  That means no personal use of that space.

A recent ruling (Haag, T. C. Summary Opinion 2013-29-you can Google it) agreed with the IRS that the taxpayers were not eligible to claim the home office deduction because they admitted in court that the 60 sq ft office space claimed on their tax return had personal information in the file cabinets and that there was personal use of the computer.  (The fact that two businesses claimed the same office space is not addressed in the opinion.  I believe that alone could have disqualified the use of that space as a home office).

A home office of 60 sq ft is pretty small.  Losing that deduction alone would not have resulted in much in the way of lost deductions but does mean that their home doesn’t qualify as a principal place of business, In turn, this results in their deductions for traveling from home to several work locations being disallowed as they were considered to be commuting expenses.

This lesson cost the taxpayers nearly $7500 in lost deductions and accuracy related penalties.  I don’t know what the court costs were but I would suspect that the total cost of this mistake was far in excess of $10,000 with interest and penalties and court costs considered.

I am surprised this went to court.  After reading the summary, it appears that the deductions claimed were mostly unsubstantiated and/or not actually deductible. It was a self-prepared return so I can understand that they didn’t know what was or was not deductible and did not understand what records were required but the taxpayers were represented in court and should have been told that they had a very weak case prior to filing.

Don’t let this happen to you.  I believe that the taxpayers in this case probably had good reason to claim a large part of what they claimed.  With good advice tax advice, recordkeeping, and proper return preparation, this return would have never been flagged for audit.  They probably saved $40-$70 for tax preparation when compared to what AFS would have likely charged for a married couple with 2 Schedule C businesses (our fees are pretty low).  But you can see what it cost them.

AFS – Use the Best for Less

Are Gifts of Cash to your Kids Taxable?

This time of year, we often get questions on the tax consequences of cash gifts to kids.

We can illustrate how this works with a very simple example.  Let’s say Bob is a single parent and wants to give his son $20,000 for Christmas this year.

Bob is the one responsible for reporting the gift in 2016.  Bob’s son has no taxable consequence and no filing requirement for the gift.

Bob will have to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, no later than April 17, 2017.  This form is required because the gift exceeded the annual gift exclusion of $14,000 for 2016.  Bob will show the $20,000 gift amount on the return as well as the name and social security number of the recipient.  The return will reflect the gift exclusion of $14,000 and show the remaining $6000 as a taxable gift, but no gift tax is due as long as Bob has not used his allowable lifetime exclusion of $5,450,000 for 2016.

The Form 709 is informational return for the IRS and is only required when gifts exceed the annual excluded gift amount or if a taxpayer has already used his allowable lifetime exclusion.

AFS – Use the Best for Less

Devastating Health Care Penalty for Small Businesses Abolished

Congress eliminated an IRS penalty on small businesses that was devastating to those that incurred it.  On their own volition, the IRS decreed that any small business that reimbursed their employees for health care premiums could face a $100 per day per employee, up to $36500 a year.

There are few small businesses that could take a hit like that.  Note that the penalty wasn’t part of the Affordable Care Act (ACA).  This was a fine the IRS wizards took upon themselves to initiate with no regard to consequences.  Their rationale was that such reimbursement plans couldn’t be integrated with individual policies to meet market reforms required by the ACA.  So, a business tries to help their employees and gets a huge fine, or even forced out of business, for doing so.

As always happens with tax law, there was relief for a few through the use of medical reimbursement plans and we helped some of our clients navigate that bureaucracy so that they could continue to offer this benefit to employees.

Finally, this last Wednesday, Congress eliminated that penalty.  The legislation can be seen in Section 18001 of the 21st Century Cures Act.

Let’s hope for more good news for small business and their employees.  Maybe more people can get back to work.

AFS – use the best for less

Filing Taxes After the Death of your Parent

We are sorry for any loss you have had.  Having gone through the loss of parents recently, we understand what you are experiencing.  This will seem hard but hopefully this overview will get you through the process.

When any taxpayer dies, a final tax return should be filed to claim income earned in the year of death up to the date of death.  This is usually done by the executor or administrator of the estate or a survivor if no executor is named.  The filing deadline is the normal April deadline in the year following the date of death.

In general, you would file the final return in the same manner as when they were alive, but “deceased” is written after the name.  Claim all the income, deductions and credits they were entitled to up to the date of death.

If your parent is due a tax refund, you can claim it using IRS Form 1310, entitled Statement of a Person Claiming a Refund Due a Deceased Taxpayer.  If money is owed, you can submit what is owed with the tax return.

That is all there is to the final tax return.  If there are assets to be distributed to beneficiaries, an estate tax return is likely needed.  That is more complicated and beyond the scope of this article.

Should you have any questions, please email me at bill@afsnodebt.com.

 

How Child Care Businesses can Increase their Tax Refunds

We do tax returns for a lot of child care businesses and many are not aware of this strategy to increase their tax refund.

The IRS rules regarding depreciation of personal property are very lenient, with the proper documentation.  Many of our clients don’t depreciate all of the personal items used in their business.

Most people know that they can depreciate their home, usually using the time-space percentage.  And they are pretty good about claiming depreciation on the refrigerator, washer and dryer, TV’s, etc.  But there is a great deal more that can be depreciated and all those little things add up. Things like a new chandelier, weatherstripping, that programmable thermostat, a new bathtub, a sandbox, patio, fencing, the pictures on the walls and all the other items that  give your home that warm and fuzzy feeling important to children, etc., etc.  (we show you how to procure a more exhaustive list below.)

And, if you have been in business for a couple of years and have not depreciated these items, you can still do so by claiming that past depreciation on your next tax return or even amending a prior year return.

So, how much can you gain?  It’s different for everyone.  You would walk through your house, room by room and determine items that are used in your business or that have value in your business and assign a fair market value (FMV) and a purchase date to each item.  The FMV is the tricky part.  If the item is new, you can use the receipt.  If you don’t have receipts or the item has been in use a while, you can find a value by looking up the items on a charity website, like Salvation Army or Goodwill.  The FMV is the price others would pay for that item if sold right now.

If you provide that list to your tax preparer, they can determine the depreciation schedule (how many years you need to fully depreciate) for each item.  With that and the FMV, each year’s depreciation can be determined.  Let’s say you came up with a list of items that had a total value of $12000 and the average depreciable life was 5 years and you are using straight line depreciation.  Further, your time space percentage is 65%.  A much simplified calculation would result in $1170 in depreciation ($12000 divided by 5 years times 0.65 = $1560).  If you are in the 25% tax bracket, that would give you an extra $390 in your Federal refund plus another $78 for CO (this year and for 4 more years).  If  you could have depreciated these items for the last 2 years and hadn’t, we could claim that depreciation as well, for the last 2 years plus the current year plus the next 2 years.

Our most recent use of this strategy helped one of our clients gain nearly $800 additional refund this last year.

Want more details on how this could help you?  Send an email to bill@afsnodebt.com and just put HELP ME INCREASE MY CHILD CARE BUSINESS TAX REFUND in the memo line.  I will send you some info on how to start this process.  No charge and no obligation.

Of course, we are hoping that you will allow us to prepare your tax returns.  That would save you even more money, this year and every year.

AFS – USE THE BEST FOR LESS

Year-End Small Business Tax Deductions

For all you small business owners, it is time to start gathering the paperwork so that you don’t miss any tax deductions for 2016.  Here are some of the most common deductions available:

  • Home office – a great way to move some personal expenses under the business deduction umbrella, even if you rent.  I know that many think this increases your audit likelihood (though I have never seen any evidence of that) but if you are entitled to it, and have good records, you should claim it. If you want more info on this deduction, send an email to bill@afsnodebt.com and I will send you a brochure describing this deduction.
  • Office supplies-even if you don’t claim the home office, you must have bought paper, toner, pens, etc.  If you used it for your business, deduct it.  Just make sure you keep the receipts.
  • Furniture-buy a new desk? Chair? Filing cabinets? Deduct them.  Either all at once with a 179 deduction or depreciate over several years to give you deductions in future years when income might be higher.
  • Other equipment – computers, copiers, scanners, tools, etc. are also deductible and you also have a choice on whether to take full deduction this year or spread it out over several years.
  • Software, subscriptions, trade journals, webinars, reference books, etc.  Keep track of these as well.
  • Mileage or auto expenses- mileage is an item that is often audited but I think the reason is because it is low hanging fruit for the IRS.  People are lousy at keeping mileage records.  We provide free pocket notebooks for our clients to record daily trips.  There is also a number of apps you can use for your cell phone to keep track of this.  Mileage quickly adds up and can result in a very nice deduction.  The highest I have seen is about $18,000 for a salesman that had a 5 state territory.  OR  Sometimes, vehicle expenses provide a better deduction.  We usually look at both if we have the data.  This includes gas, maintenance, vehicle depreciation, insurance, leases,etc. (multiplied by business use percentage).  You are allowed to choose the method (mileage or expenses) that provides the most tax benefit for you.
  • Travel, meals, entertainment and gifts – when you are out-of-town for business, the hotel is fully deductible.  Likewise, travel by air, car, train or bus is deductible. Note that only 50% of your meals and your clients meals are deductible and you should write client name and business meeting purpose on your receipt.  Gifts to clients or employees are deductible up to $25 per person per year.
  • Self-employed people can deduct their health insurance premiums.  If their spouse or children worked for them they can deduct those as well.  Note that the deduction can’t exceed your profit (can’t create a loss).  If you are incorporated, premiums may also be deductible but that is much more complicated and beyond the scope of this article.
  • Retirement contributions are of course deductible.  Anyone can deduct an IRA but business owners have options available to them that allow much higher deductible contributions than wage earners.
  • This is not a deduction but it is important.  Make sure you are paying self-employment taxes on your business income.  Half of this payment is deductible on your 1040 (this is how you fund your social security account for eventual retirement).  As your business grows and these taxes become a thorn, there are options available to help reduce the tax burden.
  • Pay your kids.  You are probably giving them money anyway.  If you have something they can do in your Schedule C business that is age appropriate, pay them from your company and deduct it.  You must have good documentation for this including pay sheets and a job description.  Have them put some of their earnings in a Roth IRA or Education IRA to help show them how to save.

Remember that any unsubstantiated deductions in an audit will be automatically tossed by the IRS.  KEEP THOSE RECEIPTS.  Some receipts are still printed on thermal paper which fades over time.  If necessary, copy onto something more permanent.

I know this work is a pain but think of what you gain.  Let’s say you are in the 25% tax bracket.  Add in 5% for CO taxes and you will cut 30% of documented expenditures from your tax bill.  If it takes you 8 hours to put together $3000 in expenses, you will save nearly $900 in taxes.  Calculate the hourly rate.  You’ll like it!!!

AFS- your small business tax specialist.  USE THE BEST FOR LESS

Transform your parents’ medical bills into tax-free retirement savings

This article is condensed from one by Brian Vnak published on Sept. 27, 2016 at  www.Marketwatch.com.

I love how people come up with these strategies.  Granted, it only fits a narrow swath of society, but for those it fits, it is awesome.

Our parents are aging and living longer than ever.  Many of their children are helping with their parent’s finances in a caretaker role.  Busy schedules often mean  opportunities for tax deductions go unnoticed and are unused.

Like anyone else, people 65 and over can deduct medical expenses that exceed 10% of their adjusted gross income (AGI) if they itemize.  Medical expenses typically increase as we age but we often also see income drop or level off.  When this happens, you could see medical deductions that go unclaimed as the amounts claimed exceed taxable income.  Let me explain.

Let’s say that John’s mother has an income of $40,000.  $22000 of this is non-social security taxable income from an IRA and interest.  She normally takes the standard deduction because her house is paid off and she can’t itemize.  In 2015 with that income and the standard deduction of $7850 (this is higher for elderly people) and her $4000 exemption, she would have taxable income of $10150.

But let’s say that John’s mother had $30,000 of medical expenses.  Her AGI was $22,000 so she can deduct all but $2200 of those bills on a Schedule A.  She paid taxes on her home and gave some items to charities so let’s say her total deduction was $30,000.  But she only had taxable income of $10150.  Subtracting the $30,000 from that leaves a negative $19,850, which is the part of the deduction that is wasted.  She doesn’t have enough taxable income to deduct the entire amount.

But she has an IRA.  What if she converts some of a traditional IRA to a Roth IRA.  If she converted $30,000, she would be able to use up all of the available deduction without paying any more taxes than she would have using the standard deduction. (In practice, a bit more of her social security would be taxable but that would be minimal.)  And the Roth IRA is still under her control, available if she needs it but she will never have to pay taxes on the any withdrawals from the Roth in the future.  Even on the earnings.  And, upon her death, her beneficiaries are likely not to have to pay taxes on distributions from a Roth account either (though they would on distributions from traditional IRA’s).

At AFS, we are always looking for ideas like this that we can utilize for our clients.

Use the BEST for LESS.  Call us for your tax needs at 303-745-3962.

 

How The Tax System Works

Even Einstein didn’t understand how taxes work.  He is famously quoted as saying “The hardest thing in the world to understand is the income tax”.

So, in a nutshell, here is how it all works…

  1. Add taxable income from all sources to figure total income.  This includes investments, wages, jury duty, business income, royalties, etc.
  2. Then subtract allowed “adjustments to income” to determine adjusted gross income (AGI).
  3. Subtract standard or itemized deductions and personal exemptions to determine taxable income.
  4. Look up taxes owed in table.
  5. Subtract allowable credits to determine final tax bill.

That is how the Form 1040 works.  Items 1 and 2 are on the first page, items 3-5 are on the 2nd page.  The trick in reducing taxes is knowing the opportunities available in each of the aforementioned categories and which forms to use to capture those opportunities.

3 of the main strategies for reducing taxes then are:

  1. Earn as much nontaxable income as you can.  You have more control over business or investment income than other income.  For instance, there are ways to shift some personal expenses under the business umbrella to reduce taxable income.  As for investments, that income can be accessed in a number of tax-advantaged ways if set up properly.
  2. Make the most of adjustments to income, deductions and credits.  Adjustments to income and deductions both reduce taxable income.  Credits reduce taxes owed and are thus generally more valuable than deductions.   The size of credits can depend on income.  Knowing the thresholds, breakpoints, etc. can help reduce taxes.  Sometimes credits can be shifted from one taxpayer to another to increase their size.
  3. Shift income to other taxpayers and other tax years.  Delaying income to a future tax year or bunching deductions in a current year would be examples of this.  Shifting income to a lower tax bracket taxpayer, such as a parent or child, can save more.  For example, if you have a business, hire your child.  Money that you are already providing them could be paid in a wage, if done properly.  Their tax bracket is typically much lower than yours or non-existent and the money you are paying out becomes deductible, reducing your taxes.

A good tax preparer recognizes opportunities in your personal situation that could be applied to each section of the tax form and helps you use them to reduce taxes.   This generally takes years of experience and continuous training as tax laws change.

We at AFS have been doing this since 2004, and we do it at a much lower cost than the vast majority of our competition.  Save on your tax preparation and save on your tax liability.

CALL US TODAY for your tax needs.  303-745-3962

 

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