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Small Business Expenses 101

For small business owners, tax breaks often come in the form of tax deductions – which can offer a nice little instant cash savings – if you know how to navigate tax law and claim the deductions you deserve (not what you believe you are entitled to).

Large tax deductions are a notorious red flag for the IRS, with home-based businesses, in particular, facing an increase in tax audits due to suspicious deduction activity on income tax returns.

To help you navigate the complex world of business tax deductions, here is some foundational guidance that will help you take the deductions that you deserve.

Recordkeeping – Whatever the deductible expense may be, it is essential to maintain adequate records. There are many bookkeeping and accounting computer software programs available that will provide the basics for tracking expenses. But it is also important to keep receipts, invoices, etc., to back up the numbers. Some types of expenses require additional documentation, such as a log book or diary for business use of your personal vehicle or notations as to the business purpose of the expense (see Entertainment Expenses below). Keeping these records up-to-date will be a time-saver in the long run, especially if the IRS selects your return for audit.

Business Expenses vs. Capital Expenses – One of the first concepts a small business owner needs to understand is the difference between what can be expensed and what must be capitalized.

  • Business expenses are expenses that can be deducted in the current year, such as: business travel, rents, utilities, supplies, insurance, wages, customer entertainment and tangible items with a useful life of no more than one year or cost less than $100. If you are a for-profit, these expenses are usually tax-deductible.

  • Capital expenses are those associated with purchasing fixed business assets, such as property and equipment that has a useful life of more than one year, and must be capitalized and depreciated over a period of years rather than be deducted as current year expenses.  The number of depreciable years depends on the type of property.   Here are some examples: office furnishings – 7 years, autos and light trucks – 5 years, computer equipment – 5 years, residential rental – 27.5 years, commercial rental – 39 years.

    Sometimes even capital items can be expensed all in one year by electing to use a special provision of the tax code that allows personal tangible property, such as computers, office equipment, tools and machinery, to be deducted in full in the year the property is placed into service. The list also includes off-the-shelf software for 2011. The maximum amount that can be expensed for 2011 is $500,000 subject to certain limitations.

    A special provision for 2011 permits certain real property, such as qualified leasehold improvements, restaurant property and retail improvements, to be expensed, although no more than $250,000 of the $500,000 expense limit can be applied to these real property assets.

    For 2011, Congress has reinstated the bonus depreciation and increased it from 50% to 100% of the cost of most personal tangible property, qualified leasehold improvement property and certain computer software with a depreciable useful life of 20 years or less. For qualifying assets placed in service in 2012, the bonus rate drops back to 50%.

    Although repairs are generally considered to be currently deductible expenses, there are occasions when that may not be true.  If a repair or replacement increases the value of the property, makes it more useful, or lengthens its life, then it must depreciated.  If not, it can be deducted like any other business expense.

Common Business Expenses – Below are some typical types of business expenses that qualify for deductions and special rules associated with them. 

  • Car Expenses – To take the business deduction for the use of your car, you must determine what percentage of the vehicle was used for business.  Deductible costs can include the cost of traveling from one workplace to another, making business trips to visit customers or to attend meetings, or traveling to temporary workplaces.  Be sure to maintain complete mileage records.  However, commuting to and from your regular place of business is not a business expense.  When it comes to claiming car expenses, there are two methods:

    a)  Actual Expenses – Add your annual car operating expenses (including gas, oil, tires, repairs, license fees, lease payments, interest on vehicle loans, registration fees, insurance and depreciation).  Multiply the car operating expenses by the percentage of business usage to get your deductible expense.  Business-related parking and road/bridge tolls are fully deductible and don’t have to be reduced by the percentage of business use.  Note: the interest paid on vehicle loans is not deductible by employees who use their personal vehicles on the job.

    b)  Standard Mileage Rate – The standard rate changes each year.  For 2011, it is 51 cents per mile for each business mile driven.  Business-related parking costs, road/bridge tolls, and the business-use portion of interest paid on vehicle loans (for other than employees) are also deductible when the standard mileage rate method is used.

  • Business Use of Your Home – If you use part of your home for your business, you may be able to deduct expenses for items such as mortgage interest, insurance, utilities, repairs, and depreciation. To qualify, you must meet the following criteria:

    a) The business part of your home must be used exclusively and regularly for your trade or business.  However, there are exceptions for daycare facilities or storage of inventory/product samples.

    b) The business part of your home must be:

    – The principal place of business, or

    – A place where you meet or deal with patients, clients, or customers in the normal course of your business, or

    – A separate structure (not attached to your home) used in connection with your business.

  • Entertainment Expenses – This includes any activity considered to provide entertainment, amusement or recreation.  To be deductible, you must generally show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your business.  Recordkeeping is essential – you will need to keep a history of the business purpose, the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained.  Entertainment expenses are usually subject to a 50 percent limit.

  • Travel Expenses – These are “ordinary” and “necessary” expenses while away from home when the primary purpose is conducting business. Your home is generally considered to be the entire city or general area where your principal place of business or employment is located.  Out-of-town expenses include transportation, meals, lodging, tips, and miscellaneous items like laundry, valet, etc.

    Document away-from-home expenses by noting the date, destination and business purpose of your trip.  Record the business miles if you drove to the out-of-town location.  In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc.  Always list meals and lodging separately in your records.  Receipts must be retained for each lodging expense (proves you were out-of-town).  However, if any other business expense is less than $75, a receipt is not necessary if you record all the information in a timely diary.  You must keep track of the full amount of meal expenses, even though only 50% of the amount will be deductible.

  • Conventions – It is not coincidental that most conventions are held in resort areas during the spring through early fall months.  Convention planners know quite well that convention timing and location is the key to its success.  If planned properly, attendees can deduct a portion of the expenses for establishing business relationships and gaining business knowledge while enjoying a mini-vacation.  Even without a convention, business travel can be married with some personal relaxation while still providing a partial or complete deduction.  It is important to be aware of when the deductions are legitimate as well as when they are not.

    Where a companion, such as a spouse, accompanies the taxpayer, the companion’s meals and travel expenses are generally not deductible.  In addition, deductible-lodging expense is based upon the single occupancy rate.

    There are special rules related to the deductibility of cruise ship conventions, and the meeting must be directly related to the active conduct of the taxpayer’s trade or business.  The cruise ship must be a vessel registered in the United States.  All ports of call must be located in the U.S. or any of its possessions.

    Note that a higher standard is applied to foreign conventions than to conventions and seminars held within the North American area.  Various factors are considered to determine the reasonableness of the location and convention, including, but not limited to, the meeting’s purpose, the sponsor’s purpose and activities, the residence of the organization’s members, the locations of past and future seminars.

  • Marketing and Advertising Expenses – Although marketing and advertising is generally thought of in terms of print ads, flyers and radio and television advertising, they also can include marketing that is intended to portray a business positively.  Such marketing creates a long-term potential for business and falls within the ordinary and normal requirements of the tax code.

    Examples of such marketing include sponsoring local youth sports teams, distributing samples of your business product, and costs associated with prizes offered by your business in a contest.  As long as your marketing expenses can be reasonably related to the promotion of your business, they can be deducted.

The foregoing is a brief overview of some of the many deductions available to the small business owner.  However, every business is different and has its own unique expenses.  If you have questions related to deductible expenses for your business, please give this office a call.

 

 

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March 8, 2011 Posted by | av best bookkeeping, lancaster business tax | Leave a comment

Lancaster Payroll Services

Managing payroll may not seem like a critical task until something goes wrong.  It can be time-consuming, but, more importantly, it requires a good knowledge of the tax laws and deposit rules.

At Accurate Bookkeeping & Tax, we can simplify the payroll process for you.  We assist in all areas of payroll and can provide full-service payroll duties upon request.  Your only responsibility is to obtain and provide employee data, such as the hours worked and other related information.  Upon receipt of your data, we’ll take it from there.

Lancaster Payroll Services



We offer a wide range of services, which include the following:
  • Checks or Direct Deposit for Your Employees
  • Payroll Reports
  • Quarterly Tax Forms
  • Year-End Tax Forms
  • Tax Deposit Services
  • W-2s and 1099s

 

February 21, 2011 Posted by | antelope valley income tax prep, av best bookkeeping, av best payroll, av best tax preparation, lancaster tax preparation, Uncategorized | , , , , | Leave a comment

Lancaster Bookkeeping & Accounting

 

Lancaster Bookkeeping & Accounting

Whether you are a start-up business, a growing business or a mature corporation, Accurate Bookkeeping & Tax has the expertise to help you.  Through prompt and timely service, along with an intimate knowledge of the rules and regulations, we can keep you ahead of government deadlines, maintain order in your internal financial systems, and reduce the headaches that come with owning a business.

We can handle it all, from your payroll needs to banking and check writing.  If you’re having issues preparing your financial statements, we can tackle them for you.  You name it…we can do it!

Why hire staff?  Let do your monthly bookkeeping at a fraction of the cost of a full-time employee.

Our talented team is experienced with all the major accounting software programs.  We perform vital accounting functions, such as accounts payable/receivable, payroll, general ledger accounting, bank reconciliations, financial statement preparation and financial analysis.

When you retain our services, we make it a priority to learn your goals and operations quickly so we can hit the ground running.  Based on experience, we can easily identify opportunities for more effective tax planning, improved internal controls, and other areas that will make your business more profitable.

February 17, 2011 Posted by | antelope valley income tax prep, av best bookkeeping, av best payroll, av best tax preparation, lancaster tax preparation | , , , , | Leave a comment

Tax Preparation and Planning

Accurate Bookkeeping & Tax has the expertise to provide you with the services that you need.  Dedicated to keeping our tax preparation skills honed with continuing education courses throughout the year, we are highly qualified to prepare tax returns for all fifty states.

Our goal is to make the preparation process as easy as possible for you and minimize your tax liability with careful planning. Your tax preparation interview can be conducted either in person, by mail, or e-mail – whichever is most convenient for you.  Whatever your circumstances may be, we are here to give you the best advice to help you get through life’s challenges.

Whether you need current year returns prepared or need to plan for retirement or your child’s education, our professional team can assist you with all of your needs.

This office provides many services, including the following:

Thank you for allowing us to be of service.

February 2, 2011 Posted by | antelope valley income tax prep, av best bookkeeping, av best tax preparation, av best tax preperation, lancaster tax preparation | , , , , | Leave a comment