business expenses

Deductible Business Expenses

The best way to find out what business expenses can be deducted from your income is to consult with your Simma Flottemesch & Orenstein representative. Reducing your business’s income by expenses means you have less money to pay taxes on. However, the scope of potentially deductible expenses is a wide range. Do yourself a favor and keep as detailed records as possible, especially when it includes the following:business expenses

General Business Expenses

Unfortunately, there is no master list of what the IRS allows your business to deduct. Instead, your CPA can help you determine whether certain expenses are incurred as a “cost of carrying on a trade or business.” At a minimum, these may include:

  • Office supplies
  • Utilities
  • Furniture and equipment
  • Software
  • Advertising
  • Rent or mortgage payments
  • Wages, salaries, bonuses, commissions and employee health insurance premiums

The IRS also requests, in the classification of these expenses, that they be “ordinary and necessary.” It defines such as “an ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.”

Other Business Expensesauto expense

You are allowed to deduct up to 50 percent of the costs of meals and entertainment when those outings are associated with business operations. Therefore, the event must take place immediately before, after or during a business discussion.

If you are staying on top of your business knowledge through the use of trade magazines, business seminars or other learning materials, these books, magazines and educational programs can be deducted from your taxes. Make sure the subject matter of these materials contribute to your ability to run, maintain or improve your business or trade.

When you start your business, any startup costs are considered capital expenses rather than business expenses, since business expenses cannot be incurred until your business is up and running. In the first year of business, up to $5,000 of your capital expenses can be deducted. What remains beyond that $5,000 can be deducted from your taxes for up to a 15-year period.

Special Expense Deductionshome office

Home office and auto expense deductions are calculated in two different ways. These methods include the standard method or the actual method. For auto expenses, the standard method is a deduction of 53.5 cents per business mile, plus toll and parking fees. The home office standard method allows a deduction of $5 per square foot, with a maximum of 300 square feet, or $1,500. Using the actual method for auto expenses requires you add up all auto expenses (gas, repairs, oil changes, etc.), and multiply the total by the percentage of miles that were used for business purposes. The actual method of calculating your home office deduction requires you add up all home expenses and multiply it by your home office percentage (office square footage divided by your home’s total square footage). For the home office, any expenses related to the space are included if the space is used exclusively and regularly for business.

Working with a CPA from Simma Flottemesch & Orenstein will maximize your business expense deductions by making sure all expenses relevant to your business are accounted for. Doing your taxes yourself often leads to these deductions slipping through the cracks or being inaccurately recorded. Get peace of mind when you prepare your taxes with a professional from our offices.

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graduate

Tax Tips for the Class of 2019

Graduating this spring? Congratulations! Graduation is a huge milestone along the road of adulthood. It marks a shift into a new chapter of your life, and, with it, your tax situation will inevitably change.

Understand your tax obligation

Up to this point, what role have you had in your tax situation? Rein in your record keeping—this means collecting the documents that detail your sources of income, receipts, student loan interest payments, and any interest you earn on your accounts. If you’re self-employed, you must keep records of your tax-deductible expenses, and consult your Simma Flottemesch & Orenstein CPA to determine your estimated tax payments for the year.graduate

Take interest in your interest

When you’re repaying your student loans, you’re also repaying the added interest. When it comes time to do your taxes, you can subtract the interest you pay from your taxable income. If you earned less than $65,000, you can deduct up to $2,500 from your taxable income. If you earned between $65,000 and $80,000, the maximum deduction amount is reduced.

*Note: If the loan is in your parents’ name, he or she receive the deduction. If the loan is in your name, but you’re a dependent on your parent’s tax return, neither receive the deduction.

Continue your education

In today’s job market, a lower level degree may not achieve all of the skills training or job requirements you need. If you opt to continue your education, utilize the Lifetime Learning Credit. As a single filer, if your modified adjusted gross income is $65,000 or less ($130,000 if you’re filing a joint return), the credit could help you recoup up to $2,000 per year spent on post-secondary coursework. While this credit doesn’t require that you are enrolled in a degree program, you must receiving the coursework from an eligible educational institution.

Utilize company programs

It is becoming less common for recent graduates to receive benefits in the workplace. So, if your employer offers benefits, utilize them. Contribute as much as you can to the company 401(k)—you’ll be receiving free money down the road if your company offers a contribution matching program. Know when enrollment deadlines for HSAs and FSAs roll around in your workplace. These accounts shelter your funds from taxation.graduation

Save, save, save

Retirement may seem like a long ways off, but saving early will set you up for success later in life. You can deduct up to $5,500 of your contributions to a traditional IRA each year. This money will only grow during your lifetime. What’s more, you may qualify for the saver’s credit. This credit could reduce your tax bill by up to $1,000 ($2,000 if married filing jointly). The value of your individual credit is determined by your contributions. Consult your Simma Flottemesch & Orenstein professional for details that apply to your individual situation.

Stash from your side gig

Freelance and contract positions are an expanding realm in the modern job market. There’s a sense of freedom and empowerment that comes from being self-employed, but your taxes aren’t automatically being withheld from your income throughout the year. Rather than face a huge tax bill in the spring (and maybe a penalty for not making estimated payments), most would advise that you set aside 25 percent of what you earn.

With this step, you’re facing numerous life changes, including your tax scenario. Arm yourself with the knowledge to confidently carry forward, and consult your tax professional for changes that are specific to your situation.graduate

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records

Retaining Your Tax Documents

Whether the results of this most recent tax season had a positive or negative impact on your bank account, it’s important to consider how long you should retain your tax documents. This includes a copy of your tax return and any documents providing support of income or deduction items, as well as evidence for any credits received.  A period of limitations is determined by the IRS based on the time in which you could amend a return to claim a credit or refund, or during which the IRS can assess additional tax.

The general rule of thumb is three years. This means you should retain a copy of your return and supporting documents for that return until three years from the filing due date. For example, you should keep the information regarding the return that was due April 15, 2019 until April 15, 2022, at the very least. Keep in mind, these periods are federal guidelines. States may have their own statute of limitations.tax records

Exceptions

There are a lot of “buts” in tax circumstances. Fittingly, if you claim a bad debt deduction or a loss from worthless securities, retain your records for seven years instead of three. If you have ever filed a fraudulent return, or forgotten to file a tax return, the IRS requires you keep your financial records for your lifetime.  Finally, if for some reason, 25 percent of your income was not reported on your tax return, the IRS has up to six years to impose additional tax.

Period of limitations

The IRS has provided the following information on a period of limitations for different scenarios:

  1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
  2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
  3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
  4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
  5. Keep records indefinitely if you do not file a return.
  6. Keep records indefinitely if you file a fraudulent return.
  7. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.shred

Disposal

A good scanner has made the electronic retention of these records fairly efficient. However, when disposing of your records and prior tax returns, it’s important to shred any physical documents that may bare identifiable information. Poorly disposed of documents could make you susceptible to identity theft. For electronic information, be sure to have strong security software in place. Keep in mind, that although the IRS may no longer have a use for your records, they could be needed by your insurance company or creditors, in some cases.

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supplies

Deductible Business Expenses for Small Businesses

The IRS requires that deductible business expenses must be both ordinary and necessary for business operations. If an expense is common to your trade or business, it is an ordinary expense. A necessary expense is helpful and appropriate to the operations of your business or trade. Deducting these qualifying expenses lowers your income tax bill. Even common business expense deductions may not apply to your specific small business. Working with a CPA from Simma Flottemesch & Orenstein will help you hone in on what expenses apply to your business, and how to make the most of these deductions.

Common small business deductions

Advertising: 100 percent of costs associated with advertising and promotion of your business, including business cards, are deductible.

Business meals: business-related meals that can be supported with proper records (amount, date, location and business relationship of other diner(s)) are 50 percent deductible. *Tip: on the back of the receipt, write down the purpose of the meal, who you dined with and what you discussed.

Business insurance: business insurance costs can be deducted on Schedule C.

Car: if your vehicle is used solely for business purposes, all the costs associated with its operation can be deducted. More commonly, vehicles are used for business and personal use, in which case only the costs associated with business-related usage can be deducted. When you claim mileage for business use of your vehicle, there are standard mileage deductions that change yearly, or you can deduct actual costs. In 2018, the standard mileage rate was 54.5 cents per mile, while that amount has increased to 58 cents per mile in 2019.car

Charitable contributions: both corporations and individuals can deduct charitable contributions to qualified organizations on their tax returns.

Depreciation: large business items depreciate over their lifetime of use. Higher priced items with a longer life of use should be depreciated, rather than deducted upfront.

Education: costs associated with training or improving the knowledge and skills of you and your staff add value to your business and are fully deductible. These costs, for classes, seminars, subscriptions, books, workshops, etc., must increase your expertise in your current field, not qualify you for a different career.

Home office: the IRS has standardized this deduction—you can deduct $5 per square foot of your home that is used for your business. This amount maxes out at 300 square feet. It’s important that this area of your home qualify under three areas: exclusivity, regularity and precedence. This means that the area must be used exclusively for business, be used regularly for business operations or responsibilities, and be used as the principal place for conducting important business activities. A portion of renter’s or homeowner’s insurance can also be included in this deduction.home office

Insurance premiums: whether your business owner’s policy covers malpractice, flood insurance, cyber liability coverage, business continuation insurance or all of the above, the costs are fully deductible.

Interest and bank fees: interest that is incurred on business loans or credit cards, in addition to fees and bank charges on your business bank accounts, can be claimed on Schedule C.

Legal and professional fees: the fees charged by Simma Flottemesch & Orenstein to prepare your tax return are included in these deductible fees. These fees would also include any bookkeeping fees charged by a bookkeeper or bookkeeping service.

Medical expenses: as a small business, you may qualify to claim a tax credit up to 50 percent of premiums paid for employees, which would be a better tax break than a deduction. If you are self-employed and paying your own health insurance premiums, those costs are generally deductible. However, there are some exceptions, like if your spouse has an employer plan you could opt to participate in. Consult your tax professional to determine how this deduction applies to your specific situation.

Rent and utilities on business property: if your business operates in a rented space, the cost of renting the facility is fully deductible. Additional deductible utilities for the operation of this space include electricity, internet and phone charges (mobile or landline).

Salaries and wages: what you pay employees for salaries, wages, bonuses, commissions and taxable fringe benefits are deductible business expenses. Owners do not qualify as employees.

Supplies: business office supplies, furniture and other equipment are all deductible. It’s important to keep all receipts related to the purchase of these items. In today’s digital age, office electronics can also be included. Think of your laptops, tablets, smartphones and the software used to operate them in relation to business activities.supplies

Travel expenses: a business trip will only qualify as business travel if it is ordinary, necessary and away from the city or area in which you conduct business. Travel must last longer than one normal day’s work. Potentially, the deductible expenses from this travel may include transportation-related costs, meals, lodging, parking, tolls, tips, business calls, etc.

This list is by no means exhaustive, but it is a starting point for determining what business expenses are deductible on your return. Every scenario is different, and your tax professional will determine which deductions you qualify for. It’s important to keep records throughout the year of these expenses.

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self employment taxes

What Are Self-Employment Taxes?

Self-employment taxes are established by SECA tax—Self-Employment Contributions Act tax. This tax is a stand-in for FICA paid by employers and employees. When you are employed, withholding covers Social Security and Medicare program contributions. Employers must also make additional contributions to these on behalf of each employee. Self-employment taxes exist to contribute to these programs by the self-employed. The self-employed do not escape these tax obligations, and are instead burdened with the full contribution, rather than sharing the FICA contributions with their employer.self employment taxes

If you earn $400 or more from your self-employment income, you are required to file a tax return. Generally, 92.35 percent of your net earnings from self-employment are subject to the self-employment tax. Your contributions will be made in the following way: 12.4 percent to Social Security for the first $128,400 of earnings (for 2018) and 2.9 percent to Medicare on all earnings.

Figuring the tax

Schedule SE helps you calculate how much self-employment tax you owe. This amount is then reported on your 1040 as “Other Taxes.” Fortunately, a portion of your self-employment tax payments can be deducted as an adjustment to income on your 1040. Whether you itemize deductions or not, you can claim 50 percent of your self-employment tax payment as a taxable income deduction.

Estimated taxes

Again, when you work as an employee, withholding throughout the year contributes to your total tax liability. When you’re self-employed, this isn’t an automatic mechanism. Therefore, it may be worth paying estimated taxes throughout the year, in quarterly installments, to avoid underpayment penalties. Discussing your options and forming a plan with a Simma Flottemesch & Orenstein team member will help you prepare for and determine your best course of action.self employment taxes

Reducing your self-employment tax

If you’ve read our previous posts on the tax implications of selecting your business entity, then you should know that S Corp elections have the opportunity to reduce your self-employment tax liability. Under this entity, you would be paid a salary out of earnings and the remaining profits would be distributed to yourself, shareholders, partners or left in the business. The amount in excess of your salary is subject to income tax, but not self-employment taxes. In an upcoming blog, we delve into determining a reasonable salary from your S Corp.

Schedule C calculates your net profit from self-employment. Be very thorough in preparing this form, deducting every possible business expense. Business expenses must be ordinary and necessary to operate your business. Deducting these expenses will lower your net profit, and, in turn, lower your self-employment tax bill. We will dive more in-depth on what qualifies as a deductible business expense in our next blog.

 

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investment

Tax Impacts From Investments

With modern apps and technologies, it’s never been so easy for individuals to participate in the investment world. Millions of Americans are dabbling in the investing game. Regardless of the size of your portfolio, your investing moves will have some impact on your tax bill. When it comes time to do your taxes, the size of your portfolio, your investment activities throughout the year and your decision to take the standard deduction or itemized deductions will all be factors. (more…)

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