Mileage As a Deduction (Guest Blogger: Arlene Perry )

Hello to all my entrepreneurs who are happily making that time-consuming commitment to creating a business for themselves and a legacy for their loved ones.

You’re busy running around, from client to client or location or location while running up all those miles on your vehicle. Well I have some good news for you. Those miles can be tax deductible. And in turn, will help decrease your taxable income. Because who in their right mind wouldn’t want to have less income to report to our best friend, Uncle Sam?

Business owners, including the self-employed, are allowed to deduct the mileage used for business. To do so, they have to use either the current IRS rate of 54 cents per mile or the business portion of their actual auto expenses. Expenses like gas, car payments and insurance. Whatever method they decide to use, they must have good, accurate, written records maintained and produced if ever the IRS should audit them.

The IRS does consider mileage deduction an easy target for auditing because there are strict restrictions on the type of mileage that qualifies as a deduction.

Individuals may also deduct their mileage if they are an employee who uses his or her car for business. Keep in mind though that the mileage Can’t Include Commuting To And From Work And Can’t Be Reimbursed By Your Employer. Here’s what Mileage can be deducted:

 Travel between 2 different work locations
 Travel to temporary work location (less than 1 year) from your home
 Travel for business related work errands, (ex. Banking, Purchasing Supplies, Setting up work events)
 Travel for clients’ meetings, both self-employed and employees
 Travel for business meetings or clients’ entertainment
 Travel to airports if related to clients

*****SELF-EMPLOYED PERSONS WILL CLAIM THEIR MILEAGE AS AN EXPENSE ON SCHEDULE C RATHER THAN ITEMIZING ON SCHEDULE A LIKE EMPLOYEES WILL DO****

In addition to the above rules, there are a few other things that can be beneficial to the tax payer. Here they are:

 People who are unemployed and traveling looking for work may deduct mileage to find a new job in their current occupation. BUT NOT traveling seeking employment in a new industry. They can deduct expenses paid traveling by public transportation.

 Those working full-time 39 weeks in the last 12-month period and have relocated at least 50 miles for work are entitled to claim a smaller deduction of 23 cents a mile

 For those working from home, usually the self-employed, there is no commuting mileage. So you claim all mileage traveling to business locations such as a second office or the clients’ locations.

As stated earlier in this post, it’s vital for individuals to keep accurate records when deciding to claim mileage. Audits by the IRS are unpredictable and have absolutely nothing to do with tax preparers.

Taxpayers are responsible for the upkeep of their own records. Which is why I also highly recommend they meet with a Bookkeeping or Accounting professional at least once a year. Twice for optimum benefits.

Additionally, I suggest investing in a travel log that can be obtained from any stationary store. And if individuals are technologically savvy, there are plenty of Apps available like QuickBooks Self-Employed. These will allow them to keep the records needed for the IRS if need be . They will need to show the number of miles for each trip, the date and time for each trip, the location they went to and the purpose of the trip which would include a client’s name if appropriate.

Mileage is a deduction/expense the tax payer is entitled to, but many bypass it because of the work involved. I say take every deduction you can and put in the effort because it can be worth it.

FOR ADDITIONAL INFORMATION ON THIS SUBJECT, REVIEW IRS PUBLICATION 463 at https://www.irs.gov/pub/irs-pdf/p463.pdf

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Arlene Perry, Bookkeeper, MBA
Arlene@ArlenesUnlimitedServices.Com

Arlene Perry, MBA is the owner of Arlene’s Unlimited Services; a full service tax preparation, bookkeeping and payroll business. Having had the business since 1998,  she serves the Manhattan and Bronx areas of New York City.

Within this time, Ms. Perry has worked with a variety of small businesses in different industries. They include security and retail as well as the bookkeeping of non-profit organizations.

Arlene graduated with a Bachelor’s degree in Accounting and a Masters degree in Business from Monroe College in New Rochelle, New York.

Prior to returning to college, Ms. Perry worked for the City of New York as a Police Officer. While serving, she prepared the tax returns for many of her co-workers and kept the financial records of a non-profit youth group that she was a part of.

Presently, Ms. Perry is working for a great non-profit organization focusing on keeping our youth out of the prison system. She’s also creating a side Baking Business. She’s a proud member of Real Sisters Rising, M & M Projects and Administrator of a Bookkeepers and Food Groups on FaceBook.

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IRS Advice On How to Pay Yourself When You Have a Business

smallbiztax

People go into business to make money. Figuring out how to account for the money they make can be a challenge. Thankfully, the IRS has provided guidance on how to handle accounting for the money business owners make.

Here is the guidance:

The procedures for compensating yourself for your efforts in carrying on a trade or business will depend on the type of business structure you elect. Below are topics that frequently arise when new business owners ask the Internal Revenue Service questions about paying themselves.


Corporate officers

An officer of a corporation is generally an employee, but an officer who performs no services or only minor services, and who neither receives nor is entitled to receive any pay, is not considered an employee. Refer to “Who Are Employees?” in Publication 15-A, Employer’s Supplemental Tax Guide (PDF).

Partners

Partners are not employees and should not be issued a Form W-2 in lieu of Form 1065, Schedule K-1, for distributions or guaranteed payments from the partnership. Refer to partnerships for more information.

Dividend distributions

Any distribution to shareholders from earnings and profits is generally a dividend. However, a distribution is not a taxable dividend if it is a return of capital to the shareholder. Most distributions are in money, but they may also be in stock or other property. For information on shareholder reporting of dividends and other distributions, refer to Publication 550, Investment Income and Expenses.

Form 1099-MISC or Form W-2

You cannot designate a worker, including yourself, as an employee or independent contractor solely by the issuance of Form W-2 or Form 1099-MISC. It does not matter whether the person works full time or part time. You use Form 1099-MISC, Miscellaneous Income (PDF) to report payments to others who are not your employees. You use Form W-2 to report wages, car allowance, and other compensation for employees.

Treating employees as nonemployees

You will be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold them because you treat an employee as a nonemployee, including yourself if you are a corporate officer, and you may be liable for a  trust fund recovery penalty. Refer toPublication 15, Circular E, Employer’s Tax Guide for details about the trust fund recovery penalty orIndependent Contractor for more information on employee classification.

Shareholder loan or officer’s compensation?

A loan by a corporation to a corporate officer should include the characteristics of a loan made at arm’s length. That is, there should be a contract with a stated interest rate, a specified length of time for repayment, and a consequence for failure to repay the loan. Collateral would also be an indication of a loan. A below-market loan is a loan which provides for no interest or interest at a rate below the federal rate that applies. If a corporation issues you, as a shareholder or an employee, a below-market loan, the lender’s payment to the borrower is treated as a gift, dividend, contribution to capital, payment of wages, or other payment, depending on the substance of the transaction.

See “Below-market interest rate loans” under Employees’ Pay / Kinds of Pay / Loans or Advances in Publication 535, Business Expenses for more information.

Reasonable compensation

Because an officer of a corporation is generally an employee with wages subject to withholding, corporate officers may question what is considered reasonable compensation for the efforts they contribute to conducting their trade or business. Wages paid to you as an officer of a corporation should generally be commensurate with your duties. Refer to “Employee’s Pay, Tests for Deducting Pay” in Publication 535, Business Expenses for more information. Public libraries may have reference sources that provide averages of compensation paid for various types of services. The Internal Revenue Service may determine that adjustments must be made to the income and expenses of tax returns for both the corporation and an individual shareholder if the officer is substantially underpaid for services provided.

Draw account

If you are a sole proprietor  or partner in a partnership, the money or other forms of payment you take from your business should be accounted for in a draw account. This helps you know what amount of benefits you have taken from the business during the year. You cannot deduct the sole proprietor s own salary or any personal withdrawals made from the business.

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An Excerpt from TaxAssurances’ Book for Small Business

sales-taxAlong with worrying about paying federal, state and local taxes, many business owners have to worry about paying sales taxes on the products and services they offer to the public. Sales taxes are a tax on the retail sales of certain tangible personal property and services.

Potential and new business owners should reach out to their state and local revenue departments to see if the business they are starting is responsible for collecting, reporting and paying sales taxes to them. Along with those requirements, they can also find out what the tax rate is that they need to collect.

In the state of New York, the sellers of the following goods and services need to worry about paying sales tax. Again, potential business owners should check with their state and local revenue departments to find out if they are responsible for accepting, reporting and paying sales taxes.

• Tangible personal property (unless specifically exempt);
• Gas, electricity, refrigeration and steam, and telephone service;
• Selected services;
• Food and beverages sold by restaurants, taverns, and caterers;
• Hotel occupancy; and
• Certain admission charges and dues.

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The Power of Distribution

Global communicationsOne of the overlooked and sometimes challenging parts of a business is its distribution. But it is vast and efficient distribution that can propel a business and its owners to phenomenal success. Whether the product or service is computer software, oil, institutional money management or popular entertainment, distribution is what allows the owner and manager to achieve great financial success.

With each of these businesses they are able to take a product or products and put them into a network that can have millions of individuals support the products or services at approximately the same time.

Software firms distribute through online and offline retailers. Money managers use money from large retirement plans for civilian employees and entertainment providers use online and offline distribution networks as well.

So as business owners look to grow their business, a focus on distribution of that product or service may be challenging but a search that none the less can bear profitable fruit.

 

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An Excerpt from TaxAssurances’ Book for Small Business

do-it-with-passionWhether they are starting a new business or expanding an existing business, entrepreneurs of all strips need to have passion and drive for what they are doing. They need passion and drive because the road for any entrepreneur is littered with challenges and hurdles that have to be overcome on a constant basis.

Passion and drive is reflected in the time and energy that is put in the little details in starting and running a business. It is reflected in the financial commitment that owners put into the business. It is reflected in the sometimes lonely journey and effort that a business owner endures to make their business a success.

Deliveries will be late or missed. Employees will be late or quit. Clients will find a million and one reasons not to pay you on time or if the entrepreneur is really luck, not at all. And none of this will be in the original or revised business plan the entrepreneur may or may not have done. Business owners need that passion and drive because that is what is going to move them forward during the tough times.

Owners will want to cry about any one of the challenges they face, but the problem will still be there when the crying is over and a solution still needs to be found. Passion and drive for what they do during those gut wrenching times will propel them forward and help them overcome those challenges.

Passion and drive will help them devise solutions and responses that keep the business going. The challenges may spark a creative bent that they otherwise might not have used. And in really breakthrough moments, it will put the business on a much better trajectory then before the challenge first appeared.

 

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Wills Are Not Enough for Business Owners

brand1-e1383682355561Most business owners will leave the business they own to their family in their will. Before those with large estates do that however they have a few important questions to think about and answer about that will. First, do their heirs have the money to pay the estate taxes on the value of the business? Next, do their heirs know what the business is worth?

Business Owners Need to Value the Business

The owners will need to find the answers to those questions because their heirs either don’t know what the value of the business is or aren’t interested in what it is. Here’s the challenge though, when it comes time to assess the value of the estate of the owner, the IRS will tell the heirs what the business is worth. Then they’ll want taxes paid on that value. Do they have the money to pay those taxes?

When it comes to the valuation process, naturally to avoid a higher estate tax bill the heirs will want the IRS to put a lower value on the business while the IRS will want to put a higher value on the business. Guess who usually wins out?

Many times heirs will have to sell homes, stock or other assets to pay that estate tax bill. Worst case scenario they may have to borrow money or even sue remaining partners to satisfy the IRS. This is not what the owners wanted to do to their loved ones and their former partners.

So how do owners figure out what their business is worth? The following are the most common methods used to value a business:

  • Book Value
  • Straight Capitalization Method
  • Capitalization of Earnings Method
  • Years’ Purchase Method
  • Discounted Future Earnings Method

Solutions with a Fully Funded Buy Sell Agreement

These methods of valuation answer the question of what the business is worth but leave another one unanswered. Namely, how do you set aside money to pay the estate taxes based on the value of the business?

In many cases the answer is, by setting up a guaranteed fully funded buy sell agreement (http://en.wikipedia.org/wiki/Buy-sell_agreement ).This is an agreement where the terms are laid out what happens to a business should something happen to one of the owners. As part of the agreement it looks to put a value on the business and determines a way to pay for it.

 Need for Updated Business Valuation

Here’s a challenge for business owners when it comes to valuing their business with the buy sell agreement. Simply put, the value changes. The business owners started 20 years ago is worth more today than it was 20 years ago.  And since most owners don’t know when they will create their estate for the IRS to value, they should look to update the value in their guaranteed fully funded buy sell agreement every few years or so. Remember the IRS will want taxes to be paid by the heirs based on what the business is worth and if the heirs don’t have the money to pay that estate tax bill, problems arise.

Are Heirs Qualified to Run the Business?

Finally, is a partner’s spouse or children qualified to take over the business if they pass away? Again, the buy sell agreement can spell out what happens to the business if one of the owners passes away. This even applies if the business is owned by one person.

Wills are a great way to start the process of transferring a business to loved ones and friends however there are a few gaps with it that can be filled by a guaranteed fully funded buy sell agreement. Working with a qualified and licensed insurance advisor and other team members can go a long way in filling those gaps.

 

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