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- 1. Structure and Tax Consideration for Small Business ASMI – Instructors Presented by: Jennifer Knourek Director of Business Development James Hamlin & Co., P.C. Biker’s Betterment Conference
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- The IRS reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit. In order to educate taxpayers regarding their filing obligations, this fact sheet explains the rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates. In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is on that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit. The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year – at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses. If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit of not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporation. It does not apply to corporation other than S corporations. Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories: Deductions that a taxpayer may take for personal and business activities, such as home mortgage interest and taxes, may be taken in full. Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
- According to the Bureau of the Census there are about 25 million non-employer businesses and the number is growing by about 1 million per year. Most of these non-employer businesses work from home. The overall benefit is: There are no fixed costs of operations Lessened cost for child care Telephone costs can be lessened by using a residential phone rate All this means more flexibility in pricing, actual work time needed to make a living, and income. It becomes easier to deal with slack periods. Working at home can mean a longer work day. It can take 12 hours to do what would be done in an office in 8 hours. No commute time. Easier to spread the work week out over 7 days or compress it to less than 5. With most work taking place at the client's site then there is lessened need for an office. There is greater ability to give quicker response to a client phone call outside of normal office hours. With a corporation, proper minutes book, and ideally having someone else be the officers there is coverage for unemployment and workers comp.
- What can I Deduct? To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade of business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. If your gross receipts are not more than $10 million a uniform capitalization rule apply. For additional information, refer to Publication 334, Tax Guide for Small Business and the chapter on Inventories, Publication538,Accounting Periods and Methods. http://www.irs.gov/publications/p538/index.html
- Personal versus Business Expenses Generally you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part. For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication535, Business Expenses, for more information on deducting interest and the allocation rules. http://www.irs.gov/publications/p535/index.html Business Use of Your Home If you use part of your home for business, you may be able to deduct expenses for the business us of your home. These expenses may include mortgage interest, insurance, utilities, repairs and depreciation. The home office deduction is available for homeowners and renters, and applies to all types of homes, from apartments to mobile homes. There are two basic requirement for your home to qualify as a deduction: Regular and Exclusive Use. You must regularly us part of your home exclusively for conducting business. For example, if you use an extra bedroom to run you online business, you can take a home office deduction for the extra bedroom. Principal Place of Your Business. You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. Refer to Publication 587, Business Use of your Home, for more information. Business Use of Your Car If you use your car in your business, you can deduct car expenses. If you use you car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. http://www.irs.gov/publications/p463/index.html. For a list of current and prior year mileage rates see the Standard Mileage Rates page at http://www.irs.gov/taxpros/article/0,,id=156624,00.html Other Types of Business Expenses Employee’ Pay – You generally deduct the pay you give your employees for the services they perform for your business. Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’ retirement. Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade of business. If you have or will receive equity in or title to the property, the rent is not deductible. Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities. Taxes – You can deduct various federal, state, local and foreign taxes directly attributable to you trade or business as business expenses. Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business or profession. This is not an inclusive list of the types of business expenses that you can deduct. For additional information, refer to Publication 535, Business Expenses. http://www.irs.gov/publications/p535/index.html Reference : Virtual Small Business Tax Workshop, Lessons 2 & 4
- Deducting Travel Separate business from pleasure when deducting travel. Travel expenses are deductable if the trip was entirely business related. If the trip was primarily for personal reasons, such as a vacation, the entire cost is a non-deductible personal expense. However, expenses at the destination directly related to business may be deductable. Trip Primarily for Business: You can deduct all of your travel expenses if your trip was entirely business related. If your trip was primarily for business and while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business related expenses at you business destination. Example: You live and work in Chicago and take a 3 day business trip to Milwaukee. On your way home you stop to see friends in Madison. You spend $807 for the 5 days you are away from home for travel, meals, lodging and other travel expenses. If you had not stopped in Madison you would have been gone only 3 days, and your travel total cost would have been $618. You can deduct $618 for your trip, including the cost of transportation to and from Milwaukee. The deduction for your meals is subject to 50% of Actual cost or the Standard Meal Allowance. Amount of standard meal allowance. The standard meal allowance is the federal M&IE rate. For travel in 2009, the rate for most small localities in the United States in $39 a day for the period January1 through September 30, 2009, and $46 a day for the period October 1 through December 31, 2009. Most major cities and many other localities in the United States are designated as high-cost areas, qualifying for higher standard meal allowances. These rates are listed in Publication 1542, which is available on the Internet at www.irs.gov Incidental expenses do not include expenses for laundry, cleaning and pressing of clothes, lodging taxes, phone calls or telegrams. They do include the following: Fees and tips given to porters, baggage carriers, etc. Transportation between places of lodging or business and places where meals are taken
- Consider hiring a Tax Professional If you pay someone to support you with you tax filing responsibilities, choose that preparer wisely. You are legally responsible for what’s on your own tax return even if prepared by someone else. So, it is important to choose carefully when hiring an individual of firm to prepare personal or small business returns. Keep these few points in mind when someone else prepares your return: A Paid Preparer is required by law to sign the return and fill in the preparer areas of the form. The preparer should also include their appropriate identifying number on the return. Although the Preparer signs the return, you are responsible for the accuracy of every item on your return. In addition, the preparer must give you a copy of the return. Review the completed return to ensure all tax information, your name, address and Social Security. number(s) are correct. Make sure that non of these spaces is left blank. Review and ensure you understand the entries and are comfortable with the accuracy of the return before you sign. Never sign a blank return, and never sign in pencil If you have provided specific authorization in a power of attorney filed with the IRS, you may have copies of notices or refund checks mailed to your preparer or representative; but only you can sign and cash your refund check. A Third Party Authorization Check Box on Form 1040 allows you to designate you Paid Preparer to speak to the IRS concerning how your return was prepared, payment and refund issues and mathematical errors. Unqualified tax preparers may overlook legitimate deductions or credits that could cause you to pay more tax than you should or make costly mistakes causing you to incur assessed deficiencies, penalties, and interest. A paid preparer must sign the return as required by law. Avoid preparers who claim they can obtain larger refunds than other preparers. (If your returns are prepared correctly, every preparer should derive substantially similar numbers). Beware of a preparer who guarantees results or who bases fees on a percentage of the amount of the refund. A practitioner may not charge a contingent fee (percentage of your refund) for preparing an original tax return. Understand that the most reputable preparers will ask you multiple questions to determine your qualifications for expenses, deductions and other items. By doing so they have your best interest in mind and are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination. Choose a preparer you will be able to contact and one who will be responsive to your needs. Ask who will actually prepare the return before engaging services. Avoid firms where your work may be delegated down to someone with less training or some unknown worker. You should know exactly who works with your tax matters at all time and how to contact him or her, after all, you are paying for it. Determine if the preparer’s credentials meet your needs or if your state mandates licensing or registration requirements for paid preparers. As of 2008 California and Oregon are the only two states that regulate paid tax preparers. Is her or she an Enrolled Agent, Certified Public Accountant (CPA) OR Tax Attorney? Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Other return preparers may represent taxpayers only in audits regarding a return that they signed as a preparer. Find our if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics. Unfortunately, unscrupulous and untrained tax return preparers do exist and can cause considerable financial and legal problems for you. Examples include improper actions by unscrupulous preparers include the preparation and filing of false paper or electronic income tax returns that claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions. Tax evasion is punishable by up to five years imprisonment and a $250,000 fine. Remember, no matter who prepares a tax return, the taxpayer is legally responsible for all the information on that return…. Consider hiring a firm like… James Hamlin & Co., P.C.
- http://www.tax.gov/virtualworkshop/ Small Business/Self-Employed VIRTUAL Small Business Tax Workshop For all Small Business Owners Lesson 1: What you need to know about Federal Taxes and your new business. Lesson 2: How to Set up and run your business so paying taxes isn’t a hassle. Lesson 3: How to file and pay your taxes using a computer Lesson 4: What you need to know when you run your business out of your home Lesson 5: How to set up a retirement plan for yourself and your employees For Small Business Employers Lesson 6: What you need to know about federal taxes when hiring employees/contractors Lesson 7: How to manage payroll so you withhold the right amount from employees Lesson 8: How to make tax deposits and file your payroll taxes using a computer Lesson 9: What you need to know about Federal Unemployment Taxes (FUTA)
- Publication535, Business Expenses, for more information on deducting interest and the allocation rules. http://www.irs.gov/publications/p535/index.html Publication 463, Travel, Entertainment, Gift, and Car Expenses. http://www.irs.gov/publications/p463/index.html Standard Mileage Rates page at http://www.irs.gov/taxpros/article/0,,id=156624,00.html Publication 535, Business Expenses. http://www.irs.gov/publications/p535/index.html
- Helping Clients Build Value Since 1964 Tax support and planning, Financial Services, Payroll www.jhamlin.com www.yourpayrolldept.com Jennifer Knourek Director Business Development James Hamlin & Co., P.C. jknourek@jhamlin.com 847-838-2724 If you would like to learn more about how James Hamlin & Co., P.C. may be of service to your business either now or in the future, please complete the following: - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Name________________________________________________________________ Company Name________________________________________________________ Street Address _________________________________________________________ City ________________________________ST _______ ZIP ____________________ Phone _____________________________Cell _______________________________ E-mail ________________________________ ____________________________________________________________________________________________ I am interested in the following: ___ Accounting ___ Payroll ___ Tax Savings ___ Increasing Profits ___ Growing My Business ___ Other Comments: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________