Heyward CPA

Surveying the Landscape of Small Business Tax Deductions

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Photo by Solo Shutter from StockSnap

Business expenses are the cost of carrying on a trade or business, and there may be some tax breaks there. But a lot has changed in recent months, and the rules can be complicated.

Are there business deductions you can take advantage of? Yes, but first you have to make sure your expenses are truly business-related. The lines can blur, especially with a small business, because you generally 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, and then deduct the business part.

An example: 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 isn’t deductible.

Let’s look at business use of your car and your home:

  • Business use of your car: If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
  • Business use of your home: If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses include mortgage interest, insurance, utilities, repairs and depreciation.

Other types of business expenses? Let’s take a closer look:

  • Employees’ pay: You can generally deduct the pay you give your employees for the services they perform for your business.
    Retirement plans: These are savings plans that offer you tax advantages to set aside money for your own, and your employees’, retirements.
  • Rent expense: Rent is any amount you pay for the use of property you don’t own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or 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 your 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 list is not inclusive but endeavors to offer some common business expenses and explains what is and isn’t deductible. Of course, in some cases, expenses might need to be amortized — deducted over a period of several years — if they are startup costs or if they’re related to the purchase of business equipment.

You must capitalize, rather than deduct, some costs that are part of your investment in your business — these are called capital expenses. Capital expenses are considered assets in your business.

Of course, some business deductions can be very complex, so professional advice is necessary to make sure you’re getting what you’re owed without raising any red flags with the IRS. We’re here to help you with your business tax needs.

The Financial Flipside Podcast, Episode 23: Peaks and Valleys or, When Is a Recession Not a Recession?

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A snow capped mountain range with a town in the foreground

Photo by Krivec Ales from Pexels

Note: we recorded this podcast in early April, just after the opening of the Paycheck Protection Program and the passage of the CARES Act, so you may hear references to dates that have already come and gone. As of this writing, though, we’re still following the roll out of the second round of the PPP, continued disbursement of EIDL loans and economic impact payments, and like everyone else, trying to be as prepared as we can for what comes next.

Most of the economic news these days is not great: high unemployment, a drop in GDP that brought the US economy’s longest period of expansion to a screeching halt, and of course, the neverending ups and downs of the stock market. Though media sources have already started reporting on “the coronavirus recession” and we’re all feeling the effects of business closures and supply chain disruptions, we’re not technically in a recession. The reason comes down to how we measure economic performance. On today’s episode, we’ll be talking about economic indicators, what a recession is, and why official definitions don’t always match up with our lived experience. We’ll also be discussing some ways to weather an economic downturn, recession declaration or no. We can’t  promise to alleviate any concerns you may have about the economy or tell you what to expect in the coming months or years, but we’ll try to provide some actions that you can take in the present.

 

Check under the cut for show notes and bonus content:

[Read more…] about The Financial Flipside Podcast, Episode 23: Peaks and Valleys or, When Is a Recession Not a Recession?

4 Areas to Consider When Transitioning Employees to Working From Home

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As the effects of COVID-19 become our new reality, businesses that haven’t traditionally embraced remote employees, may find it difficult to keep their operations moving.  To make the transition less overwhelming, we assembled a handy checklist of actions to consider while adjusting to the new workplace reality.

  1. Organization
  • Access your staff members and/or roles that are able to work remotely, those that can’t work remotely, and those where remote work may be possible with some modifications.
  • Conduct an employee survey to determine the availability of computers that can be used for working remotely, as well as availability to high-speed internet access.
  • Create company guidelines covering remote employees, including inappropriate use of company assets and security guidelines.
  • Develop and conduct work-at-home- training for using remote access, remote tools, and best practices.
  • Develop a communications plan to involve remote employees in the daily activities of the organization.

 

  1. Security
  • Create and implement a company security policy that applies to remote employees, including actions such as locking computers when not in use.
  • Implement two-factor authentication for highly-sensitive portals.
  • If needed, confirm all remote employees have access to and can use a business-grade VPN, and that you have enough licenses for all employees working remotely.
  1. Staff
  • Institute a transparency policy with your staff and communicate frequently.
  • Check-in on your staff, daily if possible, to confirm they are comfortable with working from home. Find and address any problems they may be experiencing.
  • Make certain each staff member has reliable voice communications, even if this results in adding a business-quality voice over IP service.
  • Don’t attempt to micro-manage your staff. Remember their working conditions at home won’t be ideal, and they will need to work out their own work patterns and schedules.
  • Create a phone number and email address where staff members can communicate their concerns about the firm, working at home, or even the status of COVID-19.
  1. Infrastructure
  • Ensure that you have ample bandwidth coming into your company to handle all of the new remote traffic.
  • Make sure you have backups of your services so your staff is able to keep working in the event extra traffic causes your primary service to go down.

 

You may need to adjust or expand this list to match the specific needs of your firm and the conditions affecting your organization.  Use this list to get you started and to help guide you through the process.

How To Avoid Paying Taxes!

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At the beginning of every year, millions of taxpayers begin an annual ritual of financial reporting that we all know as filing income taxes. For most taxpayers, this annual activity is the only time they have looked at their financial picture since last year because of the anxiety and stress that filing causes. I thought about the angst around filings and considered three questions:

  • How many people understand taxes?
  • If people knew more about taxes would that alleviate some of the stress?
  • The answer to "How can I avoid paying taxes?"

A Brief History of Taxes in the US

The 16th amendment of the United States Consitution established the right for Congress to levy taxes on US citizens. In 1913 the amendment was ratified and The Revenue Act of 1913 was passed to create a tax rate of 3% of the amount over $3,000. When the act was passed less than 5% of the population were subject to the tax.

Over the past 100 years, the tax code has exploded along with the rates and number of citizens who pay. As of this writing, the top rate is 37% and over 50% of the population pays income tax.

How Tax Laws are Created?

Tax laws start by being passed in the House of Representatives. Upon passing, the bill is sent to the Senate so changes can be negotiated with the house. When both sides agree, the bill is voted on in the Senate and upon passing the bill will be sent to the President for signature.

Role of the IRS

The Internal Revenue Service is an agency of the Treasury Department. The IRS Commissioner reports to the Treasury Secretary, who is appointed by the President. Many consider the IRS villains and blame them for all tax woes, but the agency exists because of laws passed by Congress and signed by the President.

The function of the IRS is to interpret and enforces tax laws. They take the statutory laws and create the forms and rules necessary to administrate the law.

How taxes are calculated?

Your personal taxes are calculated by taking your total income which consists of:

  • Wages
  • Investment income
  • Business income
  • Retirement
  • Social Security

Your total income is then reduced by adjustments like student loan interest, IRA contributions resulting in adjusted gross income.

The adjusted gross income is reduced by your deductions, you can take the standard deduction or itemize if the total exceeds the standard amount. The result is taxable income; which is multiplied by the applicable tax rate less any applicable tax credits to determine your tax liability.

The tax liability is subtracted from amounts paid in during the year from withholding and estimated payments. The result is either a refund or a balance due.

"How can I lower my taxes!"

The comment that I hear at least once a week, after telling someone I am a CPA. EVERYBODY wants to pay less and receive a huge refund and are willing to do anything to receive "their money back. I have witnessed taxpayers attempt to deduct everything from pet expenses to the renovation of their primary residence to increase their refunds.

When I first began practicing, I really believed there was a magic bullet to make a lot of money and pay little in taxes. I eventually learned that periodic tax planning is the best way to reduce your tax liability and possibly increase a refund.

The Fool-Proof Way!

Tax planning is truly the best way to reduce your tax burden in the long run, but some people don't want to pay the fees associated with planning. Those prospects of mine usually get what I call the fool-proof way of tax planning:

Don't make ANY money and I guarantee you won't pay any taxes.