Category Archives: Tax Advice

How Small Businesses Can Save for the 2018 Tax Bill

If we’ve heard it once, we’ve heard it a hundred times: “I cannot believe how much money we have to pay this year for business taxes.”

That is a sad refrain but one that is all too common. Small business owners fail to save money for their previous year’s tax bill and get slammed the following April. Then, they are in debt to the IRS. Thus, begins a vicious cycle.

Your small business taxes could cause you problems for you the next year. But there are smart ways to save to pay your tax bill.

According to www.smallbizdaily.com:

Don’t let it happen, year after year. A smart small business tax strategy can be implemented by you and your CPA and/or financial advisor.

The biggest concern for small business owners is taxes. Almost half (45%) of small business owners in the survey say taxes are a major worry for 2018, and 30% say tax laws had a negative effect on their business last year.

Now is the time to develop a smart, small business tax bill paying strategy. Here are five ways small businesses can save money from their earnings and pay all or some of the tax bill owed from 2018:

  1. Take a percentage out of each check and save it: This is the simplest and easiest way to save. Call your financial advisor or accountant and find out what percentage you can expect to pay this year. Here at A.K. Burton, PC, we can give you an estimate using your tax returns and your current earnings. From that amount, you can figure a percentage you can use for deducting from each paycheck. For instance, if you paid 30% taxes last year, take $30 from each $100 that you make. Then, deposit that in a separate bank account and don’t touch it.
  2. Pay the IRS in installments: The Internal Revenue Service (IRS) accepts payments, year-round, of taxes owed. Your small business accountant can create estimated payment installment coupons for you to use quarterly. You send them in once you have the amount to pay. Just keep in mind, even if you have more or less than the installment amount, you can still send it in. Every payment reduces your amount due on April 15. Pay what you can. It will be a relief.
  3. Do an SEP (Simplified Employee Pension Plan): SEP is a tax-deferred retirement savings plan. It is specifically for self-employed and small business owners. Using a simplified employee pension plan, a small business owner makes tax-free contributions to an IRA (individual retirement account) for each employee. SEPs are funded only by the employer using tax-deductible dollars. (Roth or post-tax contributions are not available in this plan.) Employers may contribute up to 25% of each employee’s annual compensation. Self-employed persons may contribute up to 20% of their net self-employment earnings towards their own account.
  4. Hire a CPA, EA or a Financial Advisor: Let’s face it: running a business is a heavy-duty job and takes many hours each day. Small business accounting also takes a lot of time and effort. Save yourself some time and effort. Hire a licensed Certified Public Accountant (CPA), here at A.K. Burton, PC. Then, have us figure out a tax-strategy, implement it in your accounting program and monitor your company during the fiscal year to make sure it is working or if it needs adjustments.  

January is only a few weeks away. Even with the end of the year so close, you can make all these changes before your New Year’s eve bash. Yes, it can be done that quickly.

Before you make any moves, you may want to consult the experienced and licensed financial advisors at AK Burton, PC. Our CPAs serve the Washington, D.C.metro area including our office in Bethesda, MD. We can meet with you and your staff to plan a coherent and effective tax strategy. Contact us at (301) 365-1974 for more information or email info@cpa-maryland.com.

Not too late to Plan: Year End Tax Planning

Fall is a beautiful time of year. Holidays are around the corner and taxes are the last thing you want to think about. However, certain events can drastically change your tax liability. Now is the time to plan for these changes so that a large tax bill doesn’t sneak up on you.

Just like the leaves changing, things change during the year.A  job promotion, new job, retirement, adding a new family member, or maybe an inheritance are some examples of significant events that may impact your taxes.

tax advisor AK Burton

Here are a few reasons to contact us at A.K. Burton PC for tax planning services:

  1. A change in employment. Any change in your earnings should have you reaching out to our office to discuss the best course of action. For example: when hired, you fill out form W-4 to set your allowances. Do you want one, two, or what does allowances even mean? By discussing the matter with us, we analyze and make the best decision with you.
  2. Form of compensation. For example: a change in how your money is earned such as from an employee earning income that is reported on form W2 to an independent contractor being compensated by form 1099-MISC triggers a significant tax event. Contact our office to discuss the steps that you need to take as an independent contractor. One of those steps is making estimated tax payments based on your income.
  3. Retirement. If you’re looking at retiring it is essential to contact our office and discuss what the change in income will be and what steps you’ve taken so far in the process. There are many options concerning your retirement and tax liability. Be especially cognizant of required minimum distributions once you turn 70 ½ years old. These distributions are required and the withholding that has been set up in the past may not be enough to avoid a tax liability. Contact our office to plan ahead and work to avoid unnecessary surprises.
  4. Capital gains. A large gain from an investment may trigger a nasty surprise depending on your tax bracket and other income. Any significant change in investment income should be discussed with your tax adviser.
  5. Investment property. There are many taxable situations that occur when dealing with a rental property. Many tax rules are not understood by other professionals to the extent of our staff’s knowledge. Before making the decision to sell that condo you’re renting out; contact our office and double check what tax consequences may ensue. It only takes minutes to shoot us an email or give us a call. You’ll be happy you did.

These are only some of the reasons to engage in year end tax planning with your tax advisor. Any significant change in your life should be discussed with your advisor as soon as possible. Year-end tax planning is a great way to wrap up the year and prepare for filing your taxes. At A.K. Burton, PC we specialize in year-end tax planning because it is a service our clients consistently rely on.

A.K. Burton, PC, which serves the Washington,D.C. and Bethesda, MD area, has experienced and licensed individual financial advisers who can help you with your year-end small business tax preparation. Contact us at (301) 365-1974 for more information or email us at info@cpa-maryland.com.

 

Ask your Financial Advisor: Is an LLC the Right Fit for my Small Business?

Fall is here. Leaves are falling. Pumpkins are out. Halloween Costumes are on sale. Bags of candy are available. Coffee shops are offering pumpkin spice latte’.  

What a great time to get an LLC for your business!

Okay, maybe there is no correlation with fall. But, it’s still a great time of year to set up and LLC. Let me explain: Tax Year 2018 ends December 31, so there is still time to get it done and affect your tax returns for good, perhaps.  

small business LLC AK Burton PC

First, let’s explain what an “LLC” is: An LLC (Limited Liability Corporation), according to www.Chron.com, is “owner’s liability protection against company actions and debt similar to a corporation. However, a LLC’s management can be set up as a corporation or partnership for management flexibility and taxation purposes.”

Second, the benefits of having your small business LLC designation are quite attractive:

  1. Have your taxes withheld throughout the year: Instead of having to pay a lump sum at tax time or installments throughout the year, you can have your taxes withheld throughout the year. An LLC gives you the option to have a “Flow-through Entity” meaning you become an employee of your company and pay taxes from each paycheck.     
  2. A “One-person LLC Form”: Your business is taxed as a sole proprietorship. This adds limited personal liability exposure but keeps crucial tax benefits such as the owner compensation with “distributions of profit” taxed at the individual owner’s lower marginal tax bracket (tax rate applicable to the next dollar of taxable income earned); and pass-through of business losses to the owner.
  3. Estate Planning: An LLC can also be placed in a Living Trust. This can be complex so consult with your tax attorney.
  4. Less paperwork: An LLC is less time-consuming once you have completed the forms and filed them. The money will be taken out of payroll. Fewer headaches and less paperwork means you can tend to your business.

If you decide that an LLC is the best move for your small business, you can file the forms, called “Articles of Organization”, in your state. Filing fees range from $100-$500.

Before any major financial or business decision like filing Articles of Organization to set up your LLC, give us a call. We will consider your unique needs and discuss if an LLC suits you. A.K. Burton, PC specializes in helping our small business clients structure their business to maximize benefits to the parties involved. Having an attorney/CPA on staff allows us to give our clients the most value for their money spent. Even after we have set up your business, we are always serving your business needs.

From filing the paperwork to form your business, filing taxes, business advice, and closing your business; we are a one stop shop. We serve the Bethesda, MD and Washington, D.C area. Contact us at (301) 365-1974 for more information or email us at info@cpa-maryland.com.  

It’s Tax Day Already?: Income Tax Preparation for Procrastinators

So, it’s “Tax Day” and you are still rifling through your tax documents form last year. The baby is crying. Your spouse is irritated that the papers are still strewn all over the kitchen table. They haven’t been able to eat at that table for weeks since you last poured all your papers out on it. Still nothing has been done.

Oh, did we say that it’s “Tax Day” today?

You are really, really late. In fact, your accountant hasn’t even heard from or seen you since last year.

You are hours away from missing the deadline to send your tax return to the IRS. Your family is sick of seeing a pile of unorganized receipts and statements gathering dust on the kitchen table. And, finally, your accountant is looking up your name in the local paper obits to see if you’re still around.

You’re late to file. All seems lost. Will you ever recover from this incredible example of “Tax Filing Procrastination”?

Actually, all is not lost and, yes, you can recover. However, you need to act now. Here are Five Ways to Do Your Tax Preparation and Filing after you have passed the Tax Day deadline:

  1. Don’t panic: Losing your cool and bashing your head against the wall only compounds the mistake. Admit to yourself and everyone in your household that you are late this year filing your/their tax returns. There may have been circumstances that caused it (i.e. illness, surgery, family tragedy, etc.) or you may have just been flat-out neglectful. Whatever the cause, admit to it and then calmly get your tax filing plans in place.
  2. Organize your documents: You cannot file accurately if you don’t have all of your previous tax year papers organized. Now is the time to staple them all together or photograph them and store them on a flash drive. Clear the kitchen table and place all these documents in a hard file folder and/or electronic file.
  3. Contact the IRS: This is the scariest step to do, we know. However, the Internal Revenue Service has customer service people on call 24/7/365 to assist you with your questions to help you with your income tax preparation. Give them your contact information so they can note that you will be filing late.
  4. Request a Tax File Extension: Filing an extension pushes the due date for your tax returns up giving you time to get it completed. Just keep in mind that and extension for you to complete your income tax preparation protects you from likely possible late-filing penalties. Those penalties can be five percent (5%) of the amount due with your return for each month that you’re late.
  5. Consult with your licensed bookkeeper/accountant: Your accountant can be your best friend during these high-stress times. You may believe you’re the only client who has ever done this, but we can assure you, we have seen it all! So, get your documents in order and bring or send them to us. We recommend that you set up an appointment with your trusted accountant to help you with tax preparation,tax filing and, most importantly, communications with the IRS. You need to make sure all of your communications with the IRS are documented and your accountant will do that for you. We are your advocate.

So, as you can see, procrastination in filing your tax returns is not the end of life as we know it. You do have a “second chance.” Just get moving now and try not to let it happen in the future. (While this blog may be helpful, we also advise that you read the IRS specific instructions if you are filing late.)

If you need help with late tax preparation and tax filing, contact our A.K. Burton, PC offices in Bethesda, Maryland. Our experienced and licensed tax lawyers and accountants can answer all your questions and also assist you with your communications with the IRS. We serve clients in the Washington, D.C., Bethesda, Maryland and Northern Virginia region.

Satire Alert: The IRS is On Its Way or How to Really Mess Up Your 2018 Income Tax Preparation

You have read many blogs and articles, here and elsewhere, that give you steps 1, 2, 3, etc., on how to save money, pay your tax bill, incorporate your business. They all have tried and true advice which you may have used in your business and personal finances.

Blah, blah, blah…

We know that they can all be boring after awhile. So, to break up the boredom of your typical “How-to” finance article, we are going to offer you a satirical,  tongue-in-cheek Guide to Messing Up Your 2018 Income Tax Preparation:

  1. Don’t organize any of your documents: Be sure to pile them in a shoebox, willy nilly, with absolutely no organization whatsoever. Make sure they are ripped, have nothing noted on the receipts and are the wrong year.
  2. Forget to include statements: Credit cards, payroll, expenses. They are so much trouble to print.
  3. Travel expenses mileage: Don’t use mileage records during the taxable year, just make up a mileage number! It’s just fuel after all.
  4. Write all your contractors expenses on a piece of paper: Instead of submitting contractor expense receipts, just use a notepad with amounts on it. No dates or receipts needed. Too much trouble!
  5. Don’t ask for any receipts for donations to non-profit/charitable organizations: Donations are just a nice thing we all do. Sure, you may owe less to the IRS if you accepted them or kept them, but you did it for a good cause. Who needs to brag about it, after all!?
  6. Turn in all your tax documents to your accountant on April 14: Everyone is so persistent in getting the tax filing postmarked by April 15, Tax Day. That is so arbitrary! Besides, your accountant is working 24 hours a day anyway, from January 1 to April 15. They won’t mind one more client bringing their files in at the last minute. They should be happy to be doing your taxes, anyway. It’s job security, right? Be sure your shoe boxes have your last name and phone number on them.
  7. Argue with Your Accountant over their fee: Your accountant is charging that much per hour to add up numbers? Good grief that is highway robbery. All they need is a calculator and number two pencil and they got it made. Make sure they know you can do it better and be late in paying the bill.
  8. Forget to pay the IRS bill: They had the temerity to charge you even more after you have paid them all year from your paychecks!! You’ll show them. Yeah, pay late. That will scare them. Mean old government agency.

Now, do you feel better? Actually, no. This was after all, satirical,  tongue-in-cheek blog not meant to be taken seriously. You should do EVERYTHING OPPOSITE to what you read above.

After all, there are serious legal complications if you fail to comply with the tax laws. The IRS has an ITA (Interactive Tax Assistant) online which can help you with some legal questions you may have.

In fact, the best tax advice, besides doing exactly opposite of 1-8 above, is to contact our A.K. Burton, PC offices in Bethesda, Maryland. Our experienced and licensed tax lawyers and accountants can answer all your questions and also assist you with your income tax filing preparation. We serve clients in the Washington, D.C., Bethesda, Maryland and Northern Virginia region.

How Smart Tax Preparation Can Help You Get A Better Refund in 2018

Everyone is wondering: Now that the new tax laws have passed, will I be paying the IRS more or less in 2018?

My answer to that question is this: I have no Idea. It’s impossible to know or to even contemplate. Even with the new tax laws, everyone’s tax return situation is different. You may get more money back this year or you may pay even more money this year.

Yes, it’s complicated.

This year is done. But you can prepare for next year.

Of course, it all starts with your documentation and preparation. Here are Smart Ways Your Tax Preparation Can Improve Your Refund in 2018:

  1. Reconsider how you file: Do you always file jointly if you’re married? That is always the best way, right? Actually, no it isn’t. Don’t do the “auto-reply” on your filing. Married-filing-jointly is not always the best way. If you do married-filing-separately instead, you may get a larger return. AGI or Adjusted Gross Income determines if some deductions can be used for medical and certain other expenses. Filing separately may gives each spouse a lower AGI. So, don’t automatically file jointly. Do both jointly and separately if there are a fair number of medical expenses and COBRA payments.
  2. IRA Contributions: You can still take out an IRA contribution up until April 15thfor the previous You can then claim it on your return by filing early and then claiming the credit on your return. You can file early and use your tax refund to open the traditional IRA account. Just remember that it will reduce your income and you must be at least 50 years old. (Check the IRS guidelines on IRAs for detailed rules.)
  3. It’s all in the timing: There is an old saying from the famous golfer, Arnold Palmer that “Timing is everything, in life and golf.” It’s everything in tax filing with the IRS, too. If you pay your mortgage payment by December 31, you improve your chances of getting a larger refund. Also, schedule medical appointments by the end of the year and pay those bills before January 1, too. Keep in mind that your mortgage payments and medical expenses are still deductible expenses. They will certainly increase your refund.

These are just three basic but crucial ways to increase your refund in 2018 and beyond. However, it all starts now. Our best thought on this topic: See your licensed accountant or tax adviser. They can give you the best advice based on experience and knowledge of tax laws.

A.K. Burton, PC, which serves the Washington,D.C. and Bethesda, Md area, has experienced and licensed individual tax advisers who can help you with any questions you have on the new tax laws and how you should file. Contact us at (301) 365-1974 for more information or email us at info@cpa-maryland.com.

 

Ten Tax Preparation Things Your Small Business Can Do Now

This year is almost over.

In fact, by the time you read this blog, 2018 may have already arrived. Christmas has passed, the New Year’s parties have ended, school has reopened and regular life has returned.

Ho hum…

Well, I hope you had a safe and enjoyable holiday.

But, now that the New Year has arrived, I am going to bring up a topic you need to consider and now: Taxes. Yes, taxes. Tax season has just begun for small businesses and you can do something you may have never done before as a small business owner or an employee who works the accounting department: you can get ahead of the game.

Helping you and your small business be smart and successful in your bookkeeping and accounting is one of my own accounting firm goals. So, here are Ten Tax Preparation Things Your Small Business Can Do Now:

  1. Create a checklist of what you need: This checklist can be shared, such as on Google Documents, among you and your employees. It is a good way to keep updated on each item. (An excellent tax preparation checklist can be found at H. R. Block.)
  2. Find last year’s tax return: This will help you with deductions and other facts. Some businesses have the same deductions each year. It is also a legal document that may help you stay accurate for this year’s return.
  3. Balance Sheet: Your IRS tax return is based on income and expenses. It is that simple. So, you will need a balance sheet showing gross receipts, expenses and assets. It is an excellent one-glance document summarizing your past year.
  4. Asset purchases: Your business equipment can be included in your return. Some assets may written off using depreciation deductions for a number of years. For instance, if your company purchased new laptops, printers and cell phones for employees, they can be added on your tax return. Use receipts for each purchase and have them available for your accountant.
  5. Payroll Records: Payroll is, for most businesses, the largest tax deduction of all. All full-time, part-time employees, temporary employees and subcontractors’ pay should be included.
  6. Asset Dispositions: If your small business sold any depreciable assets, you will need to calculate gainsor losses on the sales. You will need a description of the asset, sale date, asset price, sale expenses and accumulated depreciation.
  7. Business vehicle(s): This may be a crucial deduction as most small businesses have fleet and/or service vehicles. You will need to get the total miles driven for business and commuting miles. (Personal mileage is not allowed to be deducted.)
  8. Credit card statements: Many small business owners use a company credit card to purchase gas, lodging, office supplies, business meals and other pertinent business purchases. The entire statement of the year’s credit card purchases need to be submitted. (Make sure that if any personal purchases were made with that card that they are marked as “personal” and not included in the business tax return.

This is a great start! In fact, if you get these all compiled and sent to your accountant, you may be able to file your federal tax return early and know how much you owe. (You may have to pay in installments, but at least you will know how much you owe and can budget it.)

It seems too early, to many small business owners, to be tackling their tax records and preparation in January. Yet, most owners will tell you that getting their tax preparation done now is a relief. Then, they can get on with running their business.

A.K. Burton, PC, which serves the Washington,D.C. and Bethesda, Md area, has experienced and licensed small business tax advisers on staff. If you need more advice on business and individual tax planning, contact us at (301) 365-1974 for more information or email us at info@cpa-maryland.com.

 

How to Choose the Best Tax Advisor

It’s only mid-way through the fall but it’s not too early to be thinking about your tax returns for next year.

In fact, now is the time to be thinking about your personal and business tax returns especially if you have had issues in the past and want to do it right or better this time. Your tax records and tax filings are too important to be done just by anyone, including yourself, who is unfamiliar with tax laws, deadlines and forms. It could be a serious financial and legal mistake to do it on your own without any advice.

So as the holidays draw closer, begin the search for a tax advisor. Here are Five Things to Consider When Choosing a Tax Advisor:

  1. Relevant Industry Experience: No tax advisor can know everything about every industry. Make sure you are comfortable with the amount of experience the tax advisor has with your industry. Don’t be afraid to ask the advisor if he has other clients in your industry and how long he has been doing work for them. The accounting firm partners should be able to tell you if they have enough experience to handle your case. If not, ask them to send you to a firm that can do it.
  2. Five-year Minimum experience: The senior member should have at least five to ten years of experience in completing business tax returns. Also, better to find a larger accounting firm with a variety of tax advisors. This means that the accountants have had diverse experiences with a variety of industries.
  3. Certified Public Accountant (“CPA”) Designation: As a business owner, your tax advisor should be a CPA at a minimum.  You can also choose an Atty/CPA as your tax advisor.  An Atty/CPA is a dually designated individual who is both an Attorney and a CPA and is generally more knowledgeable than an advisor who is just a CPA.  Either way make sure you have one or the other.  As a business owner you cannot afford not to.
  4. Audit Representation: IRS audits are a fact of life. Even though IRS audits are down recently, you never know and cannot control whether they will audit you next. Even the most honest among us have had to go through the stress and endure the headache of having an IRS auditor reviewing our tax returns. It is, then, crucial for your tax advisor to agree to represent you during any and all audits. They can answer questions, find documents and, most importantly, advise you on any issues druing the audit. You do not want to go through an audit alone. Make sure your tax advisor is there every plodding step of the way.
  5. Fees and Fee Structure: Before you sign up with any tax advisor, find out what they charge for their services. Make sure that you are comfortable with how and what they charge. Being organized with your business records can help prevent your Accounting Bill from getting out of control.  Quicken, Quickbooks, Mint or other accounting programs can help maintain your records in reasonable workable shape. Any paper documents should be organized by type and date. Avoid the “shoebox style of organization” which forces advisors to spend hours (and your money) trying to put it all together. You will save a lot on time and fees (and bad will) by organizing your documents.
  6. Location: With the advent of the internet and the 21st century, your tax advisor does not have to be a few blocks down the road, though being local saves on expenses, especially if you are audited. They can be in another city or state. However, if you have multiple businesses that require a lot of attention from professionals, then you will probably be better served by having someone local who can drop by and advise you on a more frequent basis and keep abreast of your local issues as well.

Yes, it seems too early to be talking about tax advisors, but you may already be rethinking that after reading this blog. That’s good because the next quarterly filing is coming up in January. Don’t go it alone. Find a licensed and experienced tax advisor today.

A.K. Burton, PC has experienced and licensed tax advisors on staff. If you need more advice on business and individual tax planning, contact us at (301) 365-1974 for more information or email us at info@cpa-maryland.com.

What to do if Investment Losses Hurt Your Finances

“Buy low, sell high.”

It’s a tried and true investment philosophy. Every stockbroker and financial advisor proclaims it.

Unfortunately, investing in the stock market also means losing money-real money. Every honest stockbroker and financial advisor also tells their clients to be prepared for it, no matter what the insiders say or who is in the presidency or congress. Losses happen.

financial losses A. K. Burton, PC

So, how can you handle investment losses? Does it spell financial ruin? Sell it all to recoup your losses? Stop investing entirely and move to Costa Rica?

No, that is desperate and rarely smart. Here are Five Tips to Handle Investment Losses that Could Hurt Your Finances: 

  1. Accept that investment is a risk: Your stockbroker or financial advisor does not control the market. It is completely out of their hands and quite unpredictable. So, accept that any investment you make is a risk. You will win and lose. If you cannot accept that truth, don’t get involved in it as it will only bring disappointment.
  2. Claim your investment loss as a “Realized Loss”: This happens when you sell an investment at a lower price than you paid for it. For instance, you may make $1,000 in capital gains but lose $4,000. You may not pay taxes on the $1,000 but your net loss may be used to offset income and you may be able to claim it this year and future years as a loss. (See your licensed financial or tax advisor for more details.)
  3. Avoid making a “Wash Sale”: If you sell a stock at a loss, only to buy that exact stock back during a 30-day period, it is considered a “wash sale”. If you do that, you may lose the tax benefits of it. Badly-performing stocks you’d like to sell for tax purposes but own again later, you should wait until the wash-sale period ends before buying them back. Bottom line: Cut your losses and move on. Your losses will lower your tax burden and can be carried forward for gains and income in the future.
  4. Investment in Bankrupt Companies: This one is easy-well, sort of. If you invested in a company that has filed for bankruptcy and closed its doors, you can claim a total capital loss on your tax returns. However, the IRS will need documentation from you on why the stock is now considered worthless. So, make sure you have documents on when it became worthless and that it is of zero value.
  5. Be efficient in taking losses: Do your best to document and take your investment losses in the most efficient and ethical way possible. The IRS knows and accepts tax losses as a part of doing business in the fickle world of tax investments. Your tax bracket also is a factor in taking losses. For instance, if you are in the 10% or 15% tax bracket, you are not liable for any losses. The main point here is this: keep accurate documentation of all losses so you and your tax advisor have all the information they need to take advantage of all tax benefits coming to you when your risk goes awry. (Please refer to www.irs.gov)

Investment losses can be painful and heartbreaking. However, it does not mean bankruptcy nor does it mean that you depart the investment world. A smart investment loss strategy that you can develop with your financial and tax advisors makes all the difference and will help in the short- and long-term.

Tax and investment advice is one of the many services we offer our clients at A.K. Burton, PC. (http://cpa-maryland.com/services/accounting-services/) Our experienced and licensed staff can help you, your family and your business make smart tax and investment decisions. Call us at (301) 365-1974 for more information or email us at info@cpa-maryland.co

Tax Write-offs that Require More Scrutiny

There is a “Seinfeld” episode where Kramer kept advising Jerry that he can use his personal expenses as “write-offs”. Finally Jerry, after hearing Kramer talk off the top of his head about taxes and obviously not actually understanding the topic, says credulously, “You don’t even know what write-offs are, do you Kramer?” Kramer then looks down, sheepishly, and nods his head “no”.

Kramer’s reaction is actually pretty typical. Most people, even though well meaning, have no idea what is a “tax write-off” and what isn’t. They may think something, such as a business meal or an office equipment purchase, are tax write-offs and thus it means they will pay less in business income taxes. But, that may a mistake…a very costly mistake.

Kramer and Seinfeld

So, to keep expectations down, help you to make better small business buying choices and to keep the IRS off your back, here are Five Tax Write-Offs that Require More Scrutiny:

  1. Business Clothing: Generally, to be deductible, clothing must be required for work and not appropriate for every day wear. Uniforms required for work and protective clothing are obvious examples.  Less obvious are items such as polo branded shirts with the Company Logo which may be considered company “uniforms” and deductible as such.  Clothing such as blue jeans even though functional as work clothes are not deductible since they are not part of a uniform and are appropriate for every day wear.
  2. Business Meals & Entertainment with Clients: This one is the most-abused and most misunderstood. Business meals or an entertainment event are tax-deductible if – (i) you are meeting with a client or potential client and (ii) business is discussed before, during or after the meal or entertainment event.  More over only 50% of the expense is allowable as a deduction.
  3. Cell Phone Expense: This one seems to be a definite tax write-off to many small business owners. How can it not be, right? Well, the IRS considers cell phones to be both business and personal use. Only the business part of the expense can be written off, so you have to calculate the percentage of business calls and deduct only that cost.  There is also an alternative view – if a cell phone is an absolute necessity to your business – then having the phone could be considered an ordinary and necessary business expense for your business – and the deminimus personal use considered an inconsequential working fringe.
  4. Business Vehicle Use: Many small business owners use their personal vehicle for meeting clients, traveling to job sites and attending company meetings. A vehicle can be used for thousands of miles in a fiscal year. However, only the business mileage can be deducted. If you have your office outside of your home, commuting to work is considered personal mileage and not deductible. It is a good idea to keep a mileage log for every business trip so you can be accurate in your business expense records. (There are several apps that can be used for just such record keeping.)
  5. Charitable Organizations: Unfortunately, not all non-profits are equal. That is, they have not been designated by the IRS as a “tax-exempt organization”. (We covered how an organization can become tax-exempt in a previous blog.) There are some social and civic charities which are not 501 c (3), for whatever reason, so any donation to them is only out of your generosity and cannot be counted as a tax write-off. Be sure to check that the organization is tax-exempt before donating to them. Most national charities are known by their brands and are tax-exempt (i.e. The Salvation Army, March of Dimes, etc.) but you can find out on their website or by checking at charitycheck101.org.

There are even more supposed “tax write-offs” we can cover in another blog. Just be sure to call a licensed tax professional or do your own research before assuming your small business expense is going to save you money on your next year’s tax returns. You may be making a serious and expensive mistake.

For more information and experienced business and personal tax advice, contact a professional tax advisor at A. K. Burton, PC, at (301) 365-1974 for more information or email us at info@cpa-maryland.com.