Make Money on Your Vacation

December 2nd, 2009

How could you possibly make money on vacation. Well, by saving tax dollars mean putting more money in your pocket. The IRS is actually pretty leanant when it comes to deducting travel expenses, you just have to have some sort of business purpose while having fun at the same time.

Fun Trips Can Save You Taxes

How would you like to deduct every cent you spend on vacation this year?  A client has and for the rest of this article, we will refer to him as Bob. Bob wanted to take a two-week trip around the United States.  He learned that every thing is much cheaper when you can legitimately deduct it.

Schedule all business appointments before leaving

Some people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible. That is not true. You must have at least one business appointment before you leave in order to establish the “prior set business purpose” required by the IRS.

The first thing that Bob needs to do is set up appointments in various cities such as Los Angeles, Newport  Beach, and Long Beach before he leaves. The best way to establish this is to put advertisements in the newspaper or make calls, looking for distributors. He could then interview those who respond when he gets to the business destination. It would be important for Bob to document this business purpose by keeping a copy of the advertisement and all correspondence.

Classify it as Business Travel

In order to deduct all on-the-road business expenses, you must be traveling on business. By definition, you are on business travel whenever you are sleeping overnight in a strange bed, while conducting business.

For example, Bob wanted to go to a regional meeting in Boston, which is only a one-hour drive from his home. If he were to sleep in the hotel where the meeting will be held in order to avoid possible automobile and traffic problems, he will be deemed to be on business travel. You don’t need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status.

Deduct all expenses for each day you’re away

For every day you are on business travel, you can deduct 100% of lodging, tips, shoe-shines, laundry and dry cleaning, car rentals, and 50% of your food. According to the IRS, no receipts are required for any travel expense under $75 per expense. The only exception would be for lodging.

For example, if Bob pays $20 for drinks on the plane, $7.95 for lunch, $12.00 for breakfast, $50 for dinner, he does not need receipts for anything since each item was under $75. You would, however, need to document these items in your diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation shall consist of amount, date, place and essential character of the expense. If, however, Bob stays in the Motel 6 and spends $42 on lodging, will he need a receipt? The answer is yes. You need receipts for all paid lodging.

Not only are your on-the-road expenses deductible from your trip, but also all laundry and dry-cleaning costs for clothes worn during trip. Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry cleaning receipt and have your clothing dry cleaned within a day or two of getting home.

Weekend days between business days are deductible

Interestingly, the IRS notes that if you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend.

For example, if Bob makes business appointments in Florida on Friday and one on the following Monday. Even though he as no business on Saturday and Sunday, he may deduct on-the-road business expenses incurred during the weekend.

The majority of your trip days should be business days

The IRS says that you can deduct transportation expenses if business was the primary purpose of the trip. The majority of the days in the trip must be for business activities. Otherwise, you cannot make any transportation deductions. This is an all-or-nothing proposition. Contact your CPA if you have any questions regarding this.

Say for instance Bob spends six days in Los Angeles. He leaves early on Thursday morning. He had a business meeting on Friday and meets with distributors on Monday and flies home on Tuesday, taking the last flight of the day home after playing a complete round of golf. How many days are considered business days?

All of them are business days!  Because it includes traveling – even if the rest of the day is spent at the beach. Friday is a business day because he had a business meeting. Monday is a business day because he met with prospects and distributors in pre-arranged appointments.  Tuesday is a travel day. So every day was deductible.

Also, because Bob accrued six business days, he could spend another four or five days having fun and still deduct all his transportation to Los Angeles. The reason is that the majority of the days were business days.  However, he can only deduct six days worth of hotels, dry cleaning, shoe polishes, and tips. The important point is that Bob would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible.

How’s that for vacation planning? If you plan it right and don’t mind doing both, you can save some tax dollars.

Lawrence & Associates, Orange County CPA & Accountant

Orange County Bookkeeping/Orange County Tax Preparation

Posted in Save on Taxes | 6 Comments »

Tax Planning

November 2nd, 2009

Tax planning is an important part of what happens at the end of the year when your business files your tax return. Throughout the year decision are made regarding the business and if made right can save you taxes.

What is Tax Planning?

Small business tax planning is looking at various tax options in order to determine how to conduct business and personal transactions so that taxes are eliminated or considerably reduced.
Usually business don’t think about planning until they are going to meet their accountant, but tax planning is an ongoing process, and good tax advice is a very valuable commodity. You should review your income and expenses monthly, and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you and changing all the time, especially with this economy.

Tax Planning vs Tax Evasion

Although, if done right, tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or fraud – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was some fraudulent intent on the part of the business owner. The following are four of the areas most commonly focused on by IRS examiners as pointing to possible fraud, and ones your CPA or Accountant should be aware of:
1. Claiming fictitious or inaccurate deductions on a return, such as a sales representative’s substantial overstatement of travel expenses, or a taxpayer’s claim of a large write off for depreciation when verification doesn’t exists.
2. Accounting irregularities, such as a business’s failure to keep adequate records, or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
3. A failure to report substantial amounts of income, such as a shareholder’s failure to report dividends, or a store owner’s failure to report a portion of the daily business receipts.
4. Improper allocation of income to a related taxpayer who is in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder’s children.

Overview of Planning Strategies

Your CPA knows countless tax planning strategies available to a small business owner. Some are aimed at the owner’s individual tax situation, and some at the business itself. But regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:
• Lowering the amount of taxable income
• Reducing your tax rate
• Controlling the time when the tax must be paid
• Recognizing any of the available tax credits
• Controlling the effects of the AMT (Alternative Minimum Tax)
• Avoiding the most common tax planning mistakes

When planning and putting strategies in place, you’ll need to estimate your personal and business income for the next couple years. This is necessary as many tax planning strategies will save taxes at one income level, but will create a larger tax liability at other income levels. You will want to avoid having your tax plan fail by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.

The effort to come up with exact estimates may be difficult and by its nature will be inexact.  The better your estimates, the better the odds that your tax planning efforts will succeed. Hidden within the Internal Revenue Code are valuable money-saving strategies overlooked or undiscovered by many business owners. At the same time there are misleading passages that have been the cause of millions of dollars mistakenly paid to the IRS.  

Lawrence & Associates, Orange County CPA & Accountant

Orange County Bookkeeping/Orange County Tax Preparation

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Tax Strategies To Save Even More

October 2nd, 2009

At Lawrence & Associates, CPA we try to come up with ways to save you taxes. Here are some not so traditional ways we have advised our clients to save taxes. We try to keep you informed and welcome any questions. 

Funding Your IRA With Previously Contributed Funds

This is definitely pushing the envelope but is allowed by the IRS.  If you don’t have enough cash to make a deductible contribution to your IRA by April 15th, here is how you can still take the tax deduction. And have until June 12th to make the full $5,000 contribution for 2009! Remember, extensions are not factored in to the due date of IRA contributions. To get started, all you need is a previously started IRA.
Start by having $6,000 distributed to you from your IRA on April 15th. Your bank is required to hold 20% for income taxes so you’ll actually receive $5,000. Once you have the $5,000, immediately deposit it back into your IRA. If you do this before April 15th it will count as your deductible contribution for the year. The best part of this is that you have 59 days to “make up” the withdrawal-or to be taxed. Simply deposit $6,000 into the same IRA account by June 12th to avoid taxes on the original $5,000 distribution made to you. This is a type of short-term loan from your IRA to make this year’s deductible contribution before the April 15th due date.
Not all banks realize it is required to withhold the 20% from the original $6,000 withdrawn from your IRA. There are many options, so get informed before you miss out on the full benefits of your retirement plan.

Have Your Landlord Pay for Improvements

This strategy relates to something we worked out for a client and saved them considerable tax dollars. Instead of paying for leasehold improvements at your place of business, you can ask your landlord to pay for them. In return, you offer to pay your landlord more in rent over the term of the lease. By financing your leasehold improvements this way, both you and your landlord can save money on taxes.
Ordinarily, you must deduct the cost of leasehold improvements made to your place of business amortized over 39 years. If the year your lease term ends you move to another location, you can deduct the portion of the improvement cost you have not previously deducted. This normal scenario won’t save you tax in the earlier years of the lease. Your landlord will have to put up the initial cash for the improvements, but you will cover that over time with increased payments in your rent. Because your landlord will be paying for the improvements, you will save tax early in the lease and your landlord will benefit as well!

How does this help the landlord? During the same time, your landlord will gain depreciation deductions for the cost of the leasehold improvements. When you leave, your landlord will still have the improved property to offer other future tenants. It is a great opportunity for a win-win situation giving you faster access to invested monies.

Using Home Entertainment to Increase Deductions

There are two basic kinds of entertainment expenses: Direct entertainment expenses and associated entertainment expenses.
If you entertain at your residence and it has a business purpose, and if the business takes place during the entertainment, then the cost of entertaining at your home is deductible as a direct entertainment expense. However, if the entertainment occurs immediately before or after a business meeting, the cost is deducible as an associated entertainment expense. These expenses are 50% deductible.
Many businesses are already enjoying this tax strategy and are benefiting from it with a more social climate for conducting their business.

Lawrence & Associates, Orange County CPA & Accountant

Orange County Bookkeeping/Orange County Tax Preparation

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Small Business Tax Saving Strategies

September 2nd, 2009

These are some of the biggest deductions that are often overlooked when small businesses prepare their tax return. They can provide huge benefit for increasing deductions and saving you taxes.

Increase Entertainment Expenses

An interesting way to save on taxes, that can be fun as well as rewarding, is to deduct entertainment expenses. Entertainment expenses are great deductions to add to your income statement and can save you money, however there are some important guidelines to think about when including them on your return.

In order to qualify, business must be discussed before, during, or after any meal deducted. The surroundings must be conducive to business discussion. For instance, a small restaurant would be an ideal location for a business dinner or meeting. Prime distractions are theaters, ski trips, golf courses, sports events, and hunting trips.

The IRS allows up to a 50% deduction on entertainment expenses. Good documentation of these expenses is required in order for the IRS to consider these deductions. Remember that the business meal must be arranged with the purpose of conducting specific business.

Automobile Deductions

An automobile is a big expense, especially for those of you who own more than one. The mileage reimbursement rates for 2009 are 55 cents for business, 14 cents for charitable and 24 cents for moving/medical miles. For the first half of 2008, the mileage reimbursements rates are 50.5 cents per business mile, 14 cents per charitable mile, and 19 cents per moving/medical mile. For the second half of 2008, the mileage reimbursements rates are 58.5 cents per business mile, 14 cents per charitable mile, and 27 cents per moving/medical mile.
If you own more than one car, another common way to increase deductions is to include both cars as a deduction. This is possible since the business miles driven determine business use. To figure business use, divide the business miles driven by the total miles driven. You can do this for each car driven for the business and can bring significant deductions.

This is simply a wonderful way to save, but remember, in order to be effective, a consistent mileage log should be kept. Consider meeting with a CPA to determine the most efficient way of tracking mileage and other costs.

Home Office Deduction

There are so many tax advantages to having a home office it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.
The IRS wants you to support these expenses. Try prominently displaying your home phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices.

Section 179 deduction allow you to immediately expense, rather than depreciate over time, up to $133,000 in 2009 worth of qualified business property that you purchase during the year. The key is “purchase” …it can be new or used. All home office depreciable equipment meets the qualification. Also, if you purchase more than $133,000 in equipment, you can expense the first $133,000 then depreciate the rest.
Make sure that before you start deducting all of these items on your return, that you have qualified for the Home Office Deduction. You should consider meeting with a CPA or Tax Accountant for further Home Office Deduction advice. 

Lawrence & Associates, Orange County CPA & Accountant

Orange County Bookkeeping/Orange County Tax Preparation

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More Tax Strategies to Help You Save

August 2nd, 2009

As CPA’s it is our job to save you tax dollars and inform you of opportunities available to do just that. This article provides some insight on tax deductions that are available that business owners may overlook.

$25 Holiday Gifts To Associates

Holiday gift are often overlooked when preparing tax returns. Whether you are an employee, a self-employed individual, or even a shareholder-employee in your own company, you can deduct the cost of gifts made to clients and other business associates as a business expense. The limit of the deduction is set at $25 in value for each recipient for which the gift was purchased with cash.

The Tax Court has allowed an independent salesperson to deduct gifts to buyers, even though the buyers’ employers prohibited the acceptance of such gifts. The Tax Court felt the gifts were not bribes but were a legitimate business expense. Because the gifts were small, less then $25 but totaling more than $3,000, the taxpayer was not required to keep receipt as proof. The entries in the salesperson’s journal was acceptable proof.

Can You Deduct Your Computer at Home?

There is an opportunity for saving more on your income tax return for individuals who purchase a computer and use it for work-related purposes at home. A Tax Court ruling a few years ago may give you a tax deduction on your computer you use at home. If you are an employee and want to deduct your computer, you first have to meet the requirement stating that the computer is used for convenience and as a condition of your employment. As a result of the Tax Court ruling, if your employer limits your access to a computer at work for security reasons but still requires that the work be completed, then you can deduct the portion of the cost of your computer that is allocable to business use.

Get Dinner From Your Boss

Lets say you are in a partnership or are a shareholder-employee in a regular C or S corporation, and you have to work overtime. In this unfortunate event, your company can, on occasion, provide you with dinner. The cost of such a dinner is 100% deductible for your company, and you don’t even have to pay personal income tax on the value of the meal.

And on top of this, your company does not have to provide this fringe benefit to other employees who are working late. But your company does not have to directly pay you for the meal. Instead, it can provide you with supper money and in order for this to pass IRS scrutiny, the amount of dinner money has to be reasonable. If the IRS decides that the amount of money you received was unreasonable, the whole amount will be considered taxable personal income and will not be deductible.

We will be glad to answer your questions concerning deductible dinners and any other questions you have, so call today so we can help you start with this Section 132 “de minimis” fringe benefit.

Lawrence & Associates, Orange County CPA & Accountant

Orange County Bookkeeping/Orange County Tax Preparation

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Few Small Business Tax Misconceptions

July 11th, 2009

One of the biggest issues facing small businesses today are the numerous obligations to federal, state, and local tax agencies. They lose track of the different rules and develop misconceptions about the very complicated tax code that seems to be in a constant state of flux. Creating exceptions for certain groups has resulted in a steady stream of new and revised tax laws.

Preparing your taxes and strategizing how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Unfortunately, the ever changing nature of the tax code generates a lot of misinformation that also leads to costly mistakes. Here is a list of some common small business tax misperceptions that we have seen with our clients:

1. You can immediately deduct start-up costs.

Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for marketing, travel, equipment, research, or training. These costs are generally capital expenses and must be capitalized.

You recover costs for a particular asset through depreciation. You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized.

However, there is a catch. In order to take advantage of the immediate deduction you must spread out the remainder of your start-up costs over 15 years.

So the immediate deduction is a good option for businesses with lower start-up expenses. If you’re startup expenses are greater than $14,000, then you’ll do better by not taking an immediate deduction but spreading your start-up costs over 5 years.

2. I won’t get audited if I overpay.

The IRS doesn’t care if you overpay and they won’t pay attention to such behavior. They only care if you pay less than you owe and you can’t support your deductions. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to “Audit Proof Yourself” is to properly document your expenses and make sure you are getting good advice from your tax accountant.

3. If I incorporate I will pay less Federal Taxes.

Aside from health insurance, deductions for the self-employed, whether sole-proprietors or S Corps, are pretty much equivalent to corporate deductions. For many small businesses just getting started, being incorporated is an unnecessary expense and administrative burden. Start-ups can spend a thousand bucks in legal and accounting fees to set up a corporation, only to determine shortly after that they want to make some changes that will affect their personal taxes.  Plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income. There is a time and place and stage in your business when incorporating makes sense.

4. Must take the home office deduction for a home based business in order to claim other related expenses.

You are still eligible to take deductions for business related expenses including supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

5. Filing an extension on your taxes is an extension to pay taxes.

Filing extensions enable you to extend your tax filing date only. If you do not pay taxes on time, penalties and interest begin accruing from the due date of the actual return.

6. If you are a part-time business owner you cannot set up a self-employed pension.

If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.

Besides avoiding these pitfalls, possessing basic knowledge of how the tax system works is also beneficial.

Lawrence & Associates, Orange County CPA & Accountant

Orange County Bookkeeping/Orange County Tax Preparation

Posted in Tax Misconceptions | 3 Comments »