Corporate Tax

Choosing the Right Business Structure

 Out of all the choices you make when starting a business, one of the most important is the type of legal structure you select for your company. Careful consideration of which structure is right for you is crucial because it will have implications for how the IRS taxes your business profits. It’ll also determine whether your personal property is protected when others demand money from your business. Other considerations, including the management of the new business and your long-term plans for it, come into play as well.

It’s not a decision to be entered into lightly, either, or one that should be made without sound counsel from business experts. Mark Kalish, co-owner and vice president of EnviroTech Coating Systems Inc. in Eau Claire, Wisconsin says it’s important for business owners to seek expert advice from business professionals when considering the pros and cons of various business entities. Usually a business owner chooses either a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation. While some businesses choose to operate as cooperatives. There’s no right or wrong choice that fits everyone. Your job is to understand how each legal structure works and then pick the one that best meets your needs. The best choice isn’t always obvious. You may, after reading this section, decide to seek some guidance from a lawyer or an accountant.

For many small businesses, the best initial choice is either a sole proprietorship or, if more than one owner is involved, a partnership. Either of these structures makes good sense in a business where personal liability isn’t a big worry – for example, a small service business in which you are unlikely to be sued and for which you won’t be borrowing much money.

Cooperation Types

 A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more tax preparation services than the sole proprietorship or the partnership. Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and generally at the state level. In addition, any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns.

C Corporation

A corporation is a separate legal entity set up under state law that protects owner (shareholder) assets from creditor claims. Incorporating your business automatically makes you a regular, or “C” corporation. A C corporation (or C corp) is a separate taxpayer, with income and expenses taxed to the corporation and not owners. If corporate profits are then distributed to owners as dividends, owners must pay personal income tax on the distribution, creating “double taxation” (profits are taxed first at the corporate level and again at the personal level as dividends). Many small businesses do not opt for C corporations because of this tax feature.

A C Corporation has the widest range of deductions and expenses allowed by the IRS, especially in the area of employee fringe benefits. A C Corporation can set up medical reimbursement and other employee benefits, and deduct the costs of running these programs, including all premiums paid. The employees, including you as the owner/shareholder, will also not pay taxes on the value of those benefits.

 S corporation

Once you’ve incorporated, you can elect S corporation status by filing a form with the IRS and with your state, if applicable, so that profits, losses and other tax items pass through the corporation to you and are reported on your personal tax return (the S corporation does not pay tax).

The “S” also refers to an IRS code section. This type of taxation, the S election, allows the shareholders to be taxed only at the individual level instead of at both the corporate and individual level, thus avoiding the double taxation like the C Corporation. There is no federal income tax levied at the corporate level, unlike C Corporations which are taxed at both the corporate level and the individual level, thus earning the description “double taxation.” S Corps are favored by many business owners for their single taxation (as opposed to the double taxation of a C Corp) is limited liability protection – especially with a Nevada corporation with charging order protection extended to corporate shares – make the S Corp an attractive entity choice.

 Non-profit Corporation

A Nonprofit corporation is a special type of corporation that has been organized to meet specific tax-exempt purposes. A business organization that serves some public purpose and therefore enjoys special treatment under the law – nonprofit corporations, contrary to their name, can make a profit but can’t be designed primarily for profit-making.  To qualify for Nonprofit status, your corporation must be formed to benefit: (1) the public, (2) a specific group of individuals, or (3) the membership of the Nonprofit.

Unlike a for-profit business, a nonprofit may be eligible for certain benefits, such as sales, property, and income tax exemptions at the state level. The IRS points out that while most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit at the state level doesn’t automatically grant you an exemption from federal income tax.

Another major difference between a profit and nonprofit business deals with the treatment of the profits. With a for-profit business, the owners and shareholders generally receive the profits. With a nonprofit, any money that’s left after the organization has paid its bills is put back into the organization. Some types of nonprofits can receive contributions that are tax deductible to the individual who contributes to the organization. Keep in mind that nonprofits are organized to provide some benefit to the public.

Examples of Nonprofits include religious organizations, charitable organizations, political organizations, credit unions and membership clubs such as the Elk’s Club or a country clubs.

Other Business Structure Options

 Sole Proprietorship

This is by far the most common and popular form of business in the United States – mostly because it’s easy to start and manage. Simply put, a sole proprietorship is an unincorporated business where there is no legal distinction between the company and the individual who owns it and runs it. This is the business model most eCommerce merchants are using.

This business type is especially good for new eCommerce companies that have a low risk of liability. The sole proprietorship can evolve into another business type later but is the fastest and easiest way to start.

One of the primary disadvantages of a sole proprietorship is the self-employment (SE) tax of 15.3 percent on the ordinary net income generated by your business. Ordinary income includes items such as sales of products or services, commissions, or short-term income in real estate if you are a real estate professional. SE tax doesn’t apply to passive income, such as rent, dividends, interest, or capital gain. When evaluating the possible tax ramifications and planning options of your sole prop, it’s critical to distinguish between ordinary income and passive income.

As every business structure, taxes do need to be filed under the individual owning the sole proprietorship. The risk here is that because there is no difference between the individual and the company, the individual is personally liable for everything the company does. The sole proprietorship is the owner’s personal responsibility for the liabilities of the business. If you have exposure to risks, you may want to consider setting up an entity even if it’s unnecessary for tax purposes or any other reason. Thus, the individual’s personal assets are on the line. Also, once the business grows to more than one person, it can no longer be a sole proprietorship.

 Partnership

Partnerships are single businesses that have two or more owners. Each of these owners or partners contributes to the business either with funding, property, labor, skill, or similar. A general partnership assumes that the business is evenly divided or that specific percentages of ownership are documented if there is a partnership agreement. A limited partnership can limit both control and liability for specified partners. Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.

Partnerships will require registration but are still relatively easy to set up. Partners share responsibility and profits. Each state will have slightly different requirements for forming a partnership, but in many, if not most cases, it is a matter of filling out a form and paying a small fee.

 Cooperative

It would be somewhat unusual to find an eCommerce store merchant organized as a cooperative, but it’s not impossible. Cooperatives are businesses created to service and benefit the owners. Typically, an elected board of directors and officers run the cooperative while regular members have voting power to control the direction of the cooperative. Members can become part of the cooperative by purchasing shares, though the amount of shares they hold does not affect the weight of their vote. Put another way, its customers are its owners.

It is important to note that in some states, cooperatives are treated as a type of nonprofit corporation since a cooperative’s primary orientation is to benefit members by providing goods or services at cost. However, this type of nonprofit business is different from organizations incorporated under general nonprofit statutes, which legally have no owners, and must retain any net earnings within the organization. Nonprofit cooperative business statutes provide for member patron ownership, member voting rights for boards of directors, profit distributions to members, and member rights to assets sold if the cooperative should dissolve. Cooperatives are common in the healthcare, retail, agriculture, art galleries, and restaurant industries.

LLC Limited Liability Company

A lot of people don’t know what an LLC is, or how to get an LLC. Now it’s important to note that LLCs can differ from one state to another, but generally speaking, they are a hybrid business structure, combining the ease of a partnership with the liability protection found in corporations. Owners, frequently called members, pay taxes on the LLCs profits directly and the LLC itself does not file taxes as a separate legal entity.

LLCs require a lot less record keeping than corporations do, provide some protection for the member’s personal property, and are burdened with fewer profit sharing requirements than corporations. Conversely, LLC members will have to file additional forms for both federal and state taxes depending on the number of members, local laws, or even the LLC’s articles of organization. Often the members of an LLC pay payroll tax too.

The “owners” of an LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs. Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.

Depending on the state, LLCs may also have a limited lifetime. In some jurisdictions when a member leaves the LLC, that LLC is dissolved. Starting an LLC requires significantly more effort than forming a partnership and a business will probably want to employ a lawyer or at least consult a certified public accountant.

 Conclusion

 Your initial choice of a business structure isn’t set in stone. You can start out as sole proprietorship or partnership and later if your business grows or the risk of personal liability increases, you can convert your business to an LLC or a corporation.

After learning the basics of each business structure and considering your options, you may still find that you need help deciding which structure is best for your business. A good small business or tax lawyer can help you choose the right one, given your tax picture and the possible risks of your particular situation.

Thinking About Becoming An Enrolled Agent ?

 Do you want to be called a tax expert? Is it your goal to represent taxpayers before the IRS? Do you desire to be respected as a professional?  If so, you should work towards becoming an enrolled agent or EA.

Enrolled agents are specialists who represent the cream of the crop when it comes to taxation. They are the only federally recognized tax practitioners who can represent taxpayers before the Internal Revenue Service.

EAs and CPAs can help taxpayers facing the various tax problems:

  • Tax evasion
  • Tax fraud
  • Tax debt
  • Failure to file/pay tax penalties
  • IRS audit
  • Tax liens
  • Tax levies
  • Unfiled tax returns
  • Appeals
  • Collection issues

There are only less than 50,000 practicing EAs in the United States, according to the National Association of Enrolled Agents (NAEA).

The relatively small number of practicing enrolled agents in the US can be attributed to the expertise necessary to become one, as well as the stringent requirements for maintaining the license.

While it isn’t easy to become an enrolled agent, the rewards are more than worth it, so to speak.  Enrolled agents are highly in demand. They are needed by law and accounting firms.  These professionals can also find employment in banks and investment firms. Some pros also choose to put up their own private practice.

How to Become an Enrolled Agent

 Unlike other professional designations, there is no educational requirement for a person wanting to become an enrolled agent.

However, you must prove your knowledge on tax related matters by either passing the EA exam or working with the IRS for at least five years.

The EA exam is also called the Special Enrollment exam. It consists of three parts, with each one testing your knowledge on taxation.

The first part concerns individual taxpayers, covering sections on income and assets, deduction and credits, taxpayer information, taxation and advice, and returns for individuals.

The second part focuses on business entities with sections on businesses, specialized returns and tax payers, and business financial information. It is widely considered by EAs as the toughest section in the exam.

The third part focuses on representation, practice, and procedure.

Aside from passing the test, you will be subjected to a thorough investigation conducted by the IRS.

Maintaining Certification 

If you successfully passed the exam, you will be federally recognized as an enrolled agent. However, you will need to do the following to maintain your certification:

  1. Renew your Preparer Tax Identification Number (PTIN) annually.
  2. Renew your status as an EA every three years
  3. Undergo 72 hours of continuing education (CE) every three years. There’s a minimum requirement of 16 hours of CE per year, with at least two hours on ethics.  The need to undergo at least two hours of ethics training annually is in line with the Department of Treasury’s Circular 230.

 Joining Professional Organizations

 There are numerous professional organizations of enrolled agents. The NAEA is perhaps the biggest and most prestigious of them.

The Washington, DC-based organization aims to promote the highest level of professionalism, skills, and knowledge among its members. It is also a staunch advocate of taxpayer rights.

Established in 1972 as an offshoot of the Chicago-based National Association of Enrolled Federal Tax Accountants, the NAEA has grown into a large organization with more than 11,000 members.

Those members are demanded to take 30 hours of CE every calendar year, or 14 hours more than the 16 hours set by the IRS. They are then required to report the number of hours of CE they’ve garnered in the past year for renewal of their membership in the upcoming year.

The NAEA lets its members earn missing CE hours in the next calendar year to make up for the less than 30 hours that they accumulated in the previous year.

NAEA Membership Benefits

 While there are other professional groups of enrolled agents, the NAEA is widely considered to be the most prestigious in the country. Aside from completing annual continuing education that surpasses the requirements of the IRS, NAEA members are known to abide by a code of ethics. They also conduct themselves in a very professional manner.

Once you become an enrolled agent, you should aim to join the NAEA. Becoming a member of this organization opens the door to numerous professional benefits such as:

  1. Continuing education. Members of NAEA can participate in seminars, conferences, and conventions that can update their skills and knowledge, and set them up for success. Some of the more common CE topics include ethics, tax preparation, accounting, advanced IRS summons, among others.
  1. Participation in year-long events. NAEA conducts seminars, conventions, and meetings during the entire year. These events provide networking and educational opportunities to its members.

A key event in the NAEA calendar is the NAEA national conference. This is the only annual educational event in the country designed particularly for Circular 230 practitioners looking to focus on client representation before the IRS. The event is anchored by the National Tax Practice Institute.

  1. Enhanced reputation. NAEA works to spread the word about the benefits of hiring an enrolled agent. It taps both traditional media such as print and broadcast and social media to effectively increase the public’s knowledge about enrolled agents, and thereby enhance the potential value of EA to taxpayers. Simply put, the organization strives to make the taxpaying public more appreciative of the value of enrolled agents.
  1. Information sharing. The NAEA offers a tax knowledge base where members can look for answers to some of the more frequently asked questions of tax practitioners.
  1. Marketing tools and membership discounts. The organization offers discounts for office supplies and software that their members can use in their respective offices.

Participating in NAEA Courses

 The NAEA as well as its state affiliates are known to host numerous continuing education (CE) courses. These courses are held all year-round and provide an opportunity for current EAs to hone their skills and keep themselves updated on the latest taxation issues.

Should you become an EA and eventually a member of the NAEA, you can browse the organization’s website, www.naea.org to find and apply for an organization-sanctioned course.

The website features the “Continuing Education” section where you and other EAs associated with the group can learn more about the requirements for continuing education credits.

There’s also the “Calendar” section in the website where NAEA events for the entire year are posted.  The events range from quarterly meetings, annual conventions, and seminars. Attending these events not only provide enrolled agents with the opportunity to earn CE credits, but also get some relaxation in a world-class resort.

For 2017, some of the cities where NAEA courses are scheduled to be held are Orlando, Las Vegas, Denver, and Reno.

Enrolled agents, thus, can improve their skills and knowledge, maintain their certification, and renew their NAEA membership while getting treated to a few days of leisure and vacation.

From a professional standpoint, NAEA courses also provide enrolled agents with the opportunity to network with some of the most dedicated tax professionals and learn from accomplished  tax authorities in the country.

NAEA and its state affiliates, in fact, offer its courses even to non-members.  There are seminars which are open to enrolled agents who are not members of the NAEA and its state affiliates. Signing up for a NAEA course may also benefits like complimentary membership, special member discounts, and access to special publications.

It is also possible to get discounts if a group of enrolled agents participates in a NAEA course. The NAEA and its state affiliates usually give discounts to groups of three or more colleagues who are joining a seminar, convention, or conference.

Enrolled agents can also attend one or two days of multiple-day seminars. The NAEA offers one-day only rates for most of its courses, meaning that EAs don’t have to attend the entire course.

The easiest way to register to any NAEA course is through the Internet. The NAEA website, as well as those of NAEA’s state affiliates, usually have downloadable PDF registration forms which enrolled agents can fill out to signify their participation in a particular course.

How to Save in NAEA Courses Participation

 Truth to be told, participation fees in NAEA courses and events aren’t cheap. The cost of participating in a continuing education course can run to hundreds of dollars. The cost may also be affected by other factors such as the location as well as the number of days of the event.

Yet enrolled agents can deduct the costs of their participation in NAEA courses in their next tax returns. After all, these are considered travel expenses which are defined by the IRS as common and accepted in a trade or business.

Enrolled agents can claim most of the expenses they incur while attending a NAEA organized event or conference. They can write off registration costs, lodging expenses, 50 percent of their meals, and incidental expenses.

Communication-related expenses during a NAEA convention, such as business calls and fax machine fees, may also be written off by enrolled agents. The same goes for other ordinary and necessary expenses related to the business travel like dry cleaning and laundry as well as tips paid for any expenses during the convention.

Transportation expenses can also be written off by enrolled agents who participate in a NAEA course. These include airfare, bus fare, or taxi fare between the enrolled agent’s home and the location of the event.

Since most NAEA events are held in the United States, enrolled agents should have no problems claiming the expenses they incurred in participating in a NAEA continuing education course. However, it is worth mentioning that even conventions held outside the United States may be deducted as a legitimate travel expense.

These include countries such as Aruba, Bermuda, Bahamas, Dominica, Dominican Republic, Costa Rica, Republic of Palau, Panama, Trinidad & Tobago, Jamaica, and Honduras, among others.

Of course, enrolled agents know very well that there are also other factors to be considered in justifying the location of a convention. These include, among others, the residence of the participants, purpose and activities of the convention, and locations of previous events.

Claiming travel expenses in the next tax return isn’t the only way for enrolled agents to save the next time they participate in a NAEA course. They can also seek the assistance of professional EA groups. There are numerous organizations of EAs – and not just the NAEA– that offer scholarship programs to  both current and aspiring enrolled agents.

For example, the California Society of Enrolled Agents offers scholarship to California residents wishing to pursue accounting, finance, and other courses in preparation for the special enrollment preparation.

It also offers scholarship to current EAs in California who wish to take up courses like Tax Court in their desire to broaden their knowledge in the field of taxation.

The NAEA, meanwhile, has its own scholarship program funded by its members. This grant covers the registration expenses of educational programs offered at NAEA conferences.

Joining Online Courses

Enrolled agents may also join online courses or webinars offered by the NAEA.  Online courses are a lot cheaper than seminars, conventions, and other continuing education classes offered by the organization.

Moreover, these courses are suited for enrolled agents who don’t have the time to attend seminars or meetings organized by the NAEA. Participants of online courses can also earn continuing education credits.

There is also a lot of variety in the topics discussed in online courses. Some may be aimed at enhancing the knowledge and skills of enrolled agents such as seminars on tax update, while others may be focused on enabling EAs to improve their practice such as using social media to reach out to more potential customers.

There are a lot of career opportunities awaiting enrolled agents in the United States. Organizations particularly the NAEA are more than willing to help professional growth of EAs. One way to  achieve this is the offering of various NAEA courses such as seminars, conventions, and meetings.  Enrolled agents should be pragmatic enough to grab the opportunity and participate in NAEA courses, whether held in or outside the US.

Ten Recordkeeping Rules and Five Bonus Tips in Claiming Travel Expense

Good recordkeeping may not be in the list of business secrets of successful entrepreneurs. But for the company’s accountant or bookkeeper, it is very important.  It can significantly reduce the amount of profit that a business will pay tax on. Keeping accurate and organized records make it easier for companies to track their cash flow, save time and trouble in filing their tax returns, and perhaps more important, ensure that they are tax-efficient.

Good recordkeeping is particularly vital for business owners and contractors who go on a business trip.  The Internal Revenue Service (IRS) allows business owners to claim tax deductions for travel-related expenses such as:

  • Lodging
  • 50 percent of the costs of meals
  • Baggage charges
  • Air, rail, and bus fare
  • Cleaning and laundry
  • Taxi fare and car rental
  • Computer rental
  • Public stenographer fees
  • Telephone or fax expenses
  • Tips on qualified expenses

If you are a business owner,  you should understand how good record keeping is vital. Keeping accurate records will back up your tax deduction claims. And it can spell the difference between winning an audit and the IRS possibly digging up your other tax returns.

The following are some of the recordkeeping rules you should keep in mind when you are to claim on a business trip:

  1. You can’t claim tax exemptions for estimated or approximated expenses.

The IRS doesn’t allow businesses to deduct amounts based on approximate or estimate. You cannot guess the amount you spent for your gas or toll fees,  neither for the cost of your meals during the business trip.

It is thus recommended for entrepreneurs or their bookkeepers to keep adequate records proving their business trip -related expenses.

You should be accurate on the amount to be written off. The IRS recommends keeping documentary evidence to prove your expenses, such as receipts, bills, and checks.

 However, documentary evidence isn’t required when the travel related expense is lower than $75.  You don’t also have to present receipt for meals and lodging expenses if you are to claim per diem, or you took public transportation for which a receipt isn’t readily available.

 You should keep timely records.

 The IRS also recommends keeping records of a business travel during or near the time of the trip. It should also be supported with sufficient documentary evidence. This can make the record more believable than a statement prepared at a later date.

 Let’s cite an example. A business owner wrote off more than $20,000 in his tax return, citing that the amount represented the gas expenses he had when he went out of town during several occasions in 2013 to meet several prospective clients.

 Two years after the trip, the IRS decided that it had enough grounds to audit his tax returns. In order to substantiate his claim, he presented a 2013 calendar as well as printouts of driving directions generated by an online web mapping service. The directions also specified the distance supposedly traveled by the business owner from his place to the offices of his clients.

 Despite those documents presented , the IRS will still disallow the claims of the business owner.  For one, the documents presented were prepared two years after the business trip. Therefore, there is a lack of truthful recall on the part of the entrepreneur to justify the said claim even though an online mapping service was used.

 This illustrates the importance of keeping timely records of your business trip. While you don’t have to record information as soon as you get home, you don’t have to wait for months to do so, either.

  1. You must state the business purpose of an expense.

The IRS encourages business owners and employees who are claiming a business travel exemption to provide a written statement indicating the purpose of an expense. You can indicate that a conference you attended is for networking and meeting potential clients.  You can back up your claim by showing the conference program or invitation from the organizer.

However, this may not be needed if the purpose of an expense is obvious given the surrounding circumstances.

The easiest example of this would be a sales representative. Given the job description of the worker, it is understood that he or she is constantly travelling.  Thus there is no need to submit a written statement detailing the business purpose of each and every trip. The sales representative would only have to record the date of each trip, total miles covered, and back up his or her claims with documentary evidence like receipt or record of delivery.

You can also withhold confidential information in stating the purpose of a business travel expense.  You don’t have to be explicit in stating the purpose of a business meeting like mentioning the amount of deals you booked over dinner.

  1. You can’t use credit card statements to claim an expense.

One of the more common mistakes that business owners make when writing off a business trip expense is using their credit card statements. The IRS, though, won’t accept this as documentary evidence.

A credit card statement can be likened to a canceled check. It only shows the costs but not any further evidence to prove that the expenses were for a legitimate and necessary business purpose.

You should present a receipt alongside the credit card statement to substantiate the travel expenditure.

  1. You should provide direct and supporting evidence in case you have incomplete records of an expense.

If you cannot provide complete records to support a tax deduction, you can still write off an expense by furnishing direct evidence in the form of a written or oral statement and supporting evidence. The written or oral statement details the cost, time, place, and date of a business trip expense like meals or transportation. It may be a written statement from you, your associates, and guests. Documentary evidence, on the other hand, may be receipts or paid bills.

In the absence of documentary evidence, you can present adequate evidence to prove the character of the expense. In the case of lodging expense, a hotel receipt can be presented to and admitted by the IRS if it provides essential information such as the name and location of the hotel, the dates of the stay, and separate amounts for lodging, meals, and communication expenses.

 Another example of adequate evidence would be a restaurant receipt. It can be presented to the IRS for meal expenses as long as it indicates the name and location of the restaurant, the number of people who were served, and the date and amount of the expense.

6. You should record expenses separately.

The IRS says that each payment is considered a separate expense.

Let’s say that you took a taxi to go to a restaurant where you met a client. The dinner expense and the taxi fare are two separate expenses. You should, thus, record them separately in your records.

It is also common for businessmen to treat their clients to sports events. If you bought season or series tickets, and then used these for business purposes, then each ticket in the series should be treated as a separate item.

You can divide the total cost of the season tickets by the number of games in the series to get the cost of each ticket.

 7. You can combine items if the expenses are of a similar nature.

You can combine expenses of a similar nature, and record them as a single expense. These expenses should have happened during the course of a single event.

For instance, you don’t have to record each and every drink during a cocktail party as separate expenses. You can record the total expenses for the refreshments as a single expense.

 8. You can record all vehicle/transport expenses and then divide them into business and personal expenses at the end of the fiscal year.

You can claim gas expenses if you used your car during a business trip. It is also possible to record all your expenses during the year, and then divide them into business trip and personal expenses at the end of the year.  However, you should keep an accurate mileage log if you are to claim a tax deduction for your business trip related expenses.

The mileage log should indicate the starting mileage on the odometer at the beginning of the year, as well as its ending mileage at the end of the year. Every time you use your vehicle for a business trip, you should record details such as the date of your travel, your starting point, and destination. You must also write the purpose of your trip, the starting and ending mileage of the vehicle, and other trip-related expenses such as tolls and parking fees. It is important to keep your mileage log updated regularly, so that your records will be precise.

 9. You can claim deductions using your actual expenses, or by using the standard mileage rate.

There are two ways of claiming transportation related expenses during a business trip. You can deduct your actual expenses, or use the standard mileage rate set by the IRS.

The latter is easier to follow, which makes it the more popular option among employees and entrepreneurs. For 2017, the mileage rage is 53.5 cents for every mile. You simply have to multiply the miles that your vehicle has accumulated for business-related expenses.

For example, your car drove 20,000 miles for business trips in 2017. You will then multiple 20,000 by 53.5, giving you a total of $10,700. This is the amount that you can write off in your next tax return.

You may opt to deduct your actual expenses instead of using the standard mileage set by the IRS. However, you should have a thorough record of your gas, parking, and toll expenses. You can also deduct other expenses like repair and maintenance, tires, car washing, car repair, and gas and oil replacement. While this method requires a lot of record keeping, it can save you a lot of money because it usually results in a larger tax deduction.

  1. Keep records and receipts as long as you can.

You may wonder how long should you keep those receipts related to a business trip that you had two years ago. The IRS recommends keeping records as long as you can, as there will always be a possibility that your tax return is audited up to three years from the date that you filed it.

Bonus Tips

While entrepreneurs are entitled to many tax deductions when they go on a business trip, they won’t be able to write off expenses if these are not properly recorded. The last thing you want to have is the IRS auditing your tax returns for making unsubstantiated claims. Here are some tips to keep in mind so that you will have an easier time in recording your expenses while on a business trip:

  1. Scribble down notes on receipts. This is particularly helpful if you are to claim meal expenses. You should list down the names of those who you dined with, and the business purpose of the meeting.
  1. Scan receipts. If you’re the type of person who keeps on losing receipts, you can simply scan or take photos of these essential documentary evidences.
  1. Keep track of your expenses in a daily business journal. You can download a good daily business journal that you can use to record all your expenses during a business trip.
  1. Use debit and credit cards as much as possible. Using cash can be disadvantageous for anyone on a business trip. It is easy to spend but hard to keep track of.  Instead of using cash, simply your debit and credit cards, then reconcile them with your receipts.
  1. Use an app. There are many apps that you can use to track your business travel expenses. These apps can make it a lot easier for you to document your expenses and make an accurate tax claim.

How to Get Reimbursed for Tips and Other Incidental Expenses During a Business Trip

Traveling for business has a lot of perks. It may mean spending some time away from the office and dealing with a lot of tasks as a result, but for the most part,  it can be very rewarding.

You do not have to be a boss to understand how rewarding business trips can be. Business owners and executives, for one, can meet prospective clients and suppliers.  They can seal deals by wining and dining their associates. Or they can strengthen their relationships with current partners.

Employees, meanwhile, can improve on their skills, update their knowledge, and network with peers when they attend conventions and business conferences. Plus, the time away from the office can re-energize them and make them more productive and inspired when they return to their respective work stations.

Claiming tax deductions

What’s more encouraging is that most business-related expenses can be claimed as tax deductible. Anything related to the business trip can be written off, from airfare, taxi fare, lodging, communication charges, and supplies.

Even incidental expenses can be claimed as tax deductible. These are small costs incurred during a business travel. It may cover for tips or fees that an employee or business owner gives to porters, baggage carrier, maids, and stewards.

In short, incidental expenses are gratuities given to staff of restaurants, hotels, cruise ships, and similar establishments.

Tipping Standards

Tipping is a customary practice in the United States. It should be noted that the federal minimum wage of $8 an hour, so tips can help make up for the low pay of servers.

Thus, business travelers will normally have to spend for gratuities extended to waiters, bell boys, porters, and other servers that they will encounter during their trip.

While there’s no standard rate as far as tips in the US are concerned, the following is a guide on how much business travelers tip for people who serve them:

  • Taxi/limousine driver—at least 15 percent of the total fare
  • Porter- $1 per bag
  • Valet parking attendant– $1-2 for every car retrieved
  • Restaurant waiter/waitress- at least 15 percent of the total bill less tax
  • Bell staff- $1 for every bag delivered to a room
  • Buffet service– $1 to $2
  • Bartender/cocktail—at least 10 percent of the total bill

Tipping, however, is not practiced in other countries.  In fact, outside the United States, the practice is not customary.

For instance, tipping in Australia is practically non-existent. This can be attributed to the fact that the minimum wage in Australia is $16 per hour, or around $622 a week.

It’s also not a practice in other countries such as Japan, Argentina, and Estonia. In most countries in Europe, such as France, United Kingdom, the Netherlands and Finland, tips are already included in the bill.

What’s Not Included in Incidental Expenses?

The IRS, however, does not consider the following as incidental expenses:

  • Costs incurred in cleaning and pressing of clothes
  • Long distance telephone calls
  • Local calls
  • Internet connection
  • Fax services
  • Gas for rental vehicles
  • Parking fees

These costs incurred, after all, are reimbursable as other expenses.  For example, costs of cleaning and ironing of clothes can be written off as cleaning expenses. Local and long distance calls, as well as fax and Internet services, may be claimed as communication expenses. Gas for rental vehicles and parking fees, meanwhile, are considered as transportation expenses.

Incidental Expenses-Only

Because incidental expenses are small, it is very common for business owners and employees usually pay out in cash.  The minimal amounts involved in a tip, and the fact that there’s no need to issue a receipt for such expense, has prompted the IRS to set a rule when it comes to claiming incidental expenses during a business trip.

According to the IRS, a business owner or employee who was on a business travel can opt for the incidental-expenses only method in claiming a deduction. In this method, the taxpayer can write off incidental expense of $5 a day.

This method spares taxpayers from the hassle of keeping tabs of the costs they incurred for the tips given during the course of a business trip. Since tips are very small, it can be difficult for business travelers to keep track of the expenses they have incurred.

This method, however, can only be used when the taxpayer did not incur any meal expense.

Thus, a taxpayer cannot claim incidental expenses if he or she had and claimed meal expenses during the business travel.

Let’s cite an example.  Victoria was sent by his boss to a three day business trip to New York.  She incurred meal expenses during that trip.  She could have claimed half of the total amount of those meals under tax rules, but because she could not present the actual costs of the meals,  she just opted to claim a standard meal allowance.

Standard Meal Allowance

For 2016, the federal standard meal allowance is $51 a day.

Thus, Victoria can write off $153 for her meals during that trip. However, because she had claimed meal expenses as tax deductions, then she won’t be allowed to deduct $15 as incidental expenses.

If Victoria didn’t claim any meal expenses, then she can write off the $15 incidental expenses that she incurred during the trip.

By using the standard meal allowance, Victoria has practically claimed both meal and incidental expenses.

Victoria can receive this allowance if her employer does any of the following:

  1. Provides her with lodging, or furnishes it in kind.
  2. Reimburses her for the actual cost of lodging basing on the receipts presented
  3. Pays for the lodging
  4. Expresses reservations about Victoria incurring lodging expenses. This may be due to her having friends or relatives in New York, where she can stay with.
  5. Devise an allowance based on a formula similar to computing Victoria’s compensation like number of hours worked or number of miles traveled.

As mentioned earlier, the M&IE allowance of $51 applies to most small localities in the United States. However, a higher allowance applies to bigger cities like San Francisco, and yes, New York. As of 2017, the M&IE allowance for New York is $74.

There’s also a special standard meal allowance for those working in the transportation industry.  The IRS defines workers in the transportation industry as those who are directly involved in moving goods and people by various modes of transportation such as airplane, bus, barge, ship, or train.

Workers who are regularly required to travel away from their residence, and have to travel to different areas that are qualified for standard meal allowance rates, are also considered to be transportation workers by the IRS.

Those who are in the transportation industry get a standard meal allowance of $64 a day.

Claiming Per Diem

There are instances, though, when claiming the standard meal allowance or using the incidental expenses only method won’t suffice to cover the expenses incurred by a business owner or employee.

For example, what if Victoria had to shell out more than $30 in tips alone during her three-day trip?  She might have brought a lot of bags so that meant she had to give tips to the bellboy and porter. She could have even given the taxi driver a tip for helping her carry her baggage.

One way that Victoria can reimburse those expenses is to claim per diem or per day. Per diem is a daily allowance for expenses that companies give to employees on a daily basis to cover expenses when on a business travel.

Per diem rates cover the costs of lodging, meals, and incidental expenses incurred by an employee during a business trip. If Victoria opts to use this method instead of the incidental expenses only method and the meal and incidental expenses allowance, then she can get reimbursed not just for the tips that she gave but also for her meals and lodging expenses.

Claiming per diem also has one distinct advantage—it spares employees from preparing documentation required to support business travel expenses.  If Victoria opts for this method, then she no longer has to collect every receipt she gets during the trip. There’s also no need for her to note the time, place and purpose of each business meeting she attends. Moreover, she no longer has to hold on to those receipts and other documentation for two to three years, just in case the IRS calls in and questions her business travel deductions.

It can also mean faster reimbursement of expenses on the part of the employee, as there is no need to review and approve monthly expenses reports. It can also prevent processing delays caused by incomplete documentation, or when a supervisor inquires on the reasonableness of a claim.

Simply put, claiming per diem rate simplifies life for employees like Victoria.

However per diem rates aren’t paid to individuals who own more than 10 percent of the business. Thus, business owners cannot opt for this method in claiming tax deductions.

The IRS uses the high-low method in determining the per diem in certain areas in the United States.  Simply put, employees who work in areas like San Francisco, Boston, and Washinton D.C. have a higher per diem rate than those working in areas in the ‘low cost’ list.

For the fiscal year 2017, the IRS has set the per diem rate for high costs areas at $282. The breakdown is $214 for lodging, and $68 for meals and incidental expenses. This applies to all high cost areas within the continental United States.

Some of the high cost areas for 2017 are Los Angeles, San Francisco, Santa Monica, Santa Barbara, and San Jose in California; Denver and Aspen in Colorado, and Sedona in Arizona.

Chicago, Maine, Maryland, and Seaside in Oregon are other high cost areas as defined by the IRS. In Florida, cities like Miami and Fort Lauderdale are classified as high cost areas.

Other areas where the per diem rate is $282 for 2017 are Hershey and Philadalphia in Pennsylvania, Park City in Utah, Seattle in Washington, Jamestown, Middletown, and Newport in Rhode Island, and Virginia Beach and Wallops Island in Virginia.

For all other areas, the per diem rate is $189 with lodging at $132 and meals and incidental expenses at $57.

Compared to the previous year, the rates have gone up by $7 for high cost areas and $4 for the low cost areas.

Employers should take note that lodging and meal and incidental expenses are separated from each other. Thus under certain circumstances, they can only reimburse for the meals and incidental expenses of their employers. For instance, if Victoria’s company paid for her hotel or lodging then she is only entitled to a per diem reimbursement of her meals and incidental expenses.

In such case, she can only receive a reimbursement of $68 for M&EI as the lodging costs have been shouldered by her employer.

Exclusions

It should be noted that transportation costs and mailing costs aren’t included in incidental expenses. These include transportation between places of business and lodging, as well as mailing expenses incurred for filing travel vouchers.

The IRS states that the high-low method must be used by companies in reimbursing their employees’ travel expenses within the continental United States for the fiscal year. However, it is up to them to use permissible method when it comes to reimbursing their employee expenses for business travel outside of the United States.

Employers are also required to continue using this method for an employee in the last three months of the fiscal year.  This means that the same method utilized in the first nine months of the year should also be used for the final three months.

Conclusion

While tips extended to waiters, bellboys, and other servers are not as costly as meals and transportation expenses, the amount can quickly accumulate during a business trip. Fortunately for most employees, the IRS allows these expenses to be reimbursed either through the incidental expenses-only method, per diem, or the meal and incidental expenses method.

A Guide on Business Conventions: Why Professionals Should Take Part in One

In the age of social media where everyone can share information in a few clicks, some professionals may think they no longer have to attend an industry conference or seminar.

While social media channels, LinkedIn in particular, may have become popular platforms for information sharing and networking, the truth is that it is still a must for professionals to attend conferences, seminars, and meetings.

These events are usually short, typically 2 to 3 days. During that short amount of time, professionals like you can learn from several industry experts. Moreover, you can network with other people in your industry.

There are many reasons why you should attend an industry event, such as:

  1. Learn how industry trends are being implemented. In a typical business convention, top notch speakers and resource persons share the latest trends and how these are being used in your industry. They can enhance your knowledge base, and teach you something valuable that you can apply when you go back to your office.
  1. Meet new suppliers. Most professionals tend to shy away from business conventions because of the salespeople that introduce various industry products and services. But in truth, business conventions and conferences can introduce you to innovative products and services that you or your company may find necessary to stay competitive.
  1. Network with peers. Industry events provide the best platform for professionals to grow their network. They can learn best practices and referrals from competitors, especially those from other regions or countries.
  1. Free travel. For many professionals, their participation in industry events can give them the opportunity to get some much needed rest and relaxation. They can claim travel expenses related to their participation in a business conference or convention, from lodging to transportation to incidental expenses.

There is no shortage of business conventions that professionals can participate in. The following is a discussion of particular fields and some of the more notable meetings, conferences, and exhibits that professionals can join in.

Information Technology

The I.T. Industry is constantly evolving, so it is understandable why there are lots of business conventions held for people and organizations in this field. There are lots of technology conferences held all year round. The good news is that most of these events offer live streaming options, which augurs well for IT professionals who are too busy or those who have exhausted their travel budget.

The Google Cloud Next conference is one of the most highly anticipated events among I.T. professionals. This will take place in San Francisco from March 8-10 this year.  Google Cloud developers will benefit greatly from taking part in this event, what with Google CEO Sundar Pichai and Alphabet chairman Eric Schmidt expected to talk about Google’s initiatives this year.  The conference is expected to draw thousands of participants, who will see what the future of cloud development will be like.

Another highly anticipated business convention in the I.T. industry is the Bluetooth World 2017. This yearly, two-day conference is expected to draw more than 1,000 thought leaders to Santa Clara, California. It will showcase how Bluetooth technology is changing the world, and how the Internet of Things is making life easier for everyone.

Accounting

There are also lots of business conventions that accountants can take part in.  Perhaps the most prestigious of these is the MNCPA Tax Conference held yearly in Minnesota.  This is also one of the longest-running tax conventions in the United States, with its first staging held more than 60 years ago.   CPAs, CPOs, tax practitioners, and financial professionals looking to expand their knowledge of tax-related developments are encouraged to participate in this convention.

The American Institute of CPAs (AICPA) offers more than 60 conferences all year round. These events cover almost every topic there is in the accounting field. Some events are held simultaneously in multiple cities and most conferences can earn continuing professional education (CPE) credits for its participants.

One of the biggest events that the AICPA is holding is its CFO Conference. It will be held in Phoenix, Arizona this year, with hundreds of CFOs, CEOs, investment bankers, attorneys, chief audit executives, and academics expected to join.  The conference will tackle issues such as cybersecurity, strategic planning, risk management, and the current political, tax, and economic landscape in the U.S.

Engineering

Engineers also have tons of options when it comes to business conventions.  Engineering associations are usually at the forefront of these events, providing engineers with the opportunity to hone their skills, earn more certification, and be updated with the latest advancements.

Electrical engineers, for instance, can attend the International Solid-State Circuits Conference organized by the Institute of Electrical and Electronics Engineer. This year’s event held in San Francisco, California tackled developments in the Internet of Everything.

For mechanical engineers, the Mechanical Engineering Congress and Exposition is a prestigious event to take part in.  This is reputed to be the biggest interdisciplinary mechanical engineering convention in the world.  It has been going on for more than a century now, with the first meeting in New York held in 1880. For some historical perspective, this is also the same convention when Willis Carrier presented his concepts on air conditioning back in 1911.

This year’s Mechanical Engineering Congress and Exposition will be held in Tampa, Florida.

Academe

Conferences and education events for members of the academe are designed to provide educators with tried and tested strategies in connecting with students, connect with peers, and bolster their practice.

One of the biggest gatherings of educators in the United States is the International Society for Technology in Education (ISTE) Conference. In 2016, the conference had more than 18,000 participants composed of educators, school leaders, policy makers, tech coordinators, school administrators, and library media specialists. This year, the organizers hope that the event will have more attendees. The event is scheduled to be held in San Antonio, Texas.

The ASCD, meanwhile, organizes its annual conference called Empower. It is designed not just for teachers but also principals, school superintendents, instructional coaches, and central office staffer. This year’s conference scheduled in Anaheim, California has more than 200 sessions on deck.

There are also certain conferences held onboard cruise ships. The International Interdisciplinary Business-Economics Advancement Conference, for example, will be held at the Navigator of the Sea, a five star luxury cruise ship. The cruise will depart from Miami, Florida and stop at the Bahamas and Mexico before returning to Miami.

The conference is expected to attract scholar students, scientists, and researchers who will share their insights on business and economics.

Sales & Marketing

With the Internet changing the way people buy products and avail of services, it is not surprising that many business conventions geared towards professionals in the sales and marketing field are focused on e-commerce.

One event, Brand Innovators Summit, is conducted in multiple cities across the US throughout the year. These summits teach sales and marketing professionals and entrepreneurs how the best brands are using digital media to promote their products and services. Topics range from content marketing, monetization, and enhancing customer experience.

Mozcon Local is similar to the said event as it teaches sales and marketing executives how to use digital media, particularly local marketing and search engine optimization.  Participants will learn tips and tricks for optimizing their websites and make them rank higher on Google.

Adobe, a popular creative product, also holds its own conference. The Adobe Summit is scheduled in March, with participants converging in Las Vegas to learn how to create engaging content viewable across various devices.

Another event that sales and marketing professionals should consider joining is the Social Media Marketing World set sometime this March in San Diego. The event promises to impart some distinctive social media marketing techniques from industry leaders.

Finally, Ragan’s Social Media conference to be held at Disney World will teach attendees when and how to implement various social media techniques. This event will also impart knowledge like building a social media following, strengthening online communities, and tapping key audiences.

 

Healthcare

One of the fastest growing industries in the world, the healthcare sector has hundreds of trade shows and conventions held in various parts of the globe. These conventions are attended by medical professionals, researchers, medical technology suppliers, among others.

Arab Health is one of these events. It is considered to be the biggest healthcare exhibition and medical congress in the Middle East, and the second biggest in the world.

This event attracts more than 4,400 companies that proudly display their latest innovations.  The event aims to promote and improve healthcare services in UAE and nearby territories.

Another event that attracts many healthcare professionals around the world is the Digital Health Summit.  This event, which was most recently held in Las Vegas, tackles the substantial role that technology has in advancing medicine.

The Government Health IT Conference and Exhibition, organized by the Healthcare Information and Management Systems Society (HIMSS), is another big event that attracts thousands of healthcare workers. The event particularly is geared at healthcare IT workers, with the most recent staging focusing on how the new administration will impact the healthcare sector.

Business Leaders and Entrepreneurs

Business leaders and entrepreneurs also have lots of choices as far as business conferences and conventions are concerned.

One of the biggest and most prestigious is the CEO Space Forum, which its organizers have dubbed as a business growth accelerator event.  Participants can learn many things from the event’s resource speakers like traditional funding, strategic planning, leadership, business finance, among others. This year’s gathering will happen in Orlando, Florida and run for five days.

Young professionals, or those who belong to the Millennial generation, are the target participants of the Next Gen Summit.  This event is relatively young, with its first meeting held in 2015. It is backed by partners such as Uber and Verizon.

What’s impressive with this business convention is that it has grown exponentially in the past two years. In 2016, there were more than 500 attendees. More than 10 venture capitals were supported by $1.6 billion in capital.  This year, the organizers hope to bring in a minimum of $3 billion in capital funds.

Aspiring entrepreneurs as well as bosses of start-up businesses should also check out the Start Up Conference 2017.  This is one of the biggest entrepreneur events in Silicon Valley, attracting more than 2,000 businessmen.

As the name suggests, this conference caters mainly to entrepreneurs looking to jumpstart their startup enterprises.  Topics include pitching venture capitals, finding co-founders, promoting a product, and reaching influencers, among others.

Media and Creatives

With social media taking over the world, media practitioners will learn a lot from business conventions. Events like the Print and ePublishing Conference slated this June in Chicago, for example, will teach them how to deliver the best content that’s accessible across all platforms. The BlogHer conference, meanwhile, attracts women bloggers and promotes economic empowerment and education. This conference is open to all bloggers, and provides a good platform for networking.

A similar event is Blogcademy held in multiple cities. This two-day blogging conference and worship teaches participants how to improve their content, so they can earn more from their blogs or websites. It can also teach them how to secure book deals and other publishing agreement.

Web designers, art directors and those in the creative field may also get into courses like Future of Web Design workshop. Scheduled this April in London, said workshop is expected to be participated in by engineers, web developers, and designers.

 

There is no denying that there are a lot of business conferences, seminars, workshops, and similar events that professionals can participate in. These events are all geared towards updating the skills and knowledge of participants, provide a venue for networking, and in some instances, allow attendees to earn continuing education credits.

Professionals should be wise enough to attend these events, as this won’t only help in advancing their career. They can get the chance to travel for free, as they can claim their expenses as deductible in their next tax returns.

How Freelancers Can Write Off their Business Travel Expenses

While there are many risks of being a freelancer, it cannot be denied that there are plenty of benefits, too.

One advantage of being self-employed is that you can make more money than you would if you were an employee. You can also work at the comforts of your home.

Moreover, freelancers like you also get to enjoy many tax deductions like home office and business travel.

If you haven’t realized, going on a business travel can benefit your trade.

Here are three good ideas that you may want to explore if you want to maximize your tax deductions by going on a business trip anytime soon:

  1. Visiting a client

Perhaps you have a client in an area away from your tax home, or your primary place of work. You might want to visit that client and several customers to strengthen you relationship with them.

You don’t need to spend the entire them talking to them. You can schedule a meeting for a few hours.  Just make sure to keep note of the things you talked about during the meet.

  1. Meeting a Vendor

Do you know a supplier of a vendor that you can meet in Miami or another area that’s far from your home? You might want to meet him to negotiate a new deal, or how you can improve your business relationship together.

  1. Attend a conference

Are there any workshops, seminars, or conventions that you can participate in?  Attending one that’s relevant to your trade may teach you new skills or update your knowledge. The activity may also give you the perfect time to meet prospective clients or vendors.

What expenses can you write off?

 Any of the abovementioned ideas are justifiable enough to be the purpose of your next business travel. What’s more exciting is that you can deduct all your business travel-related expenses on your next tax returns.

Remember this–you can write off your business travel expenses as long as the primary purpose of your trip is ordinary and necessary for your work.

An ordinary expense is defined as common and accepted in the trade or business that you are in. If you are in the IT field, then your participation in an information security summit can be considered an ordinary expense.

On the other hand, the IRS considers travel as a necessary expense if it is appropriate for a taxpayer’s business.

You can write off the following travel expenses:

  1. Meal Expenses

You can also deduct the costs of meals that you had while you were on a business travel. However, there’s only a 50 percent limit on meal expenses.

There are two methods that you can choose from in figuring out your meal expenses.

The first is the actual cost.  This simply means claiming 50 percent of the actual cost of your meals during your business trip. If you are to use this method, you should have receipts or records of your actual expenses.

The second option is to deduct the standard meal allowance (SMA) of $51 a day, which is the rate for most of the small localities in the US. The advantage of this option is that you don’t have to keep every receipt, as you simply subtract the SMA.

However, the SMA is a bit low. Thus you may not be able to enjoy larger deductions on your tax return if you opt for this method.

Keep in mind that you can claim meal expenses even if your dinner or lunch with a prospective client didn’t lead to a deal. So even if you met potential clients, you can deduct the costs of their meals in your next tax return.

But you may also wonder—can you claim the meal expenses during a business meeting? After all, it is a common practice to discuss a deal or get to know a prospective partner while eating.

The answer is yes–you can also claim meal expenses that you incurred while entertaining customers or potential business partners.

In fact, it is not only the meals served to your clients that you can claim as tax deductible.  You can even include taxes and tips, cover charges if you brought your guests to a nightclub. The rent that you paid for a room in which you held a dinner party for your guests can also be deducted as a meal expense.

But the IRS won’t allow claiming deductible on lavish and extravagant meals. There’s no definite dollar amount for a lavish or extravagant meal, so it can really be tricky for most business owners to determine which meals to expense.

Let’s say that you treated a potential client to dinner at a five-star hotel. Would that be considered lavish or extravagant meal? Perhaps, but you can also justify that it is reasonable given the circumstances. Maybe the client that you met is the CEO of a Fortune 500 company, whom you just can’t bring to any ordinary restaurant.

  1. Lodging Expenses

Unlike in meal expenses where you are limited to a 50 percent tax claim, you can deduct 100% of your lodging expenses during a business travel.

You can even stay an extra day in your destination and claim associated stay-over costs. For example, you had your last meeting on a Friday, but you didn’t leave until Saturday afternoon because you wanted to get a reduced fare on that day. You can claim the stay-over costs on Saturday even though you had no business-related activities on that day.

But if you stayed for a couple more days just to enjoy the sights, then you can’t deduct the hotel charges for those extra days.

  1. Transportation Expenses

Whether you traveled by car, bus, train, or airplane, from your home to the business destination, you can write off your transportation expenses during a business trip.

But if you were provided tickets by a client, your cost is zero.

If you were able to fly because of a frequent flyer reward, then you won’t be able to claim the airfare.

You can also claim transportation expenses to and from the airport to your hotel, and the hotel to the offices of your clients or customers.

If you brought your own car, you can write off your gas expenses, toll fees, and parking. You can even charge the expenses you incurred for maintaining your vehicle, like car wash, replacement of tires, or oil change. However, you have to keep your receipts to prove that you indeed had paid for the said services while you were on a business travel.

Aside from the three major expenses, you can also write off the following:

  • Shipping of baggage
  • Dry cleaning and laundry
  • Business calls
  • Tips
  • Other out-of-pocket expenses such as computer rental fees

The rule of thumb is that expenses that are directly related to your business trip can be written off.  For example, you had paid for the shipping of your brochure or documents needed for a seminar or convention. You can deduct the shipping expenses.

But you can’t expense personal charges like gym or fitness fees. You can’t also deduct fees for movies or games.

Things to Remember Before Traveling for Business

 Now that you have learned the expenses that you can claim on your next tax return, you should then know the things that the IRS will look into before it accepts your tax deduction claim.

These include:

  1. Establish the Purpose of Your Travel

One, your travel should be primarily for business. You can prove this by showing that you have at least one business appointment or meeting schedule before you leave home.

This means that you can’t just depart for the Bahamas or Florida with the hopes of meeting a potential client there. Or collecting business cards of people you would present as business associates.

An invitation to a conference, emails, and other correspondences—these are enough to prove to the IRS that you went to a particular destination for a business-related activity.

But what if you don’t have any invitation or email proving that you went to a certain destination for a business activity?  Let’s say you want to spend a vacation in Miami, and also get some potential clients there.

You can mix pleasure with business, so to speak, by placing several advertisements in the area.

For example, you’re a distributor of computer software. You are hoping to expand your business by distributing more products in Miami.

What can you do to achieve that goal? You can post online ads showing to prove that indeed, you were looking for new business contacts in the area.

And when you get there in Miami, meet a couple of those who have responded to your advertisement. Document your meeting by taking photos, or keeping the business cards of your prospects.

However, you should also look at the time spent for business-related activities during your trip. It would be hard to justify travel costs for a week-long trip to Miami if you only spent 2-3 days meeting with clients.  The IRS will likely call your attention if you declared that you spent just half of your time in Florida meeting prospective customers or dealers.

What if your residence is just a few hours away from Miami? Does that mean you can’t claim your travel expenses as tax deductible?

You can, as long as you can prove that you had to sleep or rest in Miami so that you can meet the demands of your work. Let’s say that you slept in the hotel where you held a meeting to avoid possible traffic problems. The IRS will consider your overnight stay in Miami to be business-related, and allow you to make a claim.

  1. Allocate your expenses

If you traveled for a business meeting but also went to see some old friends or visited tourist destinations, you will have to allocate your expenses. You can only deduct your business-related expenses, and not the costs that you incurred for personal activities.

For example, you rented a car to take you to Miami from New Orleans. Your business travel amounted to around 2,000 miles round trip. But on your way back to NOLA, you decided to take a detour to Jacksonville to visit your old college buddy.

Because the detour to your college buddy is personal and not business-related, you cannot claim your expenses for that part of the trip.

Generally speaking, you can’t claim the expenses of your spouse if he or she accompanied you in your business trip unless the presence of your significant other was necessary.

No, your spouse taking down notes for you during your trip isn’t justifiable. Your partner should have done something more critical, like serving as your interpreter, or even helping you close a deal.

  1. Keep your receipts and related documents

Lastly, keep all your receipts during the trip. You may even write down details at the back of the receipt, like the names of the business associates you met and the purpose of the meeting.

If your total expense during the trip is $75, you don’t need to show your receipts, though.

Don’t throw away other papers such as conference or seminar program. Those papers can justify your tax deduction claim.

 

Going on a business travel is like hitting two birds with one stone. Your firm not only stands to benefit from you embarking on a business travel, but you can also reduce your tax obligations.

You can meet a potential client during a business travel, or strengthen your relationship with your current customers. You can also attend a convention or seminar to enhance your skills, or learn a new one.

Moreover, you can write off business travel expenses like lodging, transportation, and meals, although the latter has a limit of 50 percent of the total costs.

The IRS, though, has been quite strict when it comes to business travel claims. You can fend off an audit by properly allocating your expenses, keeping receipts and related documents, and establishing the purpose of your travel.

If you’ll follow the tips mentioned in this article, then you should have no problems in claiming business travel deductions.

Filing Your Indian Tax Return When You Are Residing in the U.S.

It has often been a question for many Indian citizens living in the U.S. whether they should file their Indian Income Tax Return or not. Actually, taxability in India is predominantly based on your residence, not on your citizenship. Hence, you have to identify your residential status first before you determine if you are liable to file your Indian ITR.

So how do you determine your residential status?

Basically, your residential status depends on the length of time of your physical stay in India within a given financial year. It helps if you check your passport and take note of the immigration stamp dates, including the dates of departure and arrival.

If you meet any of these two criteria, then you are considered an Indian resident for a financial year:

  • You reside in India for at least six (6) months, or 182 days, during the financial year
  • You have stayed in India for at least 60 days or 2 months in the previous financial year

If you do not meet any of the above-mentioned criteria, then you are considered an NRI (non-resident Indian). As such, your Indian income tax largely depends on the income that you earn in India for the entire financial year. On the other hand, if your status is “resident,” then your global income is taxable in India.

If I am living in the U.S., do I still need to file my Indian income tax return?

Yes, but on certain conditions.

Just because you are an NRI does not necessarily mean that your obligation to file your tax returns in India is no longer there. In fact, as July 31st of every year–which is the deadline for filing returns–looms, you must already be gearing up to file your returns if your income in India goes above the basic exemption limit.

Any salary you receive or earn in India, including income from a residential property located in India, income coming from fixed deposits or interest on savings bank account, as well as capital earnings on the transfer of properties in India, are just some of the many examples of income accrued within India. Such incomes are taxable for an NRI. It follows then that any income earned outside the bounds of India is not taxable in India.

It is also important to note that any interest you earn on an NRE account and FCNR account is free of tax, while interest on an NRO account is taxable for an NRI. Simply put, if you are an NRI and you have performed your job in India, your salary income will be taxable in India, regardless of where your salary is credited to your account. On the other hand, if you have worked abroad but have received your salary in India, then your salary will be included in your taxable income in India.

 When does filing my Indian income tax return become mandatory?

The question of whether you should file your Indian income tax return or not is irrespective of your being an NRI or not. If you have lived in the U.S. long enough to be considered an NRI but still have income coming from India, you are required to file your Indian income tax return when your income exceeds the basic exemption limit. As an NRI, filing your income tax return in India is mandatory in the following cases:

  • The total of your taxable income from all sources goes above the basic exemption limit of Rs 2.5 lakh.
  • You have either long term capital gain (LTCG) or short term capital gain (STCG) from selling your investments or assets in India, even if your income goes below the exemption limit.
  • You wish to claim a tax refund, in cases when TDS has already been deducted.

Are there tax deductions available to NRIs?

NRIs are also entitled to tax deductions, just like ordinary Indian residents. Most of the common deductions under the Chapter VIA of the Income Tax Act of India are available whether you are a resident or not, except for those that have to do with maintenance, treatment of disabled dependent, medical treatment of certain diseases for both self and dependents, as well as specified investments like five-year post office deposit, senior citizen savings scheme and investment in Rajiv Gandhi Equity Savings Scheme.

If I am in the U.S., can I also enjoy the benefits of the Double Tax Avoidance Agreement (DTAA)?

 Currently, India has a DTAA with around 90 countries around the world, and one of them is the U.S. As an NRI, one of the first things that you need to determine is whether your income is taxable in India. Then, if you are living in the U.S., you must furnish a tax residency certificate (TRC) issued by the tax authorities in the U.S. Aside from that, you may also have to provide a self-declaration by filling out Form 10F.

Getting relieved under DTAA depends on your type of income. In fact, under the DTAA, certain incomes may be entirely exempted or may be taxed at a lower rate. If under this agreement your income is taxable, then you are required to pay your tax in India and claim credit for your paid tax in the U.S. against the tax liability in your home country.

For you to claim a lower tax rate under the agreement, being an NRI, you must have provided your PAN number earlier on to avoid being charged with higher withholding tax  of 20 percent, as stipulated in Section 206AA. Under rule 37BC issued by the Central Board of Direct Taxes (CBDT), NRIs like you are allowed to furnish alternative information or documents instead of PAN so as to avoid high withholding tax. These include your name, email, address, contact number, TIN and TRC.

But how do I file my Indian income tax return if I reside here in the U.S.?

 If based on the abovementioned standards you have figured that it is mandatory for you to file your Indian income tax return, then make sure to do it in advance to avoid penalties. Just because you reside in the U.S. does not mean you have to go back to India to file your Indian income tax return. Today, there exists a process of electronically filing your returns, allowing you to do your job without having to physically go to India.

Now, take a look at the following tax filing process for NRIs like you.

 Step 1: Choose your method.

NRIs have different methods to choose from when filing tax returns. You may do it yourself online, avail of assisted services, or follow the traditional route of chartered accountant.

Do it online (E-filing)

Today, filing tax returns online is the easiest and most convenient method for NRIs. In fact, the Indian Income Tax office is now making strides towards making this method the most viable option for Indians filing their returns from anywhere around the globe.

You have certain options when it comes to e-filing. First, log on to the income tax website and file your returns there. While this option is free, the whole process may be cumbersome for you and really need to have some technical know-how to go about the process. Under this option, you need to download a certain software to get hold of the appropriate form, fill it out and upload an XML file on the website. If you have a digital signature, affix it on the form and that’s it. Your return is filed. In case, however, that you do not have a digital signature, then you will have to send a signed copy of your ITR-V.

Here are the steps:

  1. Log on to IncomeTaxIndiaeFiling.gov.in and register.
  2. Your user ID is your PAN.
  3. View your Form 26AS. This is your tax credit statement.
  4. Select the financial year.
  5. Download the ITR form that applies to you.
  6. Open the excel utility and fill out Form 16.
  7. Click the “Calculate Tax” tab and check your tax payable amount.
  8. Fill in the details and pay your tax.
  9. Click the “Validate” tab to confirm all the information you have provided.
  10. Generate an XML file and save it to your computer.
  11. Upload the same XML file by clicking on “Upload Return” on the panel.
  12. Sign the file digitally by selecting “Yes” on the pop-up.
  13. Download the acknowledgment form or ITR-V that will be generated by the site. Print it and sign it in blue ink.
  14. Send the form either by ordinary or speed post to the Income Tax Department office in Bangalore, 560 100, Karnataka, India within 120 days of your e-filing.

Your other option for e-filing is logging on to tax-filing service websites. The web is teeming with sites that offer tax filing services, the most popular of which include taxspanner.com and elagaan.com. Compared with the income tax website, such online tax filing service providers offer a more user-friendly experience to NRIs like you, though you have to pay a certain amount of fee for their services. Some of them even have support offices in certain countries.

Tax filing service websites offer various packages, and the one you should choose should depend on the complexity of your Indian income tax return. The first thing to do is to register on the website and follow the process of filing, which is pretty much like the process for Indian residents. For overseas filers like you, you can send your payment via your international credit card. Usually, the regular packages of these sites range between Rs 250 and Rs 750.

Assisted Return Preparation

If you do not want the do-it-yourself method in filing your tax returns online, you may opt for certain websites that offer a mix of offline and online filing services. If you want this method, you can search for websites that offer such services, choose one, and call the nearest office of the service provider of your choice. Once you decide to avail of their services, they will do the entire tax filing process through email. All you have to do is just send them scanned copies of all the required documents and they will do the filing for you. They will also send you a copy of the ITR-V, which you need to sign and send back to their office. They will then be the one to forward the document to the income tax office in Bangalore. Rates of such service providers depend on the complexity of your tax returns.

The best thing about this option is that you have the benefit of getting professional advice from tax consultants. However, not all service providers of this kind offer complete online assistance, so you really have to be careful in choosing your provider. As a rule, the one you should choose must heavily depend on your needs.

Talk to a Tax Consultant in India

Of the three options you have, this one is the most traditional one. If you take this route, you depend on your chartered accountant or tax advisor in India to file your tax return on your behalf. The advantage of choosing this method is that since you already share a long-term tax advisor-client relationship with each other, he has all your necessary tax information and will certainly be able to guide you through the entire process. The only problem you may have if you choose this method is that you have to make sure that the tax advisor of your choice is accessible and tech savvy enough to be relied on.

Step 2: File your tax returns.

To file your tax returns, make sure that you are able to complete the entire process of filing. Should you wish to do it online, choose a website that offers e-filing services and fill in the details on that website. If you opt for assisted services, send your documents to the service provider who will then complete the filing process on your behalf.

Step 3: Sign your returns.

When it comes to this, you have two options. First, you may purchase a digital signature, although that is not a popular option since it is cumbersome for both the filer and the Indian Government. The other potion is to print out the ITR-V, also known as the acknowledgment, sign it and send it to India’s income tax office in Bangalore. Take note, however, that this acknowledgment document can only be sent via regular or speed post. So if you are sending it from the U.S., then it is best to avail of the regular postal service or courier it to anyone you know in India who can send it via post to the tax office.

Deducting Your Trip To India – Detailed Business Expense Guide

Suppose that you have just arrived from a two week trip to Europe, where you were able to close some deals while visiting some old friends. You’re so happy not only because you were able to snag more business, but you were able to bring home some souvenirs for your family and friends. And of course, you were able to squeeze in some time for relaxation and got to see top sights like the Big Ben and the Eiffel Tower.

But did you know that you can even reduce your next tax bill by declaring your recent trip abroad? Indeed, jet setting can save you a significant amount of money, but only if expenses satisfy certain conditions.

Business Related Travel Expenses are Tax Deductible

According to the Internal Revenue Service (IRS), you can deduct ordinary and necessary expenses for travel away from home or business as long as these are connected with your business or job. This applies to both domestic and international travel.

What are ‘ordinary’ expenses? The IRS defines this as a common or accepted expense in your trade or business. For instance, you can consider the costs associated with distributing promotional literature like newsletters and holiday cards as ordinary expenses.

On the other hand, a necessary expense is defined as something helpful and appropriate for your business or work.  Your business trip, which allowed you to close new deals, can be considered as one.

The IRS says that for travel to be considered deductible, it should be ‘away from home.’ This stipulation is almost always  satisfied for international travel. The IRS will consider  you to be away from home if you are on travel outside your tax home (where you live or work)  for a time longer than a typical day’s work.

Keep in mind, though, that eligible deductions for business travel are only for temporary work on the road. If you spent more than a year on the road for a business travel, then it is considered an indefinite assignment and thus doesn’t qualify you for a tax liability. Even short assignments to the same place during a fiscal year may be considered by the tax authorities as an indefinite assignment.

Eligible Business Travel Tax Deductibles

Now you may ask—what are the travel related costs that you can normally deduct on your tax bill?

Among the travel related costs that you can deduct on your next tax bill are:

  1. It doesn’t matter whether you travel by plain or car; you can normally reduce the expenses related to getting to and from a business destination as long as it is not close to your tax home.

For example, you took a cab to get from the airport to the hotel where you met your client. You can deduct the cab fare as a work-related transportation cost. You can also declare car rentals, and even costs incurred when you took your own car (gasoline expenses, parking and toll fees, for example.) You can even claim the expenses of operating and maintaining a vehicle such as repairs, washing, oil change,  and tire replacement as tax deductibles.

What if your client provided you with a free ticket? Or a friend in London gave you a ride? Obviously, you can’t declare these as deductibles.

But what if you took an ocean liner on your way to London? Can you also deduce the costs on your next tax bill?

The IRS has special rules when it comes to luxury water travel. There is a daily limit on the amount that you can deduct. The amount varies depending on the time of the year. It is typically 200% of the highest federal per diem rate allowable during the time of your travel.

For instance, the highest federal per diem for the period January 1 to March 31 is $428. The daily limit on luxury water travel is double that amount, which is $856.

So let’s say that your total bill for a five-day cruise to London from New York for a business travel conducted in February is $5,000. You can only claim $4,280 as your deductible because you exceeded the daily limit of $856 per day.

  1. Shipping and Baggage. You can also deduct expenses that you incurred for shipping almost anything you need for your business or job while on travel. For instance, the $100 bill that you incurred for sending props or other materials required for a presentation.
  1. You can also deduct the full cost of the hotel room or other accommodations if your trip is overnight. Thus, you can reduce a $7000 per night stay at The Savoy on your next tax bill.
  1. You can deduce up to half of the cost of your meals if you are traveling for business. However, the meals should not be lavish or extravagant. There’s no clear-cut definition for a lavish or extravagant meal, but you can expect to get audited if you claimed a meal consisting of lobster and champagne as a deductible.
  1. You can also deduct any communication-related expenses like phone calls and faxes while you are traveling for business. This also includes international calls.
  1. Cleaning – this includes expenses for washing and ironing your clothes during the trip. Because you have to be presentable during your meetings with clients, right?
  2. Tips— you can also deduct the tips that you handed out to waiters, bellboys, and other workers.

Travel Considered Entirely for Business

The IRS maintains that only foreign travel which is spent solely for business is fully deductible. This means that if you spent your entire stay abroad on business-related activities, then you can claim all your travel expenses as tax deductible.

Since you did go spend time visiting friends and sightseeing during your trip, then you’ll have to allocate between tax deductible business expenses and the non-deductible personal ones.

But let’s face it–you do want to deduct the entire cost of transportation during your entire trip abroad, right?  You can deduce your travel expenses even if you didn’t spend the entire trip on business-related activities if you meet any of these conditions:

  1. You don’t have substantial control. According to the IRS, you don’t have substantial control over your trip if you are not a managing executive, or you are not related to your employer. The IRS defines a managing executive as an employee who has the authority and responsibility to decide on the necessity for business travel.

You also don’t have substantial control if you are merely an employee who was ordered by your boss to go to say, Paris, for a business trip.

But if you’re self-employed, then you might not satisfy this condition at all.  The IRS maintains that self-employed individuals and business owners have substantial control over arranging their business trips.

  1. You were outside the US for less than a week. The IRS will consider your travel entirely for business if you were out of the country for a week or less. However, you will have to count the day you return to the US, and not the day that you left.

This can get a bit confusing if you were traveling to different parts of the US before you left for London. For instance, say your home is in Denver. You left for New York on Tuesday, stayed there for a few days for a series of meeting, before flying to London on Saturday morning.

You had several business meetings in London on Sunday and Monday, then spent the next two days sightseeing. You went back to the US on Thursday before going back to Denver on a Saturday.

Although you were away from your home for more than a week, you were out of the US for less than a week. Remember that the IRS won’t count the day you left your home.

So, you may be able to claim the costs of your stay in London from Saturday and Sunday, but you won’t be able to do so for Tuesday and Wednesday.

  1. You spent less than a quarter of your travel on personal activities. But what if you spent more than a week outside the US? Does this mean that you can’t claim that as business related, and thus make you unqualified for tax deductibles?

You can, as long as you spent less than a quarter of your trip on personal activities.

So let’s say that you spent 14 days in London, and only got to see the sights and visit your friends in 1 to 2 days. You deduct the cost of the round trip plane fare, cost of meals, lodging, and other related expenses as mentioned earlier.

  1. Vacation was not a major consideration in arranging the trip. You can claim deductions on your tax bill if you can prove that a vacation was not a major consideration in arranging the trip.

Tips in Filing Business Travel Expenses

Now that you have an idea which business-related travel expenses you can claim as a tax deductible, here are some tips that you should remember so that you will be able to maximize your savings the next time you file your tax returns:

  1. Keep track of all your receipts and records. You can save a lot of time in looking for receipts when you keep every slip that you get during the course of your travel. You should also write on the back of each slip the location and date, the name of the person that you met, as well as the reason of the expense. This way, you won’t have to scavenge for slips when it is time to file your tax returns.
  1. Document everything. If you’re taking a client to a fancy dinner, you can claim that as a deductible. But you should be able to justify to the IRS that the nature of the meeting warranted such a fancy dinner. Thus it is recommended that you document the business you discussed so that you can justify the claim or pass an audit.

If you attended conferences or meetings while on travel, it would be a good idea to keep the programs or brochures you received. You can also keep the emails sent to you by people whom you met during the business meetings as proof to back up your claim.

Make it a habit to write down the names and business relationship of all the people you met during your travel. Write down their names as well as the business discussed.

You should also know that the IRS does not require receipts for travel expenses less than $75. So if you checked in a hotel for an overnight stay at a discounted price of $70, you’re not obligated to show the actual receipt.

  1. Try apps. If you have too many documents to keep track of, you might want to download and use apps for travel expenses. There are apps such as Tax Tracker that can help you in documenting business and travel expenses.

Mobile apps can monitor your travel expenses, time spent on the road, and miles traveled so you can file taxes and claim deductions quick, easy, and accurately.

  1. Be honest. The best way to avoid a date with the IRS is to be honest about declaring your tax returns. Deduct only the expenses that you are entitled to. Keep all supporting documents just in case you are called for audit. Remember, you not only end up losing deduction but also pay additional tax, interest, and penalties if the tax authorities find out that you make unsubstantiated claims.

Worse, the IRS may subject your tax return to further scrutiny. And you don’t want them to start digging.

The bottom-line is that you can make a lot of exemptions when you travel abroad for business purposes. Now that you know which travel expenses you can deduct, start saving those receipts and recording every expense. You’ll be surprised at the amount that you can save during the tax season.

Hire Your Children To Save Taxes

Child labor is a subject that has a negative connotation in our society. For most people, it means depriving children of their childhood. It means forcing them to work when they should be at home watching TV, or playing in the fields.

But it is a different matter altogether if the child is employed by his or her parent’s company.

If you have a small business and you have children aged below 18 years old, it is highly recommended that you hire them as employees. It can be a very fulfilling experience to them. It can hasten their growth, develop a sense of pride and self-worth, and teach them to be more responsible.

Moreover, it can save your company thousands of dollars in taxes. It’s like hitting two birds with one stone—your children can be productive during their spare time and you andyour company can get to save a lot of money.

Hiring teen and young adults in a family owned business benefits both parents and the young ones. Parents get to save more as their businesses have lesser tax burden. Children, on the other hand, can be productive and get some extra money for their extracurricular and summertime activities.

Tax Benefits

There are several ways for your company to benefit from hiring your children as workers:

  1. The child’s salary is free from taxes.

You might know that the first $6,300 of income in a fiscal year is free from federal taxes. This is called the Standard Deduction. So if you hire a child as an employee of your firm, you’re basically keeping that amount in the family. Hire someone else and that $6,300 is taken out of you.

That money coming from your own pocket can be used by your son or daughter to buy a car, or go on a vacation. Even better, he can use it to support himself or his college education.

  1. The child’s salary will be tax deductible.

Let’s say that you are hiring your child with an annual pay of $6,300.  You can declare that amount as tax deductible from your business income.  The first $6,300 earned by a child working in his/her parent’s firm is not subject to tax. Yes, this means that your child’s earning will not only be subject to federal income tax tax but also state tax, FICA, or Medicare.

You, as the business owner, meanwhile, can declare that amount as fully deductible. This means that you will get a tax relief based on your child’s salary as an employee of your business.

For instance, your business is in the 35 percent tax bracket. You hire your 14-year old son to work in your office and help you with the filing of documents, or working  with the spreadsheets. For the year, he earns $6,300 in wages. He must also has no other sources of income.

You, as the business owner, stand to save $2,205 since the full amount of his wages will be deductible as compensation.

  1. No FICA taxes.

As mentioned earlier, your child’s salary isn’t subject to FICA tax. This means your firm won’t have to pay FICA taxes on your child’s wages.

However, there are certain requirements for your child’s salary to be exempt from this kind of tax:

  1. Your business is a sole proprietorship
  2. It is a husband-wife partnership
  3. It is a husband-wife LLC considered as husband-wife partnership for tax purposes
  4. It is a single member LLC treated as sole proprietorship for tax purposes

It should be noted that your child’s salary is not exempt from FICA taxes if your business is a corporation. FICA tax exemption is also not applied if the business is a partnership, or one or more partners are not parents of the child.

  1. Setting up retirement savings plan.

What most people don’t realize is that children under 18 can contribute to their own individual retirement account (IRA). This can be a great way for them to get a head start as far as saving and investing money is concerned.

Your child can contribute up to $5,500 to a traditional IRA. He can subtract the amount from their income for tax purposes. However, your child can’t make more contribution to what he earned in a year. So if he earned $5,000 in a year, the maximum IRA contribution he can make is $5,000.

  1. Shifting a parent’s higher taxed income to a child.

Since your child can save by a) having his income exempt from taxes and b) having the option to set up IRA on the income, you can then shift your higher taxed income to him.

Going back to our examples, your son makes $6,300 and then adds $5500 as a contribution to an IRA. Thus he has $11,800 shielded from taxes, and your business can write off that amount as a legit business expense that can reduce your gross income.

That’s the maximum amount that your child can make in a year sans tax. If you give him a higher pay than $6,300 in a year, the next $9,275 will only be taxed at a rate of 10%.

Thus, your son stands to have a tax of just $927.50 for the year on aggregate earnings of $21,075.

You’ll be wise enough to include that amount in your own income as you can incur a tax liability of $10,600. You can save up to $9,672 in taxes by doing so.

Guidelines

There are several things that you should know if you are to hire your kids as employees. Knowing these guidelines should keep the IRS from disallowing your company from claiming said tax exemptions:

  1. He/she must be a real employee.

Your children should be hired as bona fide employees. This means that they have work that is helpful and appropriate for your business. Typical jobs for children include routine office work such as typing jobs, stuffing envelopes, cleaning the office, answering phones, or making deliveries.  Tech-savvy teenagers can help in marketing a company through social media. Or they can help in maintaining the spreadsheets of the firm.

They can’t be hired for jobs that have no connection with your business, like mowing your lawn at home. Suffice to say, children shouldn’t be asked to do household chores and get compensated for it.

Since your child is considered as a real employee, he or she should fill out their timesheets. It is also recommended that they sign a written employment agreement that specifies the duties and work hours of the employee.

  1. The work must be age-appropriate.

The work assigned to your child should be age-appropriate. There’s a chance that a 8 or 9 -year old child can help in some tasks in the office like stuffing envelopes or even making deliveries. But it will be difficult for the IRS to believe that a child aged below that age can perform any useful work for your firm. Employing a 6 or 7 year old for photocopying work or filing can put you in trouble with the IRS.

It’s also a no-no for children aged 16 years and below to work in a dangerous industry. Hence if your business is heavy equipment contracting, you can’t assign your 15-year old son to the field.

  1. Child should comply with legal requirements.

Since the child is considered a real employee, he or she should comply with the same legal requirements as you would when you hire a stranger. Thus, he will have to apply for a Social Security Number and fill out IRS Form W-4. He or she should also complete Form I-9 of the U.S. Citizenship and Immigration Services.

  1. Compensation must be reasonable.

Simply put, your child’s salary should be consistent with market rates.

Many shrewd business owners would try to give their children a big compensation because it can give them more tax savings in the long run. It would enable them to shift much of their income to their kids who are likely to be in a much lower income tax bracket. But you shouldn’t attempt to do this as the IRS would eventually find out about this if they do an audit.

In paying your children, you should give them a reasonable compensation. The total compensation must include the salary plus all the fringe benefits such as health insurance and medical expense reimbursements.

To get an idea on how much you are to pay your child, you can call an employment agency to see the typical compensation for the type of work that your youngster will do in your business.

  1. Pay in cash.

It’s up to you to decide how much you would pay your son for the services he renders to your business. Just make sure that you pay him in cash if you don’t want to get in trouble with the IRS. Compensation in the form of foods and other things won’t cut it.

There was this case of a tax preparer in Washington who also owned an employment agency. She employed her three children aged 8, 11, and 15. The kids earned a combined $15,000 in two fiscal years for doing tasks like filing and stuffing envelopes. Their mom deducted their salary as business expenses. The IRS disallowed it.

Why?  It’s because the children’s wages was used by their mom to pay for their food, often pizza.  Also, she used the money to pay for their tutor’s fees.

While the mother argued that it was her children who asked her to spend their earnings that way, the Tax Court ruled in favor of the IRS. It noted that it is her parental obligation to provide food and support her children’s education, and the wages of the kids should not be used for these purposes.

  1. Be diligent about documentation and book keeping.

One way to ensure that this arrangement won’t backfire on you is to be diligent about the documentation and book keeping. Doing so would convince federal or state auditor that you reasonably employed your children for your business, and that your tax claims are legit.

Aside from getting all the state permits necessary to employ children, your company’s recordkeeping and payroll tax accounting must also be fool-proof. The payroll for your kids must be done in the same way that an employer would do the payroll for another employee. Paying a fair market rate, as mentioned earlier, would also satisfy the auditors.

  1. Your child should also help your business.

Finally, business owners should not only be concerned with the tax savings they’ll get when they hire their children. They must also be sure that their children can do the tasks assigned to them. The children should be able to help the business, and not just for the tax savings that the firm gets because of them.

Sure, they’ll reduce taxes by employing a child. But if the child doesn’t do a good job at work, then it would probably best to hire another individual to do the job for the firm.

Let’s say that a father hires his 15-year old son to help typing documents in his office. He’s able to save $3,000 in taxes for doing so. But if his son just lounges around the office and doing nothing, then the father didn’t really get the best out of this arrangement. It would have been better for him to hire another person who can actually help his company.

With the tax savings that small business owners can get, it really makes a lot of sense for them to hire their children during summer or even on weekends. The business owner not only stands to save on taxes, but also instils in his/her children values like hard work and responsibility.

If you decide to do this, you should ensure that you do things right. Get your children the necessary permits. Do your accounting cleanly. And give them real wages—not slices of pizza. If you do things correctly, you can save thousands of dollars in taxes while training your children who could be your successor one day.

How to shield business using accrual accounting ?

How Accrual Accounting Can Shield Businesses from Tax Payments

 Business owners like you should not only be hard working and motivated. They must also be clever. From sourcing the cheapest materials to finding the cheapest labor without compromising the quality of their items; entrepreneurs have many ways of displaying their shrewdness. Being shrewd can give them the edge over their competitors.

Managing the company’s finances is one area where business owners should be very clever at. In particular, being familiar with the principal methods of keeping track of income and expenses—cash and accrual—would enable business owners to know which method of account is best for their business.

And it’s simply not for complying with tax rules and regulations. Sometimes, being familiar with accounting nitty-gritty can save a business owner thousands of dollars for a fiscal year.

Take for instance, delaying taxes on a portion of their income for a year. There’s a very generous accounting rule that allows an entrepreneur or a company to delay paying taxes on a fiscal year.

So say that you are a business owner, and the IRS would let you take a year to pay taxes on an income amounting to $11,000.  You’ll have 12 months to produce $2,750 assuming that you have a tax rate of 25%. You could instead defer paying that tax, and use the money to invest in advertising. Or maybe upgrade your equipment so that your business becomes more productive and profitable.

Cash vs. Accrual Method

To better illustrate how the accrual method of accounting can benefit business owners by letting them defer payment of a portion of their income tax, let’s look at the two methods of recording accounting transactions.

In cash method, the income is counted when your company receives money or check. Expense is counted when your firm pays for a service or product.

Let’s cite an example so you can better understand. If you sell merchandise amounting to $500 to a customer on January and receive payment for it on March 1, you can record the income on March 1. This is because it was only on March 1 that you received the payment.

This method is preferred and practiced by more small business owners. For one, it is easier to maintain. Business owners or their bookkeepers only record when the firm receives cash, or pays cash out. It is straightforward and simple. It requires little record keeping other than checkbook register and bank statements.

But one disadvantage of this method is that it can distort the picture of your firm’s income and expenses. It won’t account well for situations wherein you have used credit to buy supplies, or extend credit to your customers.

It can also lead you to falsely believe that your business is experiencing highs and lows.  For instance, if your company receives many payments on a month, you may think that the business is booming. But the reality could be that those payments came from sales that took place many months earlier.

In the accrual basis, transactions are only counted when they happen. It doesn’t take into account of the date the money is actually received or paid. There’s no need for you to wait until you see the customer’s money being transferred into your account, or you actually pay out of your checking account if we talk about expense.

In accrual method of accounting, the job completion date is the one that matters. You can’t put the income down in your books until your business finishes a service or delivers all the products as specified in the contract. So if a job takes another 30 days for the finishing touches, it doesn’t have to go on the books until the 30 day period has lapsed.

For example, your business is a leather repair shop. It has been commissioned to repair an antique leather couch, with the job completed on December 10, 2015.  Your business bills the customer for $1,000, which you receive on January 10, 2016. In the accrual method of accounting, your business will have to record that income in December 2016 even though your firm has yet to receive payment from the client.

The foundation for accrual accounting is the “matching principle.”  This is the idea that expenses must be recorded whenever an obligation is incurred. When a firm makes a sale, the expenses needed to produce the item or provide the service must also be record in the same period—regardless of when the cash is paid.

The strength of the accrual method is that it can tell you the health of your business. You would know if the company is booming or slowing down, depending on the number of orders or deliveries that it is posting for a certain period.

But it won’t tell you what cash your business has on hand. This in turn, could lead you to add debt that you can’t afford. Moreover, the accrual basis is very complicated for most small business owners. Shifting tax burdens using this method is also difficult for most entrepreneurs.

Some small businesses try to get the best of both worlds, so to speak, by using a hybrid method. They use the cash method for income and expenses, and accrual basis for inventory as required by the IRS.

Certain types of businesses are also allowed to use special accounting methods, like builders, contractors, farmers, and business owners who receive payments under long-term contracts.

Saving on Taxes Using Accrual Method

While the accrual method can be complex for most business owners, it can be very useful for those who want to save on taxes. As mentioned earlier, large businesses use this type of accounting. Even small businesses with sales under $5 million a year can use accrual accounting. With accrual method of accounting, business owners can reduce their tax burden or liability.

In the accrual method, businesses can delay recognition of an income to a future tax year in order to reduce their tax liability for the current year. This explains what we mentioned earlier—that if a business has an income amounting to $11,000 for year 1, it can elect to defer payment of $2,750 in taxes for the said income to the next succeeding year.

To better illustrate how accrual accounting can work to the advantage of small businesses in deferring tax payment, let’s cite a few examples.

Usually, businesses include advance payments for the services in the tax year that they receive them. But they can also choose to declare that payment until the next year until the product or service has been completed.

For example, a contracting firm uses the accrual method of accounting.  It receives a $100,000 advance payment in December 2016 from a client for the construction of a house to be completed by the end of 2017. The firm has the option not to include the amount in its income for tax purposes for 2016, but instead declare it for 2017.

The game goes for advance payments for goods and properties. Businesses can postpone reporting income from the advance payments they receive from properties they sell, lease, build, or install.

For example, a magazine receives a 12-month subscription for its monthly publication. In November 2016, it received payment the payment of $120 from a subscriber who agrees to pay the entire cost upfront. The said firm can postpone reporting the income until the completion of the contract, or when it has completed delivering the magazines to the subscriber.

In these scenarios, the companies can opt to use the payments they received to grow their businesses, like investing or buying new equipment.

Limitations

However, companies who opt for accrual accounting have to follow certain rules if they want to defer recognizing income during a certain year.

Generally, businesses are not allowed to defer inclusion of an advance payment in income for services that they are to perform after the end of the tax year following the year that they received the payment.

To further illustrate this, a dance studio gets a two year contract for 96 one-hour dance lessons. It received an advance payment for the contract in October 2016. The contract would stretch up to 2018. The company is thus obligated to recognize the payment in its 2016 income because part of the services won’t be performed until 2018 (or the year after the year it received the payment).

Deferring reporting income is also not allowed if the company receives it under a guarantee or warranty contract. The same goes for income from prepaid rent.

Other Benefits of Accrual Accounting

Aside from the flexibility that accrual accounting can afford to small business owners, there are other advantages or benefits that this accounting method can give to entrepreneurs.

One is that it gives a better picture of a company’s financial performance. Accrual accounting allows the business owner to easily see how the company is doing as far as finances are concerned. He or she will be able to see where the profits are coming from, and where the expenses are going.

Another benefit of accrual accounting is that a business owner would be able to track historical trends. Since accrual accounting can track revenue and expenses, it allows for a better way of tracking the business activities. Business owners will be able to identify trends that are related to occurrences in the market place.

Accrual accounting can also benefit the company by making access to credit easier. Since companies will be able to keep track of their financial performance with accrual accounting, they stand a better chance of getting access to credit from financial institutions. This is particularly important for small businesses which need credit to expand, and at times, to survive.

Finally, accrual accounting would enable firms with annual sales of $5 million or annual inventory sales of $1 million to meet generally accepted accounting principles or GAAP.  The latter is considered the industry standard for financial statement preparation. Meeting GAAP enables investors and financial institutions to easily determine a company’s financial health or standing.

How to Change from Cash to Accrual Accounting

Now that we have established that accrual accounting can enable a small business to defer paying of taxes under certain conditions, the next question you may have in mind is how to change from cash to accrual accounting.

Changing accounting method should be approved by the IRS first. To do this, you should file Form 3115 or Application for Change in Accounting Method. You’ll have to pay a user fee for this.

You can also contact a business or commercial law attorney, or inform your accountant, about your desire to shift from cash to accrual accounting. These pros can help your business change to the accounting method that can increase your business’s profitability and shield it from taxes during certain tax years.

The accrual method of accounting may be something you aren’t familiar with as a business owner.  You may have been accustomed to the cash-basis that you can’t imagine shifting your accounting methodology anytime soon.

But as you have realized upon reading this article, the accrual method of accounting can give you a lot of benefits. It can enable you to defer payment of taxes for a particular year.  The money that could have been spent for tax payment can then be used by the business for initiatives like buying equipment and even investments.

As a business owner, it only makes sense for you to study the nitty gritty and even shift to the accrual method of accounting from a cash-basis method. While it is complicated and time consuming, it can be very advantageous to your business. Aside from the tax savings you can get, accrual accounting can enable your business to grow. You would be able to study better the financial health of your business, and get access to loans from financial institutions.