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How To Save Taxes By Setting Up S-Corp

How to Save Taxes as an S-Corporation

If the individual is self-employed, it is possible to help avoid high Medicare and Social Security taxes to organize the business as some kind of S-corporation. This is because individuals who are not hired by any corporation must pay higher Medicare and Social Security. By organizing the business as some kind of S-corporation, then having higher taxes can be avoided.

The IRS or the Internal Revenue Service can also take a close look at the taxes if this route is chosen as it could also lower the overall tax liability and then generating the similar net income.

Self-Employment Taxes

Whether the individual is an employee or self-employed, they still have to pay Medicare and Social Security taxes to the government. When working for someone else, the individual is only responsible for his share of the taxes and the employer can make the difference by paying the balance off. However, for those who are self-employed, they are expected to pay both the portions of the tax. The combined employer and employee portions of this tax usually amounts to a total of 15.3 percent.

S-Corp Distributions

If the business is organized as some kind of S-corporation, then it is possible to classify some of the incurred income as a salary and some of these as a distribution.  The individual is still liable for the self-employment taxes on the salary portion of the income, but they just have to pay the average income tax on the distribution portion. It also depends on how the income is divided. In doing so, it can save a substantial amount of the self-employment taxes by merely converting this into the S-corporation.

The Risks of Filing the Business as an S-Corporation

The Internal Revenue System or the IRS looks closely at the S-corporation returns because it has more potential to be taken advantage of. Take this situation for example. An entrepreneur who generates an annual income of $500,000 abut only records $20,000 will trigger an inquiry from the IRS because he is obviously avoiding much self-employed taxes. The guiding principle is that the taxpayer must designate an amount that is reasonable to his income. However, this is quite a gray area and if the envelope is pushed too far, then there is more risk for the IRS to do an audit and also start of potential penalties on the interest of the back taxes that the IRS have already addressed.

Additional costs for S-Corporations

The S-Corporation saves the individual from self-employment taxes. It also costs the individual more than he can save. With larger corporations, the S-corporation is some start-up that has accounting and legal costs. There are some states that are expected to pay more taxes and fees. Take for example the S-corporation in California must pay 1.5% on the income and a minimum annual amount of $800. This is not a requirement for sole proprietors.

Difference Between S Corp and LLC

Both the S-corp and the LLC provide the entrepreneur the similar kind of protection. However, the LLC is much simpler than the S-corp. Filing it as LLC can also save the taxpayer a couple of thousand dollars especially on the cost of administration. However, studies show that there is more money saved when incorporating. This Is because of the differential in the Medicare tax.

It is important to note that the profits from the LLC are taxed completely for FICA, which is Medicare and Social Security combined. This means 15.3% of the FICA taxes along with the additional $2.9 Medicare taxes on the profits that are above the wage base.

This is where the difference between the S-profits come in. An S-Corporation is not taxed for FICA. This is the differential in Medicare. Under normal circumstances, full time physicians usually earn more than what they get from the wage base of the Social Security. The tax savings are also generated from the Medicare differential between the non-taxed profits of the S-corps and the fully taxed profits of the LLC.

The catch is when the entrepreneur incorporates then he is both the owner and employee of the corporation. As the corporate owner, the taxpayer hires himself, who is also the employee. The upside is that the LLC is some kind of venue where the taxpayer is both the worker bee and the business owner. Therefore, the business results of the LLC when reported and filed on Schedule C that also includes the individual’s 1040, there is no separate income. This then saves him money.

Receiving Remuneration from S-Corp in Two Ways:

  • As an employee, the taxpayer receives a “fair salary” by the corporation because he is productive.
  • As the owner, the tax payer pays himself a “distribution” of the said profits that remain after every other expenses (including the salary of the tax payer). These profits are also taxable because it is income and not because it is considered as Medicare taxes.

For S-Corp to make sense financially, the individual must have profits that are significant and long lasting even after the salary of the employees have been paid fair and square. How is a fair salary calculated? Here are two ways:

  • The IRS typically does not challenge the “fairness” of the salary if it is not equal to the remaining profits even after paying one’s self.
  • The entrepreneur must also pay a reasonable amount depending on one’s production, location and profession.

The salary being reasonable is constantly scrutinized by the Internal Revenue System. This is because of the owners of S-corp are tempted to earn their remaining profits from the Medicare taxes because all year round, they were only getting miniscule paycheck.

Business owners and self-made entrepreneurs must understand that S corporations can save owners tax when registered as a small business. There is a big benefit for the entrepreneur if they list the business down as an S corporation. The S corporation minimizes the employment taxes.

However, it must be clarified that the S corporation is not really a corporation. Instead, an S corporation is actually a limited liability company that is strictly made for the Subchapter S election.

People including tax accountants regard this as “S corporation.” However, the more proper way of calling it is Subchapter S corporations especially when the entity that is making the election is a “Subchapter S LLC.” It only comes to show that the entity that makes the election is really an LLC.

Here is a more elaborate explanation on how the Subchapter S allows the business owners to save more money:

Avoiding Some Taxes

The S corporation election lets the business owner avoid Medicare, self-employment taxes and Social Security on the portion of the business profits. That is the deal as well as the trick. The tax avoidance gambit also works quite simply despite it being regularly debated by the Congress and also reaffirm the works.

With an S corporation, the entrepreneur splits the business profits into two: “distributive share” and “shareholder wages.” The shareholder wages are subjected to 15.3% tax and the leftover distributive share cannot be subject to 15.3%.

Tax accountants really do not explain this and can be quite sheepish on this particular subject matter. However, for entrepreneurs who wish to avoid Medicare and Social Security taxes along with the self-employment taxes, it is definitely beneficial for them to be listed as an S corporation.

Note that the S corporation also lets the active shareholders to not pay the surtax of 3.8% for Medicare on business profits.

The Deductible Losses for Smaller S Corporations

As mentioned in the previous paragraphs, the saving tax loophole on taxes that is associated with the S corporation passes by S corporations that let the shareholder as well as the employee avoid the employment taxes. This is where entrepreneurs and self-employed individuals must focus on if they wish to make a Subchapter S election for their LLC or their corporation.

However, there are also two smaller general tax benefits that are associated with the S corporation. The first benefit is that the S corporation tends to lose money and that loss eventually becomes a tax deduction on the individual tax return of the shareholder.

There are some rules that the entrepreneur must follow in order to deduct these losses. In summation, the money that is lost must be the money of the beneficiary. They must also be working in the S corporation. This is a good benefit for businesses that experience losses whenever they ramp up.

Another benefit is that the minor tax savings can also flow from the Subchapter S status. An S corporation has a safer tax return that can put deductions. This results to entrepreneurs claiming deductions that are legitimate.

No Corporate Income Tax

Another tax saving benefit that must be delivered by S corporations is a special case and is only applicable to businesses that are operated in the form of regular corporations. These are also regarded as C corporations.

In most situations, S corporation does not pay corporate income tax. This means that when compared side by side with the C corporation, the S corporation can pretty much save the entrepreneur a corporate income tax.

With the examples presented above, it only makes sense that it is definitely fair for the entrepreneur to tax these small business corporations at a 63% tax rate. It is also self-evident that a corporation should be elected and treated as an S corporation. This is because as S corporation, there is no income tax that can be levied. Whenever the income is allocated to the individual shareholders, there is a maximum rate of 44%. This means that it would be around $440,000 in the form of income taxes and then it would be around $600,000 left over right after the tax profit.

Year End Tax Planning for S Corporations

 Businessmen and entrepreneurs work hard on preparing and planning for the upcoming tax season. An area that must be paid significant attention is how to properly plan for the S-Corporation clients. This is because the S-corporation is a designation within the IRS tax code which also changes how corporations are taxed. If the corporation is created within the state law and it is applicable, then it is granted the S Corporation status from the IRS. The business is no longer taxed as a corporation and this is good news for the owner because they receive lower tax rates. In the long run, it transforms into a “flow through” entity and its earnings accumulated from the corporation are eventually taxed at the level of shareholder and listed as is on the 1040 tax return. There are also other entities that is requested and treated as the S Corporation for the taxes whereas the remaining amount is simply for the LLC and its legality.

There are also several aspects that are connected to S corporations and must be specially planned toward the end of the year. When the Congress enacted the statutes of the S-Corporation, there have been lots of quirks and this was created and it primarily affected the S-Corporations. It eventually seemed inconsistent along with the other areas from the tax code. Nonetheless, it requires that this may be properly accounted for.

Salary of the Owner

The profits of partnerships, LLCs and sole proprietorships are subjected to two taxes: self-employment taxes and income taxes. When one of these two is treated as some kind of S-corporation. The residual profits are not subjected to taxes for the self-employed. This can definitely decrease taxes. This is somehow true to a certain degree. Offsetting the tax savings is the very reason why an owner of any S-corporation must pay himself or herself a salary that is within the means to commensurate services that have been provided to corporations. The salary is then subjected to employment taxes. In effect, the portion of the residual profits of corporations are not allocated to salaries subjected to self-employment taxes.

Understanding The 2018 Tax Changes

President Trump signed the Tax Cuts and Job Acts on December 22, 2017. It slashes the corporate tax rate originally from 35 percent and down to 21 percent the minute 2018 starts. In other words, the highest individual tax rate is now 37 percent and it also cuts the rates of the income tax, eliminates personal exemption and then doubles the standard deduction. Corporate cuts are usually permanent whereas the changes in individual cuts end by 2025. In a nutshell, here is how this new Act changes deductions for elder and child care, business taxes and income taxes.

Income Taxes

* The Act retains the seven income tax brackets. The only difference is that the tax rates are lower. Employees will eventually see these changes reflected in their February 2018 paychecks. The income levels rise every year because of inflation. However, they increase slower compared to the past because the Act is resorting to the “chained consumer price index.” This will eventually move people to higher tax brackets.

* The new Act doubles the standard deduction. Those who are single filers increases the deduction from $6,350 and to $12,000. Those who are Married and also Joint Filers find their tax increasing from $12,700 and reaching $24,000. This means that the over-all 94% of taxpayers get the standard deduction. The National Association of Realtor and National Association of Home Builders are against this. When taxpayers take the standard deduction, only a handful of them would make the most out of the mortgage interest deduction.

* This can lower housing prices. This is why people are now concerned about the real estate market. They think it is currently trapped in a bubble which could burst anytime, therefore resulting to another collapse.

* It eliminates personal exemptions. Before President Trump signed the act, taxpayers are deducted $4,150 from their income every time they claim one dependent. This then results to families with multiple children paying higher taxes regardless the increased standard deduction that the new Act has imposed.

*It eliminates itemized deductions. This covers moving expenses. Only members of the military are exempted from this. This means that individuals paying alimony are no longer deducted for this, whereas those receiving the alimony can. This begins in 2019 for couples that signed the divorce in 2018.

*The new tax code retains the deduction for retirement savings, student loan and charitable contributions.

*It limits the deduction on the mortgage interest for every $750,000. Deductions can no longer be applied on the interest of home equity. Those who currently have mortgage are not affected by this.

Those who pay taxes can subtract to a total of $10,000 on local and state taxes. They have to choose whether the taxes will be on the property taxes, sales taxes or income. Taxpayers in California and New York, both high tax states, are in the losing end here.

The New Act Regarding Medical Expenses

The Act expands the deduction for 2017 and 2018 medical expenses. It lets the taxpayers deduct their medical expenses that range around 7.5 percent and even more of their income. Before this bill, the cutoff for medical expenses was 10 percent for insured individuals who were born after 1952. Obviously, seniors already receive the 7.5 percent cutoff. Statistics show that around 8.8 million people have already used this deduction in 2015.

The Act also repeals the much-discussed Obamacare tax for individuals who do not have health insurance in 2019. Without this mandate, the Congressional Budget Office predicts that around 13 million people will discontinue their plans. Therefore, the government would eventually then be able to save around $338 billion because there is no need to pay for the subsidies. The downside to this is that the costs of health care will increase. This is because fewer people get the preventive care required and needed in order to avoid those unexpected visits to the emergency room. Maine Representative Senator Susan Collins approved this bill because the President promised to reinstate the subsidies to the insurers. This is outlined in the Murray-Alexander bill.

The overall subsidies of $7 billion is reimbursed through lowering the costs for Americans who are within the low-income range. However, the CBO has stated that it will not offset the health care prices that are higher in value and were created by the repealed mandate.

This Act also doubles the exemption of the estate tax down to $11.2 million for the single taxpayers and around $22.4 million for those who filed as couples. This benefits those who are in the top 1 percent of that group. These higher 4,918 tax returns have a total contribution of $17 billion in their taxes. The exemption also reverts the pre-Act levels in the year 2026.

It maintains the Alternative Minimum Tax. It increases exemption from the amount $54,300 to $70,300 for the singles and as for those who filed as joint, this ranges from the amount $84,500 to $109,400. As for the exemptions, the phase out is at the amount of $500,000 for the single taxpayers and $1 million for those who filed as joint. This exemption also reverts to the Act levels of the year 2026.

Elder and Child Care

As for the Child Tax Credit, the Act raises it from the amount $1,000 to $2,000. For parents who do not earn enough in order to pay the taxes, they can claim credit as much as $1,400. It also increases income level at $110,000 to $400,000 for tax filers who are married.

This lets the parents use the 529 savings plans to pay for the tuition in private schools, as well as religious schools with the K-12 program. They can also resort to these funds to pay for the expenses that are acquired when children are home-schooled.

Every non-child dependent is given $500 credit. This assists the families in caring for their elderly parents.

Taxes on Businesses

The New Act decreases the maximum tax rate of corporations from 35 percent down to 21 percent. This is the lowest that it has been since the year 1939. For the longest time, the United States is included in the list of countries with the highest rates around the world. A number of corporations do not pay that much. Therefore, on average, the reasonable and effective rate is around 18 percent. Large corporations employ tax attorneys who assist them in coming up with ways so that they do not have to pay more.

This then raises the standard deduction to the amount of 20 percent for businesses that are referred to as “pass-through.” This deduction is said to end after the year 2025. Those considered to be pass-through businesses are sole proprietorships, S corporations, limited liability companies and partnerships. They also cover hedge funds, real estate companies along with private equity funds. The deductions are then phased out for the service professionals who reach the income amount of $157,500 for singles and as for joint filers, it’s around $315,000.

This New Act sets limitation to the corporations’ ability of deducting the interest expense down to 30 percent of the overall income. Within four years, the income is based on the EBITDA but this also reverts the earnings before the taxes and the interests. This makes it more expensive for the financial firms to borrow some money. The companies will also have less opportunities to issue the bonds and buy their stock back. Stock prices may fall. This limit generates the revenue to also pay for the other tax breaks.

It lets the businesses also deduct the overall costs of the assets that are considered to be depreciable and have this done in one year as opposed to amortizing these through several years. This, however, does not apply to the structures. To qualify, the equipment can be purchased between September 27, 2017 and January 1, 2023.

The New Act also requires the requirements to be stiffened especially on profits that carry interests. Carried interests are usually taxed at the rate of 23.8 percent as opposed to 39.6 percent. The firms are then required to hold these assets for the duration of a year so that they can qualify within the lower rate. The Act also extends this requirement to last up to three years. This may not benefit the hedge funds that have the tendency to continuously trade. It would also not affect private equity funds that are within the assets of five years. This change in taxes could increase the revenue to $1.2 billion.

It also eliminates the corporate AMT. This had a tax rate of 20% that kicked in if the tax credits pushed the effective tax rate of the firm right below that specified level. Under the AMT, these companies do not have the ability to deduct the spending budget for research and development as well as the total investments especially in a low-income neighborhood. By eliminating the corporate AMT, it adds a total of $40 billion to over-all deficit.

The New Bill also advocates the change from the “worldwide” tax system that is currently operating and turn it into a territorial system. Under this, multinationals receive taxes based on the foreign income that they have earned. They also do not have to pay the tax unless the profits are brought home. This results to corporations basing their businesses overseas. When it is set in a territorial system, these businesses are not taxed on the profit that they earned on foreign soil. There are more chances that they will invest this within the United States. This benefits the pharmaceutical as well as the high tech companies, most of all.

It lets the companies repatriate the overall $2.6 trillion that they hold in stockpiles. They only have to pay the tax rate that is usually 15.5 percent once and also 8 percent for the equipment. This repatriation could also raise the yields of the Treasury note. The corporations that hold the most of the cash in the treasury notes usually sell them because the supply that are in excess often send the yields on a higher basis.

Other Benefits of the New Tax Bill

* It lets the oil drilling within the Arctic National Wildlife Refuge. It is estimated to increase this by $1.1 billion in total revenue over a period of 10 years. When drilling this, it may not appear profitable unless it gains $70 per barrel.

* It retains the tax credits for the wind farms and the electric vehicles.

* It also cuts the deduction for the drug research targeted on orphans from 50% and to half which is 25%.

* There are cuts on the taxes of liquor, beer and wine. The Brooking Institute has an estimation that amounts to 1,550 more deaths that are related to alcohol. The studies also discovered that if the alcohol prices are lowered then there are more purchases of this product and therefore results to death tolls being higher.

How It Affects Taxpayers and Individuals

This new tax plan assists businesses, and not individuals. The tax cuts on businesses are permanent whereas the individual cuts have an expiration, and this is 2025. However, the largest private employer in the country, Walmart, has released a statement that they will increase the wages of their employees. They will also use this additional money that they have saved from the tax cuts to divide it in the form of bonuses and then also increase the benefits.

As for individuals, the clear winners are the higher-income families. Those who are within the 20-80 percent of the income range receives a 1.7% increase in their income after tax. Those who are in the 95 to 99 percentile will benefit an increase of 2.2%.

The Tax Policy Center also estimates that the ones in the lowest earning percentile would see their income at a rate of 0.4% higher. As for those who are in the next highest percentile, they are expected to receive 1.2 percentage boost. Those in the next two quintiles can see their income raise by 1.6 to 1.9 percent. The biggest increase goes to those who are earning the most.

Live Seminar – Prepare Yourself To Take Advantage Of 2018 Tax Reform

Meet with Sanjiv Gupta CPA @ Live Seminar

Come and interact with Sanjiv Gupta CPA on Feb 25th, Sunday ( 10 am to 2:30 pm).  Lunch will be served.  Small business owners and individuals will greatly benefit from this event.

Sanjiv ji will focus on educating the audience on the 2018 tax reform.   You will understand how to structure your income and expenses to take advantage of recent tax law changes.  Majority of the time will be spent to discuss tax saving tips and interacting with the audience.

You can expect us to go over 50+ changes that are going to take effect this year and how you can position yourself to talk advantage of these changes.

See you at the event – Registration is only $15 (Includes Lunch).

Location: UlavacharU – 685 East El Camino Real – Sunnyvale, CA 94087

 

 

What To Expect @ the Seminar: We talked about these subject briefly in our last webinar. Sanjiv Ji will discuss all sort of tips to help you maximize your bottom line in 2018.

1.) How individuals and business owners will be impacted by the 2018 Tax Reform

2.) How 2018 Tax Reform will impact Real Estate Owners & Investors –

3.) How setting up a company in 2018 can be really helpful for everyone –

Tax Lawyers are Exploiting All the Mistakes in the GOP Bill

Republicans that are in Congress reach the verge of the vote and is connected as the biggest tax overhaul in years. Tax scholars are putting out their concern that there are parts in this bill that has been so hastily crafted and have created the opportunities for the taxpayers who are wealthier than average. A number of lawyers and analysts have already tried exploiting the glitches and the loopholes in this game that the US tax system if playing and they are also adding more to the growing deficit.

Without the right safeguards and also the anti-abuse measures, then these taxpayers can also take advantage of the tax provisions that are riddled with the problems. There are fundamentally change courses on the key provisions, then the bill is quite going to cost more than what has been expected. It is also certain more than the dollars that has been estimated.

The sense is that there are estimates that cannot be taken far into the ways that the taxpayers are also getting through the system and its game.

People have the tendency to exploit the loopholes and also give access to the advice, specifically the taxpayers and the corporations who have high incomes. These are not poor Americans. The Republican plan provides a $1.5 trillion cut that can also disproportionately has the wealthiest Americans that can also pay for the expansion of the national debt. There is the analysis of the final bill in the Tax Policy Center and discovered that the 1% of the taxpayers can also reap the 83% of the tax benefits around 2027 and also see the cut as well as the average amount of $20,660. Whereas the 40% of the households also have the tendency to see an increase in the average of this amount around 2027.

The 13 scholars on taxation have also increased the lawmakers and also mentioned this in the earlier report when they are drafting the legislation that they have already closed and rushed the processes without even providing enough regard for the tax law as well as the intricacies and the risks of the consequences that are unintended.

Another glitch that has already seen this in the overhaul process into the very minute inclusion of the AMT or the alternative minimum tax. Why? This is because it was already set at around 20%. This is similar to the 20% that the corporate tax rate can also be included in the very Senate. The alternative method to this is to lower the corporate tax rate and also make businesses no longer receive the benefits of tax breaks. There are lobbyists that also claim that the inclusion in the tax can also claim the development and the research tax credits that make it more difficult for the prevented banks and the tech companies that are received when getting the credits as well as the investment in areas around the United States that can be described as undeserved. Luckily for the business, then the lawmakers can be struck in the AMT provision along with the final plan.

The tax scholars who also presented this report discovered other issues in the House and Senate Bills. The instance that it reduces the corporate income tax has become 21%, it also encourages the taxpayers to reach the shelter income in the corporation so that it can avoid getting the high rates on the income taxes. It can also happen under the very law but “the cost of this is that there is a high corporate tax that is relatively high and also shows some limits to the benefits of all these strategies.” This is one of the essential points that the paper has brought up. Unlike the individuals, the corporations are also written in the Republican tax bills that can deduct into the local and the state income taxes. This also heightens into the incentive to just start the corporation.

Entrepreneurs can also gain the relieve that the lower tax rate is passed through the income. The changes in the legislation can also result to the substantial tax planning and also go for the lower taxes that can characterize the very livelihood is the right and proper business. The final bill is also serving as the provision for the pass-through companies to make the most out of the 20% deduction on the income. This is without the safeguards that have been placed in the very version of the Senate. It also leaves the companies to reflect something tangible to the employees that have already provided a tax break. There are also other real estate developers.

This is not the exemption that makes it limited to the real estate companies. There are associates that also spin off the limited liability that separate the corporation because of the services provided to the firm. The associates and their company are also considered the pass-through business. The associates can also check into the contract and then make sure that the original firm is the restricted income that amounts to $157,500 to the individual. The $315,000 is for couples and associates can also make the most out of this deduction from pass-through businesses.

Take for example an athlete who can create this brand name and make it into a company that can also lower the rate of the pass-through on the income. The tax experts can also check that there is a loophole that is not very clear cut. The assets of the brand company serve as the reputation of the owner, as opposed to its employees. If it is the latter, then this company cannot be eligible for deduction. IF the athlete allows the pass-through company to take place then it maintains the right to keep its image and its license. It is also the company’s asset to look into its intellectual property and also make it accessible to lower the rate, and then that’s when it can pay off.

According to the experts, the tax games can reduce the revenues and also increase the cost of the legislation that makes it more regressive. The additional tax complexity is necessary that the way for the police to come up with new rules so that this can prevent abuse. It also ensures the legislation that can move it further away from the goals that are more equitable, simpler and efficient tax system.

It is possible to deduct the taxes on the exports along with the incentivize of the firms to also develop the very intellectual property that is found in the United States. It can also export the goods on that very basis. What can also encourage these manufactures to make, claim, call and sell depends on the distributor. They can make the most out of the subsidy on the export and they can also check the low tax rate on the exports and also provide the economic incentive for companies that they said are perverse.

This shows the glitches that work around the tax code that is so complicated. In fact, this new tax bill is not even as simple as they claim it to be due to its host of changes.

25% Rate Pass Through Helps the Wealthy

The real story behind the tax bill is more complicated. It is also expected to become a windfall for the investors that are earning high-income. There are many business owners that also include small businesses. It can also end up letting the pay be as high as 35.22%. Overall, it can also serve as a complication to the tax code that also provides the small business owners. Despite the attempts of small business owners, taxpayers cannot abuse this new system because the proposal that has been laid out prevents them from doing so. It is definitely an opportunity for the business owners and the clever investors that can help the tax lawyers and add this to the game of the system.

Pass-through businesses connected to the partnerships, sole proprietorships and limited liability companies are into the S corporations. Unlike the traditional C corporations, the income is not connected to the business-level income tax and also check into the earnings of the owners. The ordinary income tax rate amounts to 39.6% can equate to the pass through businesses alongside the small businesses. However, this characterization is quite misleading. These kinds of businesses serve as the multi-state pipelines. Other companies include real estate developer, hedge funds, private equity firms and other kinds of large businesses.

In addition to this, there are millions of owners of businesses, both the big and small ones who would not benefit from this low rate because they are not incurring enough wages. Around 9% of the owners of this pass-through business have already paid at a rate of around 25%. The income tax rate cap can also pass through the income that can benefit them at all. By contrast, the ones can also benefit the 25% tax rate cap that has increased in the 39.6%. This is currently the reception of half of all the pass-through income.

Passive owners get quite a deal because there is less risk and they treat wages as business profits. The proposal can also cap the income tax for the pass-through businesses and these passive owners make the most out of 25%. This can also benefit the taxpayers who make more than around $260,000. Otherwise the 35% and higher, then it is possible for the businesses to the unproposed bracket. It is also a business for the capital intensive. The 35.22 percent can also reflects the default rule in the legislations of the 30%. This is deemed eligible so that the 25% rate as well as the remaining 70% is then characterized and be compensated and taxed at the usual maximum rate of 39.6%.

Pass-through businesses are also eligible for 25% because the entrepreneurs are passive. They really do not jump in and contribute to the business. The new bill bases this on the total hours that the taxpayer spends for the business. Taxpayers also document the hours that they are sure tax advantages are considered for active owners. They can also benefit the 25% maximum in the income tax rate. It may also reduce the total hours that they put into the business and then hide the extent of how much they are involved with the IRS. This can be a pretty hard-pressing challenge.

The bill then creates the tax planning opportunities. It also produces the rental and the interest income is also eligible for the 25% and also tax it into 39.6%. Rental activity is also inherently passive and then the rent can be earned to the pass-through businesses. Interest income is passive and can also be earned from the entity. This then trades the money that is lent and borrowed by the hedge fund as well as the private equity funds that are engages in kinds of activities. There are taxpayers that can also invest in the funds. The tax rate on the business income is capped at 25% and instead of buying, it is taxed at the rate that reaches up to 39.6%. They can also invest the REITs which can also go through the mortgage and the rent interest income which is explicit and also eligible for the 25% cap right under the proposal.

Another possibility that can be looked into is that the investors can also borrow the funds. In that way, the investors can deduct the interest at that percentage. From 39.6%, it gets into 25% and the income is then received. Investors can also borrow from kinds of pass-through businesses and then just invest this primarily in the same one, as long as this is run by persons who are not related with one another. Business owners are also borrowed and then contributed to the businesses. They can also deduct this interest. Statutes are then encouraged and separated from performances of the services. It invests in the maximization of the income eligible for 25% by cross investments in the businesses.

Treatment of Transportation Expenses When Not Traveling Away from Tax Home

When you ride a cab or get in your own car to do business somewhere, have you ever thought of your transportation costs and how much of it you can actually write off? So many materials have been written about deductible expenses when people travel away from their tax homes for business, but those that tackle deductible expenses when not traveling away from home are scarce.

Here, let’s focus on your transportation costs when you are technically not traveling away from home. But before we go to your expenses, remember first that you are considered traveling away from home if you meet the following criteria:

  • Your business or job requires you to be away from your tax home considerably longer than your ordinary day at work.
  • You need to sleep to meet the demands of your work.

If you don’t meet the above mentioned criteria, then you are not traveling away from home so this chapter is for you.

You probably know that the law mostly does not allow deductions for personal expenses, so we’re talking about business expenses here.

Transportation Expenses

By definition, transportation expenses cover your cost of transportation– may it be by rail, bus, taxi or air, as well as the cost of maintaining and driving your own car.

According to the IRS rule, these expenses include all ordinary and necessary costs of the following:

  • Going from one location to another while conducting business or performing your profession, as long as you are traveling within the general area of your tax home.
  • Visiting your customers or clients.
  • Going to a business meeting that is not within the area of your regular workplace.
  • Temporarily going from your home to a workplace when your business or job requires you to have more than one regular place of work. Here, it doesn’t matter whether your temporary workplaces are within the general area of your tax home or not.

Remember that generally, the transportation expenses that will be discussed in this chapter do not include those that you incur when you travel away from your tax home overnight, though the rules here apply when you use your own car to travel away from home overnight as this will cover car expense deductions.

Basically, the transportation expenses that you incur daily when traveling from your home to one or more of your regular workplaces are considered nondeductible. That means that if you ride a bus to travel from your home to one of your regular workplaces, you are generally not allowed to write off the commuting expenses that you incur. However, there are certain exceptions to this rule.

If you go between your home and your temporary workplace outside the general area of your residence, you are allowed to deduct the transportation expenses that you incur. You can also deduct your daily transportation expenses in the following situations:

  • If you have at least one regular work location away from your home.
  • If your home is your regular workplace or place of business and you incur transportation expenses when you go to your home and another work location. However, that work location should fall in the same industry or business, regardless of the distance and regardless of whether the work you do there is permanent or temporary.

When Transportation Expenses are Deductible

Before we go into the finest details, here is a summary of the key locations you should consider and the instances when you can and cannot deduct your transportation expenses:

  • This home is not necessarily your tax home but the place where you live. The transportation expenses that you incur when you travel to and from your regular or main place of work are considered personal commuting expenses and are therefore nondeductible.
  • Regular or Main Job. This refers to your main place of work or business. In the event that you have more than one job, you can determine which of your workplaces your main workplace is by considering the time you spend at each, as well as the activities you have at each and the income you earn at each. While your transportation expense from your main job to your home are nondeductible, your expenses from your main work location to your temporary work location or second job and vice-versa are always deductible.
  • Temporary Work Location. Your temporary work location is any place where you are expected to perform your job in a year or less. You can only write off your transportation expenses to your temporary work location if it is not within your metropolitan area, unless you have a regular workplace or place of business.
  • Second Job. You are allowed to deduct your transportation expenses when you get from one workplace to another if you have more than one job and are required to regularly work in more than one place in a day. Whether or not your two or more jobs are for the same employer, your transportation expenses are always deductible. However, you cannot deduct your transportation expenses if you’re coming from your home going to your second job. Remember that you have to go directly from your first job to your second job for your transportation expenses to be deductible. If you go somewhere else after leaving your first job, the amount you spend for your transportation going to that place is nondeductible.

The above-mentioned rules apply when you incur transportation expenses since you have a regular job away from your home. If your main workplace or place of business is your home, do not use the rules for reference.

How to Know if Your Work Location is Temporary

 If your regularly incur commuting expenses because you have more than one regular work location in the same business away from your residence, you can write off the transportation expenses that you incur for your daily round trip between your home and your temporary workplace, regardless of how near or far that workplace is from your home.

In case you are expected to complete your employment at a particular workplace in a year or less, then your employment is considered temporary. Your employment is not considered temporary if your employment at a work location is expected to last for more than a year.

But what if your employment was initially expected to last for less than a year, but due to unavoidable circumstances, you are suddenly expected to work for more than a year?

In that case, your employment will be treated as temporary and same rules on tax deductions apply. If your temporary workplace is not within the general area of your regular workplace and you stay there overnight, then you are considered traveling away from home and the treatment of your transportation expenses depends on the rules under the Traveling Away From Home section of the IRS Publication 463.

 If You Do Not Have a Regular Place of Work

 If you do not have a regular place of work but usually works in the metropolitan area of your residence, you can write off your daily transportation expenses between your home and temporary workplace that goes beyond that metropolitan area. The IRS defines this metropolitan area as the area which covers the area within the city boundaries, as well as the outskirts of the city.

Keep in mind that you cannot write off your daily transportation costs if your temporary workplace is located just within the metropolitan area because these expenses are considered nondeductible.

When You Have Two Places of Work

 Some people have more than one job in a day, and therefore have to go to two work locations in a day. If you are one of them, you are allowed to deduct your transportation expenses when you get from your first work location to the other and vice-versa. That is regardless of whether or not your two jobs are for the same employer.

But what if for some personal reason you fail to go directly from your first work location to the next?

In that case, you are not allowed to deduct your transportation expenses because the rule states that you cannot write off more than the amount it costs you to go directly from your first workplace to the next.

For instance, it’s your day off from your main job and you incur transportation expenses when you go between your home and your part-time job, such costs are considered commuting expenses and are therefore nondeductible.

When You are a Member of the Armed Forces Reserve Unit

 Specific laws are set in place for people who are members of the Armed Forces reserve unit.

Say you have a meeting in that unit. If that meeting is held on a day when you are not off from your main job, then the venue of the meeting is considered as a second place of business and the transportation expenses you incur in getting there from your main workplace are deductible.

However, if the meeting is held on a day when you don’t work at your regular job, your transportation expenses become nondeductible.

The story is different if the place where the meeting is held is temporary and you have more than one regular place of work.

Say you regularly work in a certain metropolitan area but not at any specific location in that area, and the meeting is temporarily held outside that metropolitan. In that case, you are allowed to deduct your travel expenses.

Your transportation expenses also become deductible if your being a reservist requires you to travel more than 100 miles away from your residence. If you travel that distance in connection with your performance as a reservist, you can deduct some of your costs not as itemized deductions but as an adjustment to your gross income.

Commuting Expenses

 Generally, commuting expenses are the transportation costs you incur when you commute from your home to your main place of work and vice-versa. The costs of taking a trolley, bus, taxi or subway between your home and your regular work location are nondeductible since the law sees them as personal commuting expenses.

Regardless of how far your residence is from your regular place of work, you cannot deduct your transportation expenses.

You may ask, what if you still work during the commuting trip?

Performing your job during your commuting trip does not change your commuting expenses from personal to business expenses.

Take this as an example. You use your phone to make business calls while commuting. Or you have your own car and colleague rides with you on your way home. During you travel, you engage in a business discussion. In both cases, your transportation expenses remain personal and nondeductible.

When you commute to and from work, your taxi fare usually is not the only cost covered by your transportation. Take a look at these accompanying commuting expenses:

  • Parking Fees. When you bring your own car to work and pay to park your car at the parking lot of your business location, the parking fee is nondeductible. The only parking fee that is considered deductible is that which you pay for when you visit a client.
  • Advertising Display on Car. Just because you put display material advertising your company does not necessarily mean that your car is for business use, so the expenses you incur for putting such displays on your car are all nondeductible.
  • Car Pools. When you use your car in a nonprofit car pool, you still cannot write off the cost of doing that. You should not include the payments that you receive from your passengers in your income. However, you may do otherwise if you operate a car pool for a profit. In that case, you may include their payments in your income and then deduct your car expenses.
  • Hauling Tools or Instruments. Hauling instruments in your car when you are commuting to and from work does not make your transportation expenses deductible.

 When Your Home Qualifies as a Principal Place of Business

 If you consider the place where you live as your main place of work or business, your daily transportation costs between your home and your other work location are deductible. Take note, however, that the work you do in your home and in the other workplace must be in the same business.

All things considered, it is safe to say that nothing in tax law is straightforward, no matter how easy you may find identifying deductible transportation expenses is.

Meal Expenses: How Much Can You Deduct?

Treating your customers and employees occasionally is one of the best ways to build your business. Going the extra mile to make them feel valued goes a long way, although you may not see that now. If you worry about the expenses you may incur taking them out for a meal, you shouldn’t because meals are considered a legitimate business tax deduction. In fact, even your own meals can also be deductible. But of course, there are limits on what you can write off.

Meals become a legitimate tax deduction only in these two situations:

  • You are traveling away from your tax home for your business or job and need to stop to get considerable rest somewhere so you can perform your duties well.
  • The meal is related to your business or job.

If you satisfy either of the two situations, then your meal becomes a deductible expense.

Now let us set aside business-related meals and focus on the first situation. The IRS law states that when you are traveling away from your tax home for work–may that be for your job or business—your meal expenses become deductible. Does that mean that you can eat whatever you want while on duty and completely write everything off? The answer is no.

Actually, there are meals that you can completely write off, while there are meals that are only subject to 50% deductions. You can also not eat too lavish or extravagant meals and expect them to be deductible. In that case, you purchase your meal at your own expense.

Too Lavish or Extravagant Meals

 The law states that meals that are too lavish or extravagant are never deductible. But how do you gauge the lavishness or extravagance of a meal?

Simple. As per the IRS Rule 463, “An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances.” Just because you conduct business at a high-end restaurant does not necessarily mean that you are being lavish. In fact, the law won’t disallow your meal expenses just because the meal takes place at a deluxe restaurant or hotel.

If you are treating a potential client you are trying to close a deal with, treating him to a sumptuous meal at a high-end restaurant is reasonable enough. However, if you are only conducting a business meeting with your employees to discuss your Christmas party, treating them to a buffet restaurant doesn’t seem reasonable at all. Again, it depends on the facts and circumstances.

Now it’s clear that you cannot deduct expenses for lavish and extravagant meals. However, that is not the only exception. While lavish meals are totally not subject to deductions, some meals are subject to deductions but only to a certain limit.

50% Limit on Meals

 In the law, there exists this 50% limit when it comes to meals and other entertainment expenses. Determining which of your meal expenses are subject to this limit is necessary to know how much you should write off. You use the following methods to figure your meal expenses:

  • Actual Cost.
  • The Standard Meal Allowance.

Notwithstanding the method that you use, remember that you are allowed to deduct only 50% of the unreimbursed cost of your meals. In case you are reimbursed for the cost, how you apply the limit solely depends on the reimbursement plan of your employer. Is it accountable or non-accountable? On the other hand, if you are totally not reimbursed, the limit applies regardless of what the unreimbursed meal expense is for. That means that whether your meal is for business entertainment or business travel, your unreimbursed meal expense is always subject to the limit.

Now let’s go back to the two methods that you can use to figure your meal expenses–the actual cost and the standard meal allowance.

Actual Cost

 This method is less complicated compared with the other method. You simply use the actual cost of your meals to determine the amount of your expense before reimbursing the cost and applying the 50% limit on deductions. If there is one important thing that you should remember when using this method, it’s that you should always keep your records to prove your expenses.

Standard Meal Allowance

 If you do not want to use the actual cost method, you are free to use this method in figuring your expenses for meals.

Generally, this alternative method lets you make use of a set or fixed amount for your daily meals and incidental expenses (M & IE) instead of backing up your actual costs with records, particularly receipts. Well, of course you can still keep receipts for future reference, but you won’t need them as much as you will need them when you use the actual cost method. Under this method, the set amount hugely depends on where and when you travel.

The standard meal allowance method makes mention of a fixed amount for daily meals and incidental expenses. You may probably ask, what are those incidental expenses?

Incidental Expenses

 According to the IRS Publication 463, incidental expenses refer to the fees and tips that you usually give to baggage carriers, porters, hotel staff and the likes. Since they are only incidental, they are not your main expenses. However, these incidental expenses supplement your main expenses.

While these expenses are only considered supplementary expenses, they do not include the money you spend for laundry, lodging, pressing of clothes, mailing cost and telephone or telegram charges.

Incidental-Expenses-Only

 There are days when you do not get to incur any expense for your meals. If that is the case, then you may use the incidental-expenses-only method in determining the amount of deductions you are entitled to. This method is an optional method that you can use instead of the actual cost method if you want to write off your incidental expenses only. When you use this method, you can deduct $5 a day from your expenses if you did not spend anything for your meals.

You should also note that you cannot use the incidental-expenses-only method just whenever you want, or on any day that you apply the standard meal allowance method in determining your deductions. The proration rules for partial days strictly apply to this method. However, it is not subject to the 50% limit on meal deductions.

But how will you know if your meal allowance is subject to the 50% limit? Well, this limit is a bit tricky so you have to learn the ropes.

50% Limit on Meal Deductions

Say you are not reimbursed after applying the standard meal allowance method for your meal expenses, or you used the same method but are reimbursed under a non-accountable plan. In that case, you are allowed to write off only 50% of you standard meal allowance.

This goes the same way if you are reimbursed under an accountable plan and are writing off expenses that are more than your reimbursements. In that case, you are allowed to deduct only 50% of the excess amount.

Are You Allowed to Use the Standard Meal Allowance Method?

 Whether you are an employer or an employee, you are free to use this method. It also doesn’t matter whether you are recompensed for your traveling expenses or not because either way, you can use the same method. But while the law is somewhat lenient when it comes to the use of the standard meal allowance, you should remember that there is also a limit as to where you can use it.

If you are traveling for investment or other income-generating activities, you can use this method in treating your expenses. If you travel for qualifying educational purposes, that is also acceptable. However, if you travel for charitable or medical purposes, you cannot use this method in figuring the cost of your meals.

Is There Any Standard Rate for the Standard Meal Allowance?

 The standard rate for the standard meal allowance is equivalent to the federal M & IE rate. As of 2016, the standard amount for travels in most of the small localities in the United States is set at $51 per day. This rate does not apply to the country’s major cities and localities, which are considered high-cost areas. In their case, higher standard meal allowances apply.

If you want to know the amount of standard meal allowance in the state you are in, you may visit www.gsa.gov/perdiem for the per diem rates of each state for the current fiscal year. You just have to enter the zip code of the city or state that you want to know the per diem rates of through the dropdown menu.

What if You Travel to More Than One Location in a Day?

 If that is the case, then you have to use the applicable rate in the location where you stayed longer to take a rest or sleep. However, the same rule does not apply if you are working in the transportation sector. Workers in the transportation industry are entitled to special rates and are not covered by the mentioned rate for the standard meal allowance.

But how do you know that you are working in the transportation industry? Take a look at these requirements:

  • Your job directly involves transporting goods or people by plane, bus, train, ship, barge or truck.
  • You are regularly required to travel away from your tax home and in one single trip, you become eligible for different standard meal allowance rates.

Once you confirm that you are actually working in the transportation sector, remember that you are allowed to claim a standard meal allowance of $63 a day for your travels. You become entitled to this special rate so that you no longer need to know the standard meal allowance that applies to each and every area where you stop for sleep. When reporting on your income tax return, make sure that you use this special rate for all your travels and not the regular standard meal allowance rates for each state.

When it comes to the federal government’s fiscal year to use, it’s up to you. Once you visit the GSA website to check out the list of the per diem rates of each city or state, you may either choose the rates from the 2016 fiscal year table or the 2017 table to report your travels, which is crucial in determining your income tax return for one fiscal year. However, you have to be consistent. If you use the 2016 table in reporting one travel, then you must use the same table for all the other travels you are reporting.

What if You Travel Outside the U.S.?

 The Department of Defense has assigned locations which can be considered foreign areas and non-foreign areas. The standard meal allowance rates mentioned above do not apply to these areas.

There are special rates that apply to non-foreign areas like Alaska, Hawaii, Puerto Rico, Guam, the Northern Mariana Islands, U.S. Virginia Islands, American Samoa and Wake Island, as well as to non-foreign areas which are geographically located outside the continental U.S.

If you travel to a non-foreign area outside the U.S. and want to know the per diem rate that apply to your travel location, go to www.defensetravel.dod.mil/site/perdiemCalc.cfm. But if your travel location is a foreign area, you must go to www.state.gov/travel/. Under the Foreign Per Diem Rates, click on Travel Per Diem Allowances for Foreign Areas. You will then see the list of per diem rates in the area that you are looking for.

 Whether you are allowed to use the standard meal allowance, entitled to special rates, travel in the U.S. or outside the U.S., it is always critical that you maintain proper records to substantiate all your meals. Always be on the safe side by making sure that you have something to present to back up your expenses once the need for an audit arises in the future.

Bookkeeping and Accounting for Starters

At the outset, startups and new businesses have to operate with limited resources, sometimes making difficult choices between operational outlays and administrative needs. However, no matter how strapped you are for time and money, getting your accounting and bookkeeping affairs in order when starting a new business will help you avoid any potential pitfalls. So prior to making your first business purchase, hiring your first employee or, even better, signing your first client, make sure you’ve managed your finances.

Financial talks

Your finances in the early stages of your business are crucial because they are a key driver of growth – which is what business is all about, particularly in the beginnings. There are just so many things that rely on the finances of your startup including:

  1. Your potential for growth. The healthier your finances, the more likely you are to be able to grow.
  1. Your reputation. If you’ve got a good financial footing, creditors and potential business partners can see this and will view the company more positively – this is fantastic if you’re looking to borrow in order to grow.
  1. Your capability. You might have grand ideas, but there’s not much you are able to do if all of your money is stuck in an endless stream of unnecessary expenses and overheads – good finances mean using your money sensibly.

The financials of your startup are integral to the company, and it’s important not to underestimate the role that they play – especially in regards to how other companies, creditors or investors view you.

Balancing the books

In order to balance your books, you have to keep careful track of these items and be sure the transactions that deal with assets, liabilities, and equity are recorded correctly and in the right place. Balanced books may not be sexy, but they provide small business owners with the grounding they need to make smart decisions about expanding the business, making large purchases, and hiring new employees. The language of accounting professionals can be intimidating, especially if you’re the type of person whose financial record keeping consists of handing a box of receipts to your tax preparer once a year. Don’t despair! At the most basic level, you only need to understand three words: assets, liabilities, and equity. Throw in some simple addition and subtraction, and you’ve balanced your books.

 Assets = liabilities + equity

The accounting equation means that everything the business owns (assets) is balanced against claims against the business (liabilities and equity). Liabilities are claims based on what you owe vendors and lenders. Owners of the business have claims against the remaining assets (equity).

Your first task is to choose your accounting period. Most businesses balance their books for each calendar month or each quarter. When you are new to the process, balancing your books each month will make the task more manageable.

If you use a cash accounting system, as many small-business owners do, and you want to start at the most basic level, you can simply write two columns of numbers on a piece of paper: assets on one side and liabilities on the other.  Total each column, subtract liabilities from assets and the resulting number should equal your business equity.

Accounting software can simplify your bookkeeping since most banks will allow you to download account information directly into the program. After you load the data, your only task is to review the entries and make sure each one is tagged with the correct category. Keeping a separate business bank account makes this process easy and efficient.

Accounting 101

Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are exactly the same.

Step 1. Keep your receipts.

Comprehensive summaries of your business’s income and expenses are the heart of the accounting process. But they can’t legally be created in a vacuum. Each of your business’s sales and purchases must be backed by some type of record containing the amount, the date, and other relevant information about that sale. This is true whether your accounting is done by computer or on hand-posted ledgers.

From a legal point of view, your method of keeping receipts can range from slips kept in a cigar box to a sophisticated cash register hooked into a computer system. Practically, you’ll want to choose a system that fits your business needs. For example, a small service business that handles only relatively few jobs may get by with a bare-bones approach. But the more sales and expenditures your business makes, the better your receipt filing system needs to be. The bottom line is to choose or adapt one to suit your needs.

Step 2. Decide on your method.

You will have to decide which type of accounting method to use for your business and then apply this method consistently. Cash basis accounting means that income is recorded when funds are received instead of when the income is earned. Likewise, expenses area recorded when they are paid out instead of when they are incurred.

Using the accrual basis means reporting income and expenses as they are earned even without the actual exchange of cash for goods and services. Expenses are recorded at the time they are made instead of when they are paid off. The accrual basis is the required method for businesses that handle inventory and bigger businesses generating at least $1 million in annual revenue. Professionals in business for themselves such as lawyers, doctors, accountants and others are exempt from this requirement regardless of their annual income.

Step 3. Setting up and posting ledgers.

A completed ledger is really nothing more than a summary of revenues, expenditures, and whatever else you’re keeping track of (entered from your receipts according to category and date). Later, you’ll use these summaries to answer specific financial questions about your business such as whether you’re making a profit, and if so, how much.

Most businesses carry accounts for cash on hand, a checking account used for rolling revenue and expenditures, and ancillary accounts as necessary to properly manage their funds. Your ledgers can be in accounting software; personal finance software, which is sufficient for some small businesses; or the old school paper ledger. If you find it difficult to keep accurate and complete records on a computer, use paper as a temporary holding place until you can enter transactions into your software.

You’ll start with a blank ledger page (a sheet with lines) or, more often these days, a computer file of empty rows and columns. On some regular basis like every day, once a week, or at least once a month, you should transfer the amounts from your receipts for sales and purchases into your ledger. Called “posting,” how often you do this depends on how many sales and expenditures your business makes and how detailed you want your books to be.

Generally speaking, the more sales you do, the more often you should post to your ledger. A retail store, for instance, that does hundreds of sales amounting to thousands or tens of thousands of dollars every day should probably post daily. With that volume of sales, it’s important to see what’s happening every day and not to fall behind with the paperwork. To do this, the busy retailer should use a cash register that totals and posts the day’s sales to a computerized bookkeeping system at the push of a button. A slower business, however, or one with just a few large transactions per month, such as a small Web site design shop, dog-sitting service, or swimming pool repair company, would probably be fine if it posted weekly or even monthly.

To get started on a hand-entry system, get ledger pads from any office supply store. Alternatively, you can purchase an accounting software program that will generate its own ledgers as you enter your information. All but the tiniest new businesses are well advised to use an accounting software package to help keep their books (and micro-businesses can get by with personal finance software such as Quicken). That’s because once you’ve entered your daily, weekly, or monthly numbers, accounting software makes preparing monthly and yearly financial reports incredibly easy.

Step 4. Creating basic financial reports.

Financial reports are important because they bring together several key pieces of financial information about your business. Think of it this way – while your income ledger may tell you that your business brought in a lot of money during the year, you may have no way of knowing whether you turned a profit without measuring your income against your total expenses. And even comparing your monthly totals of income and expenses won’t tell you whether your credit customers are paying fast enough to keep adequate cash flowing through your business to pay your bills on time. That’s why you need financial reports: to combine data from your ledgers and sculpt it into a shape that shows you the big picture of your business.

Aside from your records, it could also help that you have templates or actual documents for purchase orders, receipts, invoices and similar paperwork depending on your type of operations. Make sure that your forms include your contact information such as physical address, email, and phone numbers. Many templates are available online, allowing you to customize the forms as needed. You can also take the traditional route, which is ordering customized forms from a printer.

Step 5. Anticipate your credits and debits.

Create an upcoming payment schedule of all future payments anticipated by your business, such as rent, utilities, and other recurring payments. This is called your Accounts Payable, or AP. If you have upcoming one-time expenses which you would like to make, you can also use this ledger to budget for them; for example, if you would like to spend $5,000 on renovations in January, you can book that as a $1,000 set-aside for the months of August through December. Many businesses book their AP with two dates: the date it is due and the deadline which is it actually due before penalties are incurred.

Furthermore, create upcoming monies received in a schedule, which anticipates future receipts. This is called your Accounts Receivable, or AR. This ledger is most important for businesses that process invoices to their clients, and hence do not receive payments until their clients actually cut the checks. If you are using software, it is crucially important that AR payments do not automatically roll over into actual payments received ledger. You do not want to book a payment scheduled for 7/15 that does not actually arrive until 7/22, or you risk bouncing checks drawn against that amount.

Step 6. Checks and balances.

Reconcile your ledgers with your bank statements. This is where accounting software truly shines over paper ledgers; most software will automatically download your bank records and allow you to quickly mark which payments and deposits are already recorded in your ledger, and which must be separately accounted. This is typically done on a monthly schedule, but with software and online banking, it is not onerous to do this on a weekly or even daily schedule—and this is not too often for a small business.

 

If all of this seem to overwhelm you, it could be beneficial to get the service of a professional accountant to do the nitty gritty for you. Your accounting needs will change as your business grows, but as a startup, it may be helpful to have an accountant to guide your set-up process. You may prefer to do the bookkeeping yourself to save costs, but at least, have a professional assist you with setting up and defining accounts for easier recording, tracking and data analysis.

Accounting services for new businesses may also include assistance for filing incorporation papers, obtaining the necessary business licenses, establishing policies, procedures and guidelines for record keeping and system implementations. Your accountant may also help you choose the accounting software that is most suitable for your company. As the business grows, the accountant’s role may change to include payroll and tax preparation, analyzing data and preparing financial and management reports.

Getting Started with Your Very Own Business Venture

A great start-up business always starts out as an idea, but you have to transform that idea into action. That’s where many individuals can start to feel overwhelmed. It’s understandable to freeze up at the deluge of things that are required to get a business started, but getting going is actually easier than you might think.

Like any big goal, if you start by breaking it down into smaller tasks, you’ll be able to tackle enough of the actions necessary to get started. Here are six ways to break down the process and simplify getting started with your own small business.

Right now, aspiring entrepreneurs all across the country are planning their paths to business ownership. It’s a journey that requires a lot of hard work, and many people end up failing. But if your company survives, the rewards of entrepreneurship are well worth the obstacles you’ll face on the road to success.

Choose your Industry

Every new business starts with an idea. Maybe there’s something you are really knowledgeable and passionate about, or perhaps you think you’ve found a way to fill a gap in the marketplace. Wherever your interests lie, it’s almost guaranteed that there’s a way to turn it into a business. If you know your strengths and what you enjoy, you are more likely to tackle a business problem that is best suited to your skills and interests and is less sensitive to your shortcomings. Capitalize on your strengths, and accept input from advisors and the team on decisions outside your range. Everyone will see you as a better listener and a stronger leader who is not autocratic and knows how to tackle the many unknowns of a new business. Too many people fail because they are working on someone else’s problem. You won’t be happy in the wrong business.

Another option is to open a franchise of an established company. The concept, brand following, and business model are already in place; all you need is a good location and the means to fund your operation.

Once you’ve narrowed your list of ideas down to one or two, do a quick search for existing companies in your chosen industry. Learn what the current brand leaders are doing, and figure out how you can do it better. If you think your business can deliver something other companies don’t (or deliver the same thing, but faster and cheaper), you’ve got a solid idea and are ready to create a business plan.

Writing the Business Plan

During the brainstorming, you should also start thinking about your business plan. A smart entrepreneur has a vision of where he/she sees herself and the business in the foreseeable future and writing it down in a business plan helps you stay on track and focus on your goal. A business plan is an essential road map for business success. This living document generally projects 3-5 years ahead and outlines the route a company intends to take to grow revenues.

Among the possible sub parts of your business plan includes the:

  1. Executive Summary which is the snapshot of your business plan as a whole and touches on your company profile and goals. This section briefly tells your reader where your company is, where you want to take it, and why your business idea will be successful. If you are seeking financing, the executive summary is also your first opportunity to grab a potential investor’s interest.
  1. Company Description provides information on what you do, what differentiates your business from others, and the markets your business serves. This section of your business plan provides a high-level review of the different elements of your business. This is akin to an extended elevator pitch and can help readers and potential investors quickly understand the goal of your business and its unique proposition.
  1. Service or Product Line answers questions like what do you sell? How does it benefit your customers? What is the product life cycle? Get tips on how to tell the story about your product or service. If you have any existing, pending, or any anticipated copyright or patent filings, list them here. Also, disclose whether any key aspects of a product may be classified as trade secrets. Last, include any information pertaining to existing legal agreements, such as nondisclosure or non-compete agreements.
  1. Funding Request and Financial Projection tackles the possibilities if you need funding. This provides financial projections to back up your request is critical. You should develop the Financial Projections section after you’ve analyzed the market and set clear objectives. That’s when you can allocate resources efficiently.  If you are planning to make your new business your full-time job, it’s wise to wait until you have at least some money put away for startup costs and for sustaining yourself in the beginning before you start making a profit.
  1. Marketing & Sales reveals how you plan to market your business? What is your sales strategy? Marketing is the process of creating customers, and customers are the lifeblood of your business. In this section, the first thing you want to do is define your marketing strategy. There is no single way to approach a marketing strategy; your strategy should be part of an ongoing business-evaluation process and unique to your company. After you have developed a comprehensive marketing strategy, you can then define your sales strategy. This covers how you plan to actually sell your product.

Selecting Your Preferred Business Structure

An important step in forming a new business is to choose the type of business structure you will use. There are several types of business entities to choose from, including sole proprietorship, partnership, corporation, limited liability company, and limited partnership. Each has its own advantages and disadvantages, as well as tax consequences of which you should be aware. When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. Legal and tax considerations enter into selecting a business structure.

You have to decide which of these entities best suits your business objectives and needs. You can get help in making this decision from a tax practitioner, such as an accountant, enrolled agent, or attorney. A tax practitioner can also provide information about how to establish the business structure you choose.

As an entrepreneur, you will have no place and no one to hide behind. Knowledge of yourself is the key to confidence, and confidence builds leadership. Building a new business requires good leadership to develop the market, attract customers, motivate the team and conquer the unknowns.

Register your Business

Obviously, you need to register your business and declare proprietorship to it. But before you can do that, you have to settle on what to call it. Naming your business is an important branding exercise, but if you choose to name your business as anything other than your own personal name then you’ll need to register it with the appropriate authorities. This process is known as registering your “Doing Business As” (DBA) name.

Choosing a business name is an important step in the business planning process. Not only should you pick a name that reflects your brand identity, but you also need to ensure it is properly registered and protected for the long term. You should also give a thought to whether it’s web-ready. Many businesses start out as freelancers, solo operations, or partnerships. In these cases, it’s easy to fall back on your own name as your business name. While there’s nothing wrong with this, it does make it tougher to present a professional image and build brand awareness.

After you register your business, the next step is obtaining an employer identification number (EIN) from the IRS. While this is not required for sole proprietorships with no employees, you may want to apply for one anyway to keep your personal and business taxes separate, or simply to save yourself the trouble later on if you decide to hire someone else.

Take Care of the Legalities

To run your business legally, there are certain federal and state licenses and permits you will need to obtain. For some other industries like buying and selling liquor, special certificates are needed before you start operating or else you might find yourself and business in an unnecessary trouble. The form of business you operate determines what taxes you must pay and how you pay them. The following are the five general types of business taxes according to Internal Revenue Services.

 Income Tax

All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized. The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Estimated tax

Generally, taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes, and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax but other taxes such as self-employment tax and alternative minimum tax.

If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

It should be noted that anytime self-employment tax is mentioned, it only refers to Social Security and Medicare taxes and does not include any other taxes that self-employed individuals may be required to file.

 Excise Tax

This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product. There are also excise taxes on activities, such as on wagering or on highway usage by trucks. One of the major components of the excise program is motor fuel.

  • Manufacture or sell certain products.
  • Operate certain kinds of businesses.
  • Use various kinds of equipment, facilities, or products.
  • Receive payment for certain services.

 Form 720 – The federal excise taxes consist of several broad categories of taxes, including the following.

  • Environmental taxes.
  • Communications and air transportation taxes.
  • Fuel taxes.
  • Tax on the first retail sale of heavy trucks, trailers, and tractors.
  • Manufacturers taxes on the sale or use of a variety of different articles

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include the following:

  • Social security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

Aside from national laws that your business needs to abide by, there are also local state laws that you need to be aware of and observe for a smooth sailing operation. It is very important where your establishment located, and what government rules apply.

 

The good and the bad news is that as an entrepreneur, you won’t have a manager charged with directing your efforts or peers helping you implement, and your new team will be quick to tell you only what you want to hear. Thus the burden is on you to capitalize on your strengths, find co-founders and team members to fill the gaps and find mentors and advisors you trust.

Know What Kind of Documents are Needed When Claiming Business Travel Expenses

It is clear that taxpayers can deduct regular travel expenses when the trip is entirely business related. Additionally, if the taxpayer is on a domestic business trip and made personal side trips or stayed longer than the business purpose required, then the expenses must be allocated between business and personal. The portion of the trip dedicated to business activities is deductible. Any portion related to personal activities is not deductible.

However, if a trip is primarily for personal activities, such as a vacation, then the only deductible business expenses are those incurred at the destination that is directly related to the trade or business and none of the expenses for traveling to the destination are deductible.

IRS parameters

In general, all trip expenses must be recorded on the travel expense statement including procurement card expenses. If a trip is paid for entirely by procurement card, a travel expense statement must be completed and approved. It is not necessary to enter this travel report in AIS; however, the statement and documentation must be retained in the department. As a best practice, the supplemental procurement card expenses form should be used to detail procurement card activity. If the supplemental form is not completed, all procurement card expenses should be clearly marked on the travel expense statement. Procurement card expenses should be deducted from the total expense using line #22. The original procurement card receipts should be kept in the department or school procurement card files.

Even if the expense is clearly deductible the deduction can be denied if not substantiated. Taxpayers must keep adequate records and documentary evidence. However, the taxpayer can use the per diem method of deducting expenses and still satisfy the substantiation requirements for the amount of the expense. The time, place, and business purpose must still be substantiated through adequate records and documentary evidence. The per diem method can be used by employers, employees and self-employed individuals. Self-employed individuals and employees can only use the per diem method for a meal and incidental expenses, not lodging. Additionally, a taxpayer, whether employer or employee or self-employed can alternate during the year between the per diem method and the actual expense method. The per diem rates for travel can be found at www.gsa.gov/perdiem.

Taxpayers in the transportation industry may use a special per diem rate. A taxpayer eligible for this rate is in the transportation industry if the work directly involves moving people or goods by airplane, barge, bus, ship, train or truck and often requires travel during a single trip to localities with differing rates in the per diem tables. These rates, if chosen, must be used for the entire year.

According to the streamlined guidelines set by the Internal Revenue Services (IRS), there are a couple of documentation that should always be kept, regardless of circumstances or situation, to make sure that you can have an easier time in proving that your trip was primarily for business purposes. While it is best to log in everything, these ones below are the most crucial documentations needed to stake your claim.

Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:

  • Cash register tapes
  • Deposit information (cash and credit sales)
  • Receipt books
  • Invoices
  • Forms 1099-MISC

Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Cash register tape receipts
  • Credit card receipts and statements
  • Invoices

Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense. Documents for expenses include the following:

  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Cash register tapes
  • Account statements
  • Credit card receipts and statements
  • Invoices
  • Petty cash slips for small cash payments

Travel, Transportation, Entertainment, and Gift Expenses. If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.  For additional information, Publication 463 of the IRS document provides more details with regard to Travel, Entertainment, Gift, and Car Expenses.

Assets are the property, such as machinery and furniture that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets should show the following information:

  • When and how you acquired the assets
  • Purchase price
  • Cost of any improvements
  • Section 179 deduction taken
  • Deductions are taken for depreciation
  • Deductions are taken for casualty losses, such as losses resulting from fires or storms
  • How you used the asset
  • When and how you disposed of the asset
  • Selling price
  • Expenses of sale

The following documents may show this information.

  • Purchase and sales invoices
  • Real estate closing statements
  • Cancelled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred

Meals

Amounts paid for food and reasonable restaurant gratuities while traveling away from home are another deduction. The IRS gives taxpayers two methods to calculate meal costs. It publishes daily per diem rates applicable to various geographic areas that you can use without regard to the amount actually spent. Alternatively, you can keep records of all meals and list the total costs paid. Regardless of the method chosen, the total allowable meal expense gets a further 50 percent deduction. Calculate this reduction before applying the 2 percent adjusted gross income limitation.

Instead of keeping records for meal costs, the taxpayer can claim an IRS meal allowance, which is referred to as the M&IE per diem rate (for meals and incidental expenses). The M&IE rate includes tips for service people such as porters, and hotel maids, but does not include the cost of laundry, cleaning, or pressing of clothing, which can be deducted separately with the proper documentation. Self-employed individuals can claim the M&IE allowance, but employees may only claim the allowance if they are not reimbursed under an accountable plan, if their employer is not related to them, and if they do not own more than 10% of the employer’s outstanding stock.

The standard meal allowance for travel within the Conterminous (or Continental) United States (CONUS), meaning locations within the continental United States, is $46 per day, although higher rates may apply to more expensive localities such as major metropolitan areas and resort areas. Outside of the Conterminous United States (OCONUS) rates apply for travel to Alaska, Hawaii, Puerto Rico, United States possessions, and foreign countries. Generally, only 75% of the allowance can be claimed for the 1st and last days of the trip. Workers in the transportation industry who are subject to the Department of Transportation hours of service limits, such as interstate truck drivers and pilots can deduct 80% of their meal costs. CONUS rates can be found by zip code or by city and state.

If meals are not claimed on a particular day but the taxpayer had other incidental costs, then instead of using actual costs, an allowance of $5 per day can be claimed for the incidental expenses, even if the actual expenses were less than that.

Important documentation features

Substantiate is a fancy way to say: the taxpayer has to prove it. Taxpayers must keep evidence of business travel expenses in order to deduct them. The information that must be noted:

  1. The date. The date the expense was incurred will usually be listed on a receipt or credit card slip; appointment books, day planners, and similar documents have the dates pre-printed on each page, so entries on the appropriate page automatically date the expense.
  1. The amount. How much you spent, including tax and tip for meals.
  1. The place. The nature and place of the entertainment or meal will usually be shown by a receipt, or you can record it in an appointment book.
  1. The business purpose. Show that the expense was incurred for your business — for example, to obtain future business, encourage existing business relationships, and so on. What you need to show depends on whether the business conversation occurred before, during, or after entertainment or a meal.
  1. The business relationship. If entertainment or meals are involved, show the business relationship of people at the event — for example, list their names and occupations and any other information needed to establish their business relation to you.

Cautions

Trying to write off your personal vacation as a business expense isn’t worth the risk. “You have to recognize that travel and entertainment is a highly suspect area,” Barbara Weltman, a tax and law expert and the author of JK Lasser’s Small Business Tax Guide, said. “It’s an area that the IRS is on the lookout for because of the potential of crossing the line a little bit and claiming business write-offs for what are really personal expenses. You can assume that if you get audited the IRS is going to look very closely at this area, so you want to make sure you do things right.”

When traveling or entertaining for business purposes, it’s important to document everything.  It’s not enough to just keep receipts, you also need to document who you spoke with, what you spoke about, and how it was related to your business. For travel, the IRS also requires you to keep a written or electronic log, made near the time that you make the expenditure, recording the time, place, amount and business purpose of each expense. This once took the form of expense reports. Increasingly, online programs and even apps, like Tax Tracker, are available for documenting business expenses.

Weltman also suggests creating a paper trail that can be traced if you are audited by the IRS. Take notes on meetings you attend while traveling, keep programs of conferences you attend, sign into conferences, and keep e-mails sent to those you met with during business meetings.

As with all deductible business expenses, you are also expected to keep receipts for travel and entertainment purchases. For meals, make sure that the receipt includes the exact cost of the meal as well as the name and location of the restaurant. Get in the habit of writing down who was present (names and business relationship) and what business was discussed.

For entertainment expenses, document: the amount of each separate expense; the date of the entertainment; the name, address, and type of entertainment; the business reason for the entertainment; and the name, title, and occupation of the people who you entertained.

Whenever business expenses are claimed it is a good idea to keep detailed records and receipts for everything. Business expenses can be charged to a practice credit card, receipts should be obtained from taxi drivers or other modes of transportation, and a detailed copy of the hotel bill should be kept. For the show, meeting or conference, a copy of all charges, as well as a copy of the convention schedule/agenda, can help prove it is relevant to your practice.

 

The safe way to go in all of this is to just diligently record all your business-related travel expenses in a log complete with dates, times, descriptions, locations and amounts. Include your travel expenses, lodging expenses and the costs of your meals. Also include taxis, fees, tips and any other incidental expenses.

No matter how you document your expenses, you are supposed to do it in a timely manner. You don’t need to record the details of every expense on the day you incur it. It is sufficient to record them on a weekly basis. However, if you’re prone to forget details, it’s best to get everything you need in writing within a day or two. Just make sure to keep all supporting paper documentation of the recorded expenses. This way, when you present.

Visiting Your Dream Destination While Winning the Audit: Here’s How You Do It

Taking a trip to the destination of your dreams sounds fun, but nothing is more fun that taking a trip while winning the resulting audit at the same time.

Yes, you read it right. Turning your vacation into an honest-to-goodness tax deduction is possible. In fact, you can travel throughout the Mediterranean with no or very little travel costs. The key is by making your trip either a passive or an active business trip. Remember that the only way you can reduce your transportation expenses is by making business the primary purpose of your trip.

As a business owner, you know that taking a vacation doesn’t come easy. Aside from the fact that you don’t have paid vacation leaves, you can’t just entrust your business to someone else while you’re away. However, your advantage is that when it comes to business, you are free to mix pleasure with business. If you do it right, you make it possible for you to enjoy a vacation while reducing your tax bill.

 Why Need to Make Your Trip a Business Trip

 If your purpose is to lower your travel expenses, making your vacation a business trip is a must. This is because it becomes a lot easier to deduct transportation expenses if the purpose of your trip is business.

You should also not forget to count up the number of days allotted for business and for personal activities in your planned trip. As a rule of thumb, make sure that majority of your travel days is spent on business activities. A weekend that is squeezed in between workdays can also be counted as business days. Hence, you can fly to Hawaii on a Thursday and meet a client the following day, stay there for the entire weekend, have meetings again on Monday and Tuesday, and fly back home the following day. That way, you’ve already had seven business days and you can enjoy Hawaii and still expense your transportation costs.

 How to Make Your Vacation Look like a Business Trip

 Now that you know that the key to reducing your travel tax is by writing it off as a business trip, the next thing you have to figure out is how to actually do that. Well, of course you cannot just take off for your dream destination with your business cards and pretend that you are going there for pure business.

Today, for your trip to be considered a business trip, you have to have a prior set business purpose. That is as per the requirements set by the IRS. Simply put, you need to schedule at least one business appointment before leaving for your trip. If you fail to do it, then you will never be able to expense your transportation costs.

There is nothing wrong with deducting part or your entire trip by deducting your travel costs as business expenses. In fact, this is the reason many professional groups host their annual conventions in popular tourist spots. Combining your vacation with business travel is not a bad idea at all, as long as you do it right.

 The IRS Rule on Travel Expenses and Deductions

 If you love the idea of traveling with minimal travel costs, it is necessary that you identify which among your travel expenses are tax-deductible and which are not. Once you have identified that, then you can finally let your tax savings pay for the deductible part of your trip.

Writing off some of your travel expenses may invite scrutiny, but don’t hesitate taking deductions if you think you are entitled to them. However, you have to be careful when it comes to this part and remember the IRS rule. You cannot simply claim that your trip is a business trip just because you have to visit an office somewhere. The IRS made it clear: “The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip.”

Expenses that are Considered Deductible

 You know that in every trip, your transportation costs–taxi fare, airfare, airport parking, etc.)–make up a huge part of your travel expenses. If you are good and careful enough, you can fully offset such costs so long as you meet the criteria set by the IRS. Aside from your transportation costs though, there are other expenses that can be added up, too.

The IRS Pub 463 has laid out the details when it comes to these expenses, but just to give you an idea, here are some of the basic things that you should take note of:

  • For each day that is considered business day, you are allowed to deduct the entire cost for your lodging, car rentals and tips. That means that if your weeklong trip to Hawaii includes five days of business and two days for your personal getaway, then you can legally deduct your hotel bill for all those five business days.
  • For each day that is considered business day, you can deduct 50 percent of the total amount you spent for food.
  • You can also deduct other miscellaneous expenses that are “ordinary and necessary” to your travel, like dry cleaning and baggage fees.
  • The catch is, you cannot deduct the amount spend for your family, in case they joined you in your trip.

 Simple Steps to Follow When Writing Off a Trip

  1.  Choose any place in the U.S. where you want to go.
  2. Decide how you want to write off your trip–as an active or a passive trip.
  3. Find a conference, convention or any event in that destination that is related to your business or profession.
  4. Book the trip.

 Things to Remember if You Want to Write Off Your Trip

 You have to go a long way to be able to write off your trip. The IRS has existing rules stipulating which particular expenses can be written off and which cannot, so it takes a dose of wisdom to avail of tax deductions without a hitch.

  1.  S. Trip vs International Trip. Deductions for business trips within the U.S. differ from deductions for international trips. If your trip is pure business and is just within the U.S., then you can expect your transportation to be fully deducted both ways. However, if your business trip is out of the country, then it has to be at least 75 percent business to be written off your plane ticket. If you go less than 75 percent, then the amount to be deducted will be just the percentage related to business.
  1. The Importance of Traveling via a U.S.-registered cruise. In the event that you are in a business-related cruise, make sure that you are aboard a ship that is registered in the U.S. and not in any other country. However, the rule is that a business-related cruise in a U.S. ship entitles you to only a deduction of up to $2,000 a year, regardless of how long or how frequent your trip is. Also, this has to come with a detailed written statement with tax return.
  1. On Overstaying. If you stay in Hawaii for a full week but the days dedicated for business is just five days, that’s fine. You do not need to work all day and end your staycation as soon as your business is done. Remember that spending a few more days in your destination will not disqualify you for deductions, but you have to ensure that your primary purpose for that trip is business and everything is well-documented.
  1. Family’s Expenses. When it comes to the expenses incurred by your family throughout the trip, the story is different. Unless they are employees in your company too, any of your family members is not entitled to a deduction because you cannot deduct expenses for anyone who is not really part of the business trip.

If you want a way out of this rule, the trick you can do is to find a means through which you can overlap what you have to pay for yourself with what a family member can pay for himself. For example, when you drive him in your car, your deductible transportation also gets him to the destination since both of you are riding the same car. Same trick applies if you share a single hotel room. It is important to note, however, that the costs incurred for the added occupants, the need for a larger room, for instance, are not covered by the deductions.

 

  1.  Miscellaneous Fees. We’ve been talking here of transportation costs like airfare, hotel expenses and food. But how about other fees that you may incur in the course of your travel? Well, it is normal for any trip to rack up some incidental costs, including laundry charges, tips, taxi fares, internet access fees and phone calls. The rule for such fees is simple. If these expenses are related to your business trip in any way, then you are free to write them off. Otherwise, you pay for them.
  2. Meal Deductions. When you go on a business trip with your associates, you are entitled to a deduction of 50 cents per dollar, which means you get to eat out at only half of your total meal cost.
  3. Record-keeping. As previously mentioned, the key to getting as much deductions as possible for your trip is to be careful. Since many business organizations abuse this area of the law, it is highly likely for the IRS to interrogate you when it comes to your deductions. When that time comes, you have to be ready to justify everything. Make sure that you keep all the necessary records, which do not only include the receipts but everything that will prove that you were actually out there for a business trip. Hence, you have to be meticulous in keeping even your itineraries and agendas.
  4.  Extravagant Expenses. You don’t want to be called an abuser of the law, so be reasonable. While you are free to write off some of your expenses since it’s a business trip, the IRS has the power to foul on whatever expenses it may find too extravagant. As the law stipulates, your expenses must be reasonable based on facts and circumstances.

On Documenting Your Trip

 As previously mentioned, you have to document everything so you will have something to present in case the IRS asks you to prove that your trip was actually a business trip. This may sound a bit demanding, but if that’s too big a deal to you, here’s the deal: You don’t really need to keep a pocketful of receipts for expenses smaller than $75.

While the IRS does not require you to keep receipts for a travel expense that’s worth under that amount, that doesn’t necessarily mean that you are already off the hook when it comes to record-keeping. Remember, your goal is to make as much expenses deductible as possible, so be responsible enough to document all your deductible expenses. That means if you stayed at a hotel that’s worth $75, you still ought to have a copy of its receipt so you can expense it.

Tax Strategy

 The only best way for you to avoid trouble when it comes to tax strategy is to be honest. Do not deduct expenses that you are not entitled to and keep all the necessary documents that you will eventually need to back up your claim for deductions. Remember that substantiating your claim is important because if you fail to document your expenses, you are entitled to serious penalties such as losing all the deductions altogether and having to pay additional tax on top of penalties and interest.

The bottom line here is that there are existing rules on travel deductions and you’re not supposed to push these rules. However, there is no reason that you cannot tack on some days of fun when you are out there for business.