Dealing with IRS and other Tax Audits

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tax audits

Dealing with IRS and other Tax Audits

Sep 7, 2016 Posted by Sanjiv No Comments

It’s one of those fears that bog the minds of rich people and even ordinary taxpayers—getting audited by the IRS. But what are the chances that you’ll be audited by the government for your tax returns?

The chances of a tax audit are very low these days. Taxpayers with moderate income levels have a 1 percent chance; while those earning $1 million and up were audited at a 7.5 percent clip.

For companies, the rates are also low. Firms with total assets of less than $10 have a 1 percent chance. Those with assets between $1 and $5 million have a 1.2 percent rate, while firms with asset size of between $5 and $10 million have a 1.9 percent chance of being audited. Even the middle-sized firms or those with assets between $10 and $50 million had a low 6.2 percent chance of being audited.

Sure, the chances of getting a visit from the IRS have shrunk to all-time lows. But that should not be enough reason for you to be complacent. It still pays to know what to do just in case someone from the IRS knocks at your door or you get a letter from the said agency.

Individual Tax Audit

You may not be a millionaire but there are conditions that can increase your risks of being visited by the IRS:

• Being self-employed. There are lots of write-offs that self-employed taxpayers can claim, unlike most employees. These range from a home office to the use of a car, and the IRS may have queries about these claims.
• You have itemized deductions that are a lot higher than those of taxpayers with comparable incomes. The tax department will likely flag your return when it notices that there’s a big difference between your write-offs and averages.

Should you get a notification that you are to be audited, don’t panic. Keep in mind that the audit will be done in a professional manner. And if you can give the IRS people the right paperwork then you will be off the hook, so to speak.

You must not also think of ignoring the IRS. Your problem won’t go away. Worse, your interest and penalties will continue to accrue. So the earlier you deal with it, the better.

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Types of Audit

There are three types of audit. The more common is correspondence audit, which is handled by a way. According to the Transactional Records Access Clearinghouse, 76 percent of individual audits were of this kind.

These computer-generated correspondences may tell you that there was a mathematical error on your return, or that your return wasn’t the same as the 1099 statements that the IRS received from your bank or broker. In these cases, you simply send the money that you owe.

The letter may also dispute a tax break that you claimed. If you can’t prove that you were correct, then you will have to pay additional taxes.

But what if you’re right? You’ll have to collate the right paperwork then send it back to the IRS through certified days within 30 days of receipt of the letter. You’ll also have to prepare a letter that includes a copy of the correspondence audit plus your reference number.

In some cases, you imply have to go back and get receipts. But there are cases when you can’t do that. Instead, you may have to get a written acknowledgment from the charity that you gave to in order to claim a charitable contribution.

This is a task that you can handle yourself, especially if the issue is simple enough to reply to. You may ask a tax pro to help you out, but you’ll obviously have to pay him or her for the service

If you feel you are deserving of the tax break but you want a stronger case or reply to the IRS, a tax professional can be of significant help. He or he can prepare your return respond to the agency, and give you a better shot at defending your case.

The second type is field audit, which is conducted in person at your home or at IRS offices. However, the chances of an IRS guy dropping by your home are very low these days. The agency is no longer conducting a lot of field audits because these often mean additional expenses.

This type of audit is conducted when the IRS has lots of questions about your return. The agency may also resort to this type of audit when there is a certain write-off that is difficult to handle by mail.

The field audit in an IRS office shouldn’t last more than four hours. However there will likely be a follow-up visit, or the agency would require you to pass additional paperwork.

The last type is the ‘random’ audit. Among the three types of audit, this is the least likely that the IRS will conduct. You have a very slim chance of being selected for this audit.

But then again, it pays to be prepared.

The random audit is perhaps the most detail-oriented and intrusive of the three types of audit. IRS agents may even ask for your birth certificate and marriage license just to check your filing status.

This is also the type of audit where a professional expert can help you. There’s a good chance that something will happen at the audit that can cause the agency to demand you to pay more. With the help of a pro, you’ll be ready just in case the proverbial can of worms is opened.

Attitude During the Audit

Whether you are going to the IRS office or accompanied by a tax pro, you need to behave professionally during the audit. Don’t become argumentative, and treat the agents with respect.

Be honest and truthful with your answers. But you should also answer straight to the point. Avoid talking too much because the more you talk, the more questions that the agency will have.

You should also come to the office prepared and organized. You don’t want to upset the agent with your messy folder and jumbled receipts.

If you are unable to provide the document the agent is looking for, politely ask if there’s any other documentation that you may provide in lieu of the document. For example, you claimed the business use of a vehicle but couldn’t show receipts for gas. Maybe a calendar of your business meetings may be accepted as a substitute.

You can go through the appeals process if you disagree with the contention of the agent. This is where a tax pro can help you as he or she would be able to handle this step.

So what happens if you have to pay the IRS more money but you don’t have cash? You have three choices—one is to pay with a credit card, although you will have to pay a convenience fee of around 2.35 percent. You can also for an installment agreement or request for a compromise.

Business IRS Audits

Again, the chances of a business getting audited by the IRS have gone down in the past few years. But this still should not give your company a false sense of security.

What are the possible issues that the IRS will look into your company’s tax returns? Here are some of the red flags that should make the IRS agents knock on your door:

1. Net loss in more than two of the past five years.
2. Excessive deductions for travel, business meals, and entertainment
3. High salaries paid to shareholders
4. Shifting income to tax-exempt organizations in a bid to avoid payment of taxes
5. Claiming 100 percent business use of a vehicle

Like in individual tax audits, it is important for a business to be prepared if it has been picked for an audit. There’s a silver lining to being audited, as if the agency’s findings show that there is no change to the tax liability then the business won’t be audited on the same issue for the next year.

Hiring a tax professional is the first step that you need to undertake if your business has been pinpointed by the IRS for auditing. Don’t be anxious in thinking that this will indicate that your business is guilty, after all, the IRS is very much used to this practice. A tax professional can help you through the audit.

You can even sign a power-of-attorney agreement to give your tax professional the legal authority to deal with the IRS directly. This is ideal if you are unsure of what to say and what not to say during the audit. This basically takes you out of the loop and puts your tax professional in.

But there are three things that you, as the business owner, should remember when your business is faced with the prospect of being audited by the IRS:

1. Review the audit letter carefully.

An IRS agent won’t just barge into your door and announce an audit. The agency will send an audit letter to your office informing you that your firm has been picked for the audit.

Be cautious with scammers who will masquerade as the IRS by sending you email messages or leaving phone messages. Those guys will attempt to hack your personal data. The real IRS doesn’t communicate through email or phone.

Once you receive the letter, open it promptly. Read and understand what the IRS needs from you.

If your company doesn’t have a financial adviser, you can hire an accountant or tax professional to help you review the review letter. He or she will also identify the issues that the agency has flagged.

Don’t ignore the letter because the IRS will not go away. Worse, the auditor may become more suspicious and even antagonistic.

2. Organize your records.

The next step is to organize your records. Gather and organize all your business records from the previous tax year even before you meet with the tax professional and IRS auditor.

These records range from receipts and invoices from income and expenses, accounting books and ledgers, bank statements, leases or titles for properties and hard copies of tax-prep data. You should also make sure that you have the specific documents requested by the IRS for review.

3. Answer the questions honestly.

During the audit, the IRS agent will ask you a lot of questions about the information reported on your business tax return. Simply answer the questions of the auditor—no more, no less. Giving any information that you are not required to give may put you in more hot water.

Similar to dealing with individual tax audits, providing unasked-for information may give the auditor more questions to ask. The last thing that you want to happen is for the auditor to uncover more issues about your tax returns. IRS auditors won’t forgive tax debt or mistakes, so any admission that you may have will be used against you.

Be straightforward in replying to the questions. However, don’t manufacture excuses. IRS agents would know if you’re making any.

Also, don’t be antagonistic with the auditor. It would only make things worse for you and your business.

In order to avoid future audits, you should track bank transfers and other financial records aside from receipts. Anything that you cannot explain on the standard IRS form must be explained on paper. Of course, double-check all your calculations before filing your returns.

Aside from keeping proper documentation, you can avoid getting picked for an audit by deducting ordinary and necessary business expenses as allowed by the IRS. So even if your company is chosen for an audit, you have nothing to be afraid of.

Indeed, getting a letter from the IRS informing that you are to be audited can be very worrisome. But if you know how to deal with tax audits, then you don’t have anything to be afraid of. It also helps to have a tax professional guiding you to be assured that you can respond to whatever audit findings the IRS guys have with you or your business.

Board Meeting Deduction

Apr 1, 2015 Posted by Sanjiv No Comments

Board Meeting Deduction

The expenses related to the working of a board of directors are evidently termed as ordinary and necessary expenditure of conducting business as per Income Tax rules and are thus deductible. A board meeting is specifically meant for company directors. It is not a general body meeting where only the shareholders meet; but it is a meeting where the directors discuss about various issues and future prospects of the company. The legal responsibilities the board members depend on the nature of the organization, and the jurisdiction. Board meeting is organized at a regular interval and is headed by the chairperson of the organization who is also responsible to maintain a formal atmosphere during the meeting. It comprises of a fixed number of eligible members (Directors only) and everyone is bound by the rules, regulations and any resolutions that is passed in the meeting. The meeting is conducted under the presence of President, Vice President, Treasurer and Secretary.   Other official members may also be present. Recording the Minutes of the Meeting is important.

In a board meeting, the directors do the following:

  •  Evaluating the company’s growth, success and profit and governing of the organization
  • Establishing company policy and objective
  • Accounting to the shareholders and report about the accomplishment of the organization
  • Approving annual budget and ensuring organization’s capability of producing funds
  • Setting salaries of the management and employees

To legitimately write off taxes, expenditure in business should be simple and necessary to be deductible. A simple expense is one that is ordinary and common, and is accepted in industries. A necessary expense is one that is helpful and apt for the business. An expense does not have to be imperative to be regarded as necessary. Although an expense may be both ordinary and necessary, sometimes one may not be allowed to deduct it in the year paid or incurred. At times it is not allowed to deduct the expense at all.

Like many other business expenses, board meeting expenses fall under the category of necessary business expense and is thus deductible from taxable income.  However, to be deductible, board meeting expenses must be related to business activities. Some such expenses are travel expenses incurred due to traveling to and from the board meetings, hotel stays, food expenses, supply purchases, compensation for services and many such expenses can be written off business expenditure if you can give proof that the expenses were solely for the business purpose. Tax cannot be deducted from expenses that are made for an official’s personal use and where there is no interest of the company. In case of phone bills (if there is personal and business usage), then the taxpayer can only deduct the portion of the bill which is used for business.

Keeping a record of the expenses is very essential to write off tax. They also need to be classified properly as travel-related expenses, dining expenses and entertainment expenses. The company’s accountant must be responsible for identifying, classifying and deducting board expenses. When documents are to be produced to IRS it becomes easy if all the documents are recorded and are in place. The board of directors also needs to determine how to maintain the process of documenting expenses, which includes filling reimbursement forms, keeping a track of receipts and keeping a proper travel log, etc.

Tax Deduction: Entertainment for Customers and Clients

Mar 25, 2015 Posted by Sanjiv No Comments

A crucial part of business is building and nurturing relationships with clients. While doing this, the business owners meet clients, customers and business partners during social events and occasions. The expenses incurred on these are considered by the IRS for tax exemption. Tax deductions and considerations are very essential part of business interactions. Business owners and employees are allowed to take a federal tax deduction that amounts to half of their qualifying costs when they entertain their customers and clients. Although the IRS does not allow complete tax deduction, but approximately 50% of deduction is allowed on all kinds of entertainment. The pointers mentioned below would help to understand how tax deduction would help in entertainment for customers and clients.

  •  Expenses incurred in almost all kinds of business recreational activities that involve a business owner and clients can be considered for tax deduction. Entertainment deduction is applicable if that form of entertainment relates to the specific business field. Activities include going to nightclubs, theaters, films, fishing trips, hunting, athletic club and even vacations.
  • As per the IRS, meals, beverages, tips and taxes combine to form entertainment expenses. Tax deduction helps entertainment of customers and clients whereby business owner and employees pay on behalf of their clients. In return they get 50% deduction on the meal prices. When both the parties are found to divide the bills, neither of the two can avail tax deduction of the meal. Thus, if you plan to take your client out for a lunch in order to discuss a new project and the objectives, you can go for deduction in taxable income. However, if you are self-employed, then IRS would let you deduct a part of the entire lunch bill as you travel or meals and entertainment business cost when you successfully comply with certain criteria.
  • Tax deduction for entertainment of customers and clients can happen when entertainment fulfills personal and also business agenda. In such a case, an individual would get a deduction for a part of expenses that he incurs for business reasons. Such business expenses include the taxes and tips that are paid on meals, room rents, parking fees and nightclub cover expenses.
  • It may happen that an employee pays for business-related entertainment from his pocket and later gets reimbursement from the employer. But in a situation where the employee does not get the cost reimbursed by the employer, then the former can get a 50% deduction on tax for the difference that the employer compensated in return and the actual amount that he paid from his own pocket.
  • Tax deduction clause can help you in keeping customers and clients entertained if you keep all the records. You should keep tangible records handy at the time of IRS audit. Such records include itemized restaurant receipts and credit card slips correlating to the meals during a business meeting.

 

But just because tax deduction can help entertainment for customers and clients, you cannot exploit it.

Tax Filing

Deduct Accounting Fees Paid to your tax professional

Mar 17, 2015 Posted by Sanjiv 1 Comment

Accounting Fees Deduction

The Internal Revenue Service is the authority of the tax code as approved by the Congress. The IRS deciphers the tax code and has the power to permit or deny deductions with regards to income reported by people and organizations.

When it’s time to file the tax return, individuals start panicking about the amount of money that they have to pay as tax. They try to find out ways to get some amount waived off or deducted in order to save money. One such expense that can be deducted is the fees paid for hiring a tax professional. This includes the charges that you pay for preparing tax returns, tax planning advice, procedures of collections and criminal investigations and also representation in tax audits. Bookkeeping charges are at the heart of estimating wages and taxes payable.

Tax payers getting returns prepared for individual expenses can deduct professional accounting fees as per Schedule A, under the miscellaneous itemized deduction. Conversely, tax payers depositing taxes for business enterprises can get specialized tax service fees written-off on relevant tax forms for their business. The absence of clarity in the code increases the importance of tax professionals.

 Is the expense ordinary?

A cost is deductible if it is recognized as ordinary to the course of business. As it were, you would be able to work together in some other path so as to evade the cost. The code gives a great deal of scope in order to figure out what is conventional, and this gives a lot of chance for bargaining and negotiation. Bookkeeping administrations come under the definition of ordinary expenses. Without them, an individual or organization will be unable to precisely ascertain their pay.

 Is the expense essential?

A second thought for an admissible derivation is whether the cost is important for the business. While taking the representatives out for frozen yogurt every week may not be essential, bookkeeping expenses are. Actually, the intricacies of the tax code make these expenses totally vital as entrepreneurs usually don’t have absolute knowledge about the tax code.

 What category does accounting fees tax deductions come under?

The tax code and guidelines for estimating income and tax payables more than once reference representing exchanges. This shows the importance of bookkeeping expenses, giving additional evidence that accounting expenses are an ordinary and essential cost and so it falls under the category of tax deductible. However, the accounting fee varies depending on the amount of work and the tax preparer.

 Types of accounting fees tax deductions

There are different expenses that you incur right from the stage of calculating the tax payable amount to filling forms, and then finally getting the tax deposited with the government. All expenses including accounting expenses, bookkeeping expenses and auditing expenses are come under accounting fees tax deductions. Take a look at a more detailed analysis of accounting-related expenditures that can be deducted:

  •  Fees for a professional – Accountant/Financial Adviser/CPA: The fees charged by professionals for reviewing accounting books or financial statements and financial planning can be deducted. However, this only includes tax processes that are carried out for the business organizations and not individuals.
  • Bookkeeping charges: Bookkeeping is the process of recording financial transactions conducted throughout the year for maintaining accounts and statements. Expenses incurred on bookkeeping, include both accounting software and bookkeeper costs.
  • Auditing: Public corporations go through audits. Expenses paid to auditing firms can be deducted.
  • Tax Preparation and Strategy: Certified Public Accountants, tax advisers or attorneys are hired to help with tax preparation and strategy. These professionals assist with filling and submission of forms. All expenses paid for these services can be deducted.
  • Defense Expenses: Travel costs and other expenses incurred as a result of problems with IRS, state agency audits or any other challenges, including costs charged by advisers for their services can be deducted.
  • Additional Tax Issues: You cannot be present at every audit or before the IRS at every event. CPAs or agents hired by you represent you during investigations, and then they charge you for the preparation and the time that they invest.

 When to make accounting fees tax deductions?

 Accounting fees for tax preparation can be deducted in the same year for which the fee was paid. For instance, if you have paid for accounting services in 2014 for preparing accounts and tax returns of 2013, then the deductions are made on the tax payable amount of 2014, since you are paying the fee in that year.

Where to deduct fees for accounting?

Publication 529 of the IRS provides an understanding on how the tax preparation fee needs to be recorded in the tax return for maximum savings. Expenses on tax preparing must be deducted on appropriate schedules. Take a look at the various schedules that you need to file the taxes under:

Business Profit or Loss – Schedule C or C-EZ

Farm Income or Expenses – Schedule F

  • Rentals or Loyalties – Schedule E
  • Preparing taxes of the remaining part of the return – Schedule A (Form 1040), line 22 or Form 1040NR, line 8

For an individual salary expense form, proficient tax arrangement charges can be deducted in the accompanying spots:

  • Accounting fees for tax arrangement identified with setting up sole proprietors Schedule C are deducted on Schedule C on grounds of lawful and expert charges.
  • Tax preparation fee identified with putting together Schedule E for rental salary and costs are deducted on Schedule E with regards to the lawful and expert expenses.
  • Tax preparation services identified with the preparation of Schedule F for income and costs of farm are deducted on Schedule F under the segment for different costs.
  • Expenses for tax preparation identified with different parts of the government form are deducted on Schedule A on line 22 as miscellaneous itemized deduction.

Keep all the above expenses in mind while recording the accounting fees transactions in your tax return and get the amount waived off in order to be able to reap maximum benefits.

 

car deduction

How to Make Tax Deductions for Cars and Trucks ?

Mar 5, 2015 Posted by Sanjiv No Comments

Cost of operating a truck, car or other kind of automobile is tax-deductible when moving and relocating or driving for medical, business or charity purposes. The deduction made corresponds to the mileage driven for such tax credits. You may opt for standard rate of mileage in place of calculating actual car expenditure for these individual tax credits.

Medical Purpose

Driving in order to obtain medical care for either yourself or your dependents is what Medical Purpose covers. This kind of drive must primarily cater for medical care, as indicated by IRS (Publication 502) and the deduction is reflected on Schedule A and comprises part of medical expenses for an individual.

Business Purpose

Business purpose pertains to driving away from your regular employment location to a different work site in order to meet with client or travelling for a business engagement. Commuting from home to office does not qualify for this category of individual tax credits. This kind of incentive is captured by Schedule C for self-employed individuals, Schedule F for farmers or as itemized deduction that forms part of unreimbursed business expenses provided in Form 2106 for an employee.

Moving and Relocating

You can deduct the driving cost for relocating to a new place of residence as part of moving expense deduction. To qualify for this incentive, it will be necessary to cover a distance of at least 50 miles away from the old home more than what you earlier covered in-between the old home and old job. The deduction is present on Form 3903.

Charitable Purpose

Individual tax credits are available for any vehicle used for providing services to charitable organization. The corresponding deduction is covered by Schedule A as part of charitable donations. It may involve driving for volunteer causes for a charity, church or hospital.

Actual Expenses

Various elements count as truck or car expense including:

  • parking fees and tolls
  • vehicle registration fees
  • interest on loan
  • rental and lease expense
  • vehicle registration fees
  • personal property tax
  • fuel and gasoline
  • insurance
  • depreciation
  • repairs including tires, oil changes and such routine maintenance

However, fines and tickets such as for parking may not be deducted. In addition, expenditure relating to commuting or personal use is not deductible. Various car expenses may also be deducted depending upon why you are driving. One cannot claim interest, insurance and depreciation as well as auto repairs for medical expense and charity deductions.

Standard Mileage Rates

Rather than tally up all actual car expenditures, you may utilize a standard mileage rate to aid in calculating deductions. There are standard mileage rates to achieve this goal. It is multiplied by the mileage drive to establish the dollar amount deductible for car expenses as obtained from Notice 2014-79 of IRS.

Standard Mileage Rates
Type of use Year 2015
Business 57.5 cents per mile
Medical or moving 23 cents per mile
Charitable service 14 cents per mile

 

In addition to standard mileage rate, taxpayers may also deduct tolls and parking fees as stipulated by the IRS in chapter 4 of Publication 463.

Comparing between Actual Expenses and Standard Mileage Rate

You may use any method that will lead to a larger amount of your tax deduction. This varies with individuals depending upon the number of miles driven, amount of depreciation claimed and other expense variables. Claiming standard mileage rate provides results with less paperwork. It is suited best for situations where the car is driven at times for charity, work or medical appointments and the owner is avoiding lengthy scrutiny of all car-related expenditure.

 

You will require selecting the standard mileage rate option within the first year of using your automobile for business purposes in order to claim the corresponding deduction. If you start by claiming actual expenses, it will be necessary to retain the actual expense option for the entire time duration of using your vehicle for business. IRS Publication 463 offers further clarity on this situation.

Where to Make Claims for Car and Truck Expenses

Expenses for vehicles get reported on Schedule C for self-employed individuals and Form 2106 for the Employee Business Expenses. In particular, this deduction is miscellaneous itemized deduction that is subject to 2 percent of the adjusted gross income limit. It implies that unreimbursed employee expenses may be deducted, although the tax payer does not benefit from the full deduction dollar-to-dollar on tax returns.

Vehicle expenses get reported on Schedule A for medical vehicle uses, together with other medical expenses.

For charitable car use, the expense gets reported on Schedule A, together with related charitable donations.

Practicing Good Record-Keeping

Ensure keeping a mileage log as it will demonstrate your eligibility for car and truck individual tax credits. This document should show date of each trip made that is tax-deductible. It will be necessary as well to record the total mileage covered for the entire year, which makes it pivotal indicating the odometer reading as each year begins at the first.

tax shelter for business

Tax Shelter Ideas

Feb 23, 2015 Posted by Sanjiv No Comments

Tax Shelter Ideas for Small Business Owners

In general, a tax shelter refers to a program which allows business enterprises or individuals to either defer or reduce payment of income taxes. Such programs may not suit everyone and legitimate ones do involve some level of risk, which not all investors are comfortable to undertake. However, with the correct information, the process of taking advantage of these shelters becomes less involving.

The Internal Revenue Service (IRS) applies huge discretion when applying tax shelters as this area has traditionally been prone to abusive practices by both individuals and businesses.

How IRS Views Tax Shelters

Tax shelters are defined by the IRS as investments that normally requires making substantial contributions which oftentimes are associated with commensurate risk levels. For an individual, tax shelter implies an investment which involves liability incurred within the short-term, with hopes of making appreciable gains across the long term.

For instance, if someone invested in property situated within a low-income environment, depreciation benefits of such property would be termed as legitimate tax shelter.

The losses or tax deductions which a person can take on potential tax shelter gets limited to total worth of investment or amount at risk. The amount viewed as being “at risk” for example might get limited to:

  • Adjusted basis of property
  • Cash invested
  • Loans taken for which someone bears personal responsibility to repay

Treatment of Losses

It is vital gaining the understanding that business activity losses or credits are easily considered passive activity losses or credits. These may only be utilized for offsetting income from different passive activities. You cannot utilize them for offsetting income sources like wages, dividends or interest. Passive losses generated in excess from any tax shelter can be carried forward, or till the investor sells off the asset.

Take care of tax shelters which get marketed with promises of write-offs being more significant that the invested amount. IRS considers such as Abusive Tax Shelters. People generally make investments with hopes of generating huge amounts of profits. Legitimate shelters involve a certain level of risk, cut down fairly on taxes and generate income. If IRS takes note of someone operating an abusive scheme, the individual is then required to pay tax owed along with penalties and interest.

Legitimate Tax Shelters

It is vital knowing how to identify a questionable program. You may achieve this goal by adhering to three primary rules in order to distinguish between legal and illegal tax shelters as follows:

  • If the primary purpose of a given transaction is lowering taxes and not offering other economic gains to parties involved, consider such a business deal unethical or questionable.
  • Transactions involving exchange of goods, assets or even services at prices which lie well below the fair market value should be viewed with suspicion.
  • If the interest rate paid to a different party is unusually high or low, with the sole intention being sheltering income from taxes, such an arrangement should be seen as unethical.

Tax Accrual Work-Papers

The IRS maintains a policy of requesting tax accrual along with other financial audit work-papers that relate to tax reserves. This applies to deferred tax liabilities and footnotes which disclose contingent tax liabilities that appear in audited financial statements.

Owning a legitimate auto repair business enables you take advantage of numerous tax deductions, which are unavailable to mere employees. This includes partial deductions to expenses incurred on housing, automobile, entertainment and meals as well as cell-phone expenditure.

While some expenses get deducted within a year, others get spread out over a number of years.

You can write off full cost of new furniture and computers within this year as per IRS Code Section 179. This might not be significant to a relatively new business that may not generate a lot of income within at first. A wiser strategy therefore might be deferring some portion of deductible expenditure to years in future, which accountants call “depreciation”.

You may deduct some portion of “start-up costs” if this year is your first in business. However, beyond a certain level you will require spreading the remainder of associated costs across your tax returns for the next several years. This practice is termed “amortization” in accounting.

Remember not to overlook the expenses below when filing tax returns:

  • Legal and Accounting Fees
  • Website/ Advertising costs
  • Association Dues
  • Truck and Auto Expense
  • Computer Expense
  • Bank Charges
  • Subscriptions and Dues
  • Training and Education
  • Furniture and Equipment
  • Home Office Expense
  • Gifts
  • Insurance
  • Permits and Licenses
  • Postage and Delivery
  • Meals and Entertainment
  • Printing
  • Office Administration Fees and Rent
  • Maintenance and Repairs
  • Start Up Costs
  • Retirement Savings
  • Materials and Supplies
  • Telephone
  • Travel
  • Taxes (Payroll Tax, Property Tax etc)

Knowing the tax code is important for anyone who owns a business and IRS Publication 463 spells out on available business tax credits relating to travel, entertainment, gift as well as car expenses. Think about hiring services of a tax professional to aid in preparing tax returns for your auto repair business.

Health Insurance Deduction

Feb 7, 2015 Posted by Sanjiv No Comments

Tax deduction is a big concern, and on the other hand it is highly beneficial because it can help you in various ways. Health insurance is one of the most crucial things that you can consider in your life. And although you may compromise on many things in life, health insurance is surely something where you don’t want to take a chance. This becomes more important when you know that tax deduction can considerably help you pay for the health insurance.

The Internal Revenue Service or IRS provides various kinds of deductions for medical expenditures. There are some itemized reductions. Thus, you can make claims for standard deductions. Again some medical deductions are over-the-line exemptions and so all these can be claimed in addition to the standard deductions. With regard to healthcare tax deductions, three options as mentioned below can be chosen.

      •  In case you find that your expenditure crosses 7.5 percent of the adjusted gross earning, then you could take an itemized reduction where your expenses surpasses the brink. By qualifying medical expenses, you could consider medical, vision or dental care for your own self, your spouse or any individual dependant on you. Medical services include the ones that would prevent problems that could arise in the future, solve present problems or reduce pains. Medical drugs which need a prescription can be deductible. Further, expenses that you may incur in due course of traveling to the hospital in the form of parking fees, mileage, tolls can also be included.
      • In order to save for future medical expenditure, health savings accounts are sheltered by tax. However, in order to be eligible for this, you also need to possess a healthy insurance plan which has a high deductible. Every year, your contribution can go up to a limit set on the basis of the fact as to whether the health insurance plan is just meant for you or also includes your family.
      • Health insurance deduction can also be seen when you are self-employed. If you are in a partnership or you are the owner of greater than 2% of a corporation, you would be able to deduct the price of your health insurance policy and also that of your spouse and any other individual dependant on you. But if you have to qualify for the deductions, your policy should be in your name, that is, the name of the self-employed person, business or partnership. In this deduction, qualified long-term care premiums can be included. But again, there is a limit to the deductible amount because the age of the insured plays an important role in this. This deduction would affect your income tax. But as far as the decrease of your tax liability is concerned, this deduction would not be of any help. As a self-employed individual, you could deduct health insurance premiums from federal income taxes. As a taxpayer, you would be offered huge exemptions that could bring down the taxable income and thus lower the total amount that you would pay in federal income tax.

In order to understand more about tax deduction and the way it helps health insurance, you should have the clear idea about the following.

If there is a group health insurance provided through an employer then the tax exemption can be enjoyed. In such a scenario, probably your employer is paying the premiums of your insurance from your gross income before holding back federal tax income. This way your yearly tax income comes down and thus you will have a reduced tax bracket. In case your employer is not offering health insurance, you should ideally buy an individual health insurance policy from a private insurance organization. This might also be the case if you prefer to have a completely different coverage plan other than what is available. But again in order to avail tax deductions on health insurance in this regard, you need to note that you will only be able to deduct your private health insurance premiums on your federal income taxes if they are greater than 7.5 percent of your adjusted gross earnings

Tax deduction can also be seen in long term health care. The number of adults who need long term health care is on sharp rise. With the constant increase of health care expenditure, it seems that every single year, insurance coverage is getting lesser with respect to the total expenses for health care. Here, if you can comply with certain qualifications, then you can deduct cost of long term health care on the returns of your income tax. There are certain long term medical care expenses which are deductible. These include the costs incurred for diagnosis, medical treatment, healing and preventing an ailment. Certain drugs which need prescription are also deductible. With respect to long term medical care, the expenses include the cost incurred on nurses or certain care facility on long term basis, provided these have been prescribed specifically by a doctor. Health insurance payments can be deducted by you in the total expense; but again you would not be allowed to take health insurance deduction pertaining to life and disability.

While availing the benefits that tax deductions can do to health insurance, you need to make a note that all deductions should be the expenses paid during the year of tax filing from January 1 to December 31. In case you are mailing a payment on the last day of a year, that is 31st of December then it will surely be considered to be the expenditure for that particular calendar year.

Writing off your summer vacation

Aug 17, 2013 Posted by Sanjiv No Comments

Summer vacations can burn a big hole in one’s pocket; however avoiding them is not the long term solution. Working without taking any vacations can kill a person’s work life balance. One has to sneak away to small trips now and then and yet have a check on the travel expenses. Here are a few ways on how to travel yet claim deduction on some of the expenses.

Combine business with pleasure

If a person travels to trips for business meeting he can also combine the trip to do something for his personal interest. There is no hard and fast rule to identify if a trip is for business or personal purposes. If the time spent for official reasons is more on a trip, then it is a business trip. Air fares are deductible expenses. Driving to the venue of meeting gives a whopping deduction of 56.5 cents per mile with the added benefits of parking and toll charges. The key to get travel expenses deducted is excellent documentation.

One must have a very good control of his travel expenses and know all the rules of the IRS thoroughly so that he can answer any query regarding his claim for deductions.  Business trips help to write off the entire transportation and lodging expenses can be claimed for deductions. 50% of the meal expenses spent on working days is also deductible. Hence if one travels with his wife, only the meal expenses have to be taken care of. There should be some reasonable justification to be provided before claiming some expenses as deductions.

Learn something

Enrolling in some courses while travelling is another way to save travel expenses. As long as the course is to improvise on one’s skills at work, the education expenses and the travel expenses can be written off.  One has to regularly attend these classes while travelling and have good records about all the paperwork that might be needed while claiming for deductions. These courses could be a business related seminar or a professional course that would help the person climb his corporate ladder effectively.

Lend a hand

Volunteering to do charity work while travelling can help in claiming tax deductions. This is one way to prove that the aim of travel is not for pleasure or personal purposes. One can choose to do charity work after office hours and get a deduction for all the out-of-pocket expenses one spends. Driving one’s car to the venue of the charity work also helps in deducting car expenses of 14 cents per mile. The parking and other toll expenses are also covered in these deductions.

Get healthy

If a person is suffering from a severe obese condition, then he can get himself treated at a spa for weight reduction and improving his general health. These medical expenses are deductable provided there is a statement from the doctor that the treatment was purely medical and not for pleasure. Driving to the medical center can help to deduct up to 24 cents per mile with the combined benefits of parking and toll expenses.

Avoiding IRS Tax Audit This Year

Jan 15, 2013 Posted by Sanjiv No Comments

There are many things that seem to raise the red flag every time a tax return goes to the IRS. This article is going to point out some of the reasons behind an IRS audit. These points tend to increase the probability that you are going to get an audit from the IRS at one point in your life.

The first thing that should always put you on the look out is if you make a lot of money. Generally, people who earn a lot of money tend to underpay their taxes. The problem is that while people make money, they tend to spend it on many different things and forget that they are required to declare all sources of income and pay the taxes that arise from such incomes. This means that there is always the risk that such a person is underpaying his taxes or not paying some of them at all. This is a matter of concern for IRS.

There is also the risk that such a person fails to report all of the taxable income from 1099’s or W-2’s reported to the IRS. This failure may be intentional or just out of ignorance.

Another factor to look into is the charitable deductions that you make or receive. Giving back to charity and accepting charitable donations is one of the ways in which many people keep off paying taxes. However, there are some deductions that are tax exempt while others are taxable. There are many other types of deductions that you should also look out for the home office deductions that are claimable the rental losses that you make, business meals and travels as well as entertainment expenses.

One of the common mistakes that many people make is to write off the losses that have been acquired from a hobby activity among the business losses. In some cases, business persons who use their vehicles for business activities tend to claim 100% of the use of the vehicle on the business. Some of these things almost always tend to raise red flags all over the IRS servers.

Other things that may raise the IRS red flags include running a cash only business, failure to report the foreign bank accounts that individual holds and trade in currencies. Even then, whatever the reasons that you may have, it is important to avoid IRS audits. Overstating deductions and profits in most cases also attracts the IRS to your doorstep.

This is why it is important to use professionals in this field to cover the loopholes that you may have had. Professionals will also help you better organize your financial returns and reduce the possibility of raising the red flag at the IRS.

1099 Independent Contractor Tax Deduction

Oct 13, 2012 Posted by Sanjiv No Comments

Recently we got a question asking about the tax deduction for the 1099 contractor. Caller wanted to know if he can deduct the travel expense from his home to his office.

In San Francisco Bay Area, many of us are 1099 contractors, working for consulting companies or own our small business. With gas prices reaching $5 per gallon, it is no wonder that we are starting to pay special attention to the travel expenses.

 Small answer, like always, to this question is – Yes, but it depends.

You can deduct travel expense from your office to your client site. Meaning, if you have a home office and you travel from your home office to your work than that expense can be deducted.

However, if you simply travel from your home to your work than that expense is not tax deductible.

 Set Up A Home Office To Take Tax Deduction.

Your home office should be separate place in your home that is dedicated as your office. There is no special rule that define what furniture or equipment you need to buy to claim a place as your office. However, your office should serve as your “HOME OFFICE”. Meaning you should be able to do operational task from such place. Moreover, this office space should not be used for personal use. It should be dedicated forth office use only.

With increasing number of audits from the IRS, I suggest that you keep a picture of when your office was set up. Taking your home office pictures can also help strengthen your position in case of the audit. Making a list of things you do from your home office can also help you establish your home office.