September 2020

Deducting Qualifying Car and Truck Expenses, Part 9: Small Business Guide to Reducing Your Tax Burden Legally

By Office Staff|2020-10-08T20:46:55-07:00September 30, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: American Automobile Association, Standard Mileage Rate, Vehicle Expense|0 Comments

Did you know that if you have a motor vehicle and a business, you may have a tax deduction coming your way? It’s true. In many cases, you can deduct from your business profits the cost of buying, driving, and maintaining that vehicle. And if you use it exclusively or almost exclusively for work, you may be able to get the government to pay a good chunk of the expenses related to that vehicle (in the form of money you save on taxes).

That’s only fair. Every penny you put into driving to deliver product or perform a service for your customers is a penny out of your business profits!

In this blog post, Part 9 in our Small Business Guide to Reducing Your Tax Burden Legally series, we cover how it may be possible to claim a deduction on a qualifying car, truck and related expenses.

Two Ways to Claim Vehicle Expenses

In these United States, the Internal Revenue Code provides for two different ways to claim vehicle expenses:

Actual expenses: You claim the business use percentage (BUP) of all expenses related to a vehicle, including fuel cost, auto insurance, lease payments (or loan interest and depreciation), personal property tax, repairs/maintenance (oil changes, tires, etc.), and car washes. For example, suppose you use a vehicle 75 percent for business and 25 percent for personal use, and your total vehicle expenses are $8,000 for the year. Your deduction would be $8,000 x 0.75 = $6,000.
Standard mileage: You multiply the number of miles you drove the vehicle for business by the standard per-mile rate, which is 57.5 cents for the year 2020. For example, if you put 8,000 business miles on a vehicle 8,000 x 57.5 = $4,600. Using this method, you can also deduct the business use percentage of vehicle registration fees and taxes, vehicle loan interest, and tolls and parking fees. (Note: You cannot use the standard mileage method if you use five or more vehicles in your business, or you use your vehicle for hire; for example, taxi, Lyft, Uber, etc.)

Many small-business owners choose the standard mileage option because it’s so straightforward in terms of calculations and record-keeping. All you need is your odometer meter reading at the beginning and end of the year and a log of the number of miles you drove for business (which you should keep regardless of the method you use to calculate your deduction). You don’t need a receipt for every time you fuel up or take your vehicle in for an oil change.

However, using the easy method could cost you money. Every year, the American Automobile Association (AAA or more commonly “Triple A”) conducts in-depth research into vehicle operating costs. If you’re choosing to take the standard deduction for a vehicle that costs more than 57.5 cents/mile, could be losing money by not claiming your Continue reading… Continue reading… Continue reading…

Maximizing Your Home Office Deduction, Part 8: Small Business Guide to Reducing Your Tax Burden Legally

By Office Staff|2020-10-08T20:47:46-07:00September 21, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: Home Office, Home Office Deduction, Home Office Expense|0 Comments

If you’re self-employed or run a small business out of your home, you can reduce your income tax bill by claiming a home office deduction. This deduction enables you to subtract from your income a portion of expenses attributable to the area of your home that you use for business.

For example, if you run a pet grooming business out of 20 percent of your home and use that other 80 percent as living space, under the right circumstances, you may be able to deduct 20 percent of your mortgage interest, property taxes, homeowner’s insurance, homeowner association fees, and utilities (such as electricity, gas, water, sewer, and trash). You might even be able to deduct depreciation on that portion of your home.

Hey, it’s only fair. Other businesses get to deduct the cost of maintaining a building or renting office space, so you should get a tax break for the portion of your home you use for conducting business.

Unfortunately, many small-business owners don’t claim this deduction because they fear that doing so will raise red flags and increase their odds of becoming a target for a dreaded tax audit. Others avoid claiming it because they’re afraid that the calculations or record-keeping would be too complicated. However, the calculations and record-keeping are straightforward, and there’s no evidence that claiming the home office deduction increases your odds of being audited. Besides, as long as you’re honest about the business use of your home, and you have records to back up the expenses you claim, even if you do get audited, you have nothing to fear.

In addition to being able to claim the home office expense, if you are using your home office as the base for business auto mileage, it is a good idea to establish your home office as your “tax home.” This supports your claim for auto expenses any time you travel from your home office to another business location.

Pro Tip: You may be able to use expenses associated with a home office to reduce self-employment income and taxable income from your business — but not below zero. If your home office expenses for a particular year are more than your net income from your business, you may be able to carry forward the loss to future years.

Deciding Whether Your Office Space Qualifies

To qualify for a home office deduction, a portion of your home must be used in one of the following ways:

Exclusively and regularly as your principle place of business
Exclusively and regularly as a place where you meet and deal with your customers in the normal course of your business
A separate structure that’s not attached to your home and is used exclusively and regularly in connection with your business
On a regular basis, the space is used for storage of inventory or product samples used in your business for selling products at retail or wholesale (note: this usage does not have to be exclusive)
For rental use
As a daycare facility

Let’s translate this into plain English: Continue reading… Continue reading… Continue reading…

Improving Your Medical Benefits While Cutting Your Taxes, Part 7: Small Business Guide to Reducing Your Tax Burden Legally

By Office Staff|2020-10-08T20:48:38-07:00September 9, 2020|Categories: Small Business Guide to Legally Reducing Your Tax Burden|Tags: Flexible Spending Account, Health Savings Account, Medical Benefits, Medical Expense Reimbursement Plan|0 Comments

The Affordable Care Act (ACA), dubbed “Obamacare,” made health care much less affordable for many small-business owners. It led to higher health insurance premiums, while doing little to nothing to rein in the spiraling costs of doctor visits, diagnostic tests, pharmaceuticals, and hospital care.

As a result, many small-business owners have dropped their healthcare coverage, which is not something we recommend. That’s because a single unforeseen individual or family illness could stick you with a bill that could drive you into bankruptcy. What we do recommend is that you make healthcare more affordable for yourself and your family by taking full advantage of every tax break available for healthcare expenses.

You are probably already aware that if you pay for your own health insurance, you’re allowed to deduct it as an adjustment to income. You’re probably also aware that if you itemize your deductions, you’re allowed to deduct unreimbursed dental and medical that exceed 7.5 percent of your adjusted gross income. However, most of us don’t spend that much on healthcare, and since the standard deduction nearly doubled with the passing of the Tax Cut and Jobs Act of 2017, many of us don’t itemize. As a result, we end up losing a lot of money in otherwise legitimate deductions.

Here’s an idea. What if there was a way to write off medical bills as business expenses? Actually, there are three ways:

Medical Expense Reimbursement Plan (MERP)
Health Savings Account (HSA)
Flexible Spending Account (FSA)

Pro Tip: Take a big-picture approach to healthcare costs. While a high-deductible healthcare plan costs less and makes you eligible to contribute to a health savings account (HSA) and pay out-of-pocket costs out of that account tax-free, a low-deductible plan that covers more expenses may be more cost-effective for your family depending on your situation. Here at Stees, Walker & Company, LLP, we can help you evaluate different plans and choose a plan that’s best for your overall finances.

In any event, in this post we cover each of the three ways to legally write off medical bills as business expenses, starting with the use of an MERP (medical expense reimbursement plan).

Medical Expense Reimbursement Plan (MERP)

The first thing to know about a MERP (also known as a 105 plan) is that it’s an employee benefit plan. That means it requires an employee: Continue reading… Continue reading… Continue reading…