Search Results for: actual expense

Automobiles

• If you use your vehicle for business purposes, you may generally use one of the two following methods to compute deductible expenses:
  • Standard mileage rate
  • Actual car expenses
• In this blog we are going to talk about the standard mileage rate

Multiple automobiles

• If you have more than one automobile, you should pay 100% of the costs for the primary business vehicle that is titled to your Corporation/LLC directly from your business bank account or using business funds and use the actual car expense method
• On the other hand, for the second automobile, if it is titled to you personally and not to your Corporation/LLC:
  • probably you will need to have in place an employer reimbursement accountable plan for your Corporation or LLC (see Publication 463 for requirements)
  • track miles and submit mileage reimbursement to the Corporation/LLC by December 31st
  • you should pay the expenses from your personal bank account

Standard mileage rate method

• Instead of deducting the actual vehicle expenses, a taxpayer can use the standard mileage rate method
• You can use this method as a substitute for the following actual expenses:
  • Depreciation
  • Lease payments
  • Maintenance and repairs
  • Gas and oil
  • Insurance
  • Vehicle registration fees
• You must have records showing the below information, and actually these records must be kept regardless if you use the standard mileage rate method or the actual car expense method:
  • total miles driven throughout the year, regardless if the miles were for business purposes or not
  • the number of miles driven for business purposes
  • the business purpose of each business trip
• The mere existence of a mileage log is not sufficient if the entries are too generalized or not supported by other corroborating evidence
• In addition to the mileage records, you should keep substantiation for other deductible expenses, such as auto loan interest, personal property taxes, parking fees, and tolls, which are deductible based on the business use percentage along with the standard mileage rate
• You can see here the rates for 2023: IRS issues standard mileage rates for 2023; business use increases 3 cents per mile | Internal Revenue Service

Standard mileage rate not allowed

• You can not use the standard mileage rate method if you:
  • Use five or more automobiles at the same time for business, such as in a fleet operation
  • Claimed:
    • a depreciation deduction for the automobile using any method other than straight-line depreciation over its estimated useful life
    • a Section 179 deduction on the vehicle
    • a special depreciation allowance on the vehicle
    • actual expenses for an automobile that is leased
  • Have an employer-provided business auto and unreimbursed auto expenses

If you want to use the standard mileage rate, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses.

If you need help with your federal or state taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

If you use your vehicle for business purposes, you may be eligible to claim a deduction for the expenses related to your business use. However, to do so, you need to keep a contemporaneous auto mileage log book when you claim a business deduction for the business use of your vehicle.

In this blog post, we will explain you the importance of maintaining a contemporaneous mileage log book and how it can help you avoid tax problems.

Mileage Log Book

A mileage log book is essential for substantiating your claim for the business use of your vehicle, as it provides evidence of the amount and nature of your driving.

Under the substantiation requirements, no deduction is allowed unless you, as a taxpayer, substantiate:

• the amount of each expense,
• the mileage for each business use of your vehicle and the total mileage for all use of the vehicle during the tax year,
• the date of each business use of the vehicle, and
• the purpose of each business use.

The IRS requires that you keep a mileage log book if you want to deduct your vehicle expenses using the standard mileage rate or the actual expenses method. The standard mileage rate is a fixed amount per mile that covers the costs of operating your vehicle, such as gas, maintenance, depreciation, and insurance. The actual expenses method allows you to deduct the actual costs of using your vehicle for business, such as gas, repairs, tires, registration fees, and depreciation. However, regardless of which method you choose, you still need to keep a mileage log book to prove your business use.

Fail on Keeping Records

If you fail to keep a mileage log book or if your log book is incomplete or inaccurate, you may face serious consequences from the IRS. The IRS may disallow your deduction for the business use of your vehicle or it may limit it to a lower percentage, which could result in a higher tax bill, penalties and interest. The IRS may also audit your tax return and ask for additional documentation to support your claim.

Therefore, it is important that you maintain a contemporaneous mileage log book that reflects your actual driving habits and business activities. A contemporaneous mileage log book is one that is created at or near the time of each trip, rather than at a later date based on memory or estimates. A contemporaneous mileage log book is more reliable and credible than a reconstructed one, as it reduces the risk of errors and omissions.

Court Case

An example that illustrates the importance of keeping an auto mileage log is the court case Wolpert, T.C. Memo. 2022-070. In this case, the taxpayer traveled for his consulting business and deducted car and truck expenses on his Schedule C, Profit or Loss from Business. The IRS disallowed the $7,528 in car and truck expenses for taxable year 2016 because the taxpayer failed to substantiate the mileage under the substantiation rules mentioned above.

Conclusion

By maintaining a contemporaneous mileage log book, you can ensure that you claim the correct amount of deduction for the business use of your vehicle and avoid any potential problems with the IRS. A mileage log book is not only a tax requirement but also a good business practice that can help you track your expenses and optimize your profitability.

Check here our video about this case. We also have other videos on our YouTube channel that you might find useful.

In the meantime, if you encounter any issues with your taxes or have any questions, we are here to help you with your accounting, QuickBooks, and tax needs. Click here to schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

There is a new tax court case that shows the importance of retaining records for closed tax years. Even if the statute of limitations had expired for those years, the records are important.

Why Is It Important To Keep Records For Closed Tax Years?

Let’s see why. There is a new tax court ruling, TC Memo 2024-86. According to this, a tax return itself does not establish the basis of items that are carried forward. Instead, you have to have the actual past records to substantiate carry forward items to future tax years. As an example:

• depreciation,
• capital loss carry forwards,
• business credit carry forwards,
• the nondeductible basis in an IRA, or
• NOL carryforward deductions.

For example, you buy this year a piece of equipment for your business costing $5,000. You will need to keep the payment receipt and any other documentation for this piece of equipment for at least 9 years, if you depreciate this equipment using a 5-year asset life.
Why? Well, because the depreciation expense generated by this 5-year life equipment can span over six years of tax returns. This depends on the depreciation method you are using. Plus, three years statute of limitations for year 6 tax return. We get to approximately 9 years that the records must be kept. Of course, there can be situations that extend the statute of limitations beyond the three years and records must be kept even longer.

Court Case

In this new court case, the taxpayer owned a high-end Japanese steakhouse and claimed in 2008 depreciation on significant expenses for build-out improvements and equipment. However, he lacked records, like receipts or invoices to substantiate these capitalized expenses. The IRS accepted the business owner’s 2008 return as filed and it did not audit this return.

However, later returns were inconsistent having no depreciation claimed or very little depreciation for these 2008 capitalized expenses. And some returns were not filed at all for which the IRS prepared substitute returns in which it did not claim any depreciation. The IRS issued a Notice of Deficiency for several years. The business owner hired a CPA to prepare and submit amended returns. The CPA claimed additional depreciation deductions calculated using the basis for the capitalized expenses shown on the 2008 return. The IRS did not accept these amended returns.

What Happened In Court?

In court, the business owner argued that the IRS accepted his 2008 return, which should allow for depreciation deductions in later years under the Cohan rule. That’s because under the Cohan rule, if a taxpayer can show that they incurred a business expense, but cannot substantiate the exact amount, the court can estimate the amount and allow a deduction. The court must have a reasonable basis for the estimate and should approximate as closely as possible, bearing heavily on the taxpayer whose lack of records caused the inexactitude.
The court agreed that our business owner incurred expenses in 2008. But, noted that the figures on the 2008 return were unsubstantiated estimates. In addition, the court ruled that the taxpayer was entitled to depreciation deductions for the years at issue based on only one-half and not on 100% of the basis amounts reported on the 2008 return. If he had the receipts and the documentation for the 2008 restaurant build out improvements and equipment, he would have been allowed the entire amount of depreciation. The amount would have been claimed on the amended returns filed by his CPA for tax years between 2010 and 2012 and 2014 and 2016. Thus, our business owner lost hundreds of thousands of dollars in deductions.

You can check our YouTube channel for more subjects that you might find useful. If you are in need of a good CPA firm contact us!

Please note that this blog post is for informational purposes only and does not constitute tax, legal or accounting advice.

What happens if the car you are using for business is not title to your business and it is your personal car? In this blog we are going to discuss the situation in which your business is a corporation or an LLC that is treated for IRS purposes as an S Corporation or as a C Corporation.

If you are not sure how your LLC or your business is treated for tax purposes, check what tax form the business files with the IRS. In case that it is Form 1120S, your business is an S Corporation. If it is Form 1120, your business is a C Corporation.

Personal Car Used For Business

In this situation when you use your personal car for business, are you allowed to deduct the vehicle expenses? Business deductions like:

• gas, repairs maintenance, insurance, or even the cost of the vehicle through depreciation, or the interest you pay on the car loan can be very useful in reducing your tax.

And another question that arises is: from what bank account or credit card account do you pay these expenses? Do you use the business accounts or the personal accounts? Let’s see what happens in this situation:

• First, because the car is not under the business name, the car is not a business asset. It is a personal asset. So, you should pay all the expenses from your personal accounts.
• Second, how can you deduct the car expenses, since even though this is a personal asset, you are using it for business purposes?

Well, in this situation the business will have to reimburse you, as an owner-employee of your business, for the business vehicle usage. The business can claim an expense equal to the number of miles you drove for business for that period multiplied by the IRS mileage rate applicable for that time frame. This means two things:

First, that you will need to have a mileage log and track your miles. We did a separate blog regarding what information a mileage log should have.

And second, your business should have in place an arrangement called an employer reimbursement accountable plan.

Employer Reimbursement Accountable Plan

The employer reimbursement accountable plan will allow you to submit a mileage reimbursement request to your own Corporation or LLC. Having an employer reimbursement accountable plan is very important. Because if you do not have such a plan, the IRS can treat any mileage reimbursements as wage income to you. In this case, you will have to pay unnecessary payroll taxes or you can get into other complications.

Now, an employer reimbursement accountable plan is an arrangement that needs to respect three rules:

First, you must have paid or incurred deductible expenses while performing services as an employee of your employer, in our case your own company.
Since we said that your business is treated as an S Corporation or a C Corporation, you are both an owner and an employee of your own business. As a sideline, you should always pay yourself a reasonable salary for the work that you do for your corporation.
And since you are using the vehicle for business purposes, any mileage reimbursement for your business trips should satisfy this first condition.

Second, you must return any excess reimbursement or allowance within a reasonable period of time.
And third, you must adequately account to your employer, so to your own company, for these expenses within a reasonable period of time. This is where the mileage log comes into play. You should also keep documentation regarding the cost of the car and any improvements and the date you started using it for business.

Reasonable Period of Time

Now let’s see what the IRS means to be a reasonable period of time.
The IRS says that a reasonable period of time depends on the facts and circumstances of your situation. But since this is a very murky definition, the IRS came up with some time frames that the IRS will treat as taking place within a reasonable period of time. Let’s see what these are:

• You receive an advance within 30 days of the time you have an expense.
• You adequately account for your expenses within 60 days after they were paid or incurred.
• You return any excess reimbursement within 120 days after the expense was paid or incurred.
• You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.

If you do not fall under these timelines doesn’t mean that you don’t have an accountable plan. It just means that the IRS will evaluate your plan based on your facts and circumstances. But of course, the safest way is to fall within these timelines.

Conclusion

For more information on the employer reimbursement accountable plan see Publication 463.
One more thing I want to mention before wrapping up this blog: this situation where you are using your personal vehicle for business, might not be an ideal situation. That’s because a bigger deduction might result from using the actual car expenses instead of the mileage reimbursement. Whenever possible you should have the vehicle purchased under the business name.

Tax regulations can be complicated. That is why, it is very important when you have a business to seek professional advice.
If you are in need of a good CPA firm contact us!

You can check our YouTube channel for more subjects that you might find useful.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

If you are earning money from a side job, a small business, or by selling items online, it is important to report your gross income correctly. If you make more than $600 in a year through payment apps or online marketplaces, you could receive a Form 1099-K. This form is typically sent to you and the IRS by January 31^st the following year.

Taxable and Nontaxable

Keep in mind that all income, regardless of the amount, is subject to tax unless the tax law specifically exempts it. This is applicable even if you don’t receive a Form 1099-K. You will need to report as income, the profit you make from your activities. The Form 1099-K shows the total amount of payments you received (gross income). You can use this form, along with other records, to calculate the actual taxes you owe on your profits.

What Should You Not Report on Form 1099-K

You should not report money received from friends or family as a gift on Form 1099-K. Similarly, reimbursements for personal expenses should also not be reported on this form. This includes shared costs for things like car rides or meals, money received for birthday or holiday gifts, or repayments for household bills from a roommate. These are not taxable income. It’s important to mark these payments as non-business in payment apps whenever possible.

Personal Items Sold

If you’ve received payments for personal items you’ve sold through a payment app or online marketplace, you might receive a Form 1099-K. Personal items can be anything you used personally, like a car, fridge, furniture, stereo, jewelry, or silverware.

The way you report these payments on your tax return depends on whether you made a profit or a loss from the sale. If you sold various personal items and some were at a loss and others at a gain, you should report them separately. You can see how to report the gain or losses from personal items sold here.

Avoid IRS Notices

You should total the amounts on all the 1099-k forms you received and check that the total gross income you report on your tax return is not less than your total 1099-K forms for that respective tax year, otherwise you are going to receive an IRS notice. There are two possible issues that could cause your gross income to be less than the total on your 1099-K forms:

• one or more 1099-K forms might be incorrect , in which case you should request a corrected form from the issuer,
• there are errors in your accounting of gross income, in which case you should review your bank reconciliations, you should make sure you do not report net amounts instead of gross amounts, check that you account for outstanding deposits and that you considered all the bank accounts in which you received payments.

Recordkeeping

Maintaining accurate records is important for tax filing. Remember to document all expenses, sales, and payments received for services throughout the year. You must separate business and personal transactions to be able to calculate your potential tax liabilities.

You can found more information about the Form 1099-K on the IRS website.

In the meantime, if you encounter any issues or have any questions, we are here to help you with your accounting, QuickBooks, and tax needs. Click here to schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Starting with 2023, there is a new deduction available for energy efficient commercial buildings. You may qualify for the Energy Efficient Commercial Buildings Deduction if you own a building and install energy-efficient property. Higher deductions could be available if your installations save more energy or meet certain standards. As a result, making your building more energy-efficient could help you save money on taxes.

This deduction is available for new buildings that produce energy efficiency of at least 25% or for improvements made to an existing building that improve the efficiency of it by at least 25%. For example, improvements to an office building that increase its efficiency.

Normally, the cost of a commercial building or the cost of a building improvement can not be claimed as an expense when actually made. Instead, when the building or the improvement is placed in service the cost has to be taken as an expense over 39 years starting with the year when the building/improvement is placed in service.

This new rule available starting with 2023, section 179D, allows to take a lot bigger expense in the first year when the building/improvement is placed in service, if the requirements of the deduction are met.

Are You Eligible?

Starting from January 1, 2023, the tax deduction is available to the following groups:

• owners of qualified commercial buildings,
• designers of energy-efficient commercial building property or energy-efficient building retrofit property that are installed in buildings owned by certain tax-exempt entities.

Previously, this deduction was only available to owners of qualified commercial buildings and designers of energy efficient commercial building property installed in buildings owned by certain government entities. So, this is a new expansion of the taxpayers that can claim the deduction.

Requirements

To summarize the requirements:

1. The energy efficiency improvement has to be at least 25%
2. The building has to meet the 90.1 ASHRAE Standard  (this is something to talk to with the engineer or architect)
3. The building has to be built with “qualified property”: qualified property includes depreciable property installed as part of interior lighting systems, heating, cooling, ventilation and hot water systems or the building envelope
4. Also, you must obtain a certification from an engineer or contractor licensed in your state that will have to use the computer modeling required by the government to issue the certification

Amount of the Deduction

For properties in service starting with 2023, the tax deduction for energy-efficient property is based on the lesser of two amounts:

• the cost of the installed property,
• the savings per square foot, which is calculated as follows:
  • $0.50 per square foot for a building with 25% energy savings,
  • an additional $0.02 per square foot for each percentage point of energy savings above 25%,
  • the maximum amount is $1.00 per square foot for a building with 50% energy savings.

Also a bigger amount of the deduction (5 times more) is available if the contractors/laborers are paid according to the Secretary of Labor guidance for the respective geographical area (the exacts rules can be found in this notice). This is not a requirement, is just that if you meet this criteria you get a much bigger deduction.

The amount of the deduction ranges from $0.50 times the square footage of the building, if the 25% efficiency is met, up to a maximum of $1.00 times square footage for a building with 50% energy savings. And if laborers are paid local prevailing wages and apprenticeship requirements are met, then the deduction is 5 times more.

Energy Efficient Commercial Building Property

• Energy Efficient Commercial Building Property:
  • this must be installed in a building located in the U.S. and should be within the scope of a specified Reference Standard 90.1 of the:
    • American Society of Heating, Refrigerating, and Air Conditioning Engineers, and
    • Illuminating Engineering Society of North America,
  • the property should be installed as part of the:
    • interior lighting systems,
    • heating,
    • cooling,
    • ventilation, and
    • hot water systems, or
    • the building envelope.
  • it should be eligible for depreciation or amortization,
  • the installation should be part of a plan to reduce annual energy and power costs by 25% or more compared to a reference building meeting the minimum requirements of Reference Standard 90.1.

Energy Efficient Building Retrofit Property

• Energy Efficient Building Retrofit Property:
  • the property should be installed as part of the:
    • interior lighting systems,
    • heating,
    • cooling,
    • ventilation, and
    • hot water systems, or
    • the building envelope.
  • a qualified building is one located in the U.S. and has been in service for at least 5 years before a retrofit plan is established,
  • in addition, the property should be eligible for depreciation or amortization and must meet certain energy-saving requirements.

In conclusion, if you meet some energy efficiency requirements you might qualify for the Energy Efficient Commercial Buildings Deduction. If you were to qualify for this deduction, it would mean that you can reduce your taxable income in the year you place the building in service by a lot more than with the regular depreciation over 39 years. This is something to keep in mind and maybe consult with your architect or engineer and your CPA.

In the meantime, if you encounter any issues or have any questions, we are here to help you with your accounting, QuickBooks, and tax needs. Click here to schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.