Tax Regulations

IRS rules and exceptions abound, but there are some questions we can answer simply.

Next to your home, your car is probably the most expensive investment you make. And the costs of paying for and maintaining it can be considerable. Can you recoup some of your investment by claiming vehicle expenses on your tax return?

Sometimes. The IRS has many restrictions on the business use of a vehicle, and those restrictions have many exceptions. Better to know these upfront than to have to correct a tax return after you’ve filed it. Here are some questions and answers that may help you decide whether you’re eligible.

How does the IRS identify a “business vehicle”?

A car, van, pickup, or panel truck.

What are transportation expenses?

These are “ordinary and necessary expenses” incurred when you, for example:

• Visit customers,
• Attend a business meeting held at a location other than your regular workplace, or
• Go from home to a temporary workplace that is not your company’s principal location.

The daily commute to and from your regular office is not deductible. The IRS considers this personal commuting expenses.

What if I’m on an overnight business trip away from home?

The IRS considers these travel expenses, and they’re reported differently. Your car expense deduction, though, is calculated the same way in both situations.

What if I use my car for both business and personal purposes?

You’ll calculate the expenses incurred for each by determining how many miles you drive for business and how many you drive for personal reasons.

I work in a home office. Can I deduct any driving expenses?

Yes, you can deduct the cost of driving to “another work location in the same trade or business.”

How do I calculate my deductible expenses?

There are two options. You can choose between the standard mileage rate and actual car expenses – depreciation, oil and gas, insurance, and repairs.

Depreciation? Isn’t that difficult to calculate?

Yes, especially for cars. If you plan to take this kind of deduction, please let us handle your tax preparation for you. Depreciation is very, very complex, and sometimes requires more than one calculation method.

What kind of business vehicle expense records do I need to maintain?

You know the drill here. If the IRS ever wants to examine your return, it will expect evidence like receipts, cancelled checks, and credit card statements. You’ll need to document the date and location where you incurred the expense. You’ll need accurate mileage records (miles driven, purpose of trip, etc.).

These requirements scream for some kind of organized computer log or written diary, along with a safe place for any paper receipts, bills, etc. There are numerous mobile apps that can help you with this task. We can steer you in the right direction.

If you’re planning to deduct car expenses, it’s important that you keep careful paper or electronic records.

Where will I be reporting transportation expenses?

If you are self-employed, you will report business-related vehicle expenses on Schedule C or Schedule C-EZ (Form 1040). Farmers should use Schedule F (Form 1040). You’ll also want to complete a Form 4562, which is used to report depreciation and the Section 179 deduction.

Maintaining accurate records for car and truck expenses is time consuming and detail intensive. And that’s once you understand all of the IRS’s rules and exceptions surrounding this deduction. To avoid having to fix completed tax documents that the IRS has questioned, talk to us before you put a vehicle into business use. We’ll be happy to evaluate your transportation situation and guide you through the process.

 

Bringing your first employee into your business is a reason to celebrate. You’ve done well enough as a sole proprietor that you can’t handle the workload by yourself anymore.

It’s a major milestone for you, but it comes with a lot of paperwork that you must do correctly.

Before your first employee even shows up for the first day of work, you should have assembled all the paperwork required to keep you compliant with the IRS and other federal and state agencies.

EIN Application

If you are a sole proprietor and you’ve been using your Social Security number as your tax ID, you’ll need an Employer Identification Number (EIN). You can apply for one here.

The IRS’s EIN Assistant walks you through the process of applying for an Employer Identification Number (EIN).

Once you’ve completed the steps in the IRS’s EIN Assistant, you’ll receive your EIN right away, and can start using it to open a business bank account, apply for a business license, etc.

You’ll also need an EIN before you start paying your first employee in order to provide him or her with Form W-4. If you’ve ever worked for a business yourself, you’ve probably filled out this form. As an employer now, you should provide one to your new hire on the first day. This form will help you determine how much federal income tax to withhold every payday. If you’re not bringing in a full-time employee but, rather, an independent contractor, you won’t be responsible for withholding and paying income taxes for that individual. You’ll need to supply him or her with a Form W-9.

Payroll processing is the next step and can be complex. If you don’t have any experience with it, you’ll probably want to use an online payroll application. After you’re set up on one of these websites, you enter the hours worked every pay period. The site calculates tax withholding and payroll taxes due, then prints or direct deposits paychecks. Let us know if you want some guidance on this.

State Reporting

Don’t forget about state taxes. You will have to register with the Texas Workforce Commission so you can receive a TWC tax account number. To register online click here. You will have to file wage reports and make state unemployment tax payments online.

You also have to be in contact with the State to report a new hire (same goes if you ever re-hire someone). Click here to find out more about the new hire reporting requirements.

Form I-9

All employees are required to fill out a Form I-9 on the first day of a new job. New employees must also prove that they’re legally eligible to work in the United States. To do this, they complete a Form I-9 from the Department of Homeland Security. As their employer, you’re charged with verifying that the information provided is accurate by looking at one or a combination of documents (U.S. Passport, driver’s license and birth certificate, etc.). By signing this form, you’re stating that you’ve done that.

You can also use the U.S. government’s E-Verify online tool to confirm eligibility.

A Helping Hand

The Department of Labor has a great website for new employers. The FirstStep Employment Law Advisor helps employers understand what DOL federal employment laws apply to them and what record-keeping they’re required to do.

Please consider us a resource, too, as you take on a new employee. Preparing for a complex new set of tax obligations will be a challenge. We’d like to see you get everything right from the start.

A common way for a shareholder to withdraw tax-free cash from a closely held corporation is to borrow money from it. However, for such a tax strategy to pass muster with the IRS, the loan must be business like. The IRS has issued an audit guide on shareholder loans. This guide describes factors that determine whether withdrawals will be considered loans or taxable dividends.

IS THE SHAREHOLDER LOAN A BONA FIDE LOAN?

Whether or not the IRS will consider a disbursement to a shareholder to be a loan for tax purposes depends on whether, at the time of the distribution, the shareholder intended to repay it and the corporation intended to require repayment. “Yes” answers to the following questions can help demonstrate this intent.

• Did the shareholder provide security for the loan?
• Is the shareholder in a position (as to salary, other income, and net worth) to repay the loan?
• Did the shareholder give a certificate of debt to the corporation?
• Is there a repayment schedule or an attempt to repay?
• Did the shareholder and the company set a maturity date for the loan?
• Does the corporation charge interest?
• Does the corporation make systematic efforts to obtain repayment?
• Is there a ceiling on the amount the corporation can advance?

IRS may reclassify the shareholder loans that aren’t considered bona fide as dividends — taxable to the shareholder and nondeductible by the corporation. “Yes” answers to the following questions would indicate that distributions to a shareholder may be constructive dividends rather than loans.

• Does the shareholder control the corporation’s affairs?
• Is the controlling shareholder’s ability to repay the shareholder loan contingent on future events?
• Does the corporation have adequate earnings and profits with respect to the advances made, coupled with no history of paying dividends?

The above list is not all-inclusive. No factor by itself is determinative; The IRS looks at the factors as a whole. For more information on shareholder loans, contact us today.