Blog

Deducting Business Expenses: Expensed vs. Capitalized

Posted on March 31st, by Janice in Business Taxes No Comments

Business owners, including real estate investors, often come across this situation:

You make a purchase of property for your business – maybe it’s a printer, tablet, appliance or furniture – and the question becomes: is this a cost that can be expensed right away or does it have to be capitalized?

If a cost is capitalized, it means the expense (depreciation) is taken over a number of years which is usually less desirable than expensing it all at once.

The general rule is that costs must be capitalized if the useful life is more than 12 months. This can become a bit impractical in real-world application.

Fortunately, the IRS has released much needed guidance on when costs for property must be capitalized. This new guidance is effective for tax years beginning after December 31, 2013.

With this new guidance comes an important opportunity that allows businesses (which includes real estate investors) to immediately expense certain property that would otherwise have to be capitalized.

This can mean big tax savings but action must be taken now in order to take advantage of this opportunity.

How to Qualify for this Tax Opportunity
To qualify, businesses must have “non-tax accounting procedures” in place at the beginning of the year.

The purpose of these accounting procedures is to indicate that amounts paid for property that are less than a specified dollar amount or that have a useful life of 12 months or less will be expensed.

The amount that can be expensed depends on whether the business has an Applicable Financial Statement (AFS). An AFS includes financial statements filed with the SEC or provided to a federal or state government or agency (other than the IRS) and certified audited financial statements.

Businesses with an AFS must have written accounting procedures and can expense property that costs up to $5,000 (per item) if it is in accordance with their written accounting procedures.

Most businesses do not have an AFS. For those businesses without an AFS, they must have accounting procedures and can expense property costing up to $500 (per item) if it is in accordance with those procedures. At this point, the procedures for these businesses do not need to be written. However, we strongly recommend that all businesses put their accounting procedures in writing.

The following is a sample procedure:

It is the policy of the business to capitalize assets that cost $500 or more individually. All capitalized assets will be depreciated based on the appropriate depreciation rules. Assets that cost less than $500 individually will be expensed in the period purchased.

Once the above is in place, the business must follow this procedure when recording costs to purchase property. This then qualifies the business to make an election on their tax return to have these items treated the same way on its tax return.

The Bottom Line
Businesses that take advantage of this new opportunity will be able to immediately expense items that would otherwise have to be capitalized.

To take advantage of this new opportunity, businesses need to do the following:

#1 Document the accounting procedure for the business by January 1, 2014.

#2 Follow the accounting procedure when recording purchases of property in the bookkeeping for the business.

#3 Make the election on the business tax return.

If you want to learn more about how to take advantage of these tax strategies; sign up on our web site or call us for an appointment to get started today.

Big Tax Savings When You Purchase New Equipment For Your Business

Posted on March 30th, by Janice in Taxes No Comments

Business owners, including real estate investors, often come across this situation:

If a cost is capitalized, it means the expense (depreciation) is taken over a number of years which is usually less desirable than expensing it all at once.

The general rule is that costs must be capitalized if the useful life is more than 12 months. This can become a bit impractical in real-world application.

Fortunately, the IRS recently released much needed guidance on when costs for property must be capitalized. This new guidance is effective for tax years beginning after December 31, 2013.

This can mean big tax savings but action must be taken now in order to take advantage of this opportunity.

How to Qualify for this Tax Opportunity
To qualify, businesses must have “non-tax accounting procedures” in place at the beginning of the year. This means by January 1, 2014 for calendar year taxpayers.

The purpose of these accounting procedures is to indicate that amounts paid for property that are less than a specified dollar amount or that have a useful life of 12 months or less will be expensed.

Businesses with an AFS must have written accounting procedures and can expense property that costs up to $5,000 (per item) if it is in accordance with their written accounting procedures.

The following is a sample procedure:

The Bottom Line
Businesses that take advantage of this new opportunity will be able to immediately expense items that would otherwise have to be capitalized.

To take advantage of this new opportunity, businesses need to do the following:

#1 Document the accounting procedure for the business by January 1, 2014.

#2 Follow the accounting procedure when recording purchases of property in the bookkeeping for the business.

#3 Make the election on the business tax return.

If you want to learn more about how to take advantage of these tax strategies, sign up on our web site or email us for an appointment to get started today.

How is Health Care Reform Going to Affect You?

Posted on March 6th, by Janice in Business No Comments

The new health care reform or Obamacare was rolled out on October 1, 2013. Unless you have been hiding under a rock for the last couple months you probably have some knowledge of this new change. What most people don’t know is the basics of how it affects you.

The uninsured will have affordable options. With the open enrollment starting October 1, 2013 uninsured Americans can start shopping for affordable health insurance using any of the online health insurance marketplaces.
Insurance will be expanded. Pre-existing conditions will no longer exist. The reform makes it so that no individual can be denied health insurance because of pre-existing conditions. Young adults can also stay on their parents’ insurance plan until age 26.
You may be eligible for a government subsidy. If you purchase health insurance through an online insurance marketplace or exchange and your yearly income is no more than $45,960 for individuals, or $94,200 for a family or four you may be eligible for a government subsidy to help pay for insurance. The subsidy will come in the form of a tax credit.
You may receive a penalty if not insured by March 31, 2014. If health insurance isn’t purchased by this date you will receive a penalty on your 2014 tax return (filed in 2015). The penalty for 2014 is $95 per adult and $47.50 per child, and the fee is capped at $285 or 1 percent of household income. Every tax year the penalty will increase.
If you have health insurance, you are already covered under the law. Not everyone needs to purchase health insurance through the online marketplaces. If you already have eligible health insurance you are all set.

Do You Have the Right Tax Advisor?

Posted on February 13th, by Janice in Blog Taxes No Comments

The real question most people want answered is this: Is my tax advisor doing everything (legally) possible to reduce my taxes?

Without the right tax advisor, most people have the following thoughts about taxes:

Taxes are a necessary evil
There is no way I will ever understand my taxes
All my hard earned money goes to pay my taxes

What is scary about falling into this type of thinking is it can lead to overpaying your taxes. The perceived complexity of the tax code plays right into how most people are taught to think about taxes – that they are just too complicated to even try to understand.

Because of this, most people don’t bother to understand how their taxes work. This can lead to dangerous results – like not knowing if their taxes are overpaid, underpaid or legally minimized.

With the right tax advisor, the thinking changes to:

Taxes help me stay in touch with the performance of my business and investments
I know exactly what I need to do to legally reduce my taxes
My tax savings can supercharge my wealth building

Thinking about taxes differently is not the same as being a tax expert. You don’t have to be a tax expert. You’ll want a tax expert on your team. This is where the right tax advisor comes into play.

Below are a few key qualities I think every tax advisor should have. (I’ve shared this list before and I’m sharing it again now because I think this is essential information).

#1 Your Tax Advisor Should Ask You Questions (Lots of them)
If you have to ask all the questions, then you have the wrong tax advisor.

It is a necessity for your tax advisor to ask you a lot of questions. Questions enable your tax advisor to understand your situation and goals.

Here are just a few examples of questions your tax advisor should ask you:

What is your role in your business or investing activities?
What is your family’s role in your business or investing activities?
What are your personal and professional goals?
How do you track your expenses (not just your business and investing expenses, but ALL of your expenses)?

Remember, taxes are based on facts. The more your tax advisor understands your facts, the more opportunity there is to change your tax.

#2 Your Tax Advisor Should Reduce Your Taxes…Legally
I have been asked more than once if the tax strategies I use are legal. That is one of the easiest questions I ever get to answer – Yes.

The question indicates that there are tax advisors who will reduce your taxes by cheating.

Your tax advisor should know the tax law well enough to know how to be creative within the law, without having to bend any rules.

If your facts don’t fit within the law, then your advisor should be able to tell you what you can do differently so your facts do fit within the law.

#3 Your Tax Advisor Should Increase Your Tax Awareness
Your tax advisor should be excited to share new information with you about how to reduce your taxes and provide you with a clear understanding of the tax rules.

Understanding the rules doesn’t mean you have to be an expert on the tax rules. Your tax advisor should be the expert. Understanding the rules simply means you know what to look for so you can identify potential opportunities and discuss them with your tax advisor.

You are the one who is best able to identify potential opportunities because you are the one who is in the day-to-day activity of your business or investing and that is where the opportunities are.

While your tax advisor can identify some opportunities after-the-fact, the results are much better and faster if you are able to identify them as they occur. And quicker results most likely mean you can start reducing your taxes sooner.

This is why it’s important for your tax advisor to increase your tax awareness – once you know what to look for, it is much easier to identify your tax saving opportunities.

#4 Your Tax Advisor Should Prepare Your Tax Return
One more item to mention here is to never use a tax preparer who isn’t also your tax advisor. You may otherwise get great advice that is never used and lose out on great tax savings.

On the flip side of that, your tax advisor shouldn’t only prepare your tax return. Your tax advisor should be able to help you create and implement sound tax strategies, in addition to preparing your tax return.

Remember: The more passionate your tax advisor is about reducing your taxes, the lower your taxes will be.

Tips for Making Your Tax Return Preparation a Smooth Process

Posted on January 30th, by Janice in Taxes No Comments

You’ve probably already started receiving letters or emails labeled “Important Tax Return Documents”. While it may seem a little early to start thinking about your tax returns that are not due for a few more months, it’s the ideal time to start planning for a smooth tax return preparation process.

Here are some tips to get you started:

#1 Contact your tax advisor now
Map out the steps and timeline for your tax return preparation with your tax advisor. Find out when you need to have information to your tax advisor and when you should expect your tax return to be completed. Most importantly, get a list of the information you need to provide.

#2 Clean up your bookkeeping
Accurate bookkeeping can be one of the biggest obstacles in the tax return preparation process.

For starters, make sure your balance sheet accounts have been reconciled through the end of the year. For example, if you have a mortgage, makes sure the mortgage balance that shows on your balance sheet agrees to the mortgage statement received from the lender.

Review your balance sheet and profit & loss statement. While you may not be an expert at financial statements, you’re likely to catch something that is blatantly wrong.

#3 Note any changes to your entities
Did you add an entity last year? Or maybe you removed an entity, or perhaps the ownership of your entity changed. This information can have a major impact on your tax return preparation.

#4 Identify major purchases or sales of property
If you purchased a rental property, a new piece of equipment, a new business vehicle or something along those lines, have the details of those purchases available. Then do the same for any sales of property.

#5 Gather up your documentation
When it comes to permanent tax savings, the 3 most important words are: Documentation, Documentation, Documentation!

Proper documentation increases the accuracy of the information you provide to your tax advisor. This helps your tax advisor do more for you because they have good information.

Proper documentation also provides the support the government will want to see if you are audited.

Best of all, when you keep proper documentation, you do a better job of identifying all of your deductions so it’s a great way to reduce your taxes.

Documentation may include:

Receipts
Meeting minutes for your businesses / entities
Loan documents between you and your businesses / entities
Agreements between you and your businesses / entities
Mileage logs

Activity logs (particularly in the U.S. for those who claim “real estate professional” status)

#6 Make a list of your questions.
As you are gathering your tax return information, you are going to run into questions for your tax advisor. Start writing down those questions and keep a running list. Then when you meet with your tax advisor, you’ve already got your questions ready and won’t forget any.

Start today.
The small things add up. Identify one small thing you can do today to pave the way for a smooth tax return preparation process. It can be one very small thing. For example, start a folder (either a paper one or an online one) and put all the tax documents you are receiving in that folder. Then, build on that every day.

If you enjoyed this article, you might also like “Maximizing the Benefits of an LLC in Your Tax Strategy”.

Do You Need a Wealth Strategy?

Posted on January 14th, by Janice in Blog Business Uncategorized No Comments

Most people dream about being wealthy or playing the lottery in hopes of winning millions, but few people actually have a strategy to achieve their dreams of wealth.

I hear many reasons why someone doesn’t have a wealth strategy:

They don’t really know what a wealth strategy is.
They don’t know how to get started.
They think they need to wait to get started because they don’t have any money.
They think they need to get out of debt before starting their wealth strategy.
A wealth strategy is a plan of action intended to achieve specific wealth goals.

The fact is, everyone needs a wealth strategy, regardless of goals, age, wealth, income or debt.

The First Step to Creating a Wealth Strategy
The first step to creating a successful wealth strategy is knowing where you are going. I call this Your Wealth Vision.

Your wealth vision is your picture of your ultimate lifestyle. Where do you live? How do you spend your time? What are the possibilities?

Now, we can all close our eyes for a few seconds and imagine the lifestyle of our dreams. But to truly define your wealth vision means being very detailed and specific.

For example, in just a few seconds time, we may imagine our ultimate lifestyle to include traveling. In those few seconds, we may imagine the excitement that goes with traveling, and a snapshot of a place we’d like to go, but the details probably aren’t more specific than that.

This is much different than someone who takes the time to specifically define how they see traveling in their wealth vision. For example,

– How often will they travel?
– Who will they travel with?
– Where will they travel to?
– How long will each trip be?
– Will they fly coach or first class?
– Will they stay at a hotel, rent a home or buy a home?
– What activities will they do when they travel?

The more detailed and specific the wealth vision, the more likely it is to be reached.

Avoid This Mistake When Creating Your Wealth Strategy
Many people skip this first step.

I think it’s because many people think that their wealth vision is simply to have lots and lots of money, so defining it is a waste of time. Plus, they are eager to move on to the next step. But, this first step is critical because you can’t get to where you’re going if you don’t know where it is you are headed.

Once your wealth vision is defined, key pieces of your wealth strategy can come together.

For example, when you know your wealth vision, you can determine your target cash flow and your target net worth. These targets can be used to develop investment criteria so your investments work toward your wealth vision and not against it.

Your Wealth Vision
Really think about your wealth vision and the specific details. Then, put it in writing. This is the first step I always take with any wealth strategy I create.

If you want to learn more about how to take advantage of these tax strategies; sign up on our web site or email us for an appointment to get started today.

Best Ways to Write Off Meals and Entertainment Expenses

Posted on December 20th, by Janice in Taxes No Comments

Meals and entertainment expenses are one of my favorite types of deductions because they can eliminate tax. By turning your current non-deductible expenses into legal tax deductions, you are effectively eliminating tax by permanently reducing your taxes with these deductions.

This permanent tax saving strategy only works when the meals and entertainment expenses are protected by keeping proper documentation.

One thing you can always count on during an audit is a request for documentation supporting deductions for meals and entertainment expenses.

The government has found that these deductions are heavily abused and are an easy way to generate additional tax revenue, not to mention additional revenue from penalties and interest.

While I’m focusing on a U.S. tax perspective, the concept applies in most developed countries.

You don’t have to spend a lot of time reading U.S. tax cases to find one where meals and entertainment expenses were disallowed specifically because of improper documentation. Here are a few examples from tax cases:

Example 1:
The taxpayer’s business meal expenses did not satisfy the substantiation requirements because they did not include the taxpayer’s relationship to the parties involved or specify the business purposes of the meals.

Example 2:
The taxpayer’s meals and entertainment deductions were disallowed because the taxpayer couldn’t provide anything to tie the deductions to specific copies of receipts, checks, or other documents. Plus, in the few records the taxpayer did provide, there were duplications and other irregularities in the records making them unreliable altogether.

Example 3:
A spreadsheet listing the numbers the taxpayer put on his return was insufficient to substantiate or use to reconstruct business expenses for meals and entertainment.

This means that even if a meal or entertainment expense is perfectly legitimate, it can be disallowed if the documentation is not proper.

How to Protect Your Deductions for Meals and Entertainment Expenses
Here is a checklist to use for each meal and entertainment expense to make sure these deductions are well protected:

____ Amount of each separate expense

____ Description of each separate expense

____ Date of expense

____ Location of expense

____ Business purpose of expense

____ Names and business relationship of the people involved

How to Simplify Your Documentation
It may seem like quite a bit for each and every meal and entertainment expense, but here are a few ways to make this process very simple:

Get a receipt. The first 4 items – amount, description, date and location – are usually printed on the receipt. Then simply write the remaining 2 items – business purpose, names and business relationship on the receipt.

Scan your receipt. I always recommend scanning your receipts so you have an electronic copy. Many receipts tend to fade in just a year so your documentation could disappear. A scanned copy won’t fade and can help reduce the clutter of receipts.

If you don’t get a receipt, then document all of the items listed above (either write them down or type them up) and then attach support for the payment. Here are a few examples:

If you paid by check, attach a copy of the check and your bank statement showing it cleared your bank account.

If you paid by debit or credit card, attach a copy of your bank or credit card statement showing the debit or charge.

If you paid by cash, try your best to get a receipt. Otherwise, make sure your documentation is precise and make sure a very small percentage of your expenses fall into this category of paid by cash and no receipt.

Important Final Tip
Don’t force it! If a meal or entertainment expense doesn’t meet the business purpose requirement because it was a personal expense, then don’t deduct it.

If an auditor finds personal expenses being deducted, then all of your other expenses will be heavily scrutinized, putting your legitimate deductions at risk for the slightest reason.

If you want to learn more about how to take advantage of these tax strategies; sign up on our web site or email us for an appointment to get started today.

Start Your Year-End Tax Planning Now

Posted on December 3rd, by Janice in Taxes Uncategorized No Comments

Now is the time to start your year end tax planning. This is an important time in a tax strategy because once the year has ended, some tax opportunities are lost forever.

Here is a checklist to keep your year end planning on track.

#1 Meet with your tax advisor.
Hopefully you are meeting with your tax advisor throughout the year! This time of year you want to have a discussion that is focused on year-end tax planning.

#2 Have your annual meeting and create your annual meeting minutes.
Meeting minutes are an ideal place to document the activity in your tax strategy. All the items on this list should make their way into your annual meeting. Make your annual meeting and minutes part of your year-end planning.

#3 Add an entity
Entities are one of the greatest tools to reduce taxes. Knowing the right time to add an entity and knowing the right entity to add can save as much as $10,000 per year in taxes. However, the entity needs to be in place in order for the tax savings to occur.

#4 Change how an entity is taxed.
When I create a tax strategy with a client, it’s not uncommon for an entity to be created knowing that once it reaches a certain level of income, an election will be made to change how the entity is taxed. Missing this election or not making it at the ideal time can be a very costly tax mistake.

#5 Make sure your salary is on track.
Optimizing how you take money out of your entity is an effective way to reduce your taxes. Now is the time to make sure the amount of salary you receive from your entity is on track. If changes need to be made, there is still time left in the year to make those changes without having to do one big adjustment at the end of the year.

#6 Make sure your distributions are on track.
Just like salary, distributions play a huge role in reducing your taxes. You’ll want to make sure your distributions are in line to support your tax strategy.

#7 Make sure your loan and interest payments are on track.
It’s very common to make or take a loan to or from your entity, or to have loans between your entities. Make sure the loan and interest payments are paid in accordance with the loan document.

If you don’t have loan documents, you’ll definitely want to get those in place.

#8 Check the documentation for your deductions.
Documentation is a great way to successfully get through an audit. It is also a great way to increase your tax deductions because proper documentation leaves less room for deductions to get missed.

This includes documentation for travel, meals & entertainment, home office and vehicle.

#9 Check your log for your vehicle.
Your mileage log documents how many business miles versus total miles you have year-to-date. It’s an important piece of documentation to properly support your vehicle deductions.

#10 Check your log for your real estate hours.
If you claim real estate professional status in the U.S., your real estate hours need to be documented. A log detailing the date, times and activity is the best way to do this.

#11 Get reimbursed for your business expenses.
If you have paid for any business expenses personally (this includes your own business) and have not been reimbursed, it’s time to submit that expense report and get paid. These expenses are easy to forget about and that means the tax deduction could get missed.

And, if your business doesn’t have a policy in place to reimburse you for these expenses, it’s time to get that in place too.

#12 Get your bookkeeping current.
Bookkeeping impacts every item on this list. This is why it is so important to make sure your bookkeeping is current before the end of the year is here – current means it is done through the end of last month, or last quarter.

If you want to learn more about how to take advantage of these tax strategies, call us for an appointment to get started today!

Words to Live By from Dale Brown

Posted on November 21st, by Janice in Business No Comments

Learn to forgive if you are to be forgiven.
Talk bad about others and others will think bad of you.
Try to control the uncontrollable and it will control you.
Think only of yourself and you will end up alone.
If you see only hurdles you’ll never win the race.
Yesterday’s guilt will only turn into tomorrow’s worry.
Negative thoughts will produce negative results.
A person with little faith will have little hope.

HAVE A HAPPY THANKSGIVING

Estimated Tax Payments: Should I Be Making Them?

Posted on November 4th, by Janice in Blog Business No Comments

What are they?

This is really a prepayment of income taxes to the Government (Internal Revenue Service, State or City). Under certain situations where you expect your income to go up, such as self-employment income from a business, sale of investment property, or sale of stocks and bonds to name a few, the government requires you, “the Taxpayer” to prepay your income taxes if it results in more than $1,000 in tax in most cases.

When should you prepay?

Estimated tax payments are required when an individual believes that they will owe tax on their income tax return at the end of the year. Individuals that sell a large piece of property or part of a business would most likely want to make estimated tax payments before the end of the year because of the potential gains on the sale of property. If an individual has large capital gains that are out of the ordinary that individual would want to make estimated payments. Estimated tax payments are made quarterly on the following due dates: April 15, 2013, June 17, 2013, September 16, 2013 and January 16, 2014.

Why should you pay estimated tax payments?

Estimated payments are required by the government if you expect to owe more than $1000 in income taxes for the tax year after subtracting your federal income tax withholding from the total amount of tax you expect to owe for the year. If estimated payments are required for an individual and they are not paid, you will incur a penalty and interest for underpayment.

How much should you prepay?

The safest option to avoid underpayment penalties is to aim for “100% of your previous year’s taxes.” If your adjusted gross income is higher than $150,000 (or $75,000 for those married but filing separate), you will have to pay in 110% of your previous year’s taxes. Payments like these satisfy the “safe-harbor” requirement. If either test is satisfied, you won’t have to pay an estimated tax penalty no matter how much tax you owe with your tax return.

If you have questions about your tax payments, call Vanderbilt CPA Group today. We’re happy to help!