TaxTalk Q & A
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I just started my new business. Is there a list of all the business deductions I can take?
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My husband is in graduate school. Can any
of his tuition or textbook costs be deducted?
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I understand there is a tax loophole for
business owners that I am curious about. It states that if you purchase a new
sport utility vehicle that weights more than 6,000 pounds, you can immediately
deduct $25,000 of the cost and depreciate the rest faster than allowed under the
regular rules for business vehicles. My question is this: Does this apply only
to new vehicles, or does a used vehicle qualify for this deduction?
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I am currently a sole
proprietor, but will soon need liability protection as an LLC or an S
Corp. Legally, I can go either way, but from a tax standpoint, which
would you recommend? I would like to pass half of my income to my wife
to avoid Self-Employment Tax. I understand that if she is an inactive
member/shareholder, we can divert half of the net income of the
enterprise to her and thereby avoid the Self-Employment Tax. Is this
true?
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We have used a credit card
to pay for equipment rentals and expensed the total in as a business
expense on our books and on our tax return. Is there any way to deduct
the credit card payments made on those loans?
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When taking a long
business trip (over 6000 miles of estimated driving) and portions of
the trip will be used to visit friends and relatives, what is the best
method to keep track of which expenses are deductible for business
versus those that could be considered personal?
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I will be receiving a 1099
this year and I would like to know how much we should hold out of our
cash receipts for taxes. We are collecting money on a weekly basis.
Also, how often should I pay these taxes and where can I get more
information about what forms to use?
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- Sole proprietorship or corporation?
- Would it be best to be the sole proprietor or to incorporate my business?
- Am I responsible for paying self-employment taxes?
- Can I deduct business suits necessary for work?
- Can you roll over a SEP or 401(K) to a Roth IRA?
- What are the benefits to me as an "S" Corp?
- Mail-order sales tax
- Do I need to file 1099's?
- How do I deduct the cost of an addition as a business expense?
- Merchandise as income
- Capital gains tax rates
- How do I report a personal car that was converted to business use to leasing a car for business use?
- How should I structure my payroll?
- What should I know about letting my corp. now pay for my monthly premiums?
- How do I rent home office space to a non-profit organizaton?
- Sale of home taxes
Q: I
would like to change my business entity from a sole proprietorship to a
not-for-profit, or incorporation. I am creating a home nurse service, and
I would like to upgrade my services to include licensing and
certification. If I am a not-for-profit, am I precluded from charging for
my services? If I am incorporated do I appear less attractive to lenders
when I go to buy a facility?
A: The decision to incorporate is a
very important one. I would advise you contact a CPA or tax attorney in
your area and get some first-hand advice. Also, you may want to check the
business section in the bookstore or library for topics related to
incorporation. I doubt that lenders consider whether applicants are
individuals or corporations. They view the transaction as the owners
business whether incorporated or not.
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Q: I am just
starting my own steel detailing business. I work by myself. Would it be
best to be the sole proprietor or to incorporate my business? What are the
advantages and disadvantages (tax-wise) to both?
A: There are specific positive tax
aspects to both sole proprietorships and corporations. Some good, some
bad. The bottom line is this: you should consider incorporation if you
operate a business that has high liability risk (personal injury,
environmental impact, etc.), and/or high financial risk if the business
goes bankrupt. Additionally, if you plan to have numbers of partners or
investors in the business, then incorporation is an easier way to get that
done. In the absence of those considerations, I do not recommend
incorporation for small businesses. Since personal and corporation tax
rates are similar, and since the same kinds of expenses are deductible,
your net income will be taxed about the same under either business form.
The corporation requires annual corporation tax returns, in addition to
your personal returns. The annual accounting and corporation tax
preparation could cost several thousand dollars with a professional. Some
states also have minimum corporation income taxes that are a
consideration.
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Q: I am
currently classified as a non-resident alien. I am under contract as an
independent contractor for 1998 and 1999. I have only been present in the
US since September 1998 and have taxable income for the last quarter of
'99. Am I responsible for paying self-employment taxes?
A: Non-resident aliens are not
subject to pay self-employment tax. Only resident aliens are subject to
self-employment tax. That is why there is no place on the 1040NR to
calculate SE taxes.
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Q: Can I deduct
business suits necessary for work?
A:The cost of uniforms and other
work clothes is generally not deductible by employees. According to IRS,
the cost of work clothes and uniforms can be deducted if clothing is
required as condition of employment and not suitable for everyday use. Tax
Court allows a deduction if clothing is required or essential to the
taxpayer's business, unsuitable for general or personal wear and not so
worn. The deduction is a miscellaneous itemized deduction and can be
deducted only to the extent that the aggregate of all miscellaneous
itemized deductions exceeds 2 percent of the taxpayer's adjusted gross
income.
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Q: Can you roll
over a SEP or 401(K) to a Roth IRA? If not, can you roll over a SEP or
401(K) to an IRA and then roll the new IRA into a Roth IRA?
A: The "Roth" IRA is a new
item created by the 97 Tax Act in July of 1997. It is effective for tax
years beginning after 1997, so the first deduction for a Roth IRA will be
on the 1998 tax return to be filed in 1999. Regular or old IRAs can be
rolled over into a Roth IRA. The amount of the rollover is unlimited.
Here's one to look out for: the rollover is available only to taxpayers
with an adjusted gross income of less than $100,000 in the year of
rollover and amounts that would have been included in income if the
amounts converted had been withdrawn, are included in income in the year
of conversion.
If the conversion to a Roth IRA is before
January 1, 1999, the income is included ratably over 4 years, and the 10%
penalty tax on early withdrawal does not apply to the conversions. For 2005, the
maximum contribution a Roth IRA is $4,000 per year and the combined
contribution to a Roth IRA or a regular IRA cannot exceed $4,000,
excluding rollovers. The maximum of $4,000 each year can be allocated in
any proportion to the Roth IRA or the regular IRA. So, $500 to the regular
IRA and $3,500 to the Roth, or $2000 to the Roth, and $2,000 to the regular.
Banks and other financial institutions will
have detailed information on Roth IRAs and how they work. Its probably
worth your time to investigate.
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Q: What are the
benefits to me as an "S" Corp? Currently I have to pay the state
of Pennsylvania $300.00 annually regardless if my business is profitable
or not.
- How am I better off as an
"S" corp than just a sole proprietor?
- If I take any money out of my
"S" corp to pay myself, do I have to take out Social
Security, etc. on each check and fill out any paperwork, or do I wait
until it reaches a certain monetary amount? Or can I just pay myself
and square at the end of the year like normal taxpayers do?
A: At the Federal level there is no
substantial difference between the manner in which an S Corp is taxed and
the way a sole proprietor is taxed. All of the income or loss from the
business enterprise winds up on the page 1 of form 1040 and is taxed.
Check with your state because in some states sole proprietorships are not
taxed at the state level, while S Corps are. California, for example, has
a minimum $800 per year for S Corps and $0 for sole proprietorships. I
know you are not in California, but I don't know how Pennsylvania taxes
its business entities, if at all.
If you incorporate and make an S
corporation election, then you would be an employee and would receive
payroll compensation from the S corporation. The corporation would pay
payroll taxes, file quarterly and annual payroll tax returns, and give you
a W-2 at year end. Since the S Corp is paying you payroll, all of the
mandatory withholdings are required Federal income tax, social security
and Medicare tax. Unless you have 1 or more partners, and business
activity that has high injury or environmental liability risk, I would not
recommend an S Corp.
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Q: We have begun
business operations in our new lab space. We've been purchasing a lot of
chemicals and laboratory supplies, nearly everything by mail order from
vendor's catalogs. On our mail-order purchases, we are being assessed the
8.2% Washington state sales tax. We thought mail-order purchases to
customers who are not in the same state as the vendor do not incur state
sales tax. This has previously been our experience for mail-order
purchases of everything from film developing to baked goods. Are the rules
different for businesses?
A: You are correct, in general. Most
states have complicated rules about taxing sales within their state.
Texas, for example, says that if the inventory "the stuff you are
buying" touches within the boundaries of the state, then the sale is
taxable here.
To illustrate, let's say my mail-order
business is located in California, and you are a Texas resident who orders
from me. Under the general rule, that order would not have sales tax on it
since the seller is in California and the buyer is in Texas. But my
California mail order business uses a warehouse in Texas to store and ship
the inventory sold. Then the sale is taxable to a Texas state resident.
Also, if you are purchasing the goods as
raw materials to be used in the creation of something for resale, then the
goods should not be taxable in any event. Contact the seller and ask what
form he needs to exempt your purchase from sales tax. The rules are the
same for individuals and businesses.
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Q: We run a
small commercial janitorial company. Currently we service our clients with
independent contractors. We have a high turn-over rate for our staff,
contractors come and go quickly. I have not sent out 1099s for the last
three years and am not sure I should this year. I have incomplete and
false information from contractors. What is the limit on dollar amount
when I should fill out a 1099? Also, how important are they and how late
can I send them out?
A: The IRS requirement to file 1099s
is mandatory and carries a penalty of $50.00 per 1099 not filed with the
IRS and $50.00 per 1099 not given to the independent contractor. The
combined penalty is up to $100.00 per 1099. The math is pretty simple, if
you have high turnover, the penalties could be serious. For 2004, 1099's
were to be given to the independent contractors by January 31, 2005. A
copy of each is to be filed with the IRS no later than February 28, 2005.
1099's are required if the total amount paid to an independent contractor
for the year is $600.00 or greater. If you paid less than $600.00, then a 1099
is not required for that contractor.
Here are two suggestions:
- 1) Prepare and file 1099's
before the January 31st deadline; and,
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- 2) When you contract with a new
independent contractor, require a form to be given to you which
includes, name, address, city, state, zip and a social security number
or a federal identification number. Get the completed form as a
condition of payment, the you'll have the information for the 1099's
at the end of the year.
The 1099 filing requirement is burdensome
to small businesses but the penalties are to steep to ignore.
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Q: I have built
an addition on my home, with cash, to use exclusively for my business
which I conduct in the office (architecture). How do I deduct the cost of
the addition as a business expense?
A: This is a really hard question to
answer in a simple email so I am going to give you a brief overview of
what needs to happen and then refer you to the IRS publications. The
publications will give you the "nuts and bolts" of what you need
to do. If your addition is used exclusively for business and qualifies for
the home office deduction, then you can deduct 100% of the direct costs
associated with building your new office.
However, because your new office has a
useful life of more than one year, you must depreciate the cost of it
ratably over time. I recommend that you download IRS
Publication 946: How to Depreciate Property and IRS Publication
587: Business Use of Your Home.
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Q: I do many
small contract jobs for several companies. I am required to visit an
establishment, make a purchase, and provide an evaluation. I am reimbursed
for the purchase and can keep the merchandise. I sometimes get cash for
the evaluation in addition for the merchandise. My question is, am I
supposed to claim the merchandise as income? If the job involves no cash
and just payment in merchandise, can I deduct mileage?
A: You must report as income the
amount of money you are paid to perform your evaluation of an
establishment. The IRS will view the merchandise that you are allowed to
keep as another form of payment, so you must report both the cash and
merchandise received as income.
Regardless of how you are paid, you can
still deduct the miles you drive for business. The mileage rate for 2005
is 40.5 cents per mile.
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Q: I am planning
to sell an income-producing property. The new tax law says that if I am in
the 15% tax bracket, that my capital gains tax rate will be 5%. What is
the capital gain tax rate if I do not have any taxable income, i.e., the
0% tax bracket?
A: Your income tax rate is a
function of income from all sources, including capital gain income from
the sale of property. So, if you sell your property for a profit, the
amount of gain you recognize will be used in determining your income tax
rate.
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Q: On March 26,
2004 I bought a car and paid $22,500. On April 22, 2004 I started selling
real estate and became self employed. Prior to that I was an employee. On
July 29, 2004 I traded the car bought on March 26 (which I owned) for a
leased automobile that had a value of $38,900.
1. I went from owning a personal car
that was converted to business use to leasing a car for business use. I'm
not sure how, or where to report this.
2. I owned the car bought on March 26
without any loan against it. When I traded it for the car with the lease I
received a check for $18,000.
Do I have a taxable gain?
A: You do not have to report the
gain/loss from the sale of your car. The key issue for you is how you take
the business deduction for your automobile. You may take the higher of two
choices:
1) the standard mileage rate of 40.5 cents
or
2) the actual costs times the business use
percentage.
My guess is that the standard mileage rate
will yield you a higher deduction. It also is a lot easier to calculate. I
recommend that you download and read
IRS Publication 463: Travel, Entertainment, Gift and Car Expenses.
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Q: I am
estimating that my business will gross $60,000 for 2005. I would like to
structure payroll so that a portion of my personal employee income is
distribution and some will be reimbursement for supplies and
entertainment, etc. What is the optimal way of handling my taxes and what
should my personal salary be? How should I structure payroll?
A: Your questions are how to
structure payroll, and how much your personal salary should be. These
questions are hard to answer without additional information. Let me give
you a brief overview and if you need more clarification, email me again
with additional information.
First, I recommend that all business
expenses be paid out of the business.There is nothing wrong with you
personally buying company supplies and then later having the business
reimburse you; however it makes a cleaner audit trail if you just let the
company pay for all business expenses. You might want to carry a business
credit card for those times when you need to buy something for the
business and do not have a company check.
As far as payroll goes, I recommend that
you pay yourself as much or as little as you need and the business can
afford. Just because you are on payroll does not mean that every check
must be the same. You can pay yourself $1,000 one month and then $8,000
the next.
Whether or not you need to be on the
payroll really is a function of the type of business entity. If you are a
sole-proprietor, partnership, or limited liability company you do not need
to be on payroll.
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Q: I recently
incorporated as an "S" corp. What should I know about letting my
corp. now pay for my monthly premiums?
A: S Corporations can deduct the
premiums for medical insurance for the employees and their dependents. In
order to be deductible, all employees must be given the same options and
choices for coverage and dependents.
There is an anti-discrimination provision
that applies here. Even if the employees make different choices, that's
OK, but they all must be offered the same choices. So the corporation
cannot pay for dependents for some employees and not others, unless the
employee has opted out. The S Corporation can provide medical insurance to
its employees just like a C corporation and deduct 100% of the premiums.
Having said that, there is an exception to this rule, as follows.
While the owners of the S Corporation (and
their spouses) may be employees and may be receiving a payroll check and
W-2 wages, they are excluded from this deduction. The S Corporation may
not deduct medical insurance premiums paid on behalf of stockholders or
their spouses. Remember that there is a difference between "payment
and "deduction.
The S Corporation can pay the premiums for
the stockholders. At tax time, the S Corporation files its 1120S tax
return. Part of this tax return is a form called, Schedule K-1. The K-1
provides a summary of income and expenses items to be reported on the
stockholder's individual income tax return. Any medical insurance premiums
paid by the S Corporation are shown on the K-1. The stockholder can then
deduct the premiums as self-employed health insurance.
There is no method to make the medical
insurance premiums paid by a S Corporation for it's stockholders a 100%
deductible expense of the corporation. There are pros and cons to every
business entity form, and this is definitely a negative one in operating
as an S corporation.
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Q: I have a home office
which I own and I have been deducting these costs from my personal income
tax. In addition, I have converted the lower level of the house into a
office for a nonprofit foundation I have formed. Can the nonprofit rent
the office space from me personally -- such that the rent is an expense
for the nonprofit and the rent is income for me? If so, what records do I
need to keep, i.e.., the nonprofit would need to write rent checks to me?
At the moment the nonprofit has no funds but when the nonprofit begins to
secure grants, it will be necessary to document overhead expenses.
A: Yes, it's a good plan to have the
other entity pay rent to you personally. As you surmise, rent paid is a
business deduction for the other entity and income to you to be reported
on Schedule E of your personal tax return. These kinds of transactions are
"less than arms length", meaning that the same party is making
the decisions on both sides of the transaction.
There is nothing illegal, immoral or
unethical about the proposed transaction. It does mean however, that you
should have good records and paperwork to support the transaction. For
example: The directors of the not for profit organization should authorize
the rental as to term, landlord, and amount and that action should be
recorded in their meeting minutes. A written rental agreement should be
made between you and the not for profit and all payments should be made by
check to reflect the terms and amount of the rental agreement.
The not for profit should prepare and give
you a "1099 MISC" at year end which reflects the total amount of
the rents paid during the year. The IRS also receives a copy of the 1099
so that their computers can match the amount paid with the amount reported
on your personal return.
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Q: I sold my
home, 20% of which was used for business, last year, and did not buy
another. In preparing my tax return, I discovered that I
also had to prepare Form 4797 (sale of business property). This raises a
couple of questions:
1) Do I allocate between these two forms
according to the same ratio (20% business, 80% personal) used to compute
home office expenses and depreciation on Form 8829 (home office expenses)?
Or do I need to use some other method of allocation?
2) On Form 8829, can I take a deduction
for depreciation up until the date of sale (e.g., 75/365 of the full
year's depreciation deduction--3.175% of the building's value--for a home
sold on March 17, the 76th day of the year)?
A: You are on the right track for
reporting the gain from the sale of your personal residence. Use form
4797 to report the business
portion of the sale.
I use the same allocations for the sale and
basis that I used for the square footage calculation for purposes of the
home office deduction. Using your numbers, 20% of the sale is business
(4797) and 80% is personal.
Yes, you may depreciate the business
portion up to the date of sale. Rather than using a proration based on
days, however, you can use a monthly proration. Since the property was
sold after the 15th of the month, a full month is allowed. Therefore, you
can take 3 months of depreciation in the year of sale. As a practical
matter, depreciation in the year of sale is deducted on Schedule C and
then reported as gain on Schedule 4797. For purposes of regular tax, there
is no tax benefit/detriment if your estimate of depreciation is high or low.
It will make a difference in the net income from Schedule C for
self-employment tax purposes, but the amount is probably so small as to be
negligible.
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