Archives for Bookkeeping

Mileage Rate: Standard Mileage vs. Actual Expenses

If you have a job that requires you to travel a lot by car, you should be deducting your business expenses to prevent overpaying your taxes. These expenses include both “common operating expenses” for the self-employed as well as vehicle expenses—which can be a great way to lower your tax burden.

To deduct the costs associated with the use of your vehicle, you can use either the Standard Mileage method or Actual Expenses method. You won’t be able to take both deductions, so you need to evaluate which method provides the bigger tax benefit for you. To help with the decision, we’ve outlined the basics of each method and highlighted two examples that illustrate the differences among each.

Standard Mileage
The simplest method for calculating your vehicle-related deductions is to use the standard mileage deduction. For tax year 2016, this is $0.54 per mile. In 2017 it will be $0.535 per mile.

You are eligible to count any miles you drive for business-related purposes. For example, if you drive for Uber of Lyft, you can deduct any miles related to your ridesharing services, including the miles you drive looking for passengers to pick up (even if there are no passengers in your car). However, if you run personal errands in between taking customers, you can’t deduct that mileage.

In order to claim this deduction, you need to keep a detailed mileage log. Your mileage log should include the date, start time and end time, the activity involved, and the beginning and ending odometer readings. Mileage and expense-tracking tools can help you maximize this mileage amount because they are the most comprehensive.

Choosing the Standard Mileage deduction means that you cannot deduct any other expenses related to your car. If you’d prefer to deduct other items, you need to use the Actual Expenses method.

Actual Expenses
When deducting actual expenses, you can only deduct the portion associated with your self-employed work (e.g. if half of your $100 cell-phone bill is used for work, deduct only $50).

Here are some of the items you can include in your deduction:

  • A portion of your lease payment (if you are leasing your vehicle)
  • Auto loan interest (if you’re financing the purchase of your vehicle)
  • Auto Insurance
  • Maintenance and Repairs (like oil changes, new tires, replacing brake pads, etc.)
  • Depreciation: When you use the Actual Expenses method, you can use a depreciation table to deduct a portion of this on your taxes. Just make sure the deduction is in proportion to your business driving time.
  • Registration: You can’t deduct your title, licensing and registration fees in all states. However, if your car registration cost is based on a particular formula, you might be able to deduct a portion of the cost. Check with a knowledgeable tax professional to determine whether this is an option for you.

Remember to save all of your receipts and keep good records so that you have the information you need to make a decision.

Example: Part-Time Rideshare Driver
part-time-rideshare-driver-expenses
Assume you drove 10,000 miles in the year 2016, and 5,000 of those miles were for business. Here’s how you would break down your deductions using the Actual Expenses method:

  • Gas: $1,000
  • Insurance: $1,500
  • Repairs: $400
  • Lease Payments: $6,000
  • Oil: $100
  • Washes: $500

These figures total to $9,500 in car-related expenses. Since you used your car for business purposes 50% of the time, you would multiply your total expenses by 50% to get your actual deduction, which comes out to $4,750.

If you use these same figures to calculate your deductions using the Standard Mileage method, you would multiply your business mileage (5,000 miles) by the standard mileage rate (54 cents per mile), which comes out to $2,700.

As you can see, in this example, you’ll save the most on taxes by using the Actual Expenses method for the deduction.

Example: Full-Time Rideshare Driver
fulltime-rideshare-driver-expenses
Now, assume you drove 40,000 miles in the year 2016, and 30,000 of those miles were for business. Here’s how the Actual Expenses method would work in this instance:

  • Gas: $4,000
  • Depreciation: $3,160
  • Insurance: $1,500
  • Repairs: $1,200
  • Oil: $190
  • Tires: $500
  • Washes: $750If you add these up, your total expenses come out to $11,300. Since you used your car for business 75% of the time, you would multiply your total expenses by 75% to get your actual deduction, which comes out to $8,475.

If you use the Standard Method with these same numbers, you would multiply the number of miles driven for business (30,000) by the standard mileage rate (54 cents per mile), which comes out to $16,200.

In this particular example, you’ll save the most on taxes by using the Standard Mileage method.

As you can see, the method you choose to calculate your car-related expenses can translate to either saving on taxes or adding to your tax burden. Accounting software like QuickBooks Self-Employed can help you keep track of mileage, automate your deductions and calculate both methods, allowing you to decide which method works best for you. And an accountant can also help if you’re having trouble with the decision. For more tax-time tips, see our complete guide to taxes for the self-employed, as well as our guide to deductions and expenses.

This article is intended to provide you with general information; it does not constitute any type of tax advice. The views expressed in this article are those of the author alone, and do not represent the opinions of Lyft, Uber or any employee thereof. For recommendations related to your overall financial and tax status, contact Hampton Roads Accounting today.

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Marketing Opportunities to Boost Revenue During Your ‘Slow’ Season

This week, I spent some time with my lawn care provider, and we discussed how his business was going.  He said that business was good, but slowing.  In Virginia, grass is growing slower as we enter the fall and winter.   When I asked how he was marketing to his during the winter, he said he hadn’t thought about it.

Here was a huge revenue opportunity he was missing.

We talked about the need to stay in contact with his customers, and offer additional services to keep his revenue stream strong during the winter.  We also discussed building a calendar for his marketing efforts, based on the needs of his customers.

Here is an example of what we came up with.   These are complimentary services his customers will need, in addition to grass cutting:

November and December

  • Remove storm debris
  • Remove leaves
  • Dormant pruning
  • Trim all shrubbery (in preparation for holiday events)
  • Set up Christmas décor (this is both lighting and providing wreaths)
  • Snow/ice removal / salt sidewalks and driveways

January / February

  • Take down Christmas décor
  • Remove storm debris
  • Remove Christmas trees
  • Dormant pruning
  • Snow/ice removal / salt sidewalks and driveways

March / April

  • Snow/ice removal / salt sidewalks and driveways
  • Aeration, fertilization
  • Remove storm debris
  • Schedule mulching appointments for May

There are two important things to keep in mind when building a marketing plan:

  1. It is much more expensive to get new customers than it is to keep existing ones. By providing services to your customers throughout the year, you won’t need to re-introduce yourself in the spring, and your customer churn will be much lower.
  2. To be different from your competition, you have to do something different. In the spring, my front door will have several door hangers from lawn care companies.  Honestly, I won’t even look at them.  ‘My lawn guy’, who has been taking care of my needs during the winter, will be my ONLY choice for the rest of the year.  However, I might look at those door hangers if I feel my lawn care provider has forgotten about me.

Think about what additional services your customers need that you can provide during your slow season, and both you and your customers will benefit.

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It’s Not Too Early to Organize for Your Tax Returns

We are entering the holiday season – Thanksgiving, Christmas, and New Year’s.  Homes will be busy with holiday shopping, entertaining family and friends, and lots of holiday decorations.  Before you know it, it will be time to file your 2017 taxes.

Take a few moments now to collect the tax-related paperwork that reflect the special events that happened in your life this year, and put it safely away for January.

Here are some events to consider, and some items to collect now:

  • Did you buy or sell a home? A copy of your mortgage and closing documents
  • Did you have any casualty, theft or loss? A copy of all paperwork relating to the event
  • Did you get married? Social security cards
  • Did you get divorced or separated? A copy of the divorce decree or separation agreement, showing child support, alimony, and property settlement arrangements
  • Did you have any medical expenses? A copy of ALL unreimbursed receipts from any medical provider, pharmacy, and insurance provider
  • Did you move? Old and new address, and receipts for ALL expenses related to the move
  • Did you have a baby? Date of Birth, and Social Security Number (if you have one)
  • Did you start a new job? Receipts related to a new job search, or anything related to you getting the new job.
  • Did you or someone in your family attend school (beyond high school)? Receipts for all school related expenses including tuition, room and board, books, and other items
  • Did you start a new business? This list is VERY long.  I recommend you visit our website and review the July 2017 Client Newsletter, which lists much of the paperwork needed to record new business expenses.
  • Did you donate to a charity/non-profit/religious organization? A copy of your receipt is needed.
  • Did you pay for daycare? You will need either the name and SSN of the person (if an individual), or the name, address, and EIN or the business or organization
  • Did you pay Personal Property Tax? A copy of the receipt
  • A copy of your 2016 Federal and State tax returns should be kept with your 2017 paperwork.
  • A copy of ANY other paperwork you feel is important, or you have questions about (“I wonder if this is deductible?”). It is far better to have a copy of an item you have a question about, than to later learn you need it but can’t find it.

A simple filing system to keep everything organized is to file:

  • Family (birth/marriage/divorce/daycare)
  • Home (sale/purchase/casualty/theft/loss)
  • Moving or job related
  • Medical
  • Business
  • Other/Miscellaneous

My BEST recommendation is – keep ALL of your receipts.  As you can see from the brief list above, many normal events in your life have a tax implication.  If you have a question about an expense, keep a receipt, and ask us when we prepare your tax returns.rns.

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Often Overlooked Deductions for the New Business Owner

When starting your new business, you are probably not thinking about your tax return at the end of the year.  You have a whirlwind of activity and things to focus on – getting proper licenses, setting up a business location, getting supplies and equipment, growing your client list, hiring employees, and so many other things.

When I sit down with a new business client, we discuss all the things they had to do to get their business started, because most of them are items that are deductible at the end of the year.

Here is an exercise you can do to improve the deductions you can claim at the end of the year.  All you need is a notebook, a large manila envelope, a cup of coffee, and about an hour of quiet, undisturbed time.  If your business is a partnership (husband and wife, or two friends), it would be helpful for you to do this together.

Just answer the following questions:

  1. Do you have a home office? This is a space dedicated only for the use of your business, the main place where you work on your business.
    • Write down the total square footage of your home, and the total square footage of your office.
    • Look around the office and list EVERYTHING you had to purchase to start your business. Desks, computers, a copier, office supplies, a new phone line, Internet connection, security system, etc.
    • Did you have to do anything to your home office room to get it ready for business? Did you paint, install shelves, put in a new carpet or light fixtures?
    • Do you regularly meet clients at your home office?
    • Compile a list of ALL home expenses. This could include mortgage payments, property taxes, natural gas, electric, telephone, Internet, water/sewer, parking (if you have to pay for parking), landscaping/lawn care, homeowner association fees, as well as any and all repairs to the home.
  2. Do you have a business location outside the home? In other words, do you run your business from a commercial building?  This could be anything from a retail space in a shopping mall, to a rented office, to a storage unit.  If so, answer the questions above, but for your commercial location.
  3. Did you use any of your personal assets for the business? One example of this is a computer purchased for your personal use at home, but you now use it for the business. Another example would be a personally purchased pressure washer, lawn mower, or other tools that you now use for the business.  If so, write down when you purchased them, the cost, and their approximate value the day you started using them for the business.
  4. Do you sometimes go to Office Max or Staples to get something for your business, and pay for it with your personal funds? Record these purchases, and keep track of the receipts.
  5. Do you use a vehicle for your business? This could be your own vehicle, or a vehicle used only for the business.  If so, you need to track mileage.  You basically have two options:
    • Keep a notebook in the vehicle, and write down your mileage and the purpose for each trip
    • Use a mileage tracking app like MileIQ to automatically track your mileage. I strongly recommend using a mileage tracking app to make this simple.
  6. Do you use your personal money to:
    • Take clients out to lunch?
    • Pay for a company holiday party or barbecue?Keep the receipts – these expenses may be deductible.
  7. Do you pay self-employed health insurance? You may be able to deduct 70% of your health insurance premiums.
  8. Do you use your personal cell phone for business (this includes calls, texts, and/or Internet use)? If so, keep a copy of your phone records and highlight the business related calls/texts.
  9. Do you purchase fuel for your equipment? This includes lawn mowers and other landscaping equipment, pressure washers, carpet extraction equipment and related items?  If so, keeping your receipts might allow you to take a credit on the tax paid on fuel.  (Note: as of 2017, the credit is over 18 cents/gallon.)
  10. Did you buy any equipment? For many small businesses, this can be a large expense.  A new landscaper might need a truck (or two), a trailer (or two), a lawn mower (or several), trimmers, edgers, etc.  This is a big one, and is related to the home/business office questions.  Be sure to document every piece of equipment you purchased.  Some can be expensed; some can be depreciated.   The documentation you have may help significantly lower your tax liability.

These are only a few deductions that overlooked by new business owners.  If you have not started, I strongly suggest sitting down and writing down your answers to these questions, then give me a call.  Let us help you get your tax bill as low as possible.

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Hiring Seasonal Employees

If you hire part-time employees to help with your busy season, the same rules and record keeping requirements apply as when you hire full-time employees:

Eligibility to Work in the United States
You must verify that each new employee is legally eligible to work in the United States. Have the employees you hire fill out Form I-9, Employment Eligibility Verification (PDF).

Employee’s Social Security Number (SSN)
You are required to get each employee’s name and Social Security Number (SSN) and to enter them on Form W-2. (This requirement also applies to resident and nonresident alien employees.)  You should also verify the Social Security Number.  You can do this by registering with the Social Security Administration, or if you are an HRA client, we can provide this service for you.

Employee’s Withholding
To know how much income tax to withhold from employees’ wages, you should have a Form W-4, Employee’s Withholding Allowance Certificate, on file for each employee. Ask all new employees to give you a signed Form W-4 when they start work. Provide a copy of the completed W-4 to HRA or your payroll provider.

Provide a W-2
At the end of the year, you are required to provide your part-time employees with a W-2.

Maintain Records
The IRS states you should keep all records related to employment taxes for a minimum of four years.  However, HRA recommends you keep all records for six years (this is also the time you should keep records for potential tax audit purposes).

Also, keep in mind that hiring part-time or seasonal employees is a great way to find potential candidates to grow your company’s full-time staff.

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Tax Tips for Cleaning and Janitorial Companies

Cleaning homes, apartments, offices and other buildings can indeed be a chore, but one that can be incredibly rewarding, especially when you are paid well to do it.

The tips in this article apply to all cleaning companies and professionals, whether you provide janitorial services, commercial or residential cleaning, window cleaners, pressure/power washers, auto detailing, or any related business.  These tips are just as important (if not more so) to a one or two-person operation as they are to a company with dozens of employees.

Self-Employment Tax

If you ever worked for someone else and received a W-2, you and your employer each shared a responsibility for your taxes.  The employer withheld a portion from your paycheck, added an employer portion, and submitted them quarterly.

Most cleaning professionals are self-employed.  That means you are responsible to report and pay both the employee and employer portions of your taxes on a regular basis.  However, since you are in business, you can deduct the employer portion as a business expense.

Vehicle Expenses

Whether you use your personal vehicle for business use or have a separate vehicle just for business, you can deduct expenses related to your vehicle.  If you use your own vehicle for both personal use and for business use, you will need to track the business expenses separately.

Parking and Tolls

You can deduct fees and tolls related to your cleaning business.  If you have to pay for parking to clean an office or a home, it is a deductible expense.

Bus / Train / Other Public Transportation

If you have to travel by bus, train, taxi, or Uber/Lyft to go from job site to job site, you can deduct the cost of this transportation.  Keep all receipts.

While vehicle and transportation expenses will be a significant portion of your expenses, they aren’t the only ones you can deduct:

Advertising

Newspaper ads, flyers, Facebook ads, postcards, imprinted pens, direct mail letters, and other related ways to market your business.  Even the costs of setting up a tent/booth at a local home show are deductible if you are advertising your business.  The cost of having a logo designed for your company – that’s deductible also.

Insurance

Most cleaners need to have general liability insurance, which is a valid business expense.  Don’t claim vehicle insurance – that was already covered by the vehicle expenses.

Phone Service

If you have a separate phone line installed for your business, it is a valid expense.  Most people today use their cell phones for business.  If it is your personal phone, you will have to separate out the business use from personal use.

I have one client who uses her cell phone for business, and her customers communicate with her by text message.  Each month, she prints out her cell phone record and highlights the texts from her customers.  This is a great way to document actual business usage of her phone, and good records are needed to substantiate any type of deduction claimed on your tax returns.

Health Insurance

You are in business, and you need health insurance.  Your premiums may be deductible if your business makes a profit and you can’t enroll in an employer’s health plan (if you can be claimed on your spouse’s health plan, you can’t claim the deduction.)
Employer Portion of Social Security and Medicare

As noted earlier, you are responsible for both the employer and employee portions of employment taxes.  The good news is you can deduct the employer portion as a business expense.

Ordinary and Necessary Expenses

Any cleaning company has a lot of ordinary and necessary expenses to keep the operation going.  You can claim expenses for:

  • Wages you pay to employees or helpers
  • Tools
  • Machinery
  • Solvents, rags, gloves, and other supplies
  • Training and certifications you acquired

Keeping clear records is critical because it’s easy to forget small deductions over time, such as the fuel used to power your pressure washer. Keep receipts for all business-related costs to show the IRS in case you are audited.
You can deduct larger items, like a floor buffer or pressure washer, over time because it is considered a “capital purchase”. You can spread the deduction of a “capital purchase” over the number of years you expect the item to last. For example, if a floor buffer costing $1300 is expected to last five years:

  • $1300 x 20% = $260. $260 is the deduction you can claim each year for five years.


These are just a few of the many business items a new cleaning business must keep in mind.   If you need help in setting up your new business or want to discuss how you can improve your operations, please contact our office.

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Small Business or Hobby? Your Deductions Depend On The Answer

You have a passion for home repairs, and you produce professional products that you are proud of.  Friends and neighbors ask for your help, and refer you to their friends.  Before you know it, your spare time is filled doing a variety of repair projects for others (and getting paid for it, too!)   You are sure you can run a successful home repair business in your town.

After a little thought, it isn’t long before you start posting ads on Craigslist, sharing on Facebook, or passing flyers around.  Word of mouth about your service spreads, and you have customers all across town.  Congratulations, you started a small business!

But hold on a moment – are you really in business, or are you just making money off your hobby?

The Internal Revenue Service takes a serious look at a hobby listed as a business, and there are rules to determine if your activity qualifies as a business.  Here are some factors for you to consider:

Your time spent

Are you spending a few hours per week on your business, or several hours per day?  You must be able to show that you are putting in the time needed for your business to make a profit.  Otherwise, you are just spending free time on your hobby.

Do you depend on the income?

What would happen if you lost the income from your business?  If the income your business generates suddenly stops, could you still pay your bills?

Your business knowledge

Do you have the knowledge to start and operate a successful business?  If not, do you trust someone who can be an advisor?  Have you successfully operated similar activities in the past?

Profit

Profit is the goal of most small businesses.  Do you reasonably expect to make a profit from your activity?  The IRS considers you ‘for profit’ if you make a profit for at least three of the last five tax years, including this year.  If you are not making a profit, are you making changes in your operation to turn this around?

Business Deductions vs. Hobby Deductions

If you are operating a hobby (and earning money from it), you are able to deduct expenses up to the amount you earned from your hobby.  You have to report your income from your hobby, but you can also report your expenses.

If you are in business, however, you can deduct the expenses of starting and operating your business, even if you have a loss.  How much can you deduct?  It depends on your specific situation, but is generally much more than deductions allowed from a hobby.

Here’s an example:

You operate a home repair service (carpentry, painting, plumbing, general home repairs) from your garage and have numerous customers in your area.  You have a considerable investment in a truck, tools, and supplies.  Customers are happy with your services, and word of mouth drives more customers to you.

As a hobby, you are able to deduct expenses (materials, tools, equipment, etc.) up to the amount you earn from the sales.

As a business, however, you can deduct those expenses, plus:

  • The cost of going into business (business license, permits)
  • Accountant and legal fees
  • Insurance
  • A vehicle (or vehicles)
  • A deduction for the business use of your home
  • The cost of going to industry events, including travel, hotels, meals, and associated fees
  • Training, classes, and certifications you might need to remain current
  • Membership in the local Chamber of Commerce, Better Business Bureau, and other organizations related to your business
  • And so much more

So, how do you show you are a business, an not a hobby?

There is only one way to prove that you are a business and not a hobby – RECORDKEEPING.

Do you have?

  • A business plan – The old saying goes “If you fail to plan, you plan to fail.” Businesses that have a business plan (and follow it) are several times more likely to succeed than those who do not have a plan.
  • Business Entity Formation – Set up your business as a sole proprietor, partnership, limited liability company, or corporation.  Each business form has its advantages and disadvantages, so take some time to choose a form that’s beneficial for you now and in the future.
  • Copies of licenses and permits – documents that show you are legally able to sell your product or service.
  • Accounting records that show all of your transactions (purchases, sales, expenses) – this includes financial records of prior performance and projections for future operations.

Resources

Here are three resources you can turn to for more information:

  1. Hampton Roads Accounting. We specialize in small businesses, providing a range of services including accounting, bookkeeping, payroll, business planning, and tax services.
  2. IRS Publication 535, Business Expenses. You can find a copy of this publication in our Resources Section.
  3. Small Business Administration – In our Resources Section, under ‘Starting a Business’, you will find several courses from the Small Business Administration, including one on creating a business plan.

If you want help, just contact Hampton Roads Accounting today.  We’re here to help you succeed.

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