Archives for Expenses

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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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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Supplemental Employee Benefits – What exactly are they and should we be looking at them for our business?

Why do employees want to work for you? More importantly, why do they want to stay? If you have as little as one employee, you should be thinking about benefits. We offer a variety of benefits with our Gusto payroll system, but one additional benefit you can offer, at LITTLE TO NO COST to the business, is Supplemental Employee Benefits. Let’s take a look at what you can do for your employees:

Accident, Cancer, Critical Illness, Hospital Indemnity, Disability, Life

Benefit to Employers

Employers who offer supplemental benefits provide a valuable financial safety net to their employees. Offering these products allows you to enhance your current benefit package at little to no cost to the business, and gives your employees a wide array of options to choose from to help protect their financial security. It takes the burden off of the employer to make difficult decisions on whether or not to financially assist employees through a difficult financial time, caused by injury or illness.
Offering supplemental benefits can help reduce worker’s compensation experience and assist you in attracting and retaining quality employees. There can also be some payroll tax savings when combined with a Section 125 plan. When employers make supplemental coverages available at the workplace, employees respond favorably toward their employer. It is truly a win-win situation for both parties.

Benefit to Employees

Supplemental benefits provide cash directly to your employees when an unforeseen accident or illness strikes an employee or one of their family members. Payments can be used to pay non-medical expenses in addition to deductibles and co-pays. Benefits are payable over and above any other insurance they may have, including group medical. (No coordination of benefits required). These cash payments assist your employees in dealing with out-of-pocket costs and loss of income. Since most employees today live on virtually 100% of their paycheck, any unexpected, sudden reduction in income can have serious consequences to their lifestyle. Even with disability coverage, families can experience a severe hardship when they are unable to work due to an injury or illness. Many times, it is a family member who is injured or sick, and this is not covered under the employee’s disability plan. Having a menu of supplemental benefits to choose from allows you to customize your benefit package to meet your employee’s family’s specific needs and concerns.

Hampton Roads Accounting Clients have a special agent standing by to discuss your particular needs and see how Supplemental Employee Benefits can be offered in your company.

To get started, or to just learn more,
call Tammy at 757-499-1880 and tell her you were referred by Hampton Roads Accounting.

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Summer Camp Costs and the Child and Dependent Care Tax Credit

 

Many parents send their children to summer day camps while they work or look for work. The IRS urges those who do to save their paperwork for the Child and Dependent Care Tax Credit. Eligible taxpayers may be able claim it on their taxes in 2018 if they paid for day camp or for someone to care for a child, dependent or spouse during 2017.

Here are a few key facts to know about this credit:

Qualifying Person
The care must have been for “qualifying persons.” A qualifying person can be a child under age 13. A qualifying person can also be a spouse or dependent who lived with the taxpayer for more than half the year and is physically or mentally incapable of self-care.

Work-Related Expenses
The care must have been necessary so the taxpayer could work or look for work. For those who are married, the care also must have been necessary so a spouse could work or look for work. This rule does not apply if the spouse was disabled or a full-time student.

Earned Income
The taxpayer — and their spouse if married filing jointly — must have earned income for the tax year. Special rules apply to a spouse who is a student or disabled.

Credit Percentage/Expense Limits
The credit is worth between 20 and 35 percent of allowable expenses. The percentage depends on the income amount. Allowable expenses are limited to $3,000 for care of one qualifying person. The limit is $6,000 if the taxpayer paid for the care of two or more.

Care Provider Information
The name, address and taxpayer identification number of the care provider must be included on the return. The childcare provider cannot be the taxpayer’s spouse, dependent or the child’s parent.

Dependent Care Benefits
If you receive dependent care benefits from your employer, special rules apply.  You can send us an email with your questions, or review IRS Form 2441, Child and Dependent Care Expenses for more information on the rules.

Special Circumstances
Since every family is different, the IRS has a series of exceptions to the rules in the qualification process. These exceptions allow a greater number of families to take advantage of the credit. For more information, send us an email or see IRS Publication 503, Child and Dependent Care Expenses.

Even if the childcare provider is a sitter in the home, taxpayers may qualify for the credit. Taxpayers who pay someone to come to their home and care for their dependent or spouse may be a household employer. They may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax.  If you feel that this might apply to you, contact our office.

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Pet Deductions

Most people treat their pets a lot like children.  You feed them, provide them a safe place to live, teach them skills (sit, stay), bring them to the doctor when they are sick or for a checkup, play with them, and show them love.  They are part of your family.

Can you or someone you know deduct these and other pet-related expenses?  Like most tax deductions, it depends.  Let’s look at some situations:

Service Animals / Guide Dogs

If you require the assistance of a service animal (these include assistance animals for the blind, hearing impaired, mobility impaired, and therapy animals), expenses related to the animal could be considered medical expenses.

You will need a prescription from a doctor showing your medical necessity before you obtain the animal, and keep all documentation that shows the animal was trained and certified as a treatment for your specific medical illness or condition.  Then, keep records of all expenses that relate to the animal.  These could include training, veterinary care, grooming, food, and other reasonable expenses.

Guard Dogs

If your dog is used to guard and protect your business location, it might be a legitimate business expense.   It would have to make sense (to the IRS) for a dog to be used in this fashion.  For example, a dog guarding a junkyard, a warehouse, or a small retail store after hours would make sense.  A dog guarding your home office – probably not.

Also, the size and breed of dog is important to help prove the dog being a legitimate guard dog.  German Shepherds, Rottweilers, Bull Mastiffs, and Dobermans could all normally considered ‘guard dogs’.   Your Teacup Poodle, Yorkie, or Chihuahua won’t be very convincing to the IRS inspector.

Think of the dog like any other business asset – you must keep track of all expenses and hours worked.  Food, training, and veterinary bills can all be deductible.

Barn Cats / Pest Control Cats / Feral Cats

Instead of keeping out criminals, maybe your goal is to keep your barn / warehouse / lot / junkyard free of mice and rats.  This could be either cats you own or feral cats you attract by leaving out food.   You may be able to deduct food and veterinary bills for these pest control professionals.

Like the guard dog example, you have to show a reasonable business use, and document your expenses.

Show Animals / Hobby Income

Do you have a ‘show dog’ or ‘show cat’?  Do you enter your dog or cat in shows to earn money?  If so, the prizes and other income you earn from these shows could be considered hobby income.  You may be able to deduct food, training, veterinary, show fees, travel, and even lodging expenses up to the amount of your winnings.   Detailed records are the key for any hobby income and deduction, and show animals are no exception.

Foster Parents

If you provide a foster home for animals from a qualified nonprofit organization, your expenses related to the foster care may be deductible.   You can’t deduct expenses that are provided or reimbursed by the organization (most organizations provide food, litter, and medical care for the animals).  However, any other expense that is not reimbursed (like mileage to/from the organization) may be considered a tax-deductible charitable contribution.

Moving Expenses

If you have to move due to work, you may be able to deduct some of the moving expenses.  Moving your personal belongings, vehicle, boat, lodging on the way to the new home are all valid expenses.  So are expenses related to moving your pets.  This could include a pet carrier for the trip, or the cost of shipping your pets separately from the rest of the family.

If you think one of these deductions may apply to you, contact us to discuss your pets and what documentation you might need.  This will save valuable time when we prepare your tax return.

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Virginia Sales Tax Holiday – August 4-6 2017

When is it?

August 4-6, 2017. The 3-day sales tax holiday starts the first Friday in August at 12:01 am and ends the following Sunday at 11:59 pm.

What is it?

During the sales tax holiday, you can buy qualifying school supplies, clothing, footwear, hurricane and emergency preparedness items, and Energy Star™ and WaterSense™ products without paying sales tax.

What items are eligible?
  • School supplies, clothing, and footwear 
    • Qualified school supplies – $20 or less per item
    • Qualified clothing and footwear – $100 or less per item
  • Hurricane and emergency preparedness products  
    • Portable generators – $1,000 or less per item
    • Gas-powered chainsaws – $350 or less per item
    • Chainsaw accessories – $60 or less per item
    • Other specified hurricane preparedness items – $60 or less per item
  • Energy Star™ and WaterSense™​ products 
    • Qualifying Energy Star™ or WaterSense™ products purchased for noncommercial home or personal use – $2,500 or less per item

 

List of School Supplies Eligible for Exemption

“School supply,” means an item that is commonly used by a student in a course of study. For purposes of the sales tax holiday, the term does not include computers and such items may not be purchased exempt of the tax.

The following is an all-inclusive list of items that are included in the term “school supply” and are therefore exempt from tax during the sales tax holiday period, provided their sales price is $20 or less per item. Only the following items are exempt as school supplies. Items need not be intended for use in school or in connection with a school activity to be eligible for the exemption.

  • Binder pockets
  • Binders
  • Blackboard chalk
  • Book bags, messenger bags, and totes
  • Calculators
  • Cellophane tape
  • Clay and glazes
  • Compasses
  • Composition books
  • Computer storage media; diskettes; recordable compact discs; and flash drives
  • Crayons
  • Dictionaries and thesauruses
  • Disinfectant wipes
  • Dividers
  • Erasers (including dry erase marker erasers and dry erase marker cleaning solution)
  • Folders: expandable, pocket, plastic, and manila
  • Glue, paste, and paste sticks
  • Hand sanitizer soap
  • Highlighters
  • Index card boxes
  • Index cards
  • Legal pads
  • Lunch boxes and lunch bags (including disposable lunch bags)
  • Markers (including dry erase markers and dry erase marker kits)
  • Musical instruments, musical instrument accessories, and replacement items for musical instruments
  • Notebooks
  • Paintbrushes for artwork
  • Paints (acrylic, tempera, and oil)
  • Paper: loose leaf ruled notebook paper, copy and printer paper, graph paper, tracing paper, manila paper, colored paper, poster board, and construction paper
  • Pencil boxes and other school supply boxes
  • Pencil sharpeners
  • Pencils
  • Pens
  • Protractors
  • Reference books
  • Reference maps and globes
  • Rulers
  • Scissors
  • Sheet music
  • Sketch and drawing pads
  • Textbooks
  • Tissues
  • Watercolors
  • Workbooks; and
  • Writing tablets

For a full, detailed list of items available, visit Virginia Department of Taxation Sales Tax Holiday Page

 

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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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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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Starting Business as a Sole Proprietor? Let’s Talk

Getting started in a business is a challenging and exciting time. Many new businesses are set up as a sole proprietorship.  This basic form of business entity is very easy to start, requires almost no paperwork, and has the simplest records requirements.  It is also the form chosen by many people who have been making money at a hobby, and want to turn their hobby into a real business.

If you are thinking about starting a business as a sole proprietor, take a look at some of the advantages and pitfalls of this business type:

Advantages:

  • Start up costs are very low.
  • Income generated by the business is YOUR income.
  • You control all the functions of your business.
  • You don’t file separate tax returns for the business – the business information is part of your personal tax return.
  • You may or may not have employees.
  • You can sell or close your business at any time.  You can even pass it down to your children.

Disadvantages:

  • Banks are very reluctant to give loans to sole proprietors.  See the list of benefits above.  Since you can close your doors at any time, you are seen as a business risk.
  • YOU are personally liable for any debt incurred by your business.  If your business is sued or someone gets hurt as a result of your business, your home and personal assets are at risk.
  • As your business becomes profitable, your personal tax obligation increases.
  • Health insurance for your employees is not deductible.
  • If you die, your business ceases to exist.  All assets are liquidated and become part of your estate.  Your family could be burdened with large estate or inheritance taxes.
  • Sole proprietors are four times more likely to be audited than other business forms.

For some businesses, being a sole proprietor makes perfect sense.  Bookkeepers, small housekeeping services, tutors and freelance writers come to mind as businesses perfect for the sole proprietor model.  For many businesses, other forms could be a better choice.

For new (and existing) business owners in our area, Hampton Roads Accounting meets with prospective clients to discuss their business plans and needs.  Together, we can take a look at your business idea, discuss which business form would be best for your situation, and plan your next steps to make your business dream a reality.

There is no cost or obligation for this initial consultation, so give us a call, send us an email, or complete the form on our website to get started.  We’ll be in touch right away.

Hampton Roads Accounting focuses on helping small business owners in the following cities: Chesapeake, Virginia Beach, Norfolk, Portsmouth, Suffolk, and the surrounding area.

 

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Tax Savings from Higher Education Costs

Money you paid for higher education in 2015 can mean tax savings in 2016. If you, your spouse or your dependent took post-high school coursework last year, there may be a tax credit or deduction for you. Here are some facts from the IRS about key tax breaks for higher education.

The American Opportunity Credit (AOTC) is:

  • Worth up to $2,500 per eligible student.
  • Used only for the first four years at an eligible college or vocational school.
  • For students earning a degree or other recognized credential.
  • For students going to school at least half-time for at least one academic period that started  during or shortly after the tax year. Claimed on your tax return using Form 8863, Education Credits.

The Lifetime Learning Credit (LLC) is:

  • Worth up to $2,000 per tax return, per year, no matter how many students qualify.
  • For all years of higher education, including classes for learning or improving job skills.
  • Claimed on your tax return using Form 8863, Education Credits.

The Tuition and Fees Deduction is:

  • Claimed as an adjustment to income.
  • Claimed whether or not you itemize.
  • Limited to tuition and certain related expenses required for enrollment or attendance at eligible schools.
  • Worth up to $4,000.

Additionally:

  • You should receive Form 1098-T, Tuition Statement, from your school by Feb. 1, 2016. Your school also sends a copy to the IRS.
  • You may only claim qualifying expenses paid in 2015.
  • You can’t claim either credit if someone else claims you as a dependent.
  • You can’t claim either AOTC or LLC and the Tuition and Fees Deduction for the same student or for the same expense, in the same year.
  • Income limits could reduce the amount of credits or deductions you can claim.
  • Contact Hampton Roads Accounting today for help and to check your eligibility.
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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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