Seacoast Accountability’s Guide to Vehicle Expenses

The details for deducting business vehicle expenses can be found in IRS Publication 463.  Using most popular tax software programs, a worksheet is used to feed the deductible cost into the Schedule C vehicle expense line.  This discussion is a general overview, focused on self-employed individuals that own or have financing on a car that they use in their business, what is deductible, and how to go about figuring the deduction.

Commuting miles and parking are Not Deductible.  If you are deployed from a main office, that you report to regularly, you may deduct mileage from the office to the first job location, second job location, etc.   If you have no regular office, but you typically work in a metropolitan area, only outside that metropolitan area is deductible.  If you have no regular work area, and do not have a qualifying home office, travelling from home to your first stop, and from the last stop to your home is not deductible.

The beauty of qualifying a home office as a principal place of business (see my previous blog), is that there are no commuting miles to worry about.

There are two methods used to deduct vehicle expenses, the Standard Mileage Rate and the Actual Expense method.

In order to use the Standard Mileage Rate method, you must have used the standard mileage rate the first year that you used your vehicle for business purposes.  The 2009 rate is .55 per business mile (other rates are applicable for medical and charity miles, not covered here). The rate for 2010 is set at .50 per mile, at the time of this article.   Expenses that are included in the standard mileage rate consist of depreciation, lease payments, gas and oil, repairs and maintenance, insurance, and the state portion of your registration fees or the cost of your plate.  You cannot deduct these expenses in addition to the standard mileage rate.  The costs you can take in addition to the rate include business related parking and tolls.  You may also take the property tax assessed based on the value of the vehicle, and any finance charges, which are allocated to the business portion of the vehicle, based on the ratio of business mileage to total mileage.

If you use the Actual Vehicle Expense, the process is as it suggests.  You track actual expenses for the vehicle, and do not take a standard mileage rate.  You record and keep receipts for gas, oil, repairs, maintenance, lease payments, insurance, property tax, finance charges, business parking and tolls, and calculate depreciation. 

You should be aware that there are special rules for cars used less than 50% for business, the handling of lease payments, and business vehicles traded in on other vehicles.  Please see IRS Publication 463, call us, or a tax professional, if any of these situations apply to you.

In order to document your business and personal use, you need to take odometer readings at the beginning or end of each year.  Remember, some costs are allocated based on the ratio of your business miles to total miles, so just knowing your business miles is not sufficient.  You need to keep a daily record of your mileage, using a mileage log, or some other means, that will record the use of your vehicle on an ongoing basis with the details of each trip.

Maximize your deductible miles by incorporating business trips to the PO, Bank, etc. into grocery shopping and other personal trips.  As long as you document the mileage and business destination, and show the personal miles separately from the business portion of those miles, it is totally legitimate.

I get asked a lot:  So, which method do I use?  You will need to keep a mileage log, whichever method you use.  If you bought a new car, or have several repair bills during the year, actual costs may be better.  Your best bet is to figure it both ways.

Feel free to call Kathy Foster, owner of Seacoast Accountability at (603) 834-1271, or email us at info@SeacoastAccountability.com , if you have questions about deducting vehicle expenses.  There are also deductions available for employees that use their car for business purposes, and several other specifics not covered in this article.

Seacoast Accountability’s Small Business Tax Tip-The Home Office Deduction

Complete information for taking the Home Office Deduction can be found in IRS Publication 587.  The deduction is calculated on Form 8829, which transfers to Schedule C.  It should be noted that employees who receive a W-2 may also be eligible to claim a home office as an itemized deduction, however this information is not covered here.

Advantages of the Home Office Deduction

The advantages of deducting a home office is that you can take expenses that are not normally deductible, such as homeowners insurance, rent (if you do not own your home), home repairs and maintenance,  utilities, and you are able to depreciate the space, if you own your home.  There is also the advantage of shifting a portion of your mortgage interest and real estate tax from Schedule A to Schedule C, thereby lowering your self employment tax liability.

IRS Criteria to Qualify

The IRS criteria that needs to be met in order to qualify a home office space includes the fact that the space must be used exclusively and regularly as a principal place of business. 

• Exclusively means just that, the space cannot be used sometimes as a spare bedroom, and other times as an office. 
• Regularly means that you use the space on a consistent and regular basis, not casually or coincidentally. 
• Key to defining the space as a principal place of business is supported by the fact that the majority of your administrative and management functions are conducted when using the space, in addition to obvious tasks such as meeting customers or clients. 

Having another space where you conduct business does not automatically disqualify the home office space if you can support that you have met the three qualifications.

The Calculation

The typical basis used to calculate the deduction is square footage.  Another equitable basis could be used in lieu of the actual square footage, but square footage is recommended.  You need to measure the home office space that is used exclusively and regularly, and total square footage of the home.  Expenses are then allocated to the home office space based on its square footage percentage of total space.

The next thing you need to consider is if expenses are direct or indirect.  Direct expenses are amounts spent solely on the home office, and not the total home.  If you painted just the home office, then this expense would not need to be allocated based on square footage, since the cost is attributable soley to the home office.  In contrast, items such as mortgage interest and real estate taxes are attributed to the entire home, and are indirect costs, needing to be allocated to the home office space based on square footage.

Other Considerations

If you began using your home office space for only part of a year, keep track of the costs from the starting date, figure your square footage, and determine your direct and indirect costs from the starting date.  For example, if you began using your home office in July, you would figure your square footage and look at the rent or mortgage interest and real estate taxes, utilities, homeowners insurance, repairs/maintenance, and depreciation (if you own the home), etc. from July 1 through the end of your reporting year.

A home office can be used for more than one business, and your income can be derived from  more than one business location.  If either of these situations pertain to you, seek advice from a qualified tax professional.

Limitation of the Deduction

The deduction is limited by the amount of business income.  Depending on the amount of business loss you are reporting, your deduction will be limited.    If you show a business loss prior to the home office deduction, you may be limited to only the mortgage interest and real estate tax allocated to the home office space.  All other expenses, including depreciation, allocated to the home office, are carried forward to future years.

Depreciation

Be aware that the depreciation you claim on a home office is a factor in calculating the gain or loss on sale of your residence when you dispose of the property.  I get several questions about this, and people seem to have the misconception that if they don’t take the depreciation deduction, they won’t have to factor it into the equation upon selling their home.  This is a myth, and the IRS will calculate the deduction for you, even if you didn’t take it.  So, you  might as well take the deduction if you are going to claim a home office deduction.

If you  have any questions, contact Kathy Foster of Seacoast Accountability at (603) 834-1271, or send an email to info@SeacoastAccountability.com.

2009 Stimulus Highlights for Small Business

Small Business Net Operating Loss CarryBacks

Did your small business have a net operating loss for 2008?  If so, you are now able to carry back the loss for five years (previously only two years).  If your average income is $15 million or less for 2006, 2007, and 2008- you can amend your last fives years of tax returns to get a refund of taxes you paid in prior years.  Start with your 2003 tax year first and then amend your returns for 2004 through 2007.  This election to carryback the loss is irrevocable.  For more information, visit www.irs.govand search for ”ARRA Section 1211 5 year net operating loss carryback”.

Deducting Equipment Purchases

You can deduct the cost of equipment purchased during 2008 and 2009, rather than depreciating equipment over the prescribed useful life of the asset.  This deduction applies only in the year of purchase, and is up  to $250,000 worth of those assets purchased.  To be eligible, you must have a profit or break even on your 2009 tax return after taking this deduction.   In other words, if you purchased $100,000 of equipment and only have $50,000 in income, you would deduct $50,000 in the current year and depreciate the remaining $50,000 in future years.  The deduction does not apply to real property (real estate or building improvements), and the new law does not alter the limitation of $25,000 on sports utility vehicles.  For more information, visit www.irs.govand search for “net operating loss carryback Sec 179 deduction and other ARRA business provisions”.

Bonus Depreciation for New Assets

In addition to the $250,000 write off of business assets described above, small businesses are also allowed to write off an additional 50% of any remaining cost of most new assets in the year of purchase.  Again, this does not apply to real estate.  In other words, you can write off the first $250,000 of assets in full if you qualify, and apply the 50% bonus write off for any other new assets not written off using the Section 179 deduction. For more information go to www.irs.govand search for “IRB 2009-6″.

Bigger Deductions for Autos and Light Trucks

Most autos (with the exception of larger SUVs and pickups) are limited with regard to depreciation deductions.  The new bonus depreciation increases the first-year depreciation deduction by $8,000 for vehicles bought and put into service by 12/31/2009.  Assuming 100% business use, the maximum deduction for 2009 is $10,960 for new cars, and $11,060 for new light trucks.

Estimated Taxes

If  50% of your total income is derived from a small business, and total income is less than $500,000, you only have to pay 90% of your estimated tax for 2009.  You can look at your 2008 return and the total tax liability, and multiply that by 90%, then divide by four to arrive at quarterly payments.  This would be the amount you should be paying in estimated taxes to avoid an underpayment penalty.  Using your prior year tax liabililty is the suggested  method.  If you expect the tax liability to be lower for 2009, I would recommend consulting with your tax professional.

Small Business Administration Loans

The stimulus bill authorizes the SBA to temporarily eliminate or reduce fees for loan-guarantee programs.  The percentage of qualifying loans that the SBA can guarantee was also increased.  If you need financing, I would encourage you to contact the SBA for further information.

Please contact your tax professional if you feel you qualify for any of these additional tax benefits.  Each circumstance is unique and this is written for general information purposes only.

Seacoast Accountability’s 2009 Tax Highlights for Individuals

First-Time Home Buyer Tax Credit

• Congress Enacts Bigger and Better Home Buyer Tax Credit
• A tax credit of up to $8,000 is now available for qualified first-time home buyers purchasing a principal residence on or after 1/1/2009 and before 12/1/2009
• The new credit does not have to be repaid
• The tax credit is for first-time home buyers only

A first-time homebuyer is described as someone who has not owned a home in three or more years prior to purchase.  This credit applies to principal residences, which include condos, mobile homes, and even house boats. 

As I mentioned, this credit does not have to be repaid.  This is the most significant change from the prior credit.  The 2008 credit was, in essence an interest free loan, where the credit required repayment beginning in 2010 at a rate of $500 per year over a period of 15 years.  If the home is sold before the repayment period was complete, the taxpayer is required to pay off the credit amount out of the proceeds of the home.

Unfortunately, taxpayers who purchased a home during the 2008 period are only able to take advantage of the prior credit.  For taxpayers who purchased a home in early 2009 and filed their tax returns claiming the previous credit, may amend the return to take advantage of the new credit.

A couple of strategies can be employed in the use of this credit:  Prospective homebuyers qualifying for the credit may want to reduce withholding from wages, thereby enabling them to accumulate cash for the purchase of the home.  In addition, if a taxpayer has increased income in 2009 which would limit the amount of the 2009 credit, he may elect to treat the home purchase as occurring at 12/31/08. Those taxpayers would file an amended return to claim the higher credit. 

American Opportunity Tax Credit

• New credit is for up to $2,500
• The measure also does not require community service
• Only approves the credit for two years
• For tax years 2009 and 2010 for the first 4 years of college
• 40% of the credit is refundable
• This tax credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly)

During President Obama’s campaign, he promised that the first $4,000 of education would be free for most Americans.  One requirement was that the student do 100 hours of community service, during the school year or summer.  I feel the education credit has moved in a positive direction, although short of the mark promised.  After 2010, Obama will have to budget for continuation of the credit.  Congressman Fattah of Pennsylvania, who authored the plan, is fighting to increase the maximum credit to at least $3,000 for the next round.

The new credit replaces what has been historically called the HOPE credit.  It has been increased from a maximum of $1,800 per year to $2,500 per year, per student.  Community services hours are not required at this time, however, feasibility studies are being conducted by the Department of Treasury to determine if the payback of the credit through community service hours is warranted.

Previously, the HOPE credit was only available for students in the first or second year of post secondary education.  Basically, only tuition and expenses required for enrollment were eligible.    The credit wiped out the taxpayer’s tax amount and any excess was “lost”. 

The new American Opportunity Tax Credit, on the other hand, has been expanded to students in the first four years of college and the definition of qualified expenses has been expanded to include fees and course materials.  The other great benefit of the new credit, is that it is partially refundable.  A taxpayer with zero tax liability could still benefit from the credit.

Old Qualifications, New Name

• Yourself, your spouse, or a dependent that you claim
• Only one tax benefit for the same expenses
• For an undergraduate degree or certification
• Enrolled for at least half-time
• No felony drug conviction on record

You have to have paid the tuition.  Payment includes student loans, credit cards, etc.  Scholarships and grants, or any tax benefit savings used to fund the tuition do not qualify expenses. 

In addition to the credit we are currently discussing, there is the Lifetime Learning Credit and a tuition and fees adjustment to income for education expenses.  Expenses cannot be used for more than one tax benefit, and I highly advise consulting with a tax professional to make the most out of the various education tax benefits. 

This credit is intended for degree or certificate students, not for the taxpayer taking continuing education or the occasional course.

Half-time basis is usually determined by the institution.  Given the difference between semesters and quarters, the definition can vary.  The institution will provide the student with a tax form (1098T) at the end of the year, and the form will be checked if the student meets the definition.  Typically, the student must attend on a half-time basis for any part of five months during the tax year.

If for some reason, the student’s record precludes them from taking advantage of this credit, they may want to look at the other education benefits previously discussed.  Due to the variety of education benefits available, exploration of all three options is highly advised.  Consult a tax professional if you are taking advantage of a tax advantage Education Savings Account or Qualified Tuition Plan. 

Payments to Social Security Recipients

Nearly 55 million people who receive Social Security and SSI benefits will get a special one-time payment of $250. They should receive the one-time payment by late May 2009.

The payments will be automatic, so people receiving benefits do not need to take any action. In April, Social Security will send an advance notice with further information to each person who is eligible for the one-time payment.

Government workers who do not receive Social Security benefits will get a one-time $250 tax credit instead.

The legislation also provides for a one-time payment to recipients of Department of Veterans Affairs (VA) and Railroad Retirement Board (RRB) benefits. However, if a person receives Social Security or SSI benefits and also receives VA or RRB benefits, he or she will only receive one $250  payment.

You must have been eligible to receive benefits for November and December 2008 or January 2009.  In other words if you became eligible after January 2009 to receive SS benefits, you will not receive the payment.  The funds will be delivered the same way you currently receive benefits (direct deposit or paper check).

Note that $250 payment is tax free to the recipients.

Make Work Pay Credit

• Cuts in withholding at the employer level
• Will provide up to $400 per individual worker
• Phase out for individual taxpayers with AGI in excess of $75,000 (up to $95,000) or $150,000 for married couples filing jointly (up to 195,000)

As of April 1, many taxpayers will see an extra few dollars in their paychecks as a result of the Making Work Pay Credit.   There are, however, potential problems in that there could be an “over withholding” for some taxpayers.  Chief among them are college students and others who may be claimed as a dependent on someone else’s return. If you are claimed as a dependent on someone else’s return, you do not qualify for the Making Work Pay Credit.

Additionally, married taxpayers where both work, or taxpayers who work more than one job, may want to review their withholdings.  Remember, your employer is merely reading from a tax table and doesn’t know all of these other factors. The bottom line is that if any special circumstances apply to you, be aware of how much is being withheld from your check. Assuming that you’re not phased out, to receive $400 over the next nine months, each taxpayer should receive about $11 extra per week. If you feel that your withholding is more than it should be – and you’re concerned – make an adjustment on your form W-4 or talk to your tax professional.

If you do not have taxes withheld by an employer during the year because you are self-employed or because your withholding level is too low for the credit to apply, you can claim the credit on your 2009 tax return. This is a refundable credit, so if you qualify and you do not receive the entire amount, you can have any additional credit refunded to you at tax time, in 2010.

If you don’t work, you don’t get the credit.  As previously discussed, there is a $250 payment provided for retirees and the disabled.  The number of children will not affect this credit.

Other 2009 Tax Benefits

• Exclusion of up to $2,400 in unemployment compensation received in 2009
• Energy Efficient Home Improvement Credits are back for 2009 and 2010
• New Car Sales Tax Deduction
• Much, much more……

Once upon a time, you weren’t taxed on unemployment benefits-this year you can exclude up to $2,400.

During 2008, only wind or solar powered items could receive a credit.  For 2009 and 2010, homeowners are again able to deduct the cost of windows, insulation, doors, energy efficient hot water heaters and other items that typically qualified for the credit back in 2007.  The credit has increased from 10% to 30% of the amount paid, up to a maximum of $1,500 for all items purchased during the two year period.

If you’re thinking of taking advantage of lagging car sales, you can also get a tax break at the same time.   You can deduct the sales/excise tax on the first $49,500 of the sales price of a new car, light truck, motorcycle, or RV bought between 2/17 and the end of the year.  To get the full deduction, your income cannot exceed $125,000 ($250,000 for married couples).  You can get the deduction even if you can’t itemize.

The earned income credit, alternative child tax credit, transit benefits, and several other incentives for small businesses have been changed by the American Recovery and Reinvestment Act of 2009.  Call Kathy at Seacoast Accountability (603) 834-1271 if you need more information.