New Business Mileage Rate Effective July 1, 2011
July 26, 2011
Please contact us if you have any questions!
Kathy Foster
Seacoast Accountability
603-834-1271
info@seacoastaccountability.com
www.SeacoastAccountability.com
So you got out from under working for somebody else, and now you own the business. You are probably very good at what you do, and enjoy doing what you are good at. Then you begin to think about “the necessary evil” that raises its ugly head-bookkeeping, payroll, taxes and the numerous obligations, deadlines, paperwork and regulations that are in a constant state of flux. You might be good at making widgets, but you find you are not so good at knowing what to record financially, what paperwork is due when to which taxing authority, or even how much tax you may or may not owe. Of course, the best thing to do is give Seacoast Accountability a call, but if you are not quite to that step, this article is geared to dispel some of the myths about small business taxes that you may have heard.
A CPA is your best source for tax preparation
This is not always true, and it’s expensive. Select a tax professional that asks you a ton of questions, better yet, one that has experience in your industry. CPAs tend to be conservative and may not include deductions that you are legally entitled to get, resulting in the more tax you pay.
The home office deduction will get me audited
Once upon a time, this might have been the case. With the economy the way it is now, there are an increasing number of home offices, and the IRS simply doesn’t have the resources to audit every one of them. The key here is to be sure that the majority of your administrative tasks are done from the home office and to have legitimate and realistic deductions. (See my previous blog about the home office deduction) IRS asks you for a code that identifies your type of business. They have a database that tells them what the norm is for various expenses in your industry. It is the ratio of income to expense, or coding a high amount of expense in a particular area that is most likely to trigger the audit.
If I file an extension, I can wait to pay the tax I owe
Oh, this is a big fat lie! The only thing that an extension does for you, is give you the extra time to file the return without being hit with a late filing penalty. Any amount that is due after the due date is assessed with an underpayment penalty and interest begins to accrue from the original date the return was due, typically April 15th.
If I pay what I owe, I won’t get a penalty
Again, this is false. Your taxes are calculated quarterly, so if you pay everything you owe when the return is due, you could possibly be hit with an underpayment penalty for not paying taxes in quarterly installments.
I haven’t started operating the business, so I can’t deduct anything
The IRS now allows an immediate deduction of start up costs, or the business expenses you paid out before opening day. These costs consist of market surveys, wages paid to train employees, travel, and advertising the opening of the business. You can deduct up to $5,000 in the first year, or the actual start-up costs, whichever is less. The deduction is reduced by the amount of total start up costs that exceed $50,000. Any start up costs not deducted in the first year can be deducted over 180 months, starting the month after the business begins.
The only mileage I need to keep track of is my business miles
I run into this every year, especially with new clients. My returning clients have been trained to know better! IRS requires that you keep a mileage log of ALL miles. At least get your beginning odometer reading each year. (See my vehicle deduction blog) Not only is this an IRS requirement, but the ratio of total miles to business miles is used to capture other vehicle expenses such as the personal property tax and finance charges paid on the business vehicle, which can be deducted in addition to the standard mileage rate.
I live in New Hampshire, so I don’t have to pay income tax
If you have $50,000 of income, before expenses, you have to file a Business Profits tax return with the state. You may also be subject to a Business Enterprise Tax.
As a side note, and something to think about, the small business owner is saddled with not only the income tax that every taxpayer is subject to, but the self employment tax, as well. This is a double-edged sword, because the self employment tax is what you pay into the Social Security system. The less you pay in, the less you get in your golden years. I strongly recommend seeking a tax professional to help you get estimated payments set up, review your record keeping and deductions, and advise you about a tax planning strategy. Now is a great time of year to review what has happened with your company for the first half of the year, and to make any adjustments to avoid surprises at year end. Give us a call at (603) 834-1271
Seacoast Accountability’s Guide to Vehicle Expenses
January 30, 2010
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.
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