How to Escape the Rat Race
Page 9
Office Expenses
Office expenses include paper, pens, pencils, posters, staplers and most any office products that you use in your business. Keep the receipts and write the business purpose for the expense on the back of the receipts while you are still in the store. Keep all of these receipts together in a large envelope marked “Office Expenses.” Because retail stores now make receipts from a special inexpensive type of paper that quickly fades, you should make a copy of the receipts on regular paper and staple the originals to the copies. That way if you are audited years later and the original receipt is faded you can still see the numbers on the copy. There is no need to copy one receipt per page; multiple receipts can be copied on the same page, especially if they are in the same expense category.
Pension & Profit-Sharing Plans
This is another complex area but suffice it to say your personal pension plan and the plans you started for employees are deductible under certain circumstances.
Rent or Lease
If you rent your home you may deduct rent amounts equivalent to the room or rooms used exclusively for business. We will discuss “expenses for business use of your home” in a later section.
If you rent hotel space for meetings or training the cost of the room for these events is fully deductible.
If you rent equipment for a meeting, display or other business function, you may deduct these costs in full. Remember to write the business purpose on the invoice. This is a good practice because the IRS calls people for audits one or two years after you have filed the tax return. Writing the business purpose on the actual receipt helps with your credibility. In my book, How To Stick It To The IRS: Confessions From A Former Insider I explain how to make sure that if your business is audited you don’t get caught in their traps and end up paying them more of your hard earned money.
If you are renting a vehicle you must use the actual costs! Your deduction will equal your lease payments times the percentage of business use.
Keep good records. This is a so-called area of abuse by business owners who lease cars frequently.
Repairs & Maintenance
This area should not be used much, if at all. Repairs and maintenance on your cars will be deducted in the Car & Truck Expense section if you use the “actual cost” method. Do not use the standard mileage rate and also deduct repairs and maintenance on your vehicle. This is an area of abuse due to ignorance on the part of the business owners. However, per the IRS, ignorance is no excuse. If you have an office in the home and there are minor repairs, as opposed to major improvements, you may deduct these repairs. A minor repair may be replacing a piece of floorboard or crown molding that has rotted or broken. A major home improvement is putting air conditioning in your home office. Make sure that you consult a tax professional if you plan to make major renovations to your home/office.
Supplies
Supplies include your sales aids, such as banners, buttons, transparency presentations and similar aids. They should be deducted in the supplies section.
Taxes & Licenses
Here is where you get to deduct the cost of a local business license or occupancy tax. This step not only makes you legal in your county, but it also legitimizes you before the IRS. The IRS has attempted to terminate many businesses and call them hobbies on the basis that the owner did not have a business license.
If you plan to sell products at street markets you may also need a street vendor’s license. Check with your county or your Secretary of State and find out what licenses you will need.
Most states expect businesses to collect and pass sales taxes on to them. Call your state Department of Revenue and find out if they expect your type of business to obtain a sales tax ID number and collect sales tax. If they say that you need to register with them, you will need to file quarterly sales tax returns once you start actively selling products.
These sales taxes are not deductions on your tax return; rather, they are passed from your customer, to you, to the State. The taxes that are deductible to you include:
· Payroll taxes, if you ever hire employees
· Use taxes, if applicable
· Advalorem taxes on your business
· Other state taxes that you must inquire about
Travel Meals & Entertainment
According to the IRS, this area has long been abused and they have severely cracked down on business owners that have high expenses for travel, meals and entertainment.
First, we will talk about entertainment expenses. The IRS has limited entertainment expense to 50%. Entertainment is an activity that may be amusing. However, your purpose for the amusement may be to generate business income.
Per Internal Revenue Code Section 274, you need the following items to substantiate business entertainment:
· A description of the person being entertained and their relationship to you. It would not look good if you were attempting to deduct entertainment expense for taking mom out for her birthday.
· The purpose of the entertainment. Here you need to show how this amusement may generate income for your business. For example, I took a nurse out to a restaurant because she had good contacts in the medical field. This nurse was not a relative.
· The amount of the entertainment expense. This should be enumerated on a receipt unless the expense is less than $75. For expenses less than $75 you may enter the information in your travel log but I would suggest that you still keep the receipts.
· A written record of the date of the entertainment, the place of the entertainment and any other relevant information, such as the contacts received from your meeting.
Make sure that you can show that you expected future business benefit from the expense, that you discussed business at the setting and that you had a clear business purpose.
Now let’s discuss meals. Lunch appointments to recruit new distributors or dinner with your current distributors are 50% deductible.
Example: You take a massage therapist out to Red Lobster. You discuss how your medical products will enhance her practice. The meal costs $58. You may deduct $29. Keep the receipt and write the therapist’s name on the back and your purpose for meeting with her. Put all of your entertainment and meal expense receipts in a large envelope for tax preparation.
Opportunity meetings and training meetings are generally 100% deductible because actual sales presentations are being made and they are a direct expense to your business. Make sure that you are not extravagant in your presentation or you may be called to the carpet by the IRS due to the expenses not being ordinary and necessary; despite the fact that they have not been using restraint in their travel meals and entertainment expenses over the last several years:
IRS Investigation by House Panel Finds $50 Million Spent on Conferences
http://www.huffingtonpost.com/2013/06/02/irs-investigation_n_3375160.html
http://www.nydailynews.com/news/politics/irs-spent-50m-years-conferences-report-article-1.1361220
http://www.cnbc.com/id/100783820
Moving on, it would be prudent to stay clear of entertainment spots like:
· Strip clubs
· Movies
· Sporting Events
· Casinos
· Horse Races
The IRS frowns on business owners who claim entertainment expenses in these establishments.
Now let’s move on to travel. Travel is different from using your car to attend local training or interview potential employees. Travel is usually out of town trips for business. With the proper planning, you can turn what would have been a totally personal trip into at least a partial business trip.
Internal Revenue Code Section 162 allows you to deduct expenses incurred while away from home on business. You must be able, however, to show that your trip had business intent and that it was customary for you to conduct business in the travel area. For example, you would not get away with taking a business deduction for your winter coat business if you flew to Cancun; unless you were attend
ing a convention of coat makers. Even then, only a portion of the travel expenses would be deductible.
The following expenses constitute business travel expenses:
· Airfare
· Taxis
· Car Rentals
· Hotels
· Tips
· Dry Cleaning (away from home)
· Meals
If you spend more than 50% of your U.S. trip doing business, you can deduct all of your transportation expenses. Make sure that you can justify the trip being primarily a business trip.
If your spouse or children go, you must not deduct their expenses unless they are salaried employees of the business.
For example, if you, your spouse and two children go to Orlando and you plan a business opportunity meeting at a local hotel, you may not deduct an extra hotel room for the children, or food for the wife and children. The travel rules can get complex. However, for the simple trip to conventions, Super Saturdays in a neighboring state, or business briefings for your brother’s friends in Orlando, keep all of your receipts and a list of those in attendance at the meetings. If the IRS inquires, you have proof that you indeed traveled for business purposes.
Utilities
The utilities deduction will be discussed when we get to “expenses for business use of your home.” If you have another facility, such as a garage or shed, you may deduct the utilities on this property if the property is used for business purposes.
Wages
When you have a sole proprietorship you do not pay yourself wages. Any profit after expenses has income tax and self-employment tax attached to it. It is your goal to make that net income as low as possible to reduce or even eliminate any tax burden. If you have employees, you will have to pay them wages and withhold federal, state, social security tax and Medicare tax on the employees.
However, you can employ your children between the ages of six and eighteen, pay them wages of over $6,000 and pay no payroll tax at all!
This means that if you have two children between six and seventeen you can pay them $6,300 each in 2015 and have a $12,600 deduction for your business on your Schedule C. For example, if you have an 8-year-old and a 13-year-old, you may have them sweep the office, take out the garbage, shred papers, answer the phone, greet your clients at the door and a host of other tasks. You were already buying them designer clothes, video games and expensive gym shoes. Now, they can pay for these items with their own wages while you get a nice tax deduction. You may even pay your children, let them gift it back to you and you use the funds for a down payment on a home or for college tuition!
There are strict rules to this great benefit, however. First, you must actually pay the children. This can’t be just a paper transaction. You need to pay them by check and deposit these checks into their own personal savings or checking accounts. Next, you must fill out the proper payroll tax returns each quarter. Instead of paying payroll tax, however, you write in “exempt student” and put zero for the tax.
You must keep time sheets on your children. Actually make up a time sheet and run copies of it for weekly completion. This practice will help your case if audited by the IRS. These records will prove that your children actually worked. You may higher children over 18; however you will have to take out taxes for these children. It may still be worth the hassle if they can use the funds for tuition.
You may decide to pay your children more than the standard deduction amount, which is $6,300 for 2015. However, be prepared to pay payroll taxes on the difference. Also, your children will have to file income tax returns for their income if you exceed the standard deduction in any year.
You must pay the children a reasonable salary. For example, $40,000 per year is not usually reasonable for a 9-year-old that takes out the trash and vacuums daily. Remember, we want to reduce our taxes without raising the eyebrows of the Insidious Representatives of Satan!
Other Expenses
Other deductible expenses are expenses that you pay for regardless of whether or not you own a business. Some of these expenses are:
· Cell Phone
· Long Distance
· Subscriptions
· Bank Service Charges
The beauty of having your home-based business is that things that you are already paying for can become tax deductions overnight.
Business Use of Your Home
You may deduct utilities, mortgage interest, insurance and real estate taxes related to your home office. This is sometimes a red flag area to the IRS because if you aren’t using the entire space that you are deducting then you don’t get the deduction. For example, if you do all of your business at the kitchen table your deduction is toast! Designate a room in your house for business use only, like a spare bedroom, and part of your home expenses can be deducted every year.
CHARITABLE CONTRIBUTIONS
The charitable contribution deduction is a deduction on the Schedule A; “Itemized Deductions” form (Exhibit B). This form is not just for business owners. It can be used by anyone who has more deductions than the standard deduction allows. For example, a married couple is automatically given a standard deduction of $12,600 on their 2015 tax return. If the couple has mortgage interest, real estate tax and state income tax withheld to deduct, more than likely, they will have expenses that exceed the $12,600 standard deduction and would use the higher total by completing the Schedule A.
Charitable deductions can be added to the above deductions on the Schedule A. These deductions are classified as cash contributions and non-cash contributions.
Cash contributions include money given to churches and other non-profit organizations. If you plan to take a deduction for cash contributions you must pay by check and/or get a statement from the church or organization. Most churches and non-profit organizations send out annual giving statements. You must keep these in your file; do not mail them with your tax return.
The best-kept secret on the Schedule A, however, is the Non-Cash contributions. This deduction is for giving clothes, toys, furniture and other household items to the Salvation Army, Goodwill, American Kidney Fund and similar organizations. You can deduct thousands of dollars in non-cash charitable contributions every year, and it is all “perfectly legal”. Here’s how.
Contributions come in the form of cash and non-cash. Cash contributions are monies that you give to non-profit organizations like churches, humanitarian charities and civic associations.
Non-cash contributions are items given to these same organizations.
On the Schedule A in the section entitled “Gifts To Charity” There is a line that says “Gifts by cash or check” and another line that says “Other than by cash or check.” At the end of each year most people receive statements from churches and other organizations that detail how much cash they gave. However, because of fear, most people put $500 or less on the “other than cash” line. This is where people miss out on thousands in deductions. If you plan to deduct more than $500 in non-cash charitable contributions the only thing you need to do is complete one extra form called the 8283. All that form asks you is to whom you gave, when you gave, what you gave, when you acquired what you gave, and the value of what you gave. Not a scary prospect at all. Now I’ll tell you how to keep more of your hard earned cash:
When the American Kidney Fund or other charities call and say they will have a truck in your area, or when you accumulate enough clothes and other stuff in your closet that you need to give it away, do this:
1. Take all of the clothes, shoes and other items out of the closet and lay them neatly out on the floor.
2. Take a picture of the items and print the picture as soon as possible.
3. Take a pen and paper and write down a description of all of the items that are on the floor.
4. Place the items in a plastic bag or bags and put the bags on the front porch if they are coming to get it, or in your car to take to the Goodwill.
Now, you’ll receive a receipt in the front door if they are p
icking up the bags, or you need to obtain a receipt if you are dropping off bags. You have a receipt, a picture and a listing of what you gave. On the Salvation Army website is a thrift store value guide:
http://salvationarmysouth.org/valueguide-htm/
This guide gives the thrift store value for most items that we accumulate in our homes. For example, women’s suites are worth between $6 and $25. Well, you can’t tell most women that their suites aren’t worth at least $25. Therefore, 4 suites in one bag is a $100 write-off. Now I hope that you can see how one bag alone can be worth more than $500!
You can give as often as you want and accumulate as many receipts as you can get your hands on. To add to this goodie, you can get clothes and stuff from family members and friends that don’t itemize. If they don’t file tax returns or if they don’t have enough write-off’s to use the Schedule A, you can go to their homes, pick up their stuff and take it to the Salvation Army!
When they give you their stuff, it is a gift to you, and its value is the same as it was when it belonged to them. For example, if Aunt Mary is 68 years old and doesn’t file any more but she gives you four nice suites, you can take them to the Goodwill and get a $100 write off from that gift! Make sure you take pictures and make a listing of what Aunt Mary gave you.
When you keep good records of what you gave—your receipt and pictures from the charitable organization—you have two good legs to stand on if you are ever audited!
I try to give non-cash donations to organizations twice a month. That way I have at least 24 receipts at the end of the year. With the donated items listed on paper, an accepted thrift store valuation sheet and pictures to show that my deductions are legitimate and accurate, I’m confident that my donation deductions will stand up to any scrutiny.