Monday, April 13, 2009

Small Business Audit Triggers Part 3

7. Taking the home office deduction. If you work at home, remember you need a section of your house exclusively used for business to qualify for a home office deduction. The IRS particularly likes to challenge this. I generally advise that this deduction will automatically cause an audit. According to the IRS:

In order to claim a business deduction, you must use part of your home for one of the following two reasons:

  • Exclusively and regularly as either: your principal place of business, or as a place to meet or deal with patients, clients or customers in the normal course of your business. Where there is a separate structure not attached to your home, the regular and exclusive use does not need to be your principal place of business as long as the use is in connection with your trade or business.

  • On a regular basis for certain storage use -- such as storing inventory or product samples -- as rental property, or as a home daycare facility.
Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

8. Using your car for business. Like entertaining, this is another area the IRS thinks has the possibility of being misused. You're less likely to be audited if you have a separate personal car. But you've got to see customers face-to-face to keep them loyal. And this year, the mileage rate deduction was increased: 50.5 cents per mile from 1/1/08-6/30/08 and 58.5 cents the rest of the year.

9. File at the last minute. Since fewer returns are filed early, you'll have a lower chance of being audited if you file closer to deadline. So thumbs up on your procrastination!

10. Use of your cell phone for business. If you use a cell phone as part of your business, this could be a big deduction for you. So don't make the mistake of mixing business with pleasure by sneaking too many personal calls onto your cell phone bill. You need to keep good records and keep their actual telephone bill so they can demonstrate that a majority of the calls were business calls. Take a look at your cell-phone bill to make sure you receive an itemized report. Because cell phones are considered listed property, you need to keep detailed records of their use.

Sunday, April 12, 2009

Small Business Audit Triggers Part 2

5. Losing money more than three out of five years. The IRS is on the lookout for people writing off hobbies as businesses. They want to see that you've at least had the intent to make a profit. Here are some of the factors that the IRS uses to determine whether an activity is caried on for profit or as a hobby

  • Does the time and effort put into the activity indicate an intention to make a profit?

  • Do you depend on income from the activity?

  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

  • Have you changed methods of operation to improve profitability?

  • Do you have the knowledge needed to carry on the activity as a successful business?

  • Have you made a profit in similar activities in the past?

  • Does the activity make a profit in some years?

  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?

6. File a Schedule C return. If you're a sole proprietor, you'll file a Schedule "C" — Profit or Loss from a Business — as part of your 1040 form. BDO Seidman says the IRS is scrutinizing Schedule Cs more closely this year, so make sure you have proper documentation. But unless you're incorporated, you'll need to file this form. And according to an SBA report released just April 2, 2009, sole proprietors pay half the effective tax rate of S corporations (13.3 percent versus 26.9%).

Saturday, April 11, 2009

Small Business Audit Triggers Part 1

As April 15th comes closer, and many people have turned to turn some of their hobbies into businesses as a result of losing their jobs, be on the lookout for these nine areas that may cause the IRS to scrutinize your return.

1. Unreported income. Any profession that deals with a lot of cash, such as waiting tables, tends to spark the curiosity of IRS audit agents. One of the first things they compare in cases such as this is bank deposits vs. claimed income.
If you get paid in cash, rather than by check or credit card, it's tempting to just 'forget' to declare some of that income. Make sure you keep accurate records of all cash that is received. The reason is that checks and credit card payments leave a paper trail that can be traced back to the origanal payee. Cash does not leave a paper trail and can easily go unreported.

2. Making more than a million dollars. I know many people wish this was a concern of theirs. If you have an adjusted gross income of more than a million dollars, You'll have the highest chance of getting audited. In 2008, according to the IRS, they audited 5.6% of millionaires' returns, compared with 2.9% of those making more than $200,000, and less than 1% of those making less than $200,000. But, heck, if you can clear a million dollars profit, take the audit. ..

3. Mixing personal and business expenses. It's tempting to write off your new living room furniture or that trip to the Caribbean as a business expense (after all, you read e-mail while sitting on the couch or at the beach, right?) but the IRS certainly frowns upon that. Don't.

4. Entertaining. Another area where personal and business expenses are likely to be construed as intertwined. Also, the IRS doesn't want to see excessively lavish parties (except, it seems, from huge banks getting TARP money, but that's another story). Remember, you can only take 50% of entertaining and food expenses as a deduction. Nevertheless, small businesses need to be out there talking to customers over lunch or dinner, at a ballgame or golfing. Most entrepreneurs don't entertain nearly enough. Do.

Friday, April 10, 2009

Tax Break On New Car Purchases

The Internal Revenue Service announced today that taxpayers who buy a new passenger vehicle this year may be entitled to deduct state and local sales and excise taxes paid on the purchase on their 2009 tax returns next year. “For those thinking about buying a new car this year, this deduction may give them a little more drive to make their purchase this year,” said IRS Commissioner Doug Shulman. “This deduction enables taxpayers to buy now and get cash back later on their tax returns.”

The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

IRS also alerted taxpayers that the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010, to qualify for the deduction. The special deduction is available regardless of whether a taxpayer itemizes deductions on their return. The IRS reminded taxpayers the deduction may not be taken on 2008 tax returns.

Thursday, April 9, 2009

Limited Liability Company LLC

A limited liability company, or LLC, can be best described as having the characteristics of a partnership and a corporation. An LLC gives a business the good parts of a corporation without all of the corporate protocols. The multiple owners who are called members of an LLC are looked upon as a partnership for tax purposes.

The LLC is a pass-thru tax structure, so income taxes are paid by its owners, so, unlike a corporation, the LLC itself never pays income tax. As a result, LLC does not suffer from the double-taxation problem that a corporate structure does and the tax burden is passed on directly to the owners. However, an LLC is still obligated to pay state (if applicable) and federal payroll taxes.

At the time of forming a LLC, you choose how to handle income taxes. You can be taxed like a sole proprietor where you are taxed directly, a C corporation where there is double taxation, or an S corporation which is another type of pass thru entity but has the same protections as a C corporation. The choice is yours.

Assuming that the LLC is properly set up, and you completely separate business and personal activities, the owners are afforded personal liability protection. This is a big reason why people choose to form an LLC instead of operating as a sole proprietor. You should also consider that a business generally earns more admiration when it has a formal business structure, such as an LLC.

In the US, the limited liability company is a fairly new business structure. As a matter of fact, as early as 1986, you could create a limited liability company in only two states. Today, every state recognizes this business structure. A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.