Automobile Tax Expenses

The powers that be have historically written sections into the tax code promoting business activities. One of the traditional write-offs has always been the expenses associated with using a vehicle for business purposes.

The simplest automobile tax expense situation is one in which a vehicle is used entirely for business. For example, if you have a van used for a delivery service and nothing personal, all expenses associated with the van can be written off. This is known as the exclusive use situation. For many small businesses, however, a vehicle will be used for both personal and business reasons.

Where you use a vehicle for both personal and business reasons, you can only deduct the automobile expenses associated with the business use. Keep in mind that driving to and from work is not considered business mileage while driving from an office to meet a client is considered business mileage.

There are two methods for determining deductible automobile tax expenses. The first is a simple calculation known as the standard mileage deduction. The second is the actual expenses method. You can choose whichever deduction provides you with the biggest deduction unless you lease the car. With a lease, you must use the standard mileage deduction.

The standard mileage rate deduction is a calculation wherein you multiply your total business mileage for the year by a figure provided by the IRS. For the first eight months of 2005, the figure provided by the IRS is 40.5 cents per mile. For the last four months of 2005, the figure has been bumped up to 48.5 cents to reflect high gas prices.

The actual cost expense option is exactly what it sounds like. It is the actual cost associated with using the vehicle for tax purposes for a particular tax year. Automobile tax expenses will include gas, tires, repairs, oil changes, registration costs, licensing, insurance and so on. In many cases, the actual expense deduction will end up being larger than the standard mileage deduction.

Regardless of the method you choose, you must document the automobile tax expenses. This means keeping a mileage book and receipts of anything you intend to deduct.

What is a Sole Proprietorship?

A sole proprietorship is the business or an individual who has decided not to carry his business as a separate legal entity, such as a corporation, partnership, or limited liability company. This kind of business is not a separate entity. Any time a person regularly provides services for a fee, sells things at a flea market or engage in any business activity whose primary purpose is to make a profit, that person is a sole proprietor. If they carry on business activity to make profit or income, the IRS requires that you file a separate Schedule C “Profit or Loss From a Business” with your annual individual income tax return. Schedule C summarizes your income and expenses from your sole proprietorship business.

As the sold proprietor of a business, you have unlimited liability, meaning that if your business can’t pay all its liabilities, the creditors to whom your business owes money can come after your personal assets. Many part-time entrepreneurs may not know this, but it’s an enormous financial risk. If they are sued or can’t pay their bills, they are personally liable for the business’s liabilities.

A sole proprietorship has no other owners to prepare financial statements for, but the proprietor should still prepare these statements to know how his business is doing. Banks usually require financial statements from sole proprietors who apply for loans. A partnership needs to maintain a separate capital or ownership account for each partner. The total profit of the firm is allocated into these capital accounts, as spelled out in the partnership agreement. Although sole proprietors don’t have separate invested capital from retained earnings like corporations do, they still need to keep these two separate accounts for owners’ equity – not only to track the business, but for the benefit of any future buyers of the business.

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Accounting
posted by Mark Battalini
May 22, 2020

What are Auditors?

Accountants and auditors help to ensure that the Nation’s firms are run efficiently, its public records kept accurately, and its taxes paid properly and on time. They perform these vital functions by offering an increasingly wide array of business and accounting services, including public, management, and government accounting, as well as internal auditing, to their clients. Beyond carrying out the fundamental tasks of the occupation-preparing, analyzing, and verifying financial documents in order to provide information to clients-many accountants now are required to possess a wide range of knowledge and skills. Accountants and auditors are broadening the services they offer to include budget analysis, financial and investment planning, information technology consulting, and limited legal services.

Specific job duties vary widely among the four major fields of accounting: public, management, and government accounting and internal auditing.

Internal auditors verify the accuracy of their organization’s internal records and check for mismanagement, waste, or fraud. Internal auditing is an increasingly important area of accounting and auditing. Internal auditors examine and evaluate their firms’ financial and information systems, management procedures, and internal controls to ensure that records are accurate and controls are adequate to protect against fraud and waste. They also review company operations, evaluating their efficiency, effectiveness, and compliance with corporate policies and procedures, laws, and government regulations. There are many types of highly specialized auditors, such as electronic data-processing, environmental, engineering, legal, insurance premium, bank, and health care auditors. As computer systems make information timelier, internal auditors help managers to base their decisions on actual data, rather than personal observation. Internal auditors also may recommend controls for their organization’s computer system, to ensure the reliability of the system and the integrity of the data.

Government accountants and auditors work in the public sector, maintaining and examining the records of government agencies and auditing private businesses and individuals whose activities are subject to government regulations or taxation. Accountants employed by Federal, State, and local governments guarantee that revenues are received and expenditures are made in accordance with laws and regulations. Those employed by the Federal Government may work as Internal Revenue Service agents or in financial management, financial institution examination, or budget analysis and administration.

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Accounting
posted by Mark Battalini
May 21, 2020

How to Analyze a Financial Statement

Its obvious financial statements have a lot of numbers in them and at first glance, it can seem unwieldy to read and understand. One way to interpret a financial report is to compute ratios, which means, divide a particular number in the financial report by another. Financial statement ratios are also useful because they enable the reader to compare a business’s current performance with its past performance or with another business’s performance, regardless of whether sales revenue or net income was bigger or smaller for the other years or the other business. In order words, using ratios can cancel out differences in company sizes.

There aren’t many ratios in financial reports. Publicly owned businesses are required to report just one ratio (earnings per share, or EPS) and privately-owned businesses generally don’t report any ratios. Generally accepted accounting principles (GAAP) don’t require that any ratios be reported, except EPS for publicly owned companies.

Ratios don’t provide definitive answers, however. They’re useful indicators but aren’t the only factor in gauging the profitability and effectiveness of a company.

One ratio that’s a useful indicator of a company’s profitability is the gross margin ratio. This is the gross margin divided by the sales revenue. Businesses don’t disclose margin information in their external financial reports. This information is considered to be proprietary in nature and is kept confidential to shield it from competitors.

The profit ratio is very important in analyzing the bottom-line of a company. It indicates how much net income was earned on each $100 of sales revenue. A profit ratio of 5 to 10 percent is common in most industries, although some highly price-competitive industries, such as retailers or grocery stores will show profit ratios of only 1 to 2 percent.

Should I Itimize my Deductions?

When you finally decide it is time to prepare your taxes, the first question is whether you should itemize your deductions or take the standard deduction provided by the IRS.

Tax deductions are a very simple part of a theoretically simple tax reporting system. If you’ve ever prepared your own taxes, you know this simply isn’t true. Complicated tax forms can be a nightmare to fill out. Ever helpful, the IRS gives you an option of just taking a standard deduction instead of itemizing your deductions. So, what should you do?

The standard deduction is the easiest method because it requires no calculations or supporting documentation of any sort. You figure out your adjusted gross income and simply submit the amount for your classification. The amount differs based on whether you are filing as single, married, older than 65 or have kids.

Many people scoff at the mere idea of taking the standard deduction. As with all tax issues, deciding whether to take the standard deduction isn’t so easy. If you have a fairly simple financial life and don’t have many deductions, the standard deduction is almost always the best choice. For instance, if you make $45,000 as an employee of a company, rent a residence and don’t have any major medical bills or losses, the standard deduction is probably going to save you more money than itemizing. Unfortunately, you can never be sure until you take a stab at itemizing your deductions in a rough draft of a tax return.

Itemizing your deductions is exactly what it sounds like. You literally go through your records and categorize every possible deduction. These deductions are then subtracted from your adjusted gross income to get a final figure from which tax is determined using the tax tables. Itemizing is the way to go if you have significant tax deductions or tax credits in your financial life. For instance, you almost always want to itemize if you own a home as mortgage interest can be deducted. Generally, you want to itemize if you own a home, have significant medical bills, can claim a tax credit or suffered some type of major loss. Obviously, there are other situations where itemizing makes sense, but this gives you an idea of the situation.

If you have a simple financial situation, claiming the standard deduction may be the answer. If life is a bit more complicated, itemizing is probably going to save you more on your tax bill.

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Tax Deductions
posted by Mark Battalini
April 29, 2020

Tax Tips for Mortgage Holders

It’s that time of year again when numbers such as 1040, W-2 and INT-1099 become all too familiar to millions of people. One of the benefits of holding a mortgage on your house is the ability to claim certain deductions that can assist you in offsetting some of your tax burden. As you prepare to file your yearly taxes let’s look at a few areas where you can take advantage of tax deductions and keep a little more green in your pocket this tax season.

The most obvious deduction that many tax filers take advantage of is the interest paid on the mortgage for their primary residence. For those of us with a mortgage balance of less than $1 million dollars (and hopefully that is the majority of us!) you can fill out Schedule A, also known as “itemized deductions”, and claim all the interest paid in the previous year on your mortgage. Keep in mind this is for your primary residence (where you live) only and does not include other properties and houses you may own for rental purposes, etc. If you paid off your mortgage this year and were slapped with a pre-payment penalty you can also use Schedule A to take a deduction on those fees as well.

Taxes paid to local governments, known as real estate or property taxes, are also tax deductible. If your mortgage company pays your taxes for you through an escrow account you can find the deductible amount listed there – else check your assessment notice sent to you by your local taxing authority.

If you decided to spruce up your home and took out a home equity loan you may also be eligible to take a deduction for the interest of the home equity loan. One thing to keep in mind though is if the home equity loan plus your mortgage amount puts you over the real value of your home in total amount owed there are limits to what you may deduct.

Points of all types are usually tax deductible as well. If you refinanced in the past year any points you paid to buy down the mortgage rate can be written off proportionately over the life of the loan. This means that if you have a 20 year mortgage, you get to deduct 1/20th of the points each year. An added bonus comes if you refinanced in a prior year and then refinanced against in the past year and ended up paying off the first refinance. Any points you had not deducted from that first loan now become eligible for write off in their entirety.

If you took out your mortgage in the past year, any points that you paid on the purchase are fully deductible if the mortgage was for your primary residence and you paid an amount down at least equal to the points you were charged. This one can be tricky, so be sure to consult your tax prepared for more information.

This tax season make sure you are taking advantage of every deduction you can; part of owning a home and having a mortgage means that you get to reap some of the benefits of that ownership through the tax system. Don’t let the IRS keep the money that you can use to help pay off that mortgage faster!

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Accounting
posted by Mark Battalini
April 29, 2020

Revenue and receivables

In most businesses, what drives the balance sheet are sales and expenses. In other words, they cause the assets and liabilities in a business. One of the more complicated accounting items are the accounts receivable. As a hypothetical situation, imagine a business that offers all its customers a 30-day credit period, which is fairly common in transactions between businesses, (not transactions between a business and individual consumers).

An accounts receivable asset shows how much money customers who bought products on credit still owe the business. It’s a promise of case that the business will receive. Basically, accounts receivable is the amount of uncollected sales revenue at the end of the accounting period. Cash does not increase until the business actually collects this money from its business customers. However, the amount of money in accounts receivable is included in the total sales revenue for that same period. The business did make the sales, even if it hasn’t acquired all the money from the sales yet. Sales revenue, then isn’t equal to the amount of cash that the business accumulated.

To get actual cash flow, the accountant must subtract the amount of credit sales not collected from the sales revenue in cash. Then add in the amount of cash that was collected for the credit sales that were made in the preceding reporting period. If the amount of credit sales a business made during the reporting period is greater than what was collected from customers, then the accounts receivable account increased over the period and the business has to subtract from net income that difference.

If the amount they collected during the reporting period is greater than the credit sales made, then the accounts receivable decreased over the reporting period, and the accountant needs to add to net income that difference between the receivables at the beginning of the reporting period and the receivables at the end of the same period.

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Accounting
posted by Mark Battalini
April 28, 2020

What is Forensic Accounting?

Forensic accounting is the practice of utilizing accounting, auditing, and investigative skills to assist in legal matters. It encompasses 2 main areas – litigation support, investigation, and dispute resolution.

Litigation support represents the factual presentation of economic issues related to existing or pending litigation. In this capacity, the forensic accounting professional quantifies damages sustained by parties involved in legal disputes and can assist in resolving disputes, even before they reach the courtroom. If a dispute reaches the courtroom, the forensic accountant may testify as an expert witness.

Investigation is the act of determining whether criminal matters such as employee theft, securities fraud (including falsification of financial statements), identity theft, and insurance fraud have occurred. As part of the forensic accountant’s work, he or she may recommend actions that can be taken to minimize future risk of loss. Investigation may also occur in civil matters. For example, the forensic accountant may search for hidden assets in divorce cases.

Forensic accounting involves looking beyond the numbers and grasping the substance of situations. It’s more than accounting…more than detective work…it’s a combination that will be in demand for as long as human nature exists. Who wouldn’t want a career that offers such stability, excitement, and financial rewards?

In short, forensic accounting requires the most important quality a person can possess: the ability to think. Far from being an ability that is specific to success in any particular field, developing the ability to think enhances a person’s chances of success in life, thus increasing a person’s worth in today’s society. Why not consider becoming a forensic accountant?

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Tax Deductions
posted by Mark Battalini
March 16, 2020

7 Ways to Minimize Your Income Taxes

Are you paying too much in income taxes? Are you getting all the credits and deductions you are entitled to? Here are 7 tips to help you minimize taxes and keep more in your pocket:

Participate in company retirement plans. Every dollar you contribute will reduce your taxable income and thus your income taxes. Similarly, enroll in your company’s flexible spending account. You can set aside money for medical expenses and day care expenses. This money is “use it or lose it” so make sure you estimate well!

Make sure you pay in enough taxes to avoid penalties. Uncle Sam charges interest and penalties if you don’t pay in at least 90% of your current year taxes or 100% of last year’s tax liability.

Buy a house. The mortgage interest and real estate taxes are deductible, and may allow you to itemize other deductions such as property taxes and charitable donations.

Keep your house for at least two years. One of the best tax breaks available today is the home sale exclusion, which allows you to exclude up to $250,000 ($500,000 for joint filers) of profit on the sale of your home from your income. However, you must have owned and lived in your home for at least two years to qualify for the exclusion.

Time your investment sales. If your income is higher than expected, sell some of your losers to reduce taxable income. If you will be selling a mutual fund, sell before the year-end distributions to avoid taxes on the upcoming dividend or capital gain. Also, you should allocate tax efficient investments to your taxable accounts and non-efficient investments to your retirement accounts, to reduce the tax you pay on interest, dividends and capital gains.

If you’re retired, plan your retirement plan distributions carefully. If a retirement plan distribution will push you into a higher tax bracket, consider taking money out of taxable investments to keep you in the lower tax bracket. Also, pay attention to the 59-½ age limit. Withdrawals taken before this age can result in penalties in addition to income taxes.

Bunch your expenses. Certain expenses must exceed a minimum before you can deduct them (medical expenses must exceed 7.5% of your adjusted gross income and miscellaneous expenses such as tax preparation fees must exceed 2% of your AGI). In order to deduct these expenses, you may need to bunch these types of expenses into a single year to get above the minimum. To achieve this, you might prepay medical and miscellaneous expenses on December 31 to get above the minimum amount.

The most important thing is to be aware of the tax deductions and credits that apply to you and to plan for taxable events. And don’t be afraid to ask for help. The benefits from consulting an experienced tax professional far outweigh the cost to hire that professional.

Determining Your Tax Status

There are five classifications from which you choose to file: single, married filing jointly, married filing separately, head of household or qualifying widower with dependent child. If for some reason, more than one status applies to you, you should choose the status that gives you the greatest tax benefit.

Determining your status as a single filer seems simple enough, but there are different situations that exist that can qualify the taxpayer as single. For example, if you are legally separated even in the last month of the year, you are considered single for the entire year. With no dependents and you are unmarried, you are considered single. Divorce and annulment within the year also qualifies you to file as single.

However, even if you are single, but you have a dependent, or were widowed during the tax year, and you have dependents, your filing status would change to head of household or widowed with qualifying dependent child, not single.

When it comes to determining your status as a married taxpayer, there are simple qualification assessments that establish your legal filing status and if you’re considered married. Obviously, if you are legally married and living together as husband and wife, even for a small part of the tax year, then you would be considered married. If you are living together as common law spouses, and it is legally recognized in the state in which you live, or you lived part of the tax year in the state where the common law marriage began, then your filing status is married. Your filing status is still married even if you are married but not living together, but are not legally separated or divorced.

If you have unique circumstances, it might not be so easy to determine your filing status. If, for example, you were widowed during the tax year and did not remarry, you can file as married with your deceased spouse, and then file as widowed with qualified dependents for the next two years, so long as you do not remarry. If you remarry within the tax year that your spouse passed away, you would file as married with your current spouse, and file with your deceased spouse as married filing separately.

If you are married and want to file a joint return, your tax status is married filing jointly. All income to the household must be included on the one return, and both spouses must sign and date prior to submitting the tax return. All exemptions, deductions, and credits are reported on the joint return, and you share equal responsibility and liability for the information reported on the tax return, as well as any tax money owed. There are ways to ask for release from joint responsibility, either through innocent spouse relief, separation of liability for spouses who have not lived together for the past year, or equitable relief.

There are sometimes reasons that a spouse cannot sign a joint tax return, such as a spouse stationed abroad for the military. In this type of situation, you may sign for your spouse as a proxy, and attach a written explanation.

Choosing your filing status, while lengthy and sometimes complicated, is an important in the process of completing your Federal Income Tax return.

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