entrepreneur – Page 5 – SMALL BIZ TAX LADY

Business Strategies, business taxes, General Information, RUNNING YOUR BUSINESS, Self Employed, Tax Reduction, TAXES

How the 90-Day Mileage Log Rule Works for You

February 18, 2019 Howard Tax Prep LLC

Often in an IRS audit, the examiner will ask for your mileage log at the beginning of the audit. If you do not have a mileage log, then you are in danger of losing more than just vehicle deductions. Think about it. If you don’t have a log for mileage, what is the IRS examiner going to think about your other records? Right—he or she is going to think you are a bad taxpayer with bad tax records who needs extra scrutiny.

The IRS says that you may keep an adequate record for part of a tax year and use that part-year record to substantiate your vehicle’s business use for the entire year. To use a sample record, you need to prove that your sample is representative of your use for the year.

By using your appointment book as the basis for your mileage, you not only build great business-use proof, but you also do a great job of showing that your sample vehicle record mirrors your general appointments during the year. (If you are using a mileage app, synchronize the app results with the appointment book.)

The IRS illustrates two possible sampling methods:

One identical week each month (for example, the third week of each month)
Three consecutive months

We don’t recommend the one-same-week-each-month method because it is difficult to start and stop a record-keeping process. (Think about how hard it would be to create a habit, undo it, and then create it again—every month.)

. For this reason, the three-month log is the superior alternative. Before getting into the three-month method, we should note that once you have done three months, you are in the habit. You might find it easier to continue all year, rather than stop this year and then have to start again next year.

Here are the basics of how the IRS describes the three-month test:

The taxpayer uses her vehicle for business use.
She and other members of her family use the vehicle for personal use.
The taxpayer keeps a mileage log for the first three months of the taxable year, and that log shows that 75 percent of the vehicle’s use is for her business.
Invoices and paid bills show that her vehicle use is about the same throughout the year.

According to this IRS regulation, this three-month sample is adequate to prove 75 percent business use.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have tax debt help questions, need Chicago business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

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Fact check me with IRS Regulation 1.274-5T(c)(3)(ii)(A).

Business Strategies, business taxes, General Information, REAL ESTATE, RUNNING YOUR BUSINESS, Self Employed, TAX DEBT RELIEF, Tax Reduction, TAXES

TCJA Tax Reform Sticks It to Business Start-Ups That Lose Money

February 11, 2019 Howard Tax Prep LLC

The Tax Cuts and Jobs Act (TCJA) tax reform added an amazing limit on larger business losses that can attack you where it hurts—right in your cash flow.

And this new law works in some unusual ways that can tax you even when you have no real income for the year. When you know how this ugly new rule works, you have some planning opportunities to dodge the problem.

Over the years, lawmakers have implemented rules that limit your ability to use your business or rental losses against other income sources. The big three are:

The “at risk” limitation, which limits your losses to amounts that you have at risk in the activity
The partnership and S corporation basis limitations, which limit your losses to the extent of your basis in your partnership interest or S corporation stock
The passive loss limitation, which limits your passive losses to the extent of your passive income unless an exception applies

The TCJA tax reform added Section 461(l) to the tax code, and it applies to individuals (not corporations) for tax years 2018 through 2025.

The big picture under this new provision: You can’t use the portion of your business losses deemed by the new law to be an “excess business loss” in the current year. Instead, you’ll treat the excess business loss as if it were a net operating loss (NOL) carryover to the next taxable year.

To determine your excess business loss, follow these three steps:

Add the net income or loss from all your trade or business activities.
If step 1 is an overall loss, then compare it to the maximum allowed loss amount: $250,000 (or $500,000 on a joint return).
The amount by which your overall loss exceeds the maximum allowed loss amount is your new tax law–defined “excess business loss.”

Example. Paul invested $850,000 in a start-up business in 2018, and the business passed through a $750,000 loss to Paul. He has sufficient basis to use the entire loss, and it is not a passive activity. Paul’s wife had 2018 wages of $50,000, and they had other 2018 non-business income of $600,000.

Under prior law, Paul’s loss would offset all other income on the tax return and they’d owe no federal income tax. Under the TCJA tax reform that applies to years 2018 through 2025 (assuming the wages are trade or business income):

Their overall business loss is $700,000 ($750,000 – $50,000).
The excess business loss is $200,000 ($700,000 overall loss less $500,000).
$150,000 of income ($600,000 + $50,000 – $500,000) flows through the rest of their tax return.
They’ll have a $200,000 NOL to carry forward to 2019.

To avoid this ugly rule, you’ll need to keep your overall business loss to no more than $250,000 (or $500,000 joint). Your two big-picture strategies to make this happen are

accelerating business income, and
delaying business deductions.

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Business Strategies, business taxes, General Information, RUNNING YOUR BUSINESS, Self Employed, Tax Reduction, TAXES

Answers to Common Section 199A Questions

February 8, 2019February 8, 2019 Howard Tax Prep LLC

man standing near of wall — #smallbiztaxlady

I’ve been providing tax preparation for small business owners in Chicago’s south loop for quite awhile, and the new tax laws are benefiting business owners like never before! For many small businesses and the self-employed, the 20 percent tax deduction from new tax code Section 199A is the most valuable deduction to come out of the Tax Cuts and Jobs Act.

The Section 199A tax deduction is complicated, and many questions remain unanswered even after the IRS issued its proposed regulations on the provision. And to further complicate matters, there’s also a lot of misinformation out there about Section 199A.

Below are answers to six common questions about this new 199A tax deduction.

Question 1. Are real estate agents and brokers in an out-of-favor specified service trade or business for purposes of Section 199A?

Answer 1. No.

Question 2. Do my S corporation shareholder wages count as wages paid by the S corporation for purposes of the 50 percent Section 199A wage limitation?

Answer 2. Yes.

Question 3. Will my allowable SEP/SIMPLE/401(k) contribution as a Schedule C taxpayer be based only on Schedule C net earnings, or do I first subtract the Section 199A deduction?

Answer 3. You’ll continue to use Schedule C net earnings with no adjustment for Section 199A.

Question 4. Is my qualified business income for the Section 199A deduction reduced by either bonus depreciation or Section 179 expensing?

Answer 4. Yes, to both.

Question 5. I took out a loan to buy S corporation stock. The interest is deductible on my Schedule E. Does the interest reduce my Section 199A qualified business income?

Answer 5. Yes, in most circumstances.

Question 6. The out-of-favor specified service trade or business does not qualify for the Section 199A deduction, correct?

Answer 6. Incorrect.

Looking at your taxable income is the first step to see whether you qualify for the Section 199A tax deduction. If your taxable income on IRS Form 1040 is $157,500 or less (single) or $315,000 or less (married, filing jointly) and you have a pass-through business such as a proprietorship, partnership, or S corporation, you qualify for the Section 199A deduction.

With taxable income equal to or below the thresholds above, your type of pass-through business makes no difference. Retail store owners and medical doctors with income equal to or below the thresholds qualify in the same exact manner.

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Family Tax Issues, General Information, Self Employed

Tax Consequences of Bartering & Trading

January 11, 2019January 11, 2019 Howard Tax Prep LLC

Author Trudy M. Howard

When it comes to filing taxes in Chicago, many residents believe that they don’t have to file taxes because they were not paid via a W2, 1099, or with cash payments. However, even if you don’t receive cash in exchange for work done, if you receive property or you “bartered” services, you have to report the FAIR MARKET VALUE of the service/property as SELF EMPLOYMENT INCOME!

For example, let’s say one of my baker friends wanted to pay me with cakes (a girl can dream can’t she?) to prepare her taxes, and I agreed to take 5 $50 cakes in exchange for my tax preparation services. Once our transaction was done, the IRS would expect me to report the value of those cakes, and pay self employment taxes on the value of the services/property that what we bartered! Don’t believe me? Read the law for yourself below.

Per the IRS: “Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or services you receive in bartering. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise. Generally, you report this income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040). However, if the barter involves an exchange of something other than services, such as in Example 4, later, you may have to use another form or schedule instead.”

FACT CHECK me with IRS publication 525 PAGE 19. I’ve included the link to the IRS tax publication here: https://www.irs.gov/pub/irs-pdf/p525.pdf

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General Information, Tax Reduction, TAXES

5 last-minute strategies you can use to cut your 2018 tax bill!

December 26, 2018December 26, 2018 Howard Tax Prep LLC

Trudy Howard

In my South Loop Chicago Tax Preparation office, I often see clients looking for tax savings at years end. Although December 26th is cutting it close, your year-end tax planning doesn’t have to be hard. I have outlined below five strategies that will increase your tax deductions or reduce your taxable income so that Uncle Sam gets less of your 2018 cash.

1.) Prepaying your 2019 expenses right now reduces your taxes this year, without question. While it’s true you kicked the can down the road some, perhaps you have an offset with a big deduction planned for next year. And even if you don’t have such a plan at the moment, you have plenty of time to create one or to put more big deductions in place for 2019.

2.) The easiest year-end strategy of all is simply to stop billing your customers, clients, and patients. Once again, this kicks the can down the road some and makes your 2019 tax planning more important.

3.) Thanks to the new tax laws With 100 percent bonus depreciation and increased Section 179 expensing in 2018, you can make significant purchases of equipment, machinery, and furniture and write off 100 percent of the value. Make sure you place the assets in service on or before December 31, 2018, to get the deduction this year.

4.) Charges to your credit cards can create deductions on the day of the charge. This is absolutely true if you are a sole proprietor or you operate as a corporation and the credit card is in the name of the corporation. But if you operate as a corporation and the credit card is in your personal name, your corporation needs to reimburse you before December 31 to create the 2018 deduction at the corporate level.

5.) And finally, claim all your legitimate deductions. Don’t think you have too many, and don’t try to guess which of your too-many deductions could be a red flag. First, it’s unlikely you could have enough deductions to create a red flag. Second, no one knows what those red flags are. Third, if the deduction is legitimate, it doesn’t matter if the IRS audits it—you’ll win.

As you can see from the five strategies above, there’s much you can do to control your tax bite. Although we’ve given you the basics, this is not an all-inclusive article. Should you have tax debt help questions, need Chicago business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

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General Information, REAL ESTATE

Act Now! Get Your 2019 Safety Net Expensing in Place.

November 30, 2018November 30, 2018 Howard Tax Prep LLC

For 2018, you can elect the de minimis safe harbor to expense assets costing $2,500 or less ($5,000 with audited financial statements or something similar).

The term “safe harbor” means that the IRS will accept your expensing of the qualified assets if you properly abide by the rules of the safe harbor.

Here are four benefits of this safe harbor:

Safe harbor expensing is superior to Section 179 expensing because you don’t have the recapture period that can complicate your taxes.
Safe harbor expensing takes depreciation out of the equation.
Safe harbor expensing simplifies your tax and business records because you don’t have the assets cluttering your books.
The safe harbor does not reduce your overall ceiling on Section 179 expensing.

Here’s how the safe harbor works. Say you are a small business that elects the $2,500 ceiling for safe harbor expensing and you buy two desks costing $2,100 each. On the invoice, you see the quantity “two” and the total cost of $4,200, plus sales tax of $378 and a $200 delivery and setup charge, for a total of $4,778.

Before this safe harbor, you would have capitalized each desk at $2,389 ($4,778 ÷ 2) and then either Section 179 expensed or depreciated it. You would have kept the desks in your depreciation schedules until you disposed of them.

Now, with the safe harbor, you simply expense the desks as office supplies. This makes your tax life much easier.

To benefit from the safe harbor, you and I do a two-step process. It works like this:

Step 1. For safe harbor protection, you must have in place an accounting policy—at the beginning of the tax year—that requires expensing of an amount of your choosing, up to the $2,500 or $5,000 limit. I can help you with this.

Step 2. When I prepare your tax return, I make the election on your tax return for you to use safe harbor expensing. This requires that I attach the election statement to your federal tax return and file that tax return by the due date (including extensions).

If you want to use this safe harbor in 2018, we need to get this set up so that it is in place on January 1. Contact me at 855-743-5765, or email me at help@howardtaxprep.com

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