Well, Congress failed to act on my tax ideas. So, I will be making a video to promote them. (We all are told no one reads anymore. I’m thrilled to see all you readers of my blog prove them wrong.) Because we need to fix the tax system. We need to collect taxes from each and every entity that garners benefits from their USA sales and efforts. And, every individual taxpayer, too.
No, not at the rates we currently impose- which are higher than necessary because of so many cheaters. You can review my tax ideas here. But, this is really reminders that Congress acted (really??? Yes, really) to extend those tax breaks (bad ones and a few goods ones). But, they are there- and you are entitled (that means you SHOULD) take advantage of them. (You will find a list of the major components of the bill at the bottom of this blog post.)
As is NOT true for international firms- several of whom manage to claim they make all their profits in Ireland or Luxembourg and skate away from their fair share of tax payments, smaller firms (that’s most of you) only worry about US and the various state taxes. And, that means if you have a physical location in a state- you are probably subject to taxes in that state.
But, many states are pushing that definition of “presence”. If you have employees who live in “State 2” and you are in “State 1”. Or- and this is a big issue- you let employees work from home – and that home is not within the same state as your company. Because this means you do have a business presence in that other state.
Oh, that never occurred to you. Well, you know the saying- “Ignorance of the law is no excuse”. That seems to only apply to police who don’t know they can’t inspect a car just because it has a missing tailight. (I am not making this up- the Supreme Court (SCOTUS) upheld a North Carolina conviction for what should always be an illegal act by police. But, this SCOTUS has obviated common sense so long it’s become yet another institution with whom we have lost confidence. A true danger to this nation’s political health.) You can bet the Supreme Court won’t side with you in this matter- you are not big business. So beware. And, know which states use this interpretation (or– hire us to keep you informed).
That also brings up sales taxes. Congress has not yet acted (now that statement is more what we are used to hearing) on the “Internet Sales Tax Collection” bill. So, internet sales are not yet taxed- unless you sell through Amazon (which often collects them) or a few other venues. But, some states expect sales tax to be collected from out of state sales. (No, that doesn’t mean you are to collect that sales tax on sales in State 1 that are delivered to State 2, but that State 2 expects you to collect sales taxes and pay them their due, while you exist in State 1.) Again, you need to know which states follow such protocols to keep you safe.
And, what about those services for which you billed and never collected? Well, if you are a cash or modified cash base entity, then you really have nothing to deduct. Oh, your salaries paid, rent to sustain those folks who worked on the project, even the travel expenses- they will always be deductible. But, that $ 250K fee you were counting on…. fuhgeddaboudit! (Because you are a cash basis entity, it means you had no income to deduct against that which was not collected. If you were an accrual based entity [I won’t explain these terms here. You can either look them up- or, you guessed it- hire us.], then your non-collection is deductible to the amount up to which you accrued. Still not a real benefit, just not a bigger cost to your business operations.)
Now, if you loaned someone or some business some money, that involves real cash. But, that loss may have to be amortized- and then only if you exacted documented collection efforts. Or, if you shipped product to a customer who never paid. Well, then there is a documented loss. As is the issue of receiving a bad check never made good. But, again, you need to document (there’s that word again) your collection efforts. You can’t do nothing and expect Uncle Sam to let you get to take the deduction on your tax submission.
But, the biggest issue for small businesses is that they often fail to document all of their expenses. Or, have been scared into deducting their costs- because others have told them it sets up an audit position. (Yes, an audit costs money- but that doesn’t mean that the benefit should be dropped. And, your audit may only take one response letter- given the predilection of the IRS to send out letters and not humans, nowadays.)
So, the first issue is the business use of your home. If you have a home-based business, then it’s a no-brainer. It’s clearly the place of your business. And, a dedicated room means that portions of your rent or mortgage are truly part of the costs of doing business. As are the utilities involved. (Here’s another thought. If you have a programmable thermostat, and you used to work elsewhere, you can show that you now heat or air-condition your abode more than you previously did. And, that means a higher percentage than via a strict percent coverage rule.) And property taxes (if they exist). And insurance on the rental or mortgage residence. You get the idea.
But, the IRS has also set up a “wimpy” home deduction. One that is extremely simple (and extremely limited in its value). You can deduct up to 300 square feet of home office space at a rate of $ 5 per square foot (which means the maximum deduction against Schedule C profits is $ 1500).
If you operate from your home- or even from an office- and you are like me, then you probably are traveling about to clients each and every day. Which means any meals you eat or coffee you buy while doing so is a deductible expense. Yes, it’s a pain to track- but you could have all receipts mailed to an eMail address you set up specifically for this purpose. (Most places ask you nowadays if you want a receipt now or wish to have it eMailed. I have mine eMailed.) Or you take a picture of the receipt and have it saved (one system uses Shoebox) or you personally eMail each pictured receipt to that special eMail address for year-end purposes. Or, you use a dedicated credit card and then just denote each expense. Or do so via your downloaded receipts into your accounting program. It’s worth the time.
And, your car- if you use it for business- is deductible. The mileage rate this year is 56 cents per mile. (That’s for business use only. Charitable efforts only give you 1/4 of that at 14 cents; moving and medical miles are 23 cents per mile.) Or, you can use the accountable process. Which means you tally the gas, the oil, the service, etc. costs and deduct those items completely. (This really works better with older vehicles or trucks.) But, you also must allocate those costs based upon the percent business use of your vehicle.
That should get you going. Now you know what you can do on your impending days off at the end of the year.
This is a list of the major “tax extenders” passed that are retroactive for the year.