Category Archives: Tax Preparation

Tax Preparation

Writing Off Home Office Expenses

Most small business owners working out of their home knows they can write off expenses for their home office. Still, not all that many of them do, and they might not know how it all works. We’re going to offer a few bits of information that might help you save money on your taxes.

The first thing you should know if that you have write offs based on the dimensions of your office. If your office is 10×10 as an example, you get to write of $5 per square foot, which in this case comes to $500. There’s a maximum level of 300 square feet, or $1,500. This is called the “simplified method”. A more technical method involved figuring out the percentage of your house you’re using for work, such as if you’re running a day care out of your home or you have a studio where you work on projects that you want to claim. If you have extra complications like that it’s easier to work with an accountant to help you figure it out properly.

The qualifications for doing this is that you do a substantial amount of work from your home office, but it’s rare that anyone will check to see how much work you’re doing from your home. It’s supposed to only be used for business, but the definitions would be hard to prove either way. For instance, if you allow your children to use your office to do their homework it’s technically not allowed. If you use the room for other purposes, such as a laundry room (although no one would do this; just an example) then technically you’re not allowed to claim the deduction unless you have some kind of defined border showing which part is office and which part is home use.

By the way, if you’re an employee who works from home, you get to use this deduction as well. The same space rules apple as above. Strangely enough, you also get to write off expenses as it applies to your mortgage or if you rent an apartment.

Did you know if you decided to paint your office or change the flooring exclusively in there, you get to write off some of the expenses for this (you get to write off painting in full). Also, if you have a dedicated phone line for your business that counts as a write off.

If you have to store any type of inventory in your home and that room is used exclusively for that purpose you get to write that off. However, you can also write off some expenses if you use a portion of a room like a basement, as long as your home is the only location of your business.

There are a lot more exemptions you might qualify for, but truthfully it’s probably best to talk to a tax professional or your accountant to help you calculate these things and keep yourself from going crazy trying to figure it all out.

Tax Preparation

Paying Estimated Tax When Your Income Is Low

Many small businesses ponder the question of whether they should, or are supposed to, pay estimated tax quarterly when their income is low. It’s an interesting question, so let’s take a look at it.

When you look at the tax code, there’s a line that states: “Those who have income from their own business will need to make estimated tax payments if their tax liability is expected to be more than $1,000 for the year.”

This highlighted part begins the whole show, along with this one: “If you owed taxes at the end of last year, it probably means that too little was withheld from your paychecks, or you had other income that increased your tax liability”.

Let’s take the first one. The reason tax liability is highlighted is because it indicates what you might have to pay, not how much you’ve earned. This is an interesting distinction because, although you have to file taxes if you make more than $400 in a calendar year, the odds are that if you didn’t make a lot of money for the year that your tax liability won’t come close to owing $1,000.

Many small businesses have seasons where they might make a lot more money as opposed to making it all year round. If that’s the case, then making estimated payments when that time period comes up can make a lot of sense. However, paying every single quarter might not be feasible for you if you have to stretch your money out, so it can be a tough decision.

The best thing in this case is to at least pay something, even if it’s only $50, because you not only have to deal with the federal government but in some states they’re going to want a piece of you as well.

A caveat to this is if your spouse is earning a full time income and has taxes being taken out by their employer. In this case, if you’re filing jointly, you can probably get away with not paying anything because the bulk of the tax liability will be coming from them. It doesn’t hurt to hedge your bet though; you could end up getting your entire payment back.

Now let’s look at the second one. This one is a bit different because when you owe money and they don’t see estimated payments, and you don’t have a spouses income to offset your own, the IRS starts expecting you to pay quarterly, especially if you go on a payment plan.

If you can pay your balance within 3 months or so they’ll usually leave you alone; the IRS isn’t as scary as they’ve been made out to be. If you can’t, then you might have to deal with them at some time. Just remember that you can make small quarterly payments; at long as they get something they’ll leave you alone.

Our advice would be to try to make some kind of quarterly tax payments just to be safe. Obviously if you make a lot of money it’s the smart thing to do. If you don’t, and you can’t, don’t immediately worry about it because you’ll always have both time and payment options to catch up when you can.
 

Tax Preparation

States Will Garnish Your Federal Tax Refunds

One of my clients was ecstatic when he was informed that he’d be getting a nice tax refund. I was betting that he had already spent some of the money. Later on I ran into him at a networking function and found out that almost all of the refund had been absorbed by the state.

What happened is the client owed a sizable amount of tax from the previous year. He’d done the right thing and set up a payment arrangement with both the state and federal government, since he owed something to both of them. He’d been making regular monthly payments to both to offset the balance.

The bulk of the refund was coming from the federal government. The client knew that was going to happen but assumed that the rest would be coming his way.

Thus, he was surprised when he found out that one source of the state refund, which was coming from another state for work his wife had performed, had been garnisheed by New York state. Not only that but at the end of the same week, he received another letter saying that the state had put out a claim on the rest of his refund, to the extent that all he was going to receive back was around $40.

That’s a major blow when one is expecting more money, yet it’s a cautionary tale when it comes to paying on back taxes owed. Whereas the federal government doesn’t put out a garnish on state taxes, every state in the union files with the IRS to recover any outstanding funds owed to them before they make it to your bank.

What you need to know is that it doesn’t only go to taxes if requested. If there’s any other outstanding federal debt, your refund can be intercepted by them. States can also garnish refunds if there’s child support payments that are outstanding, and if you’ve been ordered to pay back any workers compensation you might have received from your state, and in some cases even student loan payments if you haven’t been paying them on a regular basis.

There is a caveat to intercepting refunds though. If you filed a joint return but filed separately, the spouse who doesn’t have an obligation can request their part of the refund without the states being allowed to take any of it.

As always, the government will make sure they get their money from you. If you’re independently employed, you can only help your case by making quarterly payments when you can. It also helps if you can make bigger payments instead of the bare minimum when setting up payment arrangements.

In any case, it’s good to know what could happen so you don’t get caught off guard when you don’t receive the refund you were expecting.
 

Tax Preparation

5 Reasons People Wait Until The Last Minute To Pay Their Taxes

We’re about 3 weeks away from when both state and federal taxes are supposed to be submitted. Believe it or not, this means that around 33% of the population hasn’t even started the process at this juncture. Also, out of those who have, around 73% have already received their refunds.

Tax Planning
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It’s not a question of whether it’s beneficial or not to submit taxes early; it’s more of a question as to the types of things that make people wait until the last minute… even if that last minute is a couple of weeks before they’re due. What are the issues? Let’s take a tongue in cheek look at it.

1. Don’t think a refund’s coming

“If I’m not getting a benefit why put in the effort.” Unfortunately, it seems to apply to taxes like pretty much everything else in life. Most people see getting a refund as the ultimate tax benefit, even though for most people it’s really not. Married couples suffer the most with this, which probably explains why it’s more often families than individuals who take the longest to put everything together.

2. Think I might owe something

This is a totally different feeling than the previous one because it comes with a dose of fear. We tend to put off things that we feel will bring us grief, which naturally correlates into tax worries. In many ways it’s not a bad strategy if true because one might not hear from the IRS about it until July or August, and you don’t have to start dealing with the issue until then. However, you still have to submit your taxes on time, and you’ll still be generating interest on your balance because they expect you to have paid something.

3. People forget

By law, everyone expecting a W-2 is supposed to have it before the end of January. Whether it happens or not, “out of sight, out of mind” works well here. If you got it but you’re not one of those people who immediately takes it to a tax preparer it’s possible you might forget. If you never got it you probably would never even think about it until the last possible moment… even then, it just might escape your mind; we’ve seen it happen.

4. Procrastination is the way

Another word for procrastination is nonchalance. Some folk are so cool that not even the pressure of having to get one’s taxes done can shake them. After all, it’s just another “thing” and there are plenty of other things going on that take time precedence. It’s probably not a good strategy if you’re not doing your own taxes however; other people might end up coming before you.

5. Mad at the government

Some people wait until the last minute because they either don’t like paying taxes or are mad at the government. The first part is understandable; the second isn’t. No one likes paying taxes but no one gets out of it… kind of. Even people who get refunds paid something to get it.

But being mad at the government… the government won’t know, and probably isn’t thinking about you. Matter of fact, we’ve known people who haven’t filed taxes in upwards of 3 years, yet never received notice from the government that they owed it. Of course, that means when a person finally gets around to do it that there will be exorbitant penalties to deal with. When that happens, being mad at the government isn’t going to get them paid.

Of course there are more things, but let’s stop with these and see if you wish to share any others.
 

Tax Preparation

Cameras, Folders, Apps & Paper

As we get close to the time when corporate taxes need to be filed and other taxes need to be calculated, it seems proper to mention that every year many people forget to not only keep their receipts but also to log all the important information they need so they can get proper write-offs to reduce their tax liabilities. We understand how time consuming it can be, as well as how hectic life can be, so we decided it was time to offer some suggestions on what could be helpful… without advertising anyone or any company in particular.

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Let’s start with cameras. Anyone who has a smartphone these days also has a camera. This means it can be used as a helpful work tool to help record a lot of different types of information that you can use later on to help figure out and track expenses. For instance, it can help you track mileage if you take pictures of your odometer when you start and stop a journey. You can take pictures of meal receipts instead of lugging around a lot of paper. You can probably figure out other ways cameras can help you out, and nothing says you have to save every picture you take. This also allows you to set up a digital file if you’d like to submit your receipts that way; accountants love things like this.

Next, folders. The majority of us pick up receipts, stuff them in our pockets and bags and move on with life. The problem is we get home pull all that paper out of our pockets and put it… somewhere. Later on, we might throw it all away because we forgot what it was or the possible significance of it. We’re not saying to carry folders around with you everywhere you go (although that’s not a bad idea), but it would help if you had a folder or two close to where you put all the paper you pull out so that it’ll spur your mind into thinking about some possible business purchases you might have made.

Back to the smartphone thing. There are a lot of apps out there that can help you track receipts, mileage and expenses. Some are free while some you’ll have to pay for. We haven’t spent a lot of time evaluating these which is one reason we’re not recommending anything, but we have noticed that there seems to be a generational gap as to who likes using these more than tracking information in other ways. Still, it’s something to think about because it might help.

The last thing to talk about is good ol’ reliable paper. One of our clients carries around a 3×5 index card notebook to capture mileage, write down where he’s been when making business purchases and highlight other information in case he forgets to log it all into a calendar. Other people carry steno-type notebooks, full folder folios or planners with them. These are all great… just try to remember not to throw away the pages in case you need to refer back to that information for your end of year expense calculations. 🙂