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Deducting Business-Related Car Expenses

Posted on February 26th, 2017

Marianne Kern, CPA
Owner, President
Kern & Associates CPA, P.A.

Whether you’re self-employed or an employee, if you use a car for business, you get the benefit of tax deductions.

There are two choices for claiming deductions:

  1. Deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, drivers’ salaries, and depreciation.
  2. Use the standard mileage deduction in 2017 and simply multiply 53.5 cents by the number of business miles traveled during the year. Your actual parking fees and tolls are deducted separately under this method.

Which Method Is Better?

For some taxpayers, using the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses.

Tip: The actual cost method allows you to claim accelerated depreciation on your car, subject to limits and restrictions not discussed here.

The standard mileage amount includes an allowance for depreciation. Opting for the standard mileage method allows you to bypass certain limits and restrictions and is simpler– but it’s often less advantageous in dollar terms.

Caution: The standard rate may understate your costs, especially if you use the car 100 percent for business, or close to that percentage.

Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.

How to Make Tax Time Easier

Keep careful records of your travel expenses and record your mileage in a logbook. If you don’t know the number of miles driven and the total amount you spent on the car, your tax advisor won’t be able to determine which of the two options is more advantageous for you at tax time.

Furthermore, the tax law requires that you keep travel expense records and that you show business versus personal use on your tax return. If you use the actual cost method for your auto deductions, you must keep receipts.

Tip: Consider using a separate credit card for business, to simplify your recordkeeping.

Tip: You can also deduct the interest you pay to finance a business-use car if you’re self-employed.

As always, contact your tax accountant to help you help you determine which method is best for you.

 


Understanding Your Financial Statements 101

Posted on February 20th, 2017

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

If you are new to our website, over a period of several months I have written a series of articles to help our clients better understand their financial statements. Below are a few that I feel address most of the common questions we hear from clients, or about which many small business owners often have some confusion:

Profit vs. “Taxable Income”

Yes, you can “have it both ways.”  See why.

Profit vs. Cash Flow Made Easy

How is it that you can show a profit, but not see the cash in your checking account?

Analyzing the Components of Cash Flow

A micro look at “Profit vs. Cash Flow.”

The Effect of Sales Growth On Cash Flow

So what IS the risk of growing too fast?

Financial Planning, or Business Turnaround – Your Choice

The importance of anticipating and addressing funding needs before they occur.

Larry’s Exit Strategies, Inc.

What determines the value of your business?

The Difference Between Your CPA and a Controller: “M-1”

“Profit vs. Taxable Income” further explained.

If you need more details on a particular topic, there are links to other articles in those above, or, click on our blog for a complete list, including in the archives.

 

 


IRS Tax Scams 2017: FAQs

Posted on February 11th, 2017

As tax season approaches, taxpayers are reminded to be on the lookout for an array of evolving tax scams related to identity theft and refund fraud. Every year scam artists look for new ways to trick taxpayers out of their hard-earned money, sensitive financial information or even access to their computers. It seems that no matter how careful you are there’s always a possibility that identity thieves could steal your personal information and try to cash in by filing fraudulent tax returns in your name.

Here’s what you need to know this year:

Which tax scams should I be on the lookout for this tax season?

This tax season some of the most prevalent IRS-impersonation scams include:

Requesting fake tax payments: The IRS has seen automated calls where scammers leave urgent callback requests telling taxpayers to call back to settle their “tax bill.” These fake calls generally claim to be the last warning before legal action is taken. Taxpayers may also receive live calls from IRS impersonators. They may demand payments on prepaid debit cards, iTunes and other gift cards or wire transfer. The IRS reminds taxpayers that any request to settle a tax bill using any of these payment methods is a clear indication of a scam.

Targeting students and parents and demanding payment for a fake “Federal Student Tax”: Telephone scammers are targeting students and parents demanding payments for fictitious taxes, such as the “Federal Student Tax.” If the person does not comply, the scammer becomes aggressive and threatens to report the student to the police to be arrested.

Sending a fraudulent IRS bill for tax year 2015 related to the Affordable Care Act: The IRS has received numerous reports around the country of scammers sending a fraudulent version of CP2000 notices for tax year 2015. Generally, the scam involves an email or letter that includes the fake CP2000. The fraudulent notice includes a payment request that taxpayers mail a check made out to “I.R.S.” to the “Austin Processing Center” at a Post Office Box address.

Soliciting W-2 information from payroll and human resources professionals: Payroll and human resources professionals should be aware of phishing email schemes that pretend to be from company executives and request personal information on employees. The email contains the actual name of the company chief executive officer. In this scam, the “CEO” sends an email to a company payroll office employee and requests a list of employees and financial and personal information including Social Security numbers (SSN).

Imitating software providers to trick tax professionals: Tax professionals may receive emails pretending to be from tax software companies. The email scheme requests the recipient to download and install an important software update via a link included in the e-mail. Upon completion, tax professionals believe they have downloaded a software update when in fact they have loaded a program designed to track the tax professional’s keystrokes, which is a common tactic used by cyber thieves to steal login information, passwords and other sensitive data.

“Verifying” tax return information over the phone: Scam artists call saying they have your tax return, and they just need to verify a few details to process your return. The scam tries to get you to give up personal information such as a Social Security number (SSN) or personal financial information, including bank numbers or credit cards.

Pretending to be from the tax preparation industry: The emails are designed to trick taxpayers into thinking these are official communications from the IRS or others in the tax industry, including tax software companies. The phishing schemes can ask taxpayers about a wide range of topics. E-mails or text messages can seek information related to refunds, filing status, confirming personal information, ordering transcripts and verifying PIN information.

What are the signs of identity theft?

Here are six signs that could indicate that you may be a victim of tax-related identity theft:

  1. Your attempt to file your tax return electronically is rejected. You get a message saying a return with a duplicate Social Security number has been filed. First, check to make sure you did not transpose any numbers. Also, make sure one of your dependents, for example, your college-age child, did not file a tax return and claim themselves. If your information is accurate, and you still can’t successfully e-file because of a duplicate SSN, you may be a victim of identity theft. You should complete Form 14039, Identity Theft Affidavit. Attach it to the top of a paper tax return and mail to the IRS.
  2. You receive a letter from the IRS asking you to verify whether you sent a tax return bearing your name and SSN. The IRS holds suspicious tax returns and sends taxpayers letters to verify them. If you did not file the tax return, follow the instructions in the IRS letter immediately.
  3. You receive income information at tax time from an employer unknown to you. Employment-related identity theft involves the use of your SSN by someone, generally an undocumented worker, for employment purposes only.
  4. You receive a tax refund that you did not request. You may receive a paper refund check by mail that the thief intended to have sent elsewhere. If you receive a tax refund you did not request, return it to the IRS. Write “VOID” in the endorsement section, and include a note on why you are returning it. If it is a direct deposit refund that you did not request, contact your bank and ask them to return it to the IRS.
  5. You receive a tax transcript by mail that you did not request. Identity thieves sometimes try to test the validity of the personal data they have chosen, or they attempt to use your data to steal even more information. If you receive a tax transcript in the mail and you did not request it, be alert to the possibility of identity theft.
  6. You receive a reloadable, prepaid debit card in the mail that you did not request. Identity thieves sometimes use your name and address to create an account for a reloadable prepaid debit card that they use for various schemes, including tax-related identity theft.

What are tax preparers and other tax professionals doing to protect my financial data?

Unfortunately, tax professionals are increasingly targets of cyber criminals seeking access to client data now as well. Criminals use this stolen information to file fraudulent tax returns for refunds; however, tax preparers and other tax professionals are able to protect their clients–and themselves in the event of a data breach by implementing critical steps such as:

Contacting the IRS and law enforcement:

Report client data theft to your local IRS Stakeholder Liaison. Liaisons will notify IRS Criminal Investigation and others within the agency on your behalf. Speed is critical. If reported quickly, the IRS can take steps to block fraudulent returns in your clients’ names. Contact local police to file a police report on the data breach, as well as the local FBI office and Secret Service (if directed).

Contacting states in which you prepare state returns:

Contacting the tax agency in each state in which you prepare returns. Contact the State Attorneys General in each state in which you prepare returns. Most states require that the attorney general is notified of data breaches. This notification process may involve multiple offices.

Contacting experts:

Security experts can determine the cause and scope of the breach, what to do to stop the breach and prevent further breaches from occurring. A data breach should also be reported to your insurance company to determine if your insurance policy covers data breach mitigation expenses.

Contacting clients and other services:

  • The Federal Trade Commission offers tips and templates for businesses that suffer data compromise, including suggested language for informing clients.
  • Send an individual letter to any clients who have been a victim of a data breach to inform them of the breach but work with law enforcement on timing. Remember that you may need to contact former clients if their prior year data was still in your system.
  • Notify your tax software provider who may need to take steps to prevent inappropriate use of your account for e-filing.
  • It’s possible that your firm and client passwords may have been compromised and need to be reset, so it’s important to contact your website and/or client portal provider(s).
  • The Federal Trade Commission offers tips and templates for businesses that suffer data compromise, including suggested language for informing clients.
  • If required, notify a credit and/or ID theft protection agency. Certain states require offering credit monitoring and ID theft protection to victims of ID theft.
  • Notify credit bureaus if there is a compromise. Clients may seek their services.

What should I do if I’ve received a suspicious phone call or email from someone claiming to be from the IRS?

If you receive an unexpected call, unsolicited email, letter or text message from someone claiming to be from the IRS, be advised that the IRS will never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer or initiate contact by email or text message. Generally, the IRS will first mail you a bill if you owe any taxes.
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • Ask for credit or debit card numbers over the phone.

If you get a suspicious phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:

  • Do not give out any information. Hang up immediately.
  • Search the web for telephone numbers scammers leave in your voicemail asking you to call back. Some of the phone numbers may be published online and linked to criminal activity.
  • Contact TIGTA to report the call. Use their IRS Impersonation Scam Reporting web page or call 800-366-4484.
  • Report it to the Federal Trade Commission. Use the FTC Complaint Assistant on FTC.gov. Please add “IRS Telephone Scam” in the notes.
  • If you think you might owe taxes, call the IRS directly at 800-829-1040.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

If you have any questions or believe that you’ve been a victim of an IRS tax scam, don’t hesitate to call.

 


Three Most Common Budgeting Errors

Posted on February 5th, 2017

 

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

When it comes to creating a budget, it’s essential to estimate your spending as realistically as possible. Here are three budget-related errors commonly made by small businesses and some tips for avoiding them.

  1. Not Setting Realistic Goals. It’s almost impossible to set spending priorities without clear goals for the coming year. It’s important to identify, in detail, your business and financial goals and what you want or need to achieve in your business. And a major category to consider is the impact of sales growth (“The Effect of Sales Growth on Cash Flow”).  An unrealistic forecast here will not only give you a false reading of your future funding requirements, but also discredit your business plan with prospective lenders right from the start (“Financial Planning, or Business Turnaround – Your Choice”).

As a case in point, a while back I was working with a client to put together a business plan to assist him in obtaining financing for his company.  I started the process by asking him to forecast his sales for the remaining 3 quarters of the year.

After struggling with it a few days, he came back with a spreadsheet indicating six percent sales growth in the second quarter, nine percent in the third quarter, and twelve percent in the fourth quarter.  And my immediate response was, “OK, now write in the margin, ‘ha, ha.’” (we had that kind of humorous relationship).

“Now here is what I really want to know: What are your customers going to buy from you?  And if you don’t know, call them and ask them.” (In his line of business his customers would know this). When he finally did obtain this information, the projected sales growth far exceeded his initial guess, having major implications for the amount and type of financing he was going to need to fund this growth. (See Testimonials under “Growth Funding”.)

  1. Underestimating Costs. Every business has ancillary or incidental costs that don’t always make it into the budget–for whatever reason. A good example of this is buying a new piece of equipment or software. While you probably accounted for the cost of the equipment in your budget, you might not have remembered to budget time and money needed to train staff or for equipment maintenance.

In addition, you also need to make sure you’ve arranged financing for the purchase of the equipment with the appropriate source of funds, usually long-term-debt.  If you neglect to do this and instead purchase the equipment out of cash flow, you can jeopardize your company’s ability meet payroll, pay suppliers, or basically, to operate (“Analyzing the Components of Cash Flow”).

  1. Failing to Adjust Your Budget. Don’t be afraid to update your forecasted expenditures whenever new circumstances affect your business. Several times a year you should set aside time to compare budget estimates against the amount you actually spent, and then adjust your budget accordingly.

In QuickBooks, there is a budget feature that allows you to create reports with such a comparison. You can project your Profit and Loss as well as your balance sheet and cash flow.  However, projecting your balance sheet is the tricky part, as changes in accounts receivable, inventory, and accounts payable, are a function of your sales growth and turnover ratios (“The Relationship Between Turnover Ratios and Cash Flow”), and QuickBooks does not do this for you automatically (nor do most other business plan and projection software programs I’ve seen).

So, I use the QuickBooks budget feature for the Profit and Loss portion only so that I can compare my actual operating results with my original budget. I then export that to EXCEL to be incorporated into a more advanced projection model I use (sample) that can forecast the above balance sheet changes based on historical or expected turnover rates, and in turn, the funds needed to support those changes. I then update the projected data with actual operating results each month so that I can forecast the company’s cash requirement through the end of the year and beyond.

Budgeting and forecasting is not easy for most small business owners who are usually not accounting oriented and have “better things to do” with their time. So as I’ve stated in previous articles, if you need help with it, consider contacting a financial professional.