Categories
accounting Business

Why Record Depreciation?

For a new business, few things are more important than knowing your numbers and making sure you’re either profitable or improving the possibility of being profitable, especially early on when money is generally tight.

One of the biggest headaches for a business owner is understanding why their accountant insists on putting in a phantom expense on the profit and loss. Depreciation shows up without fail every month, hurting your perceived profitability.

So Why Do I Have to Track and Record Depreciation?

The main reason recording depreciation is so important is because it represents the wear and tear on your long-lasting property, plants, and equipment. Even though it may not feel like a real expense, it very much is. 

Accounting is not a perfect language, but depreciation is the best way us accountants could think of to show the effects of wear and tear over time. 

Spreading the expense of a large purchase over many years on the profit and loss statements ensures that one year’s profit and loss statement is not seemingly severely under-profitable while future years are seemingly over-profitable. 

Spreading this out over many years and showing the expense against each subsequent period’s income better reflects the utility of a large purchase and its wearing down over time.

Is There Any Other Reason to Track Depreciation Expense?

Another big reason to track property, plant, equipment and their subsequent depreciation schedules is for capital expenditure planning.

Capital expenditure planning is essentially the planning for large purchases. Looking at a depreciation schedule periodically shows the wearing down of large purchases and when to expect to have to replace them with new ones.

Obviously these purchases are expensive, so it’s important to plan how to finance them, either through saving up the money or potentially obtaining financing from a bank or line of credit.

 

Thank you for reading, and to have your question featured in a future post, please leave a comment below!

Categories
Business Taxes

I Just Formed a Partnership. What Does it Mean for Taxes?

Most of us have entrepreneurial thoughts at some point in our lives. Some of us even act on those thoughts and pursue our dreams. While doing so, there’s plenty to think about, depending on the type of business, like inventory, customers, and business processes. 

Most of those starting out don’t think of other implications, like taxes, until they become relevant. And the relevance of taxes to a small business comes into play generally sometime between December 31st and April 15th.

Jonathan writes in, “Hey Mike, my brother and I just started a business together in May of last year. Do we just report our income on our own separate returns and take the expenses that each of us paid for or how does that work? Any insight would be incredibly helpful. Thanks!”

Great question, Jonathan, and truly, congratulations on going after your business idea. 

Unfortunately, things will likely only get more complicated from here because any time there is more than one person involved in ownership of a business, filing only your personal income tax return to report the income is generally not an option.

Since this is your brother, and if this venture was started together with the idea of sharing ownership in a business for each other’s skills and not just a way to split expenses, then you will need to file a Form 1065 U.S. Return of Partnership Income

The reason you have to do this is, well you guessed it, you’re in a partnership! The way the income and expenses are split up depends on how the agreement between the two of you was thought up.

If the agreement is for 50/50 ownership, then you each get to claim half of the expenses and half of the income on your personal return.

But all of that information will flow from the Form 1065 to the K-1’s that will get reported on your personal returns. 

Now, you might be wondering why the other partner gets to claim half of the expenses if only one partner paid the expenses. The reason is simple: the partner that paid the expenses actually invested the money into the partnership first (which increased his/her basis in the business), and then the partnership itself incurred the expense.

Unfortunately, we won’t be able to go into all the intricacies of a partnership tax return in this single article, but for more in-depth questions about the taxation of partnerships, please feel free to ask in a comment below.

 


Thank you for reading. This information should not be used to constitute legal or tax advice. For more personalized discussion, please leave a comment below.

Categories
Business Taxes

Can I Reimburse My Employees Tax-Free?

Do your employees use their own vehicle for work, pay for food, travel, or maybe buy office supplies out of pocket? Have you been reimbursing them without knowing the rules regarding reimbursements and the many taxes that pay is generally subject to?

It’s a common problem for employers when they’re unaware of how to reimburse employees, but would still like to, especially knowing how important it is to the employee. 

The good news is is that most reimbursements for employees are completely tax-free*. 

And we’re assuming you saw that asterisk above so you know that’s not the full story. 

*If you want to reimburse your employees tax-free, the IRS will expect you to have what is known as an accountable plan in place.

An accountable plan may sound overwhelming to implement, but in practice is quite easy. Substantiation for employee business expenses generally only requires a log of receipts and purpose of the expense. 

In addition to this, reimbursements cannot exceed certain IRS rates. For example, when an employee uses their own vehicle for a work trip, you may reimburse them for mileage tax-free up to the pre-determined IRS rate. 

This is done specifically so that employers and their accountants don’t get too creative and come up with ways to pay an excessive amount to employees tax-free.

Other rules are in place for general travel and meals, like per-diem (per day) rates. 

In addition to being free from federal income tax, these reimbursements are free from Medicare, Social Security, FUTA, SUTA, and state income taxes.

If an accountable plan is not in place, you may still reimburse your employees, but with a major catch being that the reimbursements are not tax-advantaged like under an accountable plan. 

With the Tax Cuts and Jobs Act eliminating the itemized deductions with the 2% limitation (meaning employee business expenses are no longer deductible), now is the perfect time to talk to your accountant about putting into place an accountable plan. 

Being unable to be reimbursed for out-of-pocket expenses has been known to be enough to make a good employee look elsewhere.

 


Thank you for reading. This article is meant as general guidance but should not be interpreted to constitute tax or legal advice. 

Categories
Business Taxes

“Can I Deduct Mileage as an Employee on my Taxes?”

A lot of employees that normally have to drive a lot for work will track their mileage and then claim the mileage as a deduction on their tax return, much like a self-employed taxpayer would. 

That being said, this last tax season saw a lot of changes being implemented by the Tax Cuts and Jobs Act, and a big change impacted how we record mileage for employees.

Brian writes: “Hi Mike, I work for a construction company and have to drive a lot for work. I use my own car and pick up supplies and go to different sites. I always give my CPA my mileage at the end of the year. Not sure what he did with it but he said he won’t need it this year. 

Does he know what he’s doing? I’ve been tracking it all year and I kind of want to use it if I can.”

Thanks for writing, Brian. Your CPA is right, he will not need your mileage this year. Unfortunately, one of the big changes from the Tax Cuts and Jobs Act was the suspension of writing off any deductions that were subject to the 2% of AGI floor. All that means is that any deductions that an employee would normally deduct are now suspended, including mileage.

Now, this does not mean that all hope is lost for employees that have to use their own car for work. But it may take some negotiating skills.

Your best bet is to talk to your employer about an accountable plan. These are very powerful tools for employers to use and are tax-advantaged. An accountable plan allows an employee to turn in an expense report to his or her employer with details of the expenses and then the employer can reimburse the employee, tax-free. 

Accountable plans are non-taxable fringe benefits when used appropriately. For 2019, the IRS business mileage rate is 58 cents, meaning your employer can reimburse you 58 cents a mile, completely tax-free.

Now comes the negotiating part. Just because the benefit is tax-free does not mean your employer will want to implement it. If you have other co-workers that are affected by this, talk to them about it and approach your employer together. Perhaps bring an accountant with you to explain the benefits. 

Hope this helps, Brian, and thank you for taking your time to write in.

 


To have your question featured, leave a comment below. 

This article is not intended to legal, financial, or tax advice. For help regarding your specific situation, please consult a local advisor and thank you for reading.

Categories
Business Taxes

Can Business Owners Write Off Gas for Their Car on Taxes?

With tax season 2018 in full swing, business owners are scrambling to get their records in order to make sure they not only stay compliant, but that they write off everything they are legally able to.

And an area that often causes confusion with self-employed people is that of how to write off the expenses for their vehicle. A lot goes into that topic, such as if the vehicle is used exclusively for business, and if not, how much of it is used for business?

So Can I Expense What I Pay for Gas?

In a word, yes. However, it may not be beneficial for a lot of business owners to do this.

You see, you get to choose between the actual expense method and the standard mileage method. You’ve likely heard of someone tracking their mileage for business. The reason they do this is they get to expense a certain amount of money for each business mile driven.

In 2018, that amount is 54.4 cents a mile driven.

For most business owners, this method is much easier than having to track the actual expenses and then determining afterwards what percentage of their expenses were from business and which were for personal.

So Should I Expense the Money I Spend on Gas?

That question gets to the root of the problem. Should you? Most accountants will argue that using the standard mileage rate is not only easier for record-keeping, it usually will give a bigger deduction for the year because the standard mileage rate is meant to include an average for cost of fuel and depreciation, something that is not easily tracked otherwise.

Your best bet is to speak to a professional, however, and determine together which will be the best route. Depending on how much business driving you do and what type of vehicle you own, one method or the other will likely be significantly more beneficial.

 


This article is not meant to be tax, legal, or financial advice. For help with your situation, please consult a local professional.

Categories
Business finance Taxes

Do I Get A Tax Deduction for Saving Into My 401K?

The government wants to help encourage its citizens to save for things it thinks are beneficial, such as: retirement, healthcare, and college. And one of the ways it does this is by making certain plans and savings vehicles “qualified.”

All that the term “qualified” means is that the savings vehicle is tax advantaged in some way. These include things like Health Savings Accounts, Individual Retirement Accounts, and yes, your employer’s 401k.

So What Kind of Advantage Do I Get for Saving Into My 401k?

Aside from saving money for retirement and letting it grow, you do get other advantages. Money going into a normal 401k goes in pre-tax. This term means that the money going into the account is excluded from income subject to federal income tax.

So the Money Goes in Completely Untaxed?!

But this does not mean that the money is not taxed at all. This only means it is not federally taxed when it initially goes into the account.

The money is still taxed by Social Security, Medicare, State, and local taxes. You only get to exclude this money from your income subject to federal income tax. This distinction is incredibly important to make, however it does not delegitimize how impactful saving into a retirement account can be.

On top of these taxes hitting the contributions to a 401k, the distributions in retirement are then taxed at your federal income tax bracket.

So How Much Can I Save Into My 401k Every Year?

You can save the lesser of your earned income at a given employer or $18,500 for 2018, every year in your 401k. It is important to note that only wages can be saved into a 401k as contributions.

The only other money going into a 401k account can be from rollovers from a different qualified plan, such as an IRA or a 401k or 403b at an old employer.

 


This article is not intended to be legal, financial, or tax advice. For information regarding your specific situation, please consult a local professional.

Categories
Business Taxes

Is Your Cell Phone a Business Expense?

The deductibility of certain expenses can be called into question come tax season. And a question we get a lot revolves around whether a small business owner can deduct the cost of their cell phone.

Just to specify, we will be discussing whether you can deduct the cost of your cell phone for those individuals that are self-employed, not for those that are employees. The reason being is that employees are no longer able to deduct their unreimbursed business expenses on their tax return as of 2018.

So Can I Deduct the Cost of My Cell Phone on My Tax Return?

For those that pay a monthly service fee for their cell phone’s data plan plus the cost of the cell phone, they can deduct a certain percentage of these monthly costs on their tax return.

How Do I Know How Much to Deduct?

The answer to this is somewhat subjective, given that the general rule is that the taxpayer has to estimate the amount of time that he or she uses their cell phone for personal use and how much time they use their cell phone for business use.

This is done by picking a reasonable percentage that they believe they used the cell phone for business. They then apply this percentage to the cell phone data cost. This amount is then included as an expense on their tax return.

Is There Any Way I Can Prove That My Percentage Is Accurate?

The way in which you record the amount of time you spend on your phone is going to be different than how another self-employed individual does it.

You could create a complex spreadsheet and track your time you spend on your phone, you could use an app that tracks your time, or you could just use a percentage that sounds pretty good.

In any case, when it comes to taxes it is best to have some type of record or back-up, even if it is something rudimentary. This comes into handy especially if you are picking a high percentage for your estimated business percentage use of your cell phone, like 90%.

 


This article does not constitute legal, tax, or financial advice. For information regarding your specific situation, please consult your local professional.