The owner of a carpet cleaning business reported business use on 9 vehicles. He admitted he used the vehicles sometimes for personal use, but all he had to prove business use was a handwritten summary, with no receipts. The IRS denied his claim for 75% business use for 4 vehicles. The Tax Court was willing to give the business owner some business expenses for these vehicles, but he had no acceptable evidence to support his claim. So no deduction for business use.
Points to note:
- The burden of proof is on the taxpayer.
- The default is no deduction for business use.
- You don't have to prove personal use, just business use.
- The proof is a contemporaneous (at the time) log, or other evidence created, according to the Tax Court, "at or near the time of use."
- You can't deduct commuting expenses back and forth from home to work, except in some specific cases.
Getting "Business Use" Deductions
To be able to deduct expenses for business travel and for business use of vehicles, you must be able to prove business use with records that are complete, accurate, and timely (made at the time of the expense). Your records must:
- Show that the trip was for business purposes
- Include date
- Note the mileage, if the expenses are for driving
The IRS clarifies timely by noting:
You do not need to write down the elements of every expense on the day of the expense. If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record.
Talk with your tax professional about the best way to keep good records, then find a system and stick to it. Yes, there's an App for that, too!
Source: T.C. Summ. Op. 2014-16
Read more about Keeping Records for Business Travel and Driving Expenses
1. The Employer Shared Responsibility (ESR) requirement (AKA employer mandate) starts in 2015 for larger employers (with over 100 employees) and in 2016 for employers with between 50 and 100 employees. All employers with 50 or more employees must begin collecting date in 2014.
2. ESR is for employers with 50 or more full-time equivalent employees. What does this mean? A full-time employee, for this purpose, works an average of 30 hours a week. If your business has 50 full-time employees, or if you have a combination of full-time and part-time employees equaling 50, your company is subject to the ESR payment requirement. There are some exceptions for seasonal workers and some other requirements. It's too complicated to detail here. (How to calculate FTE's)
3. Required coverage. Employers subject to ESR (that is, with 50 or more FTE employees) "must offer affordable health coverage that provides a minimum level of coverage to their full-time employees (and their dependents)," (my emphasis here) OR make ESR payments. BUT,
4. No ESR payment is required unless at least one full-time employee receives a premium tax credit for "purchasing individual coverage on one of the new Affordable Insurance Exchanges, also called a Health Insurance Marketplace (Marketplace)." The IRS will let employers know of employees receiving premium tax credits.
4. If you own more than one small business, your businesses may be combined for ESR purposes. The IRS says,
[I]f an individual owns 80% or more of two businesses that are separate legal entities, the total number of full-time employees of that employer is based on the full-time employees (including full-time equivalents) in both businesses combined together.
5. If your business is subject to the ESR requirements, you will need to file an annual return, beginning in 2015, reporting whether and what health insurance you offered employees. You must include:
- the amount of the employee's monthly health insurance coverage,
- the employee's share of the lowest-cost monthly premiums for self-only insurance
The return will be based on 2014 data. The report form 1095-C is still in draft. I'll provide more information when this form is finalized.
7. Transition relief is available to help employers get up to speed on ESR requirements. But it's complicated. Read more about transition relief from the IRS.
Still confused? Yes, it's a difficult complex deal, but it's important to know if your business will be affected by ESR requirements. Read more from the IRS: Questions and Answers on Employer Shared Responsibility
Before you file that business tax return (along with your personal income taxes), stop and check:
- Do you have the correct tax return for your business type?
- Do you have the correct Social Security Number or EIN on your tax return?
- Did you include information about any 1099-MISC forms you received for work you did as an independent contractor?
- Did you include self-employment tax calculations on Schedule SE?
- Did you calculate your tax correctly, from the tax tables, or with tax preparation software?
- Did you double check all computation and math errors?
- Did you place withholding and estimated tax payments on the right line?
- Did you enter the correct information for e-filing and direct deposit?
- And, most important, did you sign and date your return?
Common Filing Errors list from the IRS
After a long cold winter, everyone is cleaning up - and cleaning out. Or maybe you want to open a booth at a flea market or farmer's market this summer. Being aware of regulatory issues in your community and your state can save you money and hassle.
Before you begin, find out requirements in your (a) city or town, (b) county, and (c) state:
Permits and licenses. For just one garage sale? Yes, you may need a permit. It depends on your locality. Check with both your city and county to see if a permit is required.
Income taxes. If you make a profit on the sale, you must pay federal and state income taxes. But, in most cases, you are selling at a loss - just to get rid of the stuff, right? - so there's no profit. If you sell craft items, though, and you're making a profit over the cost of the items, you should keep track of the cost and your expenses. You may have to file a Schedule C as a business.
Sales taxes. Most states are not going to worry about "casual" sales, like a one-time garage sale. But if you're selling at a market, you will have to deal with sales taxes. Each state has different regulations regarding sales taxes. Check with your state's taxing authority just to be sure.
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Which checking account should I use to pay business income taxes? Use your business checking account, not your personal account, or a business credit card or debit card. Use your business account:
- To pay estimated taxes
- To pay your tax preparer, tax software purchase, or fee for online tax payments. For example, I write my CPA two checks for his work on my income taxes. One check is for the Schedule C for my business and the other check is for the 1040 for my personal taxes.
- To pay your tax bill, in a check or online.
Why use my business account? It's always important to keep business and personal expenses separate, no matter what type of business you are running.
Can I pay my taxes with a credit card? Yes, but be sure you use your business credit card, not a personal credit card. If you are filing Schedule C with your personal tax return, you may want to use your personal credit card. But, for record keeping purposes. split up the bill so part of it is noted as a business expense. Your credit card company may be able to do this, or check with your accountant.
FoxBusiness says that paying business expenses - business income taxes, for example - with a personal credit card "could lead to financial trouble down the road."
Can I pay my business taxes electronically? Yes. Here are some e-pay options from the IRS. But again, use a business credit card or bank account for this transaction.
More on why you need to keep business and personal finances separate
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About this point in tax season, many taxpayers find themselves looking at a large tax bill. Maybe you mis-calculated, or you forgot to pay estimated taxes on your business income, or you forgot self-employment taxes must be paid with your income tax bill. Some ways you can get help with business (and personal) taxes.
Pay what you can as soon as possible. If you don't pay your tax bill by the due date, the IRS begins charging penalties and interest. So, first, pay what you can by the tax due date (April 15, for most non-corporate businesses). You can pay by credit card, if that works for you. Read more from the IRS on paying electronically.
Then, call the IRS to discuss options for payment. Explain what you can pay now, when you could pay the rest, and what you can't pay.
Some options the IRS will suggest:
- You may be able to get a short (120 day) extension, with no penalty, but interest will still accrue.
- An installment agreement, in which you pay off your tax debt over time. William Perez, at Tax Planning, says "The IRS is required to agree to an installment plan if your balance due is $10,000 or less" and you meet other specific criteria. Read more about the criteria and the kinds of installment agreements.
- An offer in compromise, in which the IRS agrees to accept less than the full amount of your tax debt. Now, don't get too excited about this options, since it has a lot of criteria and it can be revoked if you don't keep paying your taxes and fulfilling other requirements in the future. There are several kinds of offers in compromise.
- Another option is to have the IRS declare you in "currently not collectible" status, but this is only for taxpayers with significant financial hardships or tax debt burdens, and obviously the IRS wants to save this status for those who are truly needy.
If you owe less than $10,000 and you think you might qualify for an installment agreement, you may be able to do this yourself. Otherwise, get the assistance of a qualified tax professional who can represent you before the IRS.
More about Tax Payment Alternatives
More from William Perez at Tax Planning on Getting Out of Tax Debt
You are scrambling to get your business tax return prepared and it is making you crazy! You think, "Maybe I should just file an extension. Then I will have until October 15 to get my return filed" (An extension for a partnership gives you five months, until September 15). But is filing an extension the best solution? It depends on your situation and various other factors. Sit back and I'll do the pro/con analysis for you:
Disadvantages of Filing an Extension Application
You Still Have to Pay Now
Even if you file an extension, you must still pay at least 90% of the tax due by April 15 to avoid penalties for late payment. So you are going to have to figure your taxes due anyway and get pretty close to the estimated amount. If you have to pay more than 10% later, you will have fines and penalties to deal with. OK, maybe this isn't a huge amount, but maybe it is. If you think you have the "worst case" (most tax owed) now, you can go ahead and apply for the extension, knowing you won't have to pay more later.
If you pay now and discover you overpaid, the only money you have lost is interest you might have had on that money while the IRS had it.
Extending Means Your Refund Is Delayed
One reason for getting that return in the mail (or e-filing it) is to get your refund. If you file an extension and you are expecting a refund, you can't get your refund until after you file your return. So if you are expecting a refund, get that return filed; you can always amend it later, if you discover that you are getting a bigger refund.
Extending Just Delays the Inevitable
If you are a procrastinator, extending will just delays the inevitable: you will still have to file your return by October 15. There are no additional extensions available, sorry. So, if you think you will be in the same place on October 12 as you are today, you might as well just get it over with and finish your return.
Benefits of Filing an Extension Application
Extending Gives You Time to Find More Deductions
June Walker, tax advisor to self-employed, says it's smart to file an extension to be sure you have time to take advantage of all possible deductions. In the rush to get that return off by April 15, you may miss some common deductions that you could have taken advantage of.
Extend to Get a Second Opinion
June Walker also points out that tax return preparers are not alike and that you may benefit from taking your return to another preparer to compare advice. You will have to pay both preparers, but reviewing your return after April 15 is an easier task for them (unless, like my CPA, they take off on trips in May.)
Extending Gives You a Clue About Carry Back and Carry Forward Benefits
Loss carry back and loss carry forward provisions allow you to take losses in 2009 and carry them back to earlier years or forward to future years where you have profits, to get a tax refund or reduction for those years. If you had a loss in 2009 and you are wondering whether to get a carry back of losses, say from 2008 or 2007, or forward to 2010, waiting until October will give you time to see if your profits in 2010 will be higher.
Extending Doesn't Penalize You
Filing an extension doesn't make you more likely to be audited, and the extension application is automatic, if you file by April 15. Filing an amended return, on the other hand, is more difficult (the form is more complex), and an amended return is more likely to be audited.
You Can File Using Tax Software Programs
Both H&R Block's Online tax program and TurboTax allow you to file an extension, electronically, for a reasonable price.
- H&R Block charges $19.95 for a personal tax return extension.
- TurboTax extension services let you file a personal extension for $9.95 or a business extension for $19.95, including walking you through e-filing the extension.
Use form 4868 for a sole proprietorship or single-member LLC filing Schedule C, or Form 7004 for a corporation, partnership, or multiple-member LLC.
Bitcoin and other virtual currencies are considered as property for tax purposes, according to the IRS. What does this mean to your business?
Virtual currencies (also called "cryptocurrencies") are a hot topic in the business and financial world. Paul Gil, at Net for Beginners, describes Bitcoin as "a form of digital public money that is created by painstaking mathematical computations, and policed by millions of computer users called 'miners'."
Here's what this IRS ruling means, in brief:
- Property in this case means personal property, not real property. Personal property is movable property, not affixed to land. So land and buildings are not personal property but almost every other business asset is.
- Business transactions involving the exchange of goods and services for Bitcoins as property are taxable. Of course.
- The value of the virtual currency is current fair market value. Robert Wood at Forbes says, "If it is listed on an exchange and the exchange rate is established by market supply and demand, convert it into U.S. dollars at the exchange rate."
- If you are trading capital assets (equipment, vehicles, for example) for Bitcoin, the sale is a capital gain, and capital gains taxes apply.
- If you pay independent contractors or employees in Bitcoin, the payments are taxable to the payee, and all reporting requirements (1099-MISC or W-2) are applicable.
This is another step in our march to a virtual world. And the IRS will be right there to help us with the tax implications of this new world.
More details on Bitcoins and other Virtual Currencies and Taxes
More from the IRS on Virtual Currencies and Taxes
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Image: Oliver Cleve/Photographers Choice/Getty Images
It's getting close to Tax Day - April 15. You still have plenty of time to file your business tax return, but you may be considering filing an extension application. Here are answers to some common questions about tax extensions, to help you make your decision:
What form do I use to apply for an extension?
Use Form 4868 for businesses filing business taxes on Schedule C with personal tax returns: sole proprietorship, independent contractor who receives 1099s, and single-member LLC.
Use Form 7004 for business tax returns for corporations, partnerships, and multiple-member LLCs.
I don't owe any taxes. Do I have to file by the tax due date?
The IRS says that even if you don't owe income taxes, you must still file your small business and personal tax return by the April 15. You must file an extension by April 15 if you will not be able to complete your tax return by the due date.
Do I also get an extension on my tax payment? No, you must also pay your tax bill (you'll have to do an estimate) by the tax due date. At least 90% of your tax bill must be paid by the due date, to avoid fines and penalties.
If I don't get my taxes filed by the first extension due date, can I file a second one?
No. You only get one six-month extension.
Do I have to provide a reason for requesting an extension of time to file my business taxes?
Nope. You can just file the extension. The approval is automatic. But the IRS does reject extensions if they find errors or if the taxpayer information doesn't match their records.
How do I file for an extension with my state? Does the federal extension application count for my state as well?
Each state that requires income taxes handles extensions differently. Check with your state's taxing authority (state department of revenue or other similar title) to learn about the process for filing an extension for a state tax return. Or ask your tax preparer, or check your tax software, if you have the state version.
I will be on vacation on April 15. Can I file the extension when I return?
File the extension application before you leave. The deadline for the extension application is the tax return due date. The only exception to this requirement is for people who are not in the U.S. on April 15, but being on vacation doesn't count. (See IRS Publication 54 for more information.)
I need an extension on a corporate tax return. Is the filing the same as for personal returns?
Tax returns for corporations with December 31 year ends are due March 15 (or, the 15th day of the 3rd month after the corporation's financial year ends). The request for extension for corporate tax returns is Form 7004 and the extension is for six months, to September 15, 2014.
More information on Filing an Extension for Your Business Taxes
Everyone business selling products or services needs to know about the sales taxes that apply where they do business. Even though your business doesn't directly pay sales taxes, the sales tax rates are one factor that determines business climate. Your business also has to know which kinds of products and services are taxable, especially if you are considering moving or expanding your business.
Yes, consumers do try to avoid sales taxes by traveling to other localities or other states to make purchases. The nonprofit Tax Foundation reports, for example, that "strong evidence exists that Chicago-area consumers make major purchases in surrounding suburbs or online to avoid Chicago's 9.25 percent sales tax rate." And Delaware "actually uses its state border welcome sign to remind motorists that Delaware is the 'Home of Tax-Free Shopping.'"
The Tax Foundation has released its updated 2014 report on sales tax rates. The report includes a map showing sales tax rates in all U.S. states and rank from highest to lowest sales taxes. The rates include combined state and average local option sales taxes. Four states - Oregon, Montana, New Hampshire, and Delaware - all rank #47 because they have no state sales taxes. Alaska has no state sales tax but allows localities to impose sales taxes.
Highest and Lowest Combined Sales Tax Rate States
The five states with the highest average combined state and average local rates are Tennessee (9.45 percent), Arkansas (9.19 percent), Louisiana (8.89 percent), Washington (8.88 percent), and Oklahoma (8.72 percent).
The five states with the lowest average combined rates are Alaska (1.69 percent), Hawaii (4.35 percent), Wisconsin (5.43 percent), Wyoming (5.49 percent), and Maine (5.50 percent).
The tax base (what products and services are taxable) is also important. States taxing more products have broader sales tax bases. The Tax Foundation says, "Hawaii is generally considered to have the broadest sales tax rate, as their "General Excise Tax" taxes many products multiple times in the production chain as opposed to just one time at the point of final consumption."