2018 Tax Filing Season

The IRS will begin accepting tax returns on Jan. 29.  The tax deadline will be April 17 this year – so taxpayers will have two additional days to file beyond April 15.

Posted in IRS

Tax Preparers

When it comes to deciding who should prepare your taxes, the different designations can sometimes be confusing.  The major 3 options are Enrolled Agent, Tax Attorney and CPA.

  •  An Enrolled Agent is usually a full-time tax advisor and tax preparer licensed to practice before the IRS. They earn the designation by either passing an IRS exam or having at least five years’ experience working for the IRS.
  • Tax attorneys are lawyers who various types of tax related work. Look for a tax attorney with either a special tax law degree or certification as a tax law specialist from a state bar association.  If a great deal of money is at stake, the IRS is accusing you of committing fraud, or you’re headed to court, call a tax attorney.
  • CPA’s are licensed and regulated in all states.  They do sophisticated accounting and internal audit work, and prepare tax return.  To become a CPA, an accountant must have a college degree, experience with a CPA firm, and must pass a rigorous examination.  Some CPAs have a great deal of IRS experience, but some don’t ever deal with the IRS.
Posted in IRS

2018 Standard Mileage Rates

The standard mileage rates for business use of a vehicle will increase slightly in 2018.

For business use of a car, van, pickup truck, or panel truck, the rate for 2018 will be 54.5 cents per mile, up from 53.5 cents per mile in 2017. Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

The rate for medical or moving purposes is 18 cents per mile, which is one cent higher than for 2017.

The rate for service to a charitable organization is unchanged at 14 cents per mile.

The portion of the business standard mileage rate that is treated as depreciation will be 25 cents per mile for 2018, unchanged from 2017.

Posted in Deductions

Colorado’s New Minimum Wage

On January 1, 2018, the Colorado minimum wage will increase to $10.20 per hour. For tipped employees, the minimum wage will be $7.18.

The new minimum wage is the result of the passage of Amendment 70 by Colorado voters in the November 2016 election. Amendment 70 requires the minimum wage to increase by 90 cents each January 1st until the rate reaches $12.00 on January 1, 2020.

Posted in Colorado

Donating Art

How much of a deduction can I take for the art I donated?  It depends.

The people who buy the art are entitled to deduct the fair market value of the art, but the people who create the art are only entitled to deduct the costs of the materials that went into the work.  However, artists (and writers and photographers) deduct the cost of all their supplies in the year they incur them. Thus the net effect of this is that the contribution that can be deducted by an artist for the gift of a work of art is actually zero.

Artists used to be able to deduct the value of their art that they donate, but the IRS doesn’t allow it anymore.  Around the time of Richard Nixon, Congress changed the rules so that people who created the work could only take the cost of materials (which can be fairly meaningless). There have been bills in Congress to change this rule back but as of now they have not been passed.

As an example, a person who pays $1,000 for a work of art that becomes worth $500,000 can possibly then take $500,000 worth of deductions if they give it to an art museum who will accept it. If the artist who created this work were to contribute it, she or he would get no deduction.

Posted in Deductions

Prepaid Expenses 12-Month Rule

Most individuals and many small businesses use the cash basis method of accounting. With this method you record income when money is received and you record expenses when money is paid out. Tax deductions are taken in the year they’re paid for.

The general rule is that you can’t prepay business expenses for a future year and deduct them from the current year’s taxes. This means that generally an expense you pay in advance can be deducted only in the year or years to which it applies. Such an expense must be prorated over time rather than deducted in full in the tax year in which it is paid.

However, there’s an important exception called the 12-month rule. It lets you deduct a prepaid future expense in the current year if the expense is for a right or benefit that extends no longer than the earlier of:

  • 12 months after the right or benefit begins, or
  • the end of the tax year after the tax year in which payment is made

An example the IRS provides in Publication 538 is:

“You are a calendar year taxpayer and pay $10,000 on July 1, 2016, for a business insurance policy that is effective for only one year beginning on July 1, 2016. The 12-month rule applies. Therefore, the full $10,000 is deductible in 2016.”

Therefore, you may be able to deduct those prepaid expenses sooner than later.

Posted in Deductions

Deducting Vehicle Expenses

When it comes to taking deductions for your business vehicles, you can either use the standard mileage deduction or the actual expenses, but not both methods.

Standard Mileage Rate

With the standard mileage rate, you take a mileage deduction for a specified number of cents (determined by the IRS) for every business mile you drive. To figure out the deduction, multiply your business miles by the applicable standard mileage rate.

The standard mileage rate requires you keep track of how many miles you drive for business and the total miles you drive. You also need the date of the trip, your business destination and business purpose.

If you choose the standard mileage rate, you cannot deduct actual car operating expenses. That means you can’t deduct maintenance and repairs, gasoline and its taxes, oil, insurance, vehicle registration fees nor depreciation.

Generally, you’ll be better off using the standard mileage rate if you drive a smaller, old or an inexpensive car, particularly if you drive many business miles.   This is because you get the same fixed deduction rate no matter how much the car is worth. Because the standard mileage rate factors in depreciation, an inexpensive car might benefit more from it than an expensive vehicle

Actual Expenses

Instead of using the standard mileage rate, you can deduct the actual cost of using your car for business, plus depreciation. This requires much more record keeping , but you can potentially get a larger deduction with the actual expense method.  This method requires you keep detailed records of every single expense.  You’ll want to keep careful track of all the costs you incur for your car during the year, including:

  • gas and oil
  • repairs and maintenance
  • depreciation of your original vehicle and improvements
  • car repair tools
  • license fees
  • parking fees for business trips
  • registration fees
  • tires
  • insurance
  • car washing
  • lease payments
  • towing charges
  • auto club dues.

 

The actual expense method will likely provide a larger deduction if you drive a larger, more expensive car or don’t have a lot of business miles per year.

Which Method To Choose

The only way to know for sure which method is best for you is to keep careful track of your costs the first year you use your car for business. This means tracking your mileage and your actual expenses.  If you do this, then at tax time you can compare which method gives you the higher deduction

You can only make this comparison and choose the method to use the first year you use your car for business. After that, you’re ability to choose which method is subject to restrictions.

If you use the standard mileage rate the first year, you can switch to the actual expense method in a later year.  Then, you can switch back and forth between the two methods after that, subject to certain restrictions.

Conversely, if you don’t use the standard mileage rate in the first year, you have to stay with the actual expense method in future years.

Therefore, if you’re not sure about standard mileage rate vs actual vehicle expenses, it’s a good idea to use the standard mileage rate the first year you use the car for business. This leaves all your options open for later years.

Posted in Deductions

Employee Bonuses and Gifts

You can deduct the cost of tangible gifts you give to employees as long as the value does not exceed $25 per year per employee. They qualify as business expenses, and the gifts are not taxable to the employees or subject to withholding.

Cash — or cash equivalents, such as gift certificates — are looked at differently through the tax authorities’ eyes, however. You must treat such gifts as additional compensation, no matter what the amount. These gifts are subject to withholding and need to be run through payroll.

Per the IRS, “You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year.”

Posted in Deductions

Worker Classification

While the definition of employment in Colorado law is broad and inclusive, it is not the same as the Internal Revenue Service.

According to Colorado law, the two main concepts used to determine the status of a worker and whether they are an employee (W-2) or a contractor (1099) are:

  • Whether or not the individual is free from control and direction in the performance of the service, both under the contract for the performance of service and in fact.
  • Whether or not the individual is customarily engaged in an independent trade, occupation, profession, or business related to the service performed.

The more freedom an individual has to perform the job and the more they do similar work for other businesses, the more likely they are to be considered a contractor.

Some examples of these circumstances may include any written agreements that are in existence, the day-to-day relationship between the worker and the company, the actual directions given, the use of tools, advertising, type or payments and a myriad of other everyday issues. Overall, it is the totality of circumstances that is the basis of the decision.

Posted in Colorado

Can I pay someone as both an employee and as an independent contractor?

The official IRS position is that “facts and circumstances” always dictate how a worker is “classified” for employee (W-2) or independent contractor (1099) purposes. A person can be both an employee and an independent contractor if their “sideline services” are not part of their regular job duties. We have read that issuing both a W-2 and 1099 in the same time period to the same individual can cause a “red flag” to the IRS, but it doesn’t necessarily mean that a client will be selected for an audit.

The Federal Tax court case, Ramirez V. Commissioner, stated “that the fact that a person is an employee in one capacity does not foreclose the possibility that he can be an independent contractor with the same employer in another context”.

Examples of people who correctly should be given both a W-2 and a 1099 in the same year are:

–An employed dental assistant asks if she can clean the dental office on the weekend. She is paid a fixed weekly fee, uses her own supplies, and chooses the time from Friday PM to early Monday AM to clean the office.

–An employee of a surveying firm bids to provide lawn mowing services for his employer’s office building as part of his separate side business.

–A store manager is a musician and is paid to perform at the employer’s Christmas party.

To further solidify the relationship, we suggest having individuals sign an employment agreement for employee duties and an independent contractor agreement for other duties.  This could help solidify the working arrangements if the IRS ever comes knocking.

Posted in Tips