Another chapter in our Self-Employed Tax Guide.

As a Self-Employed Small Business owner, this is one of the best marketing tools out there as well as a great tax deduction if prepared and carried out correctly. What better way to get your small business’s services and products in the front of the mind of a large audience and gain the tax rewards as well. It could sound too easy to be real! Let’s look properly at the various ways these contributions can reward your business.

Goods and servicesThe value of your contributions is as a general rule at FMV, or Fair Market Value, and ought to be significant in such. One such illustration of this would be a donation of product to a Good Will Store with a value of above $250. Your organization possesses some un-sellable shirts in storage that you might have purchased in bulk, but which can’t be gotten rid of via sales and time has passed where the articles may no longer have a market value as regards fashion trends. These products can be offered up as a charitable donation to a Good Will Store, or other such store or used by an Outreach service for people who are in need of articles of clothing in order to progress in their lives. Upon transfer of this charitable contribution the outreach service is going to give a donation receipt to validate the acceptance of the merchandise. This receipt would be fixed to the bill of goods to validate the purchase, and also the accounting transaction which reduces your inventory and records the charitable donation.

Another example would be for services that you provide to the public. This approach is an excellent way to perform community service plus receive a tax deduction as well. The United Way and organization like this often have events where needy and indigent people gather to receive, en masse, services which they can’t afford or for which they don’t access to. Your service would be counted as a charitable contribution at fair market value and the organization would give you a receipt declaring the value associated with these services for taxation purposes. For your purposes, this receipt as well as any of the supplies used can be considered deductions. Please make note these events pull such a big gathering of individuals that via word-of-mouth and direct-exposure marketing your business might be seen by quite a few persons. Donating scrap materials from finished goods product is another such example. This could be unused food items. The fair market value rules again apply. To assess the FMV, consider at what price an item may fetch in a yard sale.

Cash Contributions

In compliance with Irs regs, a receipt is required for any single donation exceeding $250 so as to claim the deduction. This variety of contribution is the most common and is easy to maintain. One employed method is planned giving. This can be established monthly, quarterly, or annually depending upon your preference. As a small business owner, this is a ideal way to plan your annual charitable deduction and maintain your cash reserves, arriving a expected results. Remember to confer your accountant for rules on the Schedule C form. Your business can extend its marketing reach, benefit the community, and obtain a tax break in one single move. Additional information can be located in Publication 526 and guidelines for disclosure in Publication 1771. Or just go see your certified public accountant.

getting a rejection from the Internal Revenue Service on an Offer in compromise application you’ve submitted might posture you with a little uneasiness, but don’t agonize — you’ve still got the option of sending payments toward the amount owed in installments.

The Internal Revenue Service allows for a couple of installment agreement options such as full-payment installment plans or partial-payment installment plans . Full-payment plans might be the streamlined installment agreement, the promised installment agreement, and the financially verified installment agreement. The payment plan you qualify for is dependent upon financial info you offer to the Irs, but monthly repayments for these types programs are established differently than OIC settlement amounts.

In this conversation we will talk about the payment plan options and guide you define which option of settlement is best suited for you.

The Guaranteed Installment Agreeement Option

The guaranteed installment agreement is available only if your owed balance is under $10,000 and your payments will full-pay your total Internal Revenue Service owed balance within 3 years. The Irs must consent to this type of plan if you conform with the requirements.

The Streamlined Installment Agreement

A streamlined installment agreement is an option if your due balance is not in excess of $25,000 and you promise to full-pay your full IRS balance within the period of 60 months. Your full balance is comprised of your principal tax liability, plus penalty accruals and interest for each tax year you have a balance on.

Calculating Your Monthly Payment

To determine the bottom amount the Internal Revenue Service will agree to each month, divide the total amount owed, including the interests and penalities, by fifty. The end result will show the base amount that will have to be paid. The last 10 months of the 60-month payment plan is set aside for interest. If you have insufficient disposable monthly income to allow for a 5-year payment plan, you just might meet the criteria for a partial pay plan in lieu.

The Partial Payment Installment Agreement

A partial payment installment agreement plan is an option that will permit you to pay only what you can afford to pay on a per month basis, even if the amount is under what the Irs typically accepts in an installment agreement plan. You must make payments for the remainder of the period the Internal Revenue Service can by law collect your debt, this could be for a period longer than five years. When the collection statute of limitations comes to its expiration date, any balance remaining is then written off by the Irs. The payment option is called a partial payment installment agreement plan as you never will pay the full debt balance that you owe.

Statute of Limitations on Collection

A statute for collection exists in each tax year you have a tax debt balance. The statute begins when you file your tax return, or the date in which a principal tax balance is assessed, whatever is more recent. The statue will usually end within 10 years, though there are certain instances when a collection statute can extend passed 10 years. You or your power of Attorney may contact the IRS and request the Collection Statue Expiration Date (CSED) for each balance-due period.

Calculating Payments

The partial payment installment agreement is assessed in terms of your disposable income on a monthly basis, or the amount of money you have left each month after your expenses are paid. Calculate your disposable monthly income by the number of months that remain on your collection statute to figure the total amount you will need to pay the Internal Revenue Service over time. For example, if your disposable income is one hundred dollars and the amount of time left on the collection statute is two years, you will pay $2,400 towards your tax liability. The rest is not collectable by the Internal Revenue Service. However, you must make the payments in set installments and you can’t offer the total amount in a single lump sum payment.

Financially Verified Installment Agreement

The financially verified or “Non-Streamlined” installment agreement is attainable if your balance owed is over $25,000 or where the repayment period exceeds 5 years. This agreement needs to be negotiated with the Internal Revenue Service. Full financial disclosures must be imparted to the Internal Revenue Service. Your monthly payment amount is based on your full-picture financial situation, and the Internal Revenue Service may require you liquidate assets so as to reduce the balance due.

Applicable Rules to all Installment Agreement Plan Options

No matter the type of payment plan you request, a few basic rules apply for retaining and obtaining an installment agreement contract.

Offer In Compromise Rejection Period

Most of the time, you will have to wait at the least a period of sixty days post the date marked on your OIC rejection letter for you to request an installment agreement option. During this 60 day period, your file is marked as an Offer case in the Irs system to allow for your right to appeal the rejected OIC. Internal Revenue Service officers are unable to change the status of your case to mark it as an installment agreement.

Staying Current and Compliant

If you are in an installment agreement, then you must stay compliant and up to date with the payment arrangements and new tax obligations. This means that while you’re in this contract, then you have to make all installment payments in full and on time, file all future tax returns on time, and pay any new balances in full and on time.

If you do not comply with the stipulations, you will default on your payment plan, and therefore be opened up to various IRS Collection Measures

When Financial Circumstances Change

A change in your financial situation that will interrupt your ability to meet scheduled payments, may warrent that you make a modification to your monthly installment payments.

If this change to your finances is anticipated to endure over a months time, you can proceed. Examples of qualifying financial changes are: divorce, a reduction in income, loss of income, the new addition of a dependent, or an increase in your regular living expenses. The Irs requires documentation of this change in your financial statements.

A full-pay installment agreement could convert to a a partial pay plan if changes to your finances warrant such a change. Installment agreements are in most cases easier to set up with the Irs and require less paperwork than an OIC application. This installment agreement option is a solution to your OIC rejection.

Explore the Guide to OIC at Seattle Offer in Compromise

Form 433-A is a financial statement that must be prepared and submitted with your initiial OIC application. This is the form the Irs makes use of so that they can scrutinize your current earnings, expenses and additionally assets. Also, the Irs uses the presented details to be able to establish whether or not you have the capacity to full pay your personal balance by way of a measured combination of disposable monthly income and equity in assets. If your Form 433-A suggests that full payment is not really an option, you may qualify for settlement by way of the Offer in Compromise program.

Sections 1 and 2: Personal Information and Employment Information

In Section 1, you need to provide personal details about your family and yourself. If you are married, details about your partener will additionally need to be added.

In the second section, or Section: 2, provide employer information for yourself and your spouse, if applicable. You will have to write “self” in the line 4a, if you’re the company owner. Your self-employment history is going to be addressed in a different section.

Other Financial Information: Section 3

Here you divulge specifics regarding any sort of lawsuit or impending increases-decreases in income.

In line 6, divulge legal information surrounding any lawsuit, whether or not you are defendant or plaintiff, list the docket info on this line. Offer information limited to proceedings which have been legally filed to the courts.

Line 8: Line 8 inquires whether you anticipate any increase or fall in income. In general, it is best not to share any anticipated increases that is unless you are assured of the increase in earning. Examples of applicable increases to include may be the end result of new contracts, notice of courtroom awards or written notice of a pay increase. The Irs might understandably consider your expected earnings increase when determining your OIC amount, so do not include any factors that are speculation.

Personal Asset Information: Section 4

Section 4: gathers details of all personal cash and equity property that you claim ownership of, including: bank account and information about credit cards, real estate information, and life insurance policy information.

Line 11 requests that you disclose the cash you presently have on-hand. As this amount of money can certainly fluctuate everyday, mark the average amount of money you usually have.

Lines 12a and 12b: Use these blanks to list any savings or checking account for which you are the owner. Now if you need more space than is provided, provide all additional accounts on an attached piece of paper and fix it to your Form 433-A. You need to provide bank statements to the Internal Revenue Service for each accounts youin your name. In general, it’s advantageous to use the end balance shown in the most recent bank statement you provide with Form 433-A.The Internal Revenue Service can then substantiate your provided numbers correspond with your supporting documents and statements.

Then in 13a through 13d, you are going to provide information regarding investments such as stocks, bonds, and retirement accounts. Also provide information about 401ks.

Lines 14a and 14b: List any credit cards you have with existant credit balance on these lines.

Lines 15a through 15g: Life insurance policies with cash value are reported on Line 15. However, you should not record any term life policy details. The IRS is just curious about whole life insurance plans you have got. Whole life insurance policies have cash dollar value and you could be able to borrow against the value, whereas term life coverage policies have no cash value or borrowing options.

In line number 16 you are to report every and any assets that you have transferred, given or sold to a person or perhaps business for under the full value within the past 10 years. The IRS uses this information in order to establish whether you could have dumped assets in the recent past to protect against having liquid equity available, that you could’ve had to pay debt. The Internal Revenue Service asks for this data to determine if you have got rid of assets lately to steer clear of having liquid equity accessible to pay your debts.

In line 17 to 17c: make known real estate which you own. In cases where you do not own real estate, offer your street address along with your landlord’s name and location. In lines number 18a through 18c: provide any transportation assets you own. This will need to include, vehicles such as watercrafts and motorcycles and trailers and campers. If any are secured by a loan, you’ll need to make known those notes in the blank. Look online for a aid to provide fair market values.

Line 19a and 19b: List the type and worth of your personal assets you possess. Personal assets or effects comprises your furniture, residence goods, memorabilia and precious jewelry. When you write down the price of the effects, specify the estimated liquidation worth. A simple strategy to think of the liquidation value of these effects can be to approximate just what the items might move for in a quick-sell venue, just like a yard sale or public sale. Don’t mark the original purchase expense as the value. The IRS does not usually petition that you sell your personal objects that is unless you currently have a lot of luxury effects. The Internal Revenue Service additionally allows a individual exemption amount of $7,900 for the value of items in this specific grouping.

Monthly Income and Expense Statement

This statement is found on page 4 of Form 433-A. Inside this section, you have to list your month-to-month revenue and expenses from all sources. If you’re a sole proprietor, you will have to finish pages 5 and 6 of the 433-A prior to concluding the income statement found on page 4.

Income: In the section for income, tell of gross wages – the amount you get paid in advance of when taxes and other deductions are deducted from your paychecks. Use the guide in the bottom margin beneath the statement form to help assess your monthly gross income based on your pay period. If you do collect rental income or are self-employed, report your net income. Your net income is equal to revenue gained minus functioning expenditures.

Expenses: In the expense portion, report your typical monthly expenditures. Include taxes and other deductions withheld of your earnings in the expense portion. For various categories, the IRS has collection standards, which means these are standard figures the IRS will allow for expenses for example food, housing, transportation and out-of-pocket health care costs. For an Offer in Compromise, the IRS most often only permits the standard amounts for these categories. Collection standards can be identified within the irs.gov online site.

Self-Employed Section: Pages 5 and 6

The self-employed are to provide business asset information, including: equiptment, accounts receivable information, and revenue streams. You’ll also report the number of employees you have on your payroll. Submitting Form 433-A

Remember to add corroborating records to your form 433-A. Typical docs consist of recent bank statements and paystubs, recent invoicing statements, and monthly statements and payoff information on any loan accounts.

In case you’d like to see more visit our Offer in Compromise Guide at: Seattle Tax Debt Relief

So what kind of pet- and animal-related expenses are tax deductable?

Our pets are near and dear to us. Some may consider our cat or dog worth its weight in gold (this is a figure of speech). But, did you know that pet-related expenses are, in certain circumstances, eligible for tax deductions. For instance, when relocating, a pet owner can file for a tax deduction specifically for the expenses incurred in relocating a family pet, in tax law in this circumstance, a pet can be considered a personal effect, and therein Mittens or Spot is treated as such.

A business might be able to deduct for the expenses of keeping a guard dog. Or a volunteer host of a therapy animal, such as a guide dog, might be able to deduct the veterinarian bills, and other such unreimbursed expenses (considered charitable donations). There have also been court rulings that have favored tax deductions for expenses related to caring for animals that serve visually-impaired, hearing-impaired, and physically-impaired individuals. There are also tax deductions in expenses related to the care of animals in an animal-breeding business.

The Cat Lady Case—Van Dunsen vs Commissioner

In 2004, Ms. Van Dusen shared her living space with 70 – 80 cats (7 of which she considered personal pets). She was a volunteer for a charitable organization (named “Fix our Ferals”) with the primary aim of neutering feral cats. The volunteer deducted $12,068 on her tax return. The IRS argued that the woman was rescuing cats on her own rather than incurring expenses as a volunteer for a charity. The tax court rejected this argument. The tax court did agree with the IRS, however, that many of the expenses (State Bar dues, DMV fees, Costco membership dues, and wet/dry vacuum repair cost) did not constitute an exclusively charitable expense.

Finally, all individual expenses that exceeded $250 were disallowed because Ms. Van Dusen did not have the required documentation for such charitable donations (i.e. a contemporaneous written acknowledgment from the donee organization.) For the deduction to be allowable, the donee must file a return with the IRS reporting the information that would be included in the written acknowledgment, such as:  1) the amount of cash contributed; 2) a description and good-faith estimate of any goods or services received in exchange; and 3) if the donee provides any intangible religious benefits, a statement to that effect).  If you want to deduct the expenses for your 70 cats, make sure you are acting on behalf of an appropriate charitable organization and make sure you get the required documentation.

How do I differentiate between tax deductable and non-tax deductable animal care-related expenses?

So you see there are possibilities for tax deductions related to the expenses incurred by care of pets and animals. And there are instances where these expenses are non-tax deductable. If you are considering a tax deduction related to the expenses of caring for pets or animals, seek the counsel of a CPA (certified public accountant). Don’t assume that just because your neighbor owns twenty cats, she can provide you informed pet-related tax deduction information and counsel.

In one bizarre instance, a landscaper attempted to deduct for the expenses of caring for a dog that helped him pull a wagon at work—presumably without the counsel of his tax accountant. This awarded the landscaper an audit. We can assume that this caused some working-relations strain, but we cannot verify this. Nor is it likely that either dog or boss will go on the record anytime soon.

Joe goes to the local office supply store occasionally to stock up on supplies. He stops for lunch now and then on the way back to the store, but he knows he can’t claim the lunch as an expense. He is eating by himself, and has no business-related purpose.

Joe picks up the tab when he meets with his banker for lunch, and puts the receipt in a special file when he returns to the store. Meals are only 50% deductible on his taxes, even an “entertainment” business lunch with a customer or business partner like the banker, so to keep his records straight, he has a separate file.

Joe wants to travel 1,200 miles to attend a conference in Las Vegas. The four day conference is in mid-November, and is sponsored by the Diving Equipment and Marketing Association. Joe is going to fly to save the two day drive each way. He expects he will make new contacts, and will learn about the latest trends in marketing for his business. The conference doesn’t include meals in the registration prices. Joe would like his wife to go also, and they want to see a show, maybe the Tournament of Kings. They are also considering renting a car to visit the new bridge over the Hoover Dam.

Because Joe is in the business of selling SCUBA equipment and he is going to a conference that is “ordinary and necessary” for his line of work, he can deduct the costs of the conference. His travel by air, the cost of the hotel, and the mileage on the rented vehicle going from the hotel to the conference are all deductible. He can still only deduct 50% of the cost of his meals even though he is away overnight. None of the costs related to his wife’s travel or meals can be deducted because she isn’t Joe’s employee. The visit to Hoover Dam can’t be deducted, nor the Tournament of Kings show. Joe needs to keep receipts for all of his expenses, and he should note on the receipt when and why the costs were incurred.

It turns out Joe’s wife can’t go after all, but he meets a potential supplier at the conference, and they decide to see the Tournament of Kings show after the seminars end for the day. The entertainment takes place immediately following a substantial business discussion, so Joe generously offers to pay for the outing, and he is able to deduct 50% of the cost of the tickets.

After he returns from the conference, Joe decides to put into practice some of the marketing information he learned at the conference. He takes a trip to Portland to promote his business to the 7:00 PM Oregon SCUBA Club meeting. This is about 200 miles from his home and store, so he drives his car. After the meeting he stays in a hotel overnight. The cost of the hotel is fully deductible, and his meals are deductible at 50%. He uses the standard mileage rate for travel, so once again he tracks his odometer reading. He also saves his receipts for parking and tolls, and deducts those as well.

Joe Taxpayer keeps his travel records orderly and documented because he has learned a little bit of effort now will mean tax savings when his tax return is filed.

Related Articles:

http://www.huddlestontaxcpas.com/travel-deductions-for-the-self-employed/

For a charitable contribution to be deductable on your tax return it must be a contribution of money or goods to a qualified charitable organization.  If you donate goods to a qualified organization then you can generally deduct the fair market value of those goods at the time of donation.  Charitable donations are usually limited to 50% of your adjusted gross income and are reported on Schedule A of your personal tax return.

Contributions that do not qualify for tax purposes are contributions from which you benefit, contributions to specific individuals, contributions to non-qualified organizations, the value of your time or services, your personal expenses, appraisal fees, certain contributions to donor advised funds, and certain contributions of partial interests in property.

If you have questions on whether or not a specific contribution you have made or are thinking of making qualifies for tax purposes it is always a good idea to consult your tax advisor.

How comfortable would you feel about your records if your were audited?

If the thought of the IRS paying you a visit gives you a miniature heart attack, you may be able to find some comfort in hiring a CPA. First of all, compliant bookkeeping will reduce your chances of being audited and having an accountable professional will help you retrace your footsteps in a worst case scenario.

Are you spending too much time with bookkeeping?

Businesses grow when the principles are out there interfacing with customers, developing products and improving the core competencies. If all of your time is consumed with paperwork, payroll and bookkeeping, then it might be a good idea to hire someone else to handle this relatively mundane aspect of the business.

Are you losing money and you don’t know why?

Having a clear financial picture of your company is key to improving your business. An accountant can give you an accurate snapshot of your cashflow and areas that need attention so you know where to focus your energies.

Are you thinking of restructuring?

Being a sole proprietor works for some businesses, but as you grow, you might want to think about incorporating. Choosing the right structure for your business can save you lots of time and money. A CPA can advise you on what’s best for you.

The bottom-line is that you should hire a CPA if you aren’t completely confident and comfortable with the numbers side of your business. This is a reality for many small business owners, since most entrepreneurs get into the business by following their innovation or passion and give little thought to bookkeeping. But accounting practices can make or break a business, no matter how ingenious your product is.

John Huddleston
Seattle CPA  

Most small business owners are able to choose which method they want to use for their business for tax purposes.  In some cases though, you have no choice but to you the accrual method.  This is when:

1.  Your sales are more than $5 million per year or

2.  Your business stocks an inventory of items that you will sell to the public and your gross receipts are over $1 million per year

The cash method of accounting is the most commonly used method for small businesses.  When using the cash method you do not recognize income until the cash is actually received.  You also do not recognize expenes until the cash is actually paid out. 

The accrual method of accounting is different from the cash method in that you recognize income when a sale occurs, even if you have not yet received the cash from it.  You also count expenses when you receive the goods or services, even if you have not paid for them yet.  With the accrual method you do not have to wait until you receive or pay money to show the income and expenses

The advantage of the accrual method is that it more accurately shows you a picture of how your business is doing because it shows the ebb and flow of income and debts.  The disadvantage of the accrual method is that it can lead to cash flow problems because it does not always show you an accurate picture of cash on hand.  You also have to keep accounts payable and accounts receivable records which leads to recording more transcations.

The advatages of the cash method are that it gives you a better picture of your current cash on hand and it is also easier to maintain when it comes to bookkeeping.  The disadvantage is that it can give you a misleading picture of longer-term profitablity.

When you are a new business owner it is important to discuss with your tax preparer which method of account is best for you and your business.  Accural vs. cash method of account can be an important decision that you must make when first starting your business.

1. Have you met all the requirements to be considered a Certified Public Accountant in my state?

The first step when vetting a CPA is to determine whether or not they are a genuine CPA in your state. You can actually answer this question on your own via your state’s professional licenses website. You can find a list of CPA institutions by state at aicpa.org. Make sure your CPA is up to date with their requirements and are not suspended or inactive.

2. How many years experience have you had as a CPA?

The road to becoming a CPA is marked by years of education and training, so even a freshly minted CPA won’t be completely inexperienced. But it’s still best to choose a CPA who has considerable hands-on experience as a practicing CPA.

3. What is your financial expertise in?

There are a number of CPA specializations, including Assurance and Attestation, Corporate Financing, Corporate Governance, Estate Planning, Financial Accounting, Financial Analysis, Financial Planning, Forensic Accounting, Income Tax, Information Technology in accounting and auditing, Management Consulting, Performance Consulting, Tax Preparation and Planning, or Venture Capitalism. Make sure your CPA is well-versed in the area where you need the most help.

4. I need (state the requirements of your business) and I’m wondering if you have the necessary knowledge and experience to help me with this type of accounting?

Chances are, you know what part of your tax return is the most complicated and potentially problematic. Be up front about this issue and make sure they can address it with confidence.

5. What are your hours and availability? What kind of contingency is there if I am audited?

Lastly, you’ll want to make sure that your CPA firm will be there for you when you need them. Make sure they can meet with you when you are available (i.e. do they only operate during business hours when you are also at work? Are lunch meeting feasible?). You’ll also want to be sure that they’ll be accountable (no pun intended) in the case that you are audited. Otherwise, you’ll have to reverse engineer their work in order to answer all of the IRS’ questions.

These five questions should just get you started. Choose your CPA carefully and ensure that you feel comfortable and confident in their experience and expertise.

John Huddleston
Seattle CPA