Allowable Business Deductions for Self-Employed and Home-Based Businesses

One of the major advantages of being self-employed or having your own home based business is that there are many allowable deductions that you can claim against your tax obligations to the federal government. These can all be found, itemized, on the website of the Internal Revenue Service (IRS).

What is important is to make sure you document all your business-related expenses and to have them documented properly.

Since a lot of small businesses get audited, and the rate is rising dramatically in recent years, keeping in mind the following top 10 home business tax deductions may help you avoid paying additional taxes and go through the audit process quickly and confidently.

Home Office Space

If you are devoting part of your home exclusively for the use of your business operations, you can allocate a certain percentage of the total area of your home and deduct it from your taxable income as office space. The IRS allows specific calculations for the allowable deduction. There are businesses, however, that require the actual acquisition prior to using it as a business office. Make sure to check the applicable regulations for your industry before operating the business to avoid disqualification from claiming the deduction. If audited, the examiner will want to see a diagram of your home/office space and square footage allocated.

Health Expenses

All medical-related expenditures for individuals not covered by group insurance are allowed by the IRS for deductions. If the insurance deductible exceeds $1,000, the insured may set up a heath savings account. The amount must be set aside prior to the payment of taxes to pay for the deductible, prescriptions, and other health expenses outside of the insurance coverage.

Insurance Premiums

Premiums paid to cover persons ineligible for group insurance can also be used as tax deductions if they can be supported with valid receipts. Car insurance premiums are also allowed provided you can show records that can clearly show official use of the vehicle for the business such as odometer readings for the tax period. The IRS rarely questions well-supported records. This is one of the top 10 home business tax deductions that people usually overlook.

Utilities and Services

You can claim as deductions the phone lines exclusively used by the business. This will also include installation, monthly service fees, and long distance charges. If you are using your cell phone exclusively for business purposes, you can also deduct the entire bill from your taxable income from business. Otherwise, you can only deduct the portion of the charges attributable to the business. The power and water charges can be pro-rated between home and business use, and the portion for the business can be claimed as a deduction.

Casualty Losses

According to the IRS, loss of business income arising from equipment loss, damage to the office, and cost of repairs are allowable deductions. If necessary, you may consult a tax professional to determine which taxable year the claims can be made, especially when the expense extends beyond one year. For tax purposes, actual receipts are required and mere cancelled checks will not do. Be careful in making your claims as the IRS can sometimes be strict in this area.

Car Expenses

You can deduct mileage based on the federal rate established at the start of the taxable year as a percentage of the total mileage covered within the year. Again, proper recording of actual trips made must be observed, which may later be required for presentation to the tax auditor.

Travel Expenses

The IRS understands the importance of business trips and therefore allows related expenses for deduction. However, proper recording must be maintained as the IRS will question and may disallow expenses that seem to be incurred solely for pleasure and personal benefit. Make sure to provide sufficient documentation for expenses that at first glance may seem like personal and not business-related expenses to avoid confusion about valid expenses.

Computers, Software, and Supplies

Depreciation for the office equipment can be claimed as deduction from annual taxable income. Different rules apply for claiming deductions for capital equipment, furniture, and software; and for consumables or supplies. The IRS website provides more details about this particular allowable deduction.

Moving Expenses

When your business grows or expands, the home office may be outgrown and may require moving to a bigger office space. The cost for moving in to a new rented or owned office is allowed for deduction. However, if the entire family is moving to a new home, a particular portion of the moving cost pertaining to the business may be allowed under certain IRS rules.

Research Materials

Training manuals, videos, subscriptions, and books can also be allowed as valid expenses. Keep official receipts that will prove that the materials are really essential for the business operations.

The key to hurdling tax examinations and audits is the presentation of clear and well-maintained business records, this cannot be emphasized enough and doing so allows for safely using aggressive deduction strategies. This will make the job of the tax examiner a lot easier, and it will give him the impression that you have nothing to hide especially when the basis for the deductions you are claiming can clearly be seen. He can then be more lenient and may just opt to overlook small lapses you may have committed. For further information on the top 10 home business tax deductions, refer to the IRS website or speak with your certified public accountant.

I tried to prepare my own IRS taxes this year and now have no fingernails (on either hand) and several bald spots in my normally full head of hair! While hard to admit…I need help. But how does one pick a good tax preparer? What should I be looking for?

Here are a few tips:

• Only consider either a CPA, Tax Lawyer or Enrolled Tax Agent (tax professional recognized by the United States Federal Government)
• How long has the office been in the area? (you don’t want a “fly by night operation)
  What’s their training and background?
• Check out their walls; certificates of professional associations and proof of continuing education is important
• Check with the Better Business Bureau and the State Board of Accountancy to see if any complaints have been lodged

Things to absolutely, positively avoid:

• Promises for greater refunds than anyone else is estimating
• Giving your preparer a percentage of your refund in lieu of a set fee.
• Never, ever, ever sign a blank return.

Remember you, not the preparer, are responsible for the accuracy of the return.

It’s time to get cracking on filing for income tax returns. The Internal Revenue Service (IRS) is tapping its foot and waiting patiently (till April 16) to double-check and process your returns.

Certified Public Accountants

As someone who really likes to “drive my own financial vehicle,” the question of whether or not to pay a professional tax preparer weighs very heavily on my mind this time of year. Just the thought of skidding on all of those slick patches and maneuvering the pot holes of the IRS return itself seems so overwhelming. But, is it throwing money away to pay someone for something I think I might be able to handle myself?

How do I know?

Here’s a tip…most on-line tax preparer websites don’t make you pay their fee until you actually click on “FILE.” Yep, you can go through the whole process for free to see if you can do it yourself. You can even do this on a couple of different sites to compare numbers to make sure you have done everything correctly.

If you are over-whelmed or just keep getting different numbers, Honey you better let a professional take the wheel!

A Wage Garnishment is one of the most difficult ordeals a person can live through. You cannot ignore an Internal Revenue Service (IRS) Wage Garnishment until it goes away. The most dangerous thing you can do is stick your head in the sand. A Wage Garnishment is the most effective collection method the IRS has, and they can collect from you every pay period for years. The longer it goes on, the harder it is to dig yourself out. Here are six Wage Garnishment Facts and other helpful information:

Six Wage Garnishment Facts

• Your employer is usually the first to receive the Wage Garnishment notification.
• Wage Garnishments open up your private tax debt problems to your co-workers.
• Employers often fire an employee when the Wage Garnishment notice is received.
• Most people find that a Wage Garnishment makes their bills unaffordable.
• It does not prevent any other aggressive action from the IRS.
• If you are a contractor receiving 1099s, the IRS will take your entire check.

An IRS Wage Garnishment does not take out a percentage of your income. The IRS has very rigid Wage Garnishment guidelines. As indicated previously, 1099 contractors will receive no payment at all. For W2 employees, how much you are left with is based on your filing status and how many exemptions you are allowed to claim on your W4. For example, this IRS Wage Garnishment Table shows that a single mother with one child, filing as Head of Household, would take home $376.90 a week. Clearly, this kind of IRS Aggressive Action can land you in the poor house.

Six Reasons Why You Need a Tax Attorney

• You need an Official Agreement with the IRS to end or prevent a Wage Garnishment.
• The IRS uses pressure tactics to force you into an unaffordable payment plan.
• The IRS will coerce you into disclosing information that will leave you vulnerable.
• Giving Power of Attorney to a Tax Attorney prevents further aggressive action.
• A Tax Attorney works with an IRS official with real authority on your behalf.
• A Tax Attorney can end a Wage Garnishment and put you in the best possible situation.

Hiring a Tax Attorney to end a Wage Garnishment ensures that tax debt will disrupt your life as little as possible. Not only will your Wage Garnishment worries end, but you will also be placed into an agreement that will prevent any other aggressive action as well.

An IRS tax levy is the government’s legal seizure of your property and assets as repayment for unpaid tax debt. Unlike an IRS tax lien, in which nothing is physically taken from you, an IRS tax levy grants the government a legal right to take your property and sell it in efforts to satisfy what you owe. The federal government may only issue an IRS tax levy after:

• The IRS has assessed your tax debt and sent you a Notice and Demand for Payment
• You have not fully paid your tax debt liability
• The IRS has sent you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing

If you fail to pay your tax debt completely, or to make any type of payment arrangement with the IRS, 30 days after receiving the Final Notice of Intent to Levy, and IRS tax levy may be issued. The three types of federal levies most used are bank levies, wage garnishments, and federal and state payment levies.

Penalties and Interest raise your Internal Revenue Service (IRS) tax debt higher and higher. It may seem like there is no end in sight when you are making payments but your debt seems to be growing still. This tax problem may be the one that fills you with the most hopelessness.

You had a hard enough time figuring out how to handle your tax debt when you saw your first bill. Now, you’re getting more bills and your debt seems to be growing out of control. What’s causing the rapid increase in your back taxes? The answer is the accumulation of Penalties and Interest. Here’s what you can do about it.

Breaking Down Penalties and Interest

To understand how Penalties and Interest affect your tax debt, you need to break down the two different factors influencing how high your tax debt is growing.

Penalties
There are two main types of IRS Penalties. The first is the Failure to File Penalty. It adds another 5% of what you owe to your tax debt every month you do not file past the due date. This penalty caps off at 25%. The second is the Failure to Pay Penalty. Every month that you do not pay off your tax debt in full, another 0.5% is added to your tax debt. Unlike the Failure to File Penalty, there is no maximum limit to what this penalty can add to your debt.

Interest
The IRS Interest is what can really hike your tax debt up. It fluctuates wildly per quarter; ranging anywhere from 3% to 9%. The average percentage in recent years has been around 5%. The Interest on your debt is calculated every day it goes unpaid.

What You Can Do About Penalties and Interest

If IRS Penalties and Interest are making your tax debt difficult to pay off, you may want to consider a Penalty Abatement. Is there a reason why you couldn’t file on time, or were there tragic circumstances beyond your control that caused your tax debt? A Penalty Abatement may actually work to lower your tax debt! In order to file for Penalty Abatement, you need to fill out and mail a Form 843. The review is a subjective process done by an IRS employee looking for certain things. It may be best hire a tax professional to file the Penalty Abatement for you.

The best way to diminish the damage Penalties and Interest can do to your debt is to try to pay it off. Filing for an Offer in Compromise, or applying for other tax programs, calls for a review process. Time waiting on tax debt miracles is time the Penalties and Interest are accumulating.

If you cannot pay the debt in full, get into a payment plan. You will still have to deal with Penalties and Interest. However, you can apply your payments directly toward the tax portion of your debt. This will greatly lessen the Penalties and Interest, since they are closely related to how much you owe in actual taxes. You will still need to pay the Penalties and Interest, but it will not be as steep.

If you are concerned about what Penalties and Interest are doing to your tax debt, consult a professional.

So you’ve decided to itemize rather than use the standard deduction. Here is a list of the most common tax deductions overlooked by folks who opt for the standard deduction. Considering both options is smart and worth going through the motions twice, once for standard deductions and one for itemized to see which works best for you and your personal tax situation:

1. Charitable Contributions
If you have been charitable in 2011, and have saved your receipts, you are eligible to include them. On the other hand, if you donated some items from your home to Salvation Army or a similar charity, the value of your donated items is also deductible if you have a written receipt. With non-cash charitable contributions, the rule is: no receipt equals no deduction if you get audited.

Time is crunching for you tax-time procrastinators. The fear of the IRS grim reaper is tapping at your window sill…time to get busy! Now you’re sitting there with your store-bought tax preparation software and your stack of receipts, property tax receipts, investment paperwork, W2s and 1099s and you are wondering “should I itemize or claim the standard deduction?”

According to the Internal Revenue Service, itemizing deductions is only possible if your total deductions exceed the standard deduction that non-itemizers can claim.

For the 2011 tax year, if you are either single or married but filing separately your standard deduction will be approximately $5,800. If you are married and you file your returns jointly or have a dependent then your standard deduction will increase to $11,600. If you claim head of household your standard deduction will then be $8,500. Your standard deduction may also be decreased if your annual income exceeds a certain amount.

See Top 10 Tax Deductions Often Overlooked for more information.

April 15 will be here sooner than you expect. If you are a student, you may want to find out if you have to file federal returns this year. Do part-time working college students need to file taxes?

Hmm, think that seems like a straight forward question? Well, think again.

Here’s the poop.

Many students hold part-time jobs and are not required to file income taxes because they do not make enough money. However, you could receive a refund if your employer withheld taxes from your pay. You are exempt if you do not expect to exceed the minimum filing requirement. Generally, if you are single, under age 65 and making W-2 wages, the minimum filing requirement is $9,350 (What does that mean “generally?”)

If you make $6,000 or less, you can discontinue your deductions and get a refund of the federal taxes you did pay. You may also qualify for the Earned Income Tax Credit or other tax credits, like tuition, etc.

BUT, if you end up earning over the $9,350, all bets are off and you may incur interest and penalties if you don’t file. Serves you right for expecting inaccurately!

Say What?

We’re talking students here not PhD’s in economics! When will some common sense prevail…how ‘bout simply keeping it in the forefront of your mind, especially at tax time, that if you earned more than an even $10,000, you have to file??

And don’t forget to acknowledge whether your parents or someone else is claiming you (especially if they’re the ones paying for your college or a good chunk of it).  When you fill out that 1040EZ, the form asks if someone else can/is claiming you. Be honest because they’re going to check anyway.

Students may benefit from keeping their last paycheck for the year, as it shows how much they have made and how much, if any, has been withheld.

Parents and students may be able to qualify for tax deductions, such as the Lifetime Learning Credit. This credit applies to individuals or dependents who are taking a college class that improves or teaches job skills. The American opportunity credit offers a maximum annual credit that changes each year. To receive the entire benefit, a taxpayer’s income must fall within certain parameters.

Students should take advantage of the American opportunity credit as well as many other credits the IRS provides.

Taxes can be tricky. The last thing you need is to have the IRS knocking at your door with their hand out asking for money you’ve already spent! Best advice, contact a certified tax preparer or if your parents are helping pay for college, hand over everything (W2s and 1099s) to them and let their tax preparer file for you.

O.K. so now you have e-filed your Internal Revenue Service (IRS) income tax return and are feeling pretty proud of yourself. But oh no. Oh @#$%! Where is your refund? The Fed claims to issue refunds in 10-12 days but it is now over two weeks and the dough ain’t showing up in your account.

I’m told the Fed’s are standing by to help (of course you wouldn’t need the help if they would have issued your refund check as promised!) Anyway, if there is a problem go to www.irs.gov then type in “refund status” in the search box and you can find an update on your account. For tax year 2011, visit “Where’s My Refund?” for details on the IRS refund status.

For those of you now frustrated with the whole hi-tech filing stuff there is a hot line…yes a phone number to call to get answers to your refunds questions 800-829-1954. The Income Tax Refund hot-line hours are 7am to 7pm weekdays. O.K. This is good. Now, time to start thinking of ways to spend that extra cash?!

The Internal Revenue Service has issued its annual “Dirty Dozen” ranking of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

“Taxpayers should be careful and avoid falling into a trap with the Dirty Dozen,” said IRS Commissioner Doug Shulman. “Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don’t be fooled by these scams.”

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.

The following is the Dirty Dozen tax scams for 2012:

Why is it that just when you think you can relish the prospects of a new year, a clean slate, and a fresh beginning, you are pulled up short by the realization that before you know it you will have to tackle the ever perplexing, always annoying job of preparing your taxes for the Internal Revenue Service (IRS)?

Whose idea was that and what gives our government the right to force us to pay? What exactly are the constitutional parameters allowing our government to tax us?

I found that like so much in our constitution, the guidelines are stated simply, in the vaguest of terms.

• Article 1, Section 8, Clause 1 (commonly referred to as the taxing and spending clause) states: “The Congress shall have the power to lay and collect taxes, duties, imposts and excises to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States.”

So, there you have it…the IRS can do it; but one wonders how such a simple concept has morphed into the behemoth with which we now have to contend on an annual basis.

Got a note that you’re being audited? Fear not. Take a few deep breaths and then start getting prepared. You can be sure that educating yourself and following a few simple rules can make the process less painful.

Kinds of Audits

Some audits are worse than others. You can expect either:

• A correspondence audit, by mail, asking for a straightforward answer (by mail) on less complicated issues, such as proof of deductions
• An office audit, held in the IRS office, where you’ll be asked to produce receipts and other documents related to specific issues or
• A field audit, where the IRS agent comes to your home or place of business

Producing Financial Documentation

The IRS has the right to look at your financial records to see if you’ve reported your deductions, exemptions and credits accurately. But it’s to your advantage to:

• Ask questions of the IRS agent ahead of time to make sure you understand exactly what the IRS is looking for
• Provide only the documentation that’s being asked for and nothing more
• Organize the paperwork you turn over to the IRS so that the audit agent doesn’t have to go looking through stacks of unrelated documents and find something else that needs auditing
• If you’re missing receipts or other documentation, try to reconstruct the information as best as you can, based on other documentation

Preparing for an Audit

There’s a lot you can do ahead of time to get ready for an audit:

• Consult with a tax attorney or certified public accountant to understand the issues the IRS in focusing on
• Thoroughly review IRS Publication 1, the Taxpayers’ Bill of Rights, which should have come with the notice you receiving saying you were being audited
• Research the issues on the IRS web site, www.irs.gov
• Discuss the situation with the professional tax preparer that helped you with the return(s) in question, and decide whether he or she should be present with you in the audit
• Don’t hesitate to ask for a postponement of the audit, if you need more time to round up records

During the Audit

Many lawyers advise having a lawyer or certified tax professional represent you during the audit instead of going yourself.

If you’re going to be present during the audit:

• Don’t volunteer information of any type
• Answer questions as concisely as possible
• Don’t lie
• If you sense things aren’t going well, don’t hesitate to stop the audit to consult with a tax attorney or accountant before continuing
• Ask to speak with the audit agent’s supervisor if you think the agent isn’t being fair

The IRS must complete an audit and give you an examination report within three years of the time you filed the return.

Appealing Audit Results

Most people owe something after an audit. If this happens, there are things you can do if you can’t pay the entire tax bill that you owe after the audit.

• Meet with the auditor and/or his supervisor to discuss the process and results and see if they’re willing to bend a bit to avoid an appeal
• Appeal the audit results to the IRS Appeals Office
• Take an appeal in Tax Court

Appealing your case within the IRS or to Tax Court will often net you some savings (although seldom a complete victory) and buys you time to figure out how you’ll pay the ultimate tax bill. Unfortunately, interest continues to build on the amount owed while you’re appealing. An appeal within the IRS may uncover issues not spotted by the initial auditor. Instructions for appealing an audit result should come with the examination report, but you can also find this information at your local IRS office.

Questions for Your Attorney

• I received a notice from the IRS, what should I do?
• I have lost some of my receipts for items that I claimed deductions, can I use bank statements?
• What information do I have to give to the IRS field agent?

My son turns 19 in April and my ex-husband does not pay child support anymore. My son is now a full-time college student and lives with me. Can I claim him on my tax returns for this year?

I have contributed more than 50% of my child’s support and he has always lived with me. Basically, who gets to claim him?

Answer:

If there’s a child support order, somewhere in that order should be direction as to which parent gets to claim the child and when. Once you determine that, if you claim your son as a dependent on your income tax return, he cannot claim herself on his income tax return.

• If an individual is filing his or her own tax return, and the individual can be claimed as a dependent on someone else’s return, the individual cannot claim his or her own personal exemption.

• In this case, your aon should check the box on hia return indicating that someone else can claim him as a dependent.

  Additional Information:

• • Publication 501, Exemptions, Standard Deduction, and Filing Information
  • This link offers additional information for deciding who claims the exemption. http://www.irs.gov/faqs/faq/0,,id=199709,00.html

I don’t know a single person in the USA who would hear the words “tax audit” without feeling a bit queasy. Those two words seem to strike as much fear as the dentist for most folks. And, you can best be sure that anything they find is bound to cost a pretty penny. What can you do about it?

So what’s the good news? Well, chances are the Internal Revenue Service (IRS) won’t be calling you anytime soon. During 2009, less than one percent of those who made under $200,000 were audited. Interestingly, about three percent of those who made more were audited. If you were fortunate enough to make more than $1 million, that target on your head made it easy for six percent of you to be audited.

Still, there’s no need to tempt the beast! Pay your taxes and let the IRS go after the careless and fraudulent cases.

Here are a few things to help you avoid getting audited, and what to do if the worst case scenario does indeed happen to you.

Avoid IRS Red Flags

There are certain things the IRS looks for when deciding who to audit. Do your best to avoid these categories if you can help it:

• Checkered past: If you’ve run into the IRS before, chances are they haven’t forgotten about you. Your best bet is to make sure you’re in good standing with the IRS. Pay off all your tax debt.

• High-income earners: As mentioned above, the more you make, the more you stand out, though making less money to avoid an audit is kind of like cutting off your nose to spite your face.

• Self-employed/small-business owners: The chances are if you reported a large business loss for the year, the IRS will be paying attention. That’s especially true if you claimed a lot of business expenses as well.

• Home office deduction: If you’re going to file your home as a deduction, you’ll need to prove that you actually use it as an office for work. You need to prove that your home office is clearly distinguishable from the rest of your house.

• Large charitable donations: Talk about giving until it hurts. If the IRS notices a large charitable write-off, they’re going to make sure it’s legitimate. If you’re giving cash, make sure you keep the receipt. If you’re giving items, keep detailed records like appraisals, photos and letters from the organization you made the donation to.

• Bad math: It seems self-explanatory, but you’d be surprised how common this issue can be among most people. Make sure everything adds up. If the IRS notices a sudden drop in income, or unusually high deductions, they’re going to think something fishy is going on.

Keep Impeccable Tax Records

Just because you probably won’t get audited doesn’t mean you shouldn’t keep your books organized. It’s always a good idea to have a firm grasp of where you stand financially. By keeping your books in order–as best you can, of course–you don’t have to fear if an auditor comes calling.

These days, keeping your tax records organized is easier than ever. Instead of finding storage for binders upon binders of forms, receipts and so forth, you can keep them electronically on your computer’s hard drive. If you’re prepared then there’s no need to fear for what may or may not come. That’s peace of mind no tax refund can top.

Surviving Your Tax Audit

So you did everything you could, and you still got slapped with an audit. Sometimes these things are just unavoidable. However, that doesn’t mean you’re helpless. In fact, there are a lot of things you can do to improve your prospects of coming out unscathed.

• Taxation with representation: If you didn’t prepare your own taxes, the onus might be on your preparer to defend your filed return. If you did it yourself, you could look into hiring a certified public accountant or tax attorney to help represent you.

• Snail mail: The majority of audits are conducted through the mail. This is where keeping pristine record books comes in handy. Keep a record of any forms, receipts, etc. that you send to the IRS, and do it through certified mail for proof that you sent it.

• Take your time: It isn’t a good idea to rush through your audit. If you can’t get all your records together in the allotted 30 days, you can always file for an extension. It’s more important to be accurate than early.

• Mum’s the word: If you have to schedule a sit-down meeting with an auditor, never volunteer more information than what the IRS formally requested. If the meeting is at your place of business or home office, it’s a good idea to get everybody on the same page as well.

• Access your options: If the auditor finds you owe back taxes, or worse, that you must pay penalties, have them put it in writing. You can discuss any disagreements with the auditor’s supervisor. If not, you could always file for an appeal.

• Paying the piper: When all else fails and you have to pay, try negotiating with the IRS on the amount owed. You can also set up a plan to pay off the debt in installments.

Dealing with taxes is seldom a pleasant experience, but if you keep your books organize and avoid being greedy, you can actually alleviate a lot of stress and apprehension of facing the IRS.

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