Employee Business Expense Deductions: Who Qualifies?
Posted on January 1st, 2021
Prior to tax reform, an employee was able to deduct unreimbursed job expenses, along with certain other miscellaneous expenses, that was more than two percent of adjusted gross income (AGI) as long as they itemized instead of taking the standard deduction. Starting in 2018, however, most taxpayers can no longer claim unreimbursed employee expenses as miscellaneous itemized deductions unless they are a qualified employee or an eligible educator. Read More…
10 Things About Reporting Farm Income and Expenses
Posted on July 2nd, 2020
Farms include plantations, ranches, ranges and orchards and farmers may raise livestock, poultry or fish, or grow fruits or vegetables. If you’re in the farming business or are thinking about it, here are ten things you should know about farm income and expenses. Read More…
Tips for Deducting Medical and Dental Expenses
Posted on May 5th, 2020
If you, your spouse, or dependents have significant medical or dental costs in 2019, you may be able to deduct those expenses when you file your tax return this year. Here are eight things you should know about medical and dental expenses and other benefits: Read More…
New Rules for Depreciation and Expensing of Qualified Property
Posted on March 1st, 2020
As part of final guidance issued that pertains to the Tax Cuts and Jobs Act of 2017, new rules and limitations are in effect for taxpayers who deduct depreciation for qualified property acquired and placed in service after September 27, 2017, and, as a business owner, they could affect your tax situation. Let’s take a closer look: Read More…
7 Smart Ways to Separate Business and Personal Expenses
Posted on December 20th, 2019
Do You Avoid Separating Business and Personal Expenses?
You’re in good – or should we say, bad – company. Over half of American business owners use either their personal checking account or credit card for business purposes according to a TD Bank Survey.
Why is that such a bad thing? For starters, if you’re ever audited by the IRS, you’ll need to prove that every expense you deducted for business purposes was legitimate. Separating business and personal expenses becomes even more important in the case of a lawsuit (we’ll dive deeper into the #1 “golden rule”).
Here at Robert P Russo CPA, we ensure our clients understand the importance of separating business and personal expenses – and exactly how to do just that.
1) The Golden Rule of Separating Business and Personal Expenses: Create the Right Business Entity!
This may seem obvious, but the sooner you form an official structure for your business, the better. The reasons for officially forming a business entity transcend accounting and taxes, and move into life-altering situations.
For example, let’s say you have been operating a side business as a sole proprietor, making porch swings. One swing out of hundreds breaks, injures a person, and you’re being personally sued for $1 million. If you had set up any of these other business entities, such as an LLC, you’d have a better chance for making a case that your personal assets are off limits. After all, LLC stands for “limited liability company.”
However, simply having an LLC isn’t enough…if you’ve never bothered separating business and personal expenses! The judge might allow the injured person to go after your personal assets – from your home to your savings accounts – instead of the $1,500 in your business account.
Now that we have your attention about the importance of selecting the right entity – and separating business and personal expenses – take action. Contact a qualified CPA, like members of our team at Robert P Russo CPA, to analyze which business structure is best for you.
2) Open a Credit Card and Checking Account, Use it ONLY for Business Purposes
Next up on our list of tips for separating business and personal expenses is to immediately set up a business checking account and credit card after creating your entity. Depending on the entity you chose, you may have a separate Tax ID number – known as an EIN. This will be associated with your accounts going forward, and will help you build credit for your business.
You may face temptation when separating business and personal expenses thanks to alluring offers from credit card companies. They may promise $250-$500 cash back if you spend a certain amount on your business credit card within a few months. Don’t fall into the trap of using that business card for personal expenses! Think of that potential audit or lawsuit – it’s just NOT worth it.
3) Track What You’ve Invested Into Your Business
In most cases, business owners start up operations using some of their personal savings. That’s fine from a tax and accounting perspective. But be sure you record this in your business ledger because this amount is typically considered “owner equity” and is not taxable (there are exceptions, talk with a CPA to review your situation).
4) Splitting and Separating Business and Personal Expenses Related to a Single Item
Not everyone likes to have two smartphones: one for business, one for personal. So how can you go about separating business and personal expenses you incur for a single smartphone or laptop? What about Internet fees? You’ve got two options. You can deduct the actual amount used for business purposes from your bill each month. Or, if you have a home office, you can deduct all utilities – such as Internet fees – at a percentage that relates to how much square footage your office takes up compared to your home’s total square footage. A qualified CPA can help you sort out which is more beneficial for you. See, you’ve got options for separating business and personal expenses!
5) If You DO Use a Personal Account for a Business Purchase? Track It!
It happens. You’re purchasing office supplies, and you left your business credit card at home. You have no choice but to whip out your personal card and pay. Good news, you won’t miss out on that deduction, as long as you pay yourself for the supplies via your business account AND you’ve saved your receipt. Proof is essential when separating business and personal expenses.
6) Convenience at a Cost: You Need to Separate Business and Personal Expenses Online
Temptation arises again. You need to buy business equipment online right away and the supplier only accepts PayPal. The only PayPal account you have is tied to your personal social security number, not your EIN. PayPal requires a few documents before they’ll set up your business account, so what do you do if you’re getting serious about separating business and personal expense? If it’s a one-time occurrence, go ahead and use your personal PayPal account and reimburse yourself – just like we mentioned in tip #5. But don’t make this a habit! Set up business accounts for Amazon, PayPal, etc.
7) Get Smart About Separating Business and Personal Expenses While Traveling
Now here’s where things get a little more complicated in regards to separating business and personal expenses. What happens if you live in the Northeast but have business in Florida in the dead of winter? You want to bring your family along, but you’re unsure how to go about separating business and personal expenses. First, you know what to do: talk to a qualified CPA before you start trip planning. And of course, review these general rules about deducting travel expenses. You’ll learn things like the fact that you can deduct lodging for you only, not your family – and only on the days that you spend primarily engaged in business work (not on the days you went to Disney World).
Now that you’re informed about the basics of separating business and personal expenses, the next step is to put what you’ve learned into practice. Save all receipts, track every expenditure in QuickBooks or whichever accounting software you use, and by all means, speak with a CPA so that your business is set up for success!
New Depreciation Deduction Benefits Business
Posted on December 4th, 2018
Tax reform legislation passed in December 2017 included numerous changes that affect businesses this year. One of them allows businesses to write off most depreciable business assets in the year they place them in service. Here are five facts to help businesses better understand this deduction:
1. The 100-percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property.
2. Machinery, equipment, computers, appliances, and furniture generally qualify.
3. The 100-percent depreciation deduction applies to qualifying property acquired and placed in service after September 27, 2017.
4. Taxpayers who elect out of the 100-percent depreciation deduction for a class of property must do so on a timely filed return.
5. The IRS has issued proposed regulations with guidance on what property qualifies and rules for qualified film, television and live theatrical productions, and certain plants.
For more details about the 100-percent depreciation deduction or electing out of claiming it, please call.
Business Expense Deductions for Meals, Entertainment
Posted on November 5th, 2018
As the end of year approaches, taxpayers should be reminded that business expense deduction for meals and entertainment have changed due to tax law changes in the Tax Cuts and Jobs Act (TCJA). Until proposed regulations clarifying when business meal expenses are deductible and what constitutes entertainment are in effect, taxpayers should rely on transitional guidance that was recently issued by the IRS. Read More…
2018 Year-End Tax Planning for Businesses
Posted on November 1st, 2018
There are a number of end of year tax planning strategies that businesses can use to reduce their tax burden for 2018. Here are a few of them: Read More…
Employer Reimbursements for Moving Expenses
Posted on October 4th, 2018
For tax years prior to 2018, employees could exclude from income moving expenses reimbursed or paid by an employer. However, due to the passage of the Tax Cuts and Jobs Act (TCJA) last year, this tax provision has been suspended starting this year. This means, that going forward, these amounts are considered taxable income with one exception: amounts reimbursed to active-duty members of the U.S. Armed Forces whose moves relate to a military-ordered permanent change of station. Read More…
Five Ways to Minimize your Tax Liability
Posted on September 5th, 2018
If you want to save money on your tax bill next year, consider using one or more of these tax-saving strategies that reduce your income, lower your tax bracket, and minimize your tax bill. Read More…
Small Business Payroll Expenses
Posted on July 5th, 2018
Federal law requires most employers to withhold federal taxes from their employees’ wages. Whether you’re a small business owner who’s just starting out or one who has been in business a while and is ready to hire an employee or two, here are five things you should know about withholding, reporting, and paying employment taxes. Read More…
Saving for Education: 529 College Savings Plans
Posted on June 1st, 2018
Many parents are looking for ways to save for their child’s education and a 529 Plan is an excellent way to do so. Even better, is that they are now available to parents wishing to save for their child’s K-12 education as well as college.
Every state has a program allowing persons to prepay for future higher education, tax-free, and you may open a Section 529 plan in any state. Contributions must be in cash, and they must not total more than reasonably needed for higher education (as determined initially by the state). Neither account owner or beneficiary may direct investments, but the state may allow the owner to select a type of investment fund (e.g., fixed income securities), and to change the investment annually, and when the beneficiary is changed. The account owner decides who gets the funds (can pick and change the beneficiary) and is legally allowed to withdraw funds at any time, subject to tax and penalties (discussed later). Read More…
Self-Employed? Five Easy Ways to Lower your Tax Bill
Posted on April 30th, 2018
If you’re like most small business owners, you’re always looking for ways to lower your taxable income. Here are five ways to do just that.
1. Deducting the Cost of a Home Computer
If you purchased a computer and use it for work-related purposes, you can take advantage of the Section 179 expense election, which allows you to write off new equipment in the year it was purchased if it is used for business more than 50 percent of the time (subject to certain rules). Read More…
Donating a Car to Charity
Posted on February 1st, 2018
If you donated a car to a qualified charitable organization in 2017 and intend to claim a deduction, you should be aware of the special rules that apply to vehicle donations.
Note: Deduct contributions to a charity only if you itemize deductions using Schedule A of Form 1040.
Charities typically sell donated vehicles. If the vehicle is sold by the charitable organization you donated it to, the deduction claimed by the donor (you) and usually may not exceed the gross proceeds from the sale.