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What Can I Write Off as Startup Expenses? And More Free Tax Q&A – Ask the Tax Pro 12/13/12

with 5 comments

On Thursdays, CPA and Vice President of Corporate Tax Network, Gary Milkwick and his team, answer tax questions for free on the LegalZoom Facebook Page. Did you miss the last Ask the Tax Pro? Don’t worry. We’ve got it all right here.

Peter: After my first year of business I want to know what I can write off? How should I do my taxes(online or through a CPA)?

Corporate Tax Network: Hi Peter, in the first year of business, your expenses would generally fall under the following 2 categories: Start-Up Expenses and Operational Expenses. Start up expenses generally include the expenses you incurred before the business became operational or active. You can deduct up to $5000 of your start up expenses in the first year, and if more expenses remain, the difference would be amortized over a 15 year period. Operational expenses are those that are incurred after the business has become active. Operational expenses include your general office expense, asset depreciation, salaries, rent, internet travel, etc. unlike most other expenses, meals and entertainment expenses are 50% deductible.
Generally, business tax returns require more advanced accounting knowledge and because of this I would recommend to have the business tax returns prepared by an EA or CPA.

Jon: You were immature in your early entrepreneurial years, but now you’re trying to wise up. What’s the best way to take care of back taxes, poor records, and make a fresh start next year?

Corporate Tax Network: Hi Jon, to start, I would recommend to file your past due tax returns (if any) as soon as possible. If you owe taxes, the IRS will also access penalties and interest for not making the payment on time. However if you are entitled to a refund, you will not be penalized for filing your taxes late.
Going forward, I would recommend that you keep track of all your personal tax documents in a safe place, and make a copy if possible. If you have a business, I would also recommend getting a bookkeeping software or hiring a bookkeeper to maintain your company’s books. This will make it a lot less burdensome on you during tax time. The individual and partnership tax return filing deadline is generally April 15th and the corporate tax filing deadline is generally March 15th (unless it falls on a weekend). If you are considered self employed, then you may also need to make quarterly estimated tax payments throughout the year to prepay your income and self employment taxes.

Cande: I have a business where I sell when I want and how often I want. I would like to know do I need to file taxes on it? And if so do I do it with my husband (he’s not a partner) or on my own? This year I have only made roughly 350.00.

Corporate Tax Network: Hi Cande, based on your description, it looks like you may have a hobby business. Hobby income, no matter how small or large, should be reported on your tax return as other income (if you are required to file a tax return based on your income). The expenses related to your hobby business, are deductible on schedule A-Itemized deductions as miscellaneous expenses. Your miscellaneous expenses exceeding 2% of your adjusted gross income would be deductible on schedule A.
If you are running a for-profit unincorporated business, then your income and expenses would be listed on a Schedule C, on your personal tax return. In either case, you can still file a joint tax return with your husband, and would not need to file separately.

Justine: I was wondering if my boyfreind could claim me on his tax even though were not married?

Corporate Tax Network: Hi Justine, your boyfriend can claim you, as long as do not qualify as a dependent on another taxpayer’s tax return, have lived with your boyfried for the entire year, he provides more than half of your support, and your income is not more than $3800

Here is the link to the IRS site where you can find more information:

Isaac: Can I claim my wife if she’s not working as a dependent? Can I also claim head of household? Is there a difference?

Corporate Tax Network: Hi Isaac, since you are married, you can file as married filing jointly, even if your wife is not working. This will give you the greatest deduction.

Jeff: Can you do a one time money gift to parents and avoid having parents pay taxes on gifted money?

Corporate Tax Network: Hi Jeff, An individual can make an annual gift of $13,000 ($14,000 beginning on 1/1/13) to another person without tax consequences or tax filings. Larger gifts can also be made, without immediate tax consequences, but a gift tax return for reporting purposes is required.

You may be thinking of the lifetime exemption for gifts, and that is set at $5,120,000 thru 12/31/12. The amount is set to revert to $1 million on 1/1/13, but may be changed by Congress as part of the current “fiscal cliff” negotiations.

Lindsay: What sort of things can an independent work from home travel agent claim on taxes? Can travel be claimed as a business/research expense?

Corporate Tax Network: Lindsy, if you are an independent contractor, your travel expenses are considered deductible. You can either claim your mileage as an expense, or actual vehicle expenses such as gas, repairs, insurance, etc. If you are traveling away from home overnight, then your meals would be 50% deductible as well ( even if you dine alone). If you are traveling out of state, then your flight/hotel/meals can be claimed as long as the trip is business related. Other expenses you can claim would include: cell phone, internet, advertising, supplies, telephone and fax, etc.

Ashley: If someone takes a job like a paper route that doesn’t take out taxes can the money be put in an ira and the person only be taxed on what they keep out for gas for work? At least in Oregon they let the employee pay the tax at the end of the yr. It’s a huge hit.

Corporate Tax Network: You can contribute to an IRA, based on your gross wages, if you are an employee and receive a W2. In 2012, the maximum IRA contribution is based on your wages and is $5,000. It will be increased to $5,500 in 2013.

If you are an independent contractor, as opposed to an employee, you can deduct your business travel expenses and other business expenses from your income to determine your taxable income. That amount would be used to calculate your self-employment tax and would be reported on your personal tax return. Your net self-employment income would be used to calculate your maximum IRA contribution.

Mogan: With an S-Corp, does it pay to leave any money in the company account (leaving it on the K1), or should I just pass the revenue through and pay it out as shareholder distribution and salary?

Corporate Tax Network: Mogan, because an S-corporation is a flow-through entity, the shareholder(s) would have to report their share of the profit and pay income tax on it. This is true, regardless of whether the funds are still sitting in the business bank account or taken as distributions. You may, however, see an increase in tax, if you take the money out in the form of wages. Wages are subject to employment tax, but the net profit from business is only subject to income tax on your personal return. Per IRS guidelines, active shareholders of an S-corporation should be receiving reasonable compensation (through wages). If there is any money left over, you can either chose to keep it in the business account- to use for business operating expenses or you can take a distribution. Either way, you will pay income tax on the net profit from business that flows through to your tax return.

Mogan: Got it, so to summarize, I pay myself, and my expenses, and that results in a surplus. The amount I pay myself, is subject to income + employment tax, the surplus amount is subject to only income tax. And as a follow up, if I leave the surplus amount in the business account, but then pay myself a wage out of that amount in the next fiscal year, then that amount is not subject to income taxation, but the amount that leaves the company as wages is subject to employment tax?

Corporate Tax Network: I will provide an example: If your company made $100,000 net profit (before your wages), assuming your reasonable compensation is $60,000, then you would pay employment taxes on 60,000 The company would withhold employee portion of social security and Medicare tax, and the company would pay its share of social security and Medicare tax. The $60,000 would also be reported as W2 wages on your personal return, and income tax would have to be paid. In addition to this, whatever net profit from business that is left over, (assuming you are the sole shareholder) would be reported through schedule K-1 on your personal tax return, and you would pay income tax on it. This is true regardless of whether the money remained in the business account or was taken as a distribution. The income tax you pay on your business income is generally not computed based on the amounts you take as distribution, it depends on your share of the net profit from business. Hope this helps!

Mogan: Also, I currently personally own a VUL. Can I have the company pay into this as a pre-tax expense, or do I have to transfer the ownership to the company in order to do that? And would I have to report the premium payments as personal income?

Corporate Tax Network: Mogan, I suspect that the VUL is a form of a personal life insurance policy. If it is not, please correct me. Life insurance benefits do not qualify as a deductible business expense, and is not considered a pre tax benefit to the employee. I would not recommend for you to transfer it to your business or pay the premiums from your business account, otherwise you would have to claim the premiums as income on your W2, and unfortunately cannot claim a deduction on either your business return or personal return for life insurance premiums.

Mitu: I was unemployed last year but spent money on job search trips. Will I get any refund?

Corporate Tax Network: Mitu, job search expenses can be claimed on your schedule A, under miscellaneous expenses. Your miscellaneous expenses have to be over 2% of your AGI, to qualify as a deduction on Schedule A-itemized deduction. In order for you to claim itemized deduction, it would have to exceed your standard deduction. In order for you to claim this as a deduction it has to meet these criteria, however it is not a refundable deduction, so it can only reduce your taxable income.

Lisa: Can my ex-husband and I file our taxes together? Can he claim me? We are legally divorced, but got back together 10 months ago and also live together.

Corporate Tax Network: Lisa, unfortunately if you are legally divorced as of 12/31/2012, you cannot file a joint tax return.

Christine: See precious question. My company won’t let me borrow from my 401k to bury my father because he is not listed as a beneficiary. That seems stupid to me as who lists their parents as they get up in age and their children are adults! Now I have had to take from my children’s college fund to bury my father! How in the heck, if there is a way, can j recoup those funds???

Corporate Tax Network: Hi CHristine, I don’t see your previous question, however here is the response for this one:If you are talking about your state 529 educational plan, when funds are taken out, they are treated either as 1) a qualified distribution or 2) non-qualified distribution. Qualified distributions are those used to pay for higher education expenses, such as tuition, fees, books, etc. That distribution is tax free. A non-qualified distribution is subject to income tax and an additional 10% early-distribution penalty on the gains portion of the distribution. Once you take money out of the 529 plan, you cannot put it back to make up for the earlier distribution. You will receive a tax statement, form 1099Q, in January showing the amount of the distribution

Michael: How much money are you allowed to generate for your business before you have to pay taxes to the IRS?

Corporate Tax Network: Hi Michael, Michael,

It all depends in the type of business structure you are operating. If you have an S corporation or an LLC, the business does not pay income taxes, instead, at the end of the year your business income flows through to your personal tax return. In your 1040, you will add all your sources of income including the business profit and your tax liability will be computed. If you are expecting a business profit, you should speak with your accountant to find out if you need to send estimated tax payments.

On the other hand, a regular corporation is taxed as a separate entity. Income earned by the corporation is taxed at the corporate level using the tax rates provided by the IRS. For example from 0$ to $27, 000 the tax rate is 15%.
I cannot give you a set amount of income which will trigger tax. It would depend on the type of business you have, whether it is reported on your personal return, and whether you have any other sources of income. You may want to discuss this in more detail with your accountant.

Mona: What is the best way to get an offer in compromise accepted? Should one start making payments towards tax debt first then file an offer in compromise?

Corporate Tax Network: Mona, When you are planning to make an offer in compromise, you will need to represent your financial condition such that it is evident that you are either unable to pay your taxes in full or doing so will place a severe burden on your financial resources. This of course, does not mean that you misrepresent the facts about your assets and liabilities but rather entails reorganizing the details of your financial condition to present them such that they corroborate and thus favor your situation.
You would want to cite real or relevant instances in your life and present details about these such that your financial difficulties come through clearly. That might involve preparing for your children’s college education or if you are paying medical expenses for yourself or a family member.
The IRS likes documentation to support an offer, meaning they will want you to provide bank statements, paystubs, verification of car and mortgage payments and proof of your living expenses, just to name a few. Sometimes, they will ask for this information more than once, depending on how long your offer takes to investigate. And things can happen in between the disclosures, like receiving a pay increase, which could negatively impact your settlement.
If you are not in a position to make payments from the very beginning, it is best to let that be known from the start. Good Luck!

Corinne: This is my first year with an LLC, I have 4 employees that are 1099. What kind of tax forms do I need to file besides my normal 1040?

Corporate Tax Network: Corinne, if your business is a single member LLC, you would need to report the business activity on the Schedule C of your individual income tax return. If you have a partner, then you would need to file a partnership tax return, form 1065. You would also need to issue 1099 Misc forms for your contractors and file form 1096. Form 1099 Misc is due to the contractor by January 31st, and forms 1099 Misc and 1096 are due to the IRS by February 28th.

Vi: What are right offs for Realtors and home office?

Corporate Tax Network: Vi, In order to claim a home office expense, the room must be used solely for this business activity, and must be the primary place where you perform all the administrative work related to your business. In this case, you would need to calculate the % of business based on the square footage of your office vs your house, and claim % of your mortgage interest, property taxes, general repairs, utilities and security expense to offset your business profit. If your business is at a loss, the deduction will carry over to the following year. Other expenses related to real estate include: license fees, internet, telephone, vehicle expenses, advertising expenses, education and training, etc.

Susan: My husband is 100% disabled veteran and I am his sole caregiver and am unable to have a job. V.A. and Social Security pay him. But is there a tax credit we can take because I take care of him and am unable to get a job? As it stands we end up paying tax because of military ret pay he gets and we have no clildren we can claim on out return. It’s hard to pay the end of the year income tax with me not working.

Corporate Tax Network: Susan, Unfortunately, there is no tax credit or deduction available for you. However, you can increase the federal withholdings from his military retirement and you will either break even or get a refund at the end of the year. On the other hand, your job search expenses are tax deductible on your Schedule A- 2% AGI. Please save all the receipts and provide them to your tax preparer.

Tammy: I have custody of my 2 yr granddaughter which we pay my daughter cash to help watch her. Can I claim that?
We also support our daughter 100% and she just started college, she is 30 has no income except what we pay her, can we claim her as well? The grandchild is not my daughters child.

Corporate Tax Network: You can claim your granddaughter as dependents on your tax return. If you are single, you can file as Head of Household.

HI Tammy, If you have earned income, the amount paid to your daughter for childcare should qualify for a credit for dependent care.

Your daughter may be claimed as a dependent also, but you will need to be careful with how much income your daughter is paid. If she earns more than $3,800. In addition, your daughter may need to file a tax return to report the self employment income on her tax return, however, if you will be claiming her as a dependent, she will not be able to claim her own exemption when filing her tax return.

Michelle: If I’m separated from my husband and have always been a stay at home mom of three, am I not entitled to any of our tax return?

Corporate Tax Network: Hi Michelle, The filing requirement depends on your gross income, filing status and age. If your filing status is married filing separately you must file if your gross income is at least $3800. If you are under this figure you don’t have a filing requirement with the IRS. However if you have the right to claim any of your children as dependents, and your income is low enough, you may qualify for the earned income credit.
If per your separation agreement, your husband is filing separately from you and claiming all of the dependents, then he would be entitled to the refund.

LegalZoom: That’s a wrap! The Tax Pros from Corporate Tax Network will be back next week to answer more of your questions. Join us then!

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December 17th, 2012 at 6:13 am