Accounting & Payroll Blog

Thanks to aipb.org here is useful information about company car writeoffs.

A sole proprietorship–an unincorporated company with one owner–can depreciate a vehicle as though it were used 100% for business even when employees drive company vehicles for personal use under the same conditions, provided that:

1.      the employer has a business reason for providing the vehicle, such as for business travel or as part of the employee’s compensation as a perk for the job; and

2.      the employer reports the value of the employee’s personal use as taxable income on the employee’s W-2.

    But when the sole proprietor drives the car for personal use, there are different rules.

    Sole proprietors do not file a W-2 for themselves, so their personal use of their own car is not taxable income. However, they are allowed to depreciate the vehicle only in proportion to their business usage. For example, a sole proprietor who drives his or her own vehicle 68% for business can depreciate only 68% of the vehicle’s cost basis for tax purposes.

Example 1: Sole proprietor Rosa has a pickup and a car. She lets employee Jane use the pickup for business, and Rosa uses the car. Mileage records show that Rosa and Jane both drove the vehicles 80% for business and 20% for personal use.

·          If Rosa’s company reports the value of Jane’s 20% personal use of the pickup as taxable income on Jane’s W-2, 100% of the pickup’s cost basis can be depreciated.

·          Rosa does not report her 20% personal use of her own car as taxable income. Instead, she must limit her depreciation of the vehicle to 80% of the cost basis (because she used the car 80% for business). Example: If Rosa’s car has a cost basis of $20,000, she can depreciate only $16,000 ($20,000 cost basis x 80% business use). Her deduction of other vehicle costs (gas, repairs, oil, etc.) is also limited to 80%–the business use portion.

    When a sole proprietor drives the car for both personal and business use, the IRS auto limit is also reduced by the personal use.

Example 2: In 2006, sole proprietor Rosa purchases a car for $24,000. Mileage records indicate that Rosa drives her car 75% for business use and 25% for personal use. Rosa’s cost basis is $18,000 ($24,000 original cost basis x 75% business use). What is Rosa’s maximum depreciation deduction for the auto on her 2006 tax return?

To compute: $18,000 cost basis x 20% Table 1 rate for Year 1 = $3,600 Year 1 depreciation. However, Rosa’s maximum deduction, based on the IRS limit for a car purchased in 2006, is $2,220 ($2,960 x 75% business use). Rosa’s maximum depreciation deduction for the auto on her 2006 tax return is $2,220.

    The depreciation schedule for a sole proprietor passenger auto driven partly for personal use is complicated; a CPA should be consulted.

    Sole proprietors who use the company car do not have to include the value of their own personal use in their taxable income, but they must limit depreciation to the portion of the cost basis proportional to the business use of the vehicle. However, if a sole proprietor’s employees drive the company car, their personal use is reported as personal income on their W-2, and the sole proprietor depreciates the full cost basis of the auto.

If you are an online auction seller, you may have tax responsibilities. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your sales may result in capital gains, nondeductible personal losses, or you may have ordinary business income. Read more in IRS website.

The Internal Revenue Service reminds taxpayers that there are specific guidelines to be followed when deducting travel, entertainment and gift expenses.

In general, taxpayers may deduct ordinary and necessary business-related expenses for traveling away from home, entertaining clients and customers and giving gifts to customers, employees and others with whom they have a business association. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business.

Taxpayers who deduct these expenses must exclude personal expenses when computing their deductions and must have documentation for the expense, including statement of the business purpose, names of the persons being entertained, date and location. In addition, generally only 50 percent of business meal and entertainment expenses can be deducted.

 Read more info on IRS website.

I found an interesting report detailing the importance and relevance of Business Ethics in Accounting. Enjoy!

http://acct.tamu.edu/smith/ethics/ethics.htm

There are many different kinds of business income, and almost all of them are taxable. From the Nolo Small Business Center Just as the IRS taxes individuals’ income, such as income from a job, it also taxes the income a business brings in. And, in the same way that an individual can lower her taxable income through credits and deductions, so can a small business.
Before getting into business deductions, let’s make sure we all understand what the tax code means by the term “income.” With a few exclusions discussed below, the tax law doesn’t care whether you get it from your business, from wages paid by someone else’s business or from an investment: it is taxable to you as an individual. Actually, the better question for small business tax understanding is, “What is gross income?” The tax code (IRC § 61) talks in terms of gross income, so we will, too. It reads: “Except as otherwise provided ? gross income means all income from whatever source derived.” You can’t get much broader than that, can you? Goods and services. Income, for tax purposes, doesn’t mean just cash; it can take many forms. Goods, property or services received have all been held to be within the definition of income.

If you barter (exchange goods or services for the same), the fair market value of the item or service you received should be included in your tax reported income. Of course a lot of bartering goes on, and the IRS isn’t any the wiser, but getting away with it doesn’t make it right. Anything of value your business (or you individually) receives is income, unless it specifically falls within the exclusions discussed below.

Constructive income. Income also means anything you have the right to put your hands on but don’t for some reason. The legal doctrine of “constructive receipt” says that as soon as money or property is available to you, or is credited to your account, it becomes income — whether you grab it or not. For instance, you can’t get a check for services in November 2000 and hold it for deposit until 2001 without being taxed on it in 2000, the year received. Illegal income. Note that IRC § 61 is morally neutral; it doesn’t distinguish between illegal and legal income. If you earn a living as a hit man for the mob, you still are earning income as far as the IRS is concerned, and had better declare it on your tax return. Al Capone wasn’t sent to prison for murder, bootlegging or racketeering; he was convicted of tax evasion for not reporting the fruits of his labors to the IRS. Worldwide income.

Americans are taxed on their worldwide income; no matter where earned it is still income taxable in the U.S. There is one exception: if you earn it and reside outside the United States for most of the year, some or all of your foreign income may be excludable. See IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. What isn’t income: exclusions. Some kinds of income fall into the “except as otherwise provided” exception of IRC § 61. For instance, the tax code specifically excludes gifts and inheritances from taxable income.

There is no dollar limitation on how much you can get by these means without tax to you. (Sorry, the $10 million that is being dropped off by the Prize Patrol from Publisher’s Clearinghouse is not legally a gift and is taxable.) Thankfully, many so-called fringe benefits provided by businesses to owners and employees are specifically excluded from income. Most of the statutory exclusions from income granted by Congress are found in IRC § § 101 to 150. Return of capital. Of great importance to owners and investors in businesses is that the return of a capital investment is not taxable income. In other words, to the extent that you sell a business or an asset and get back your money exchanged for the asset, you haven’t earned any taxable income.

Only the profit, if any, is taxed. Example Toni invests $1,000 in the stock of Ronaldo’s Rubber Fashions, a small business corporation, and later sells her stock for $1,500. Only $500 is considered income for tax purposes; the other $1,000 is a return of capital to Toni. Tax-free withdrawals. If you borrow against an asset, whether it belongs to your business or to you personally, the loan proceeds are not income. This is a valuable tool for taking money tax-free out of an unincorporated business that holds an appreciated asset, such as real estate.

I ran across this article at AllBusiness.com and thought it was interesting. It highlights some of the top bookkeeping mistakes made by Small Businesses.

From one-person entities to major corporations, bookkeeping is a significant part of any business endeavor. While it is typically not one of the more glamorous jobs, bookkeeping is at the heart of a company’s success, and errors can cost the company significantly. Below are 10 of the most common errors that you want to avoid.

1. Not saving receipts of less than $75. While such receipts may not be required by the IRS, they provide backup documentation for the many deductions you may claim. It is very simple to have a folder for such receipts, which can prove valuable at tax time.

2. Doing it yourself. No matter how much they hate it, many small business owners insist upon handling the books themselves. Having a competent bookkeeper coming in to handle the books can be extremely beneficial in that they have the skills to do the job quickly and efficiently and will provide a second pair of eyes to find errors and make suggestions.

3. Forgetting to track reimbursable expenses. Small business owners often pay for expenses out of pocket or with their own personal credit card then make the mistakes of failing to track these expenses. They then fail to submit the expenses to the company for reimbursement.

4. Not properly classifying employees. The proliferation of independent contractors, consultants, and freelancers has made it difficult to determine who is on staff and who is not. This results in misfiling when it comes to filing taxes since there are different rules and regulations for employees and non-employees.

5. Lack of communication. Having someone handling bookkeeping is only effective if they are filled in and kept up to date on all financial transactions. A frequent mistake is paying someone a bonus and not reporting it or buying supplies and not providing the bookkeeper with the information or receipts.

6. Not reconciling the books with the bank statement each month. One of the fundamental aspects of bookkeeping is reconciling the books and bank statements every month. Nonetheless, there are businesses that do not do this and others where errors are made by not doing it properly. Again, this is a good reason for hiring an experienced bookkeeper.

7. No backup. The paperless office does not exist in the real world, where audits do still exist. A paper trail, documentation or verification in the form of backup documents should be available, especially if all files are on the computer system, which could be prone to technical problems.

8. Not deducting sales tax. A common mistake in retail businesses is not deducting the sales tax from the total sales. This results in a higher total sales amount and does not lower the amount of taxes due.

9. Petty cash nonchalance. A system should be set up whereby a set amount of money is in petty cash and each time money is taken out for any purpose, a petty cash slip is filled out. When the fund is exhausted, the slips will total the original amount and a check can be written to cash to set up the full amount again. Many offices are nonchalant about using the petty cash fund without keeping accurate records.

10. Miscategorization or overcategorization. There are fairly standard categories for expenses. However, often expenses are entered into the wrong categories or too many categories are created. Use general bookkeeping guidelines for standard categorization and create as few new categories as possible. Try to follow generally accepted accounting practices.

Here is a great bookkeeping tip from Karen Schneider article from the December 2006 issue of The General Ledger.

To find posting errors in the income statement accounts on QuickBooks: 

1.     On REPORTS, click COMPANY & FINANCIAL.

2.     Click PROFIT & LOSS STANDARD.

3.     Change the date span, if needed, to Jan 01, 2006 thru Dec 31, 2006.

4.     To study the report in “Accrual Basis” (for accuracy),  click MODIFY REPORT in the top left-hand corner. When the window appears (“Modify Report: Profit & Loss”), look under the 2^nd section, “Report Basis,” and click ACCRUAL, then OK. The upper left corner of report will confirm “Accrual Basis” reporting, the current date and the time created.

5.     Double-click the TOTAL INCOME figure and examine entries for errors. To view an original form, double-click the particular transaction.  

6.     Use the Esc key (or red X on form) to close a detail window and return to the P&L report you created.  

7.     Scroll to the bottom of P&L and look directly above “Net Ordinary Income” and double-click the TOTAL EXPENSE figure.

8.     If a transaction is posted to the wrong account, double click anywhere on it and, when the original form opens, post it to the right account. Save and close. 

To find posting errors in “Other Income” on QuickBooks, follow the same procedure.

To find posting errors in balance sheet accounts on QuickBooks:

1.      Reconcile the final bank statement. Reconcile liabilities such as business and car loans, credit cards, lines of credit, etc., against available statements. Tip: Attach copies of bank or other liability statements to the balance sheet as proof of accuracy.

2.     Click the drop-down menu REPORTS.

3.     Click COMPANY & FINANCIAL.

4.     Click BALANCE SHEET STANDARD.

5.     Correct the date, if needed, to 12/31/06 (a balance sheet has only one date—the “as of” date—unlike the P&L’s beginning and ending dates).

6.     To view the report in “Accrual Basis,” follow the directions above using “For the income statement” in step 4

Michael is one of our bookkeepers we work and he offers medical billing. Here is his explanation about the process and pricing. Do not hesitate to contact him if interested in medical billing service.

If you’re a small business owner with problems managing your accounting and bookkeeping, consider hiring a bookkeeper to help you get organized and make the most out of your money.  It’s not uncommon for small business owners who do their own accounting to have problems reconciling bank accounts, collecting accounts receivable, and keeping track of when monthly, quarterly, and annual payments are due.  Hiring a bookkeeping professional can take the burden of bookkeeping away from you and prevent you from having to pay fines for late payments or missed deadlines.  Bookkeepers can pay the bills of a business, create invoices for purchases or services rendered, reconcile credit card and banking statements, make additions to your chart of accounts, and help you with maintaining accurate tax records.  One of the best things about having a bookkeeper is that he or she can concentrate on keeping your finances organized so that all you have to do when it’s time to file taxes is fill out the paperwork and attach any necessary documentation.  If you’d like more information on what a bookkeeper does, The Bureau of Labor Statistics has a great profile of what kind of education and knowledge a bookkeeper should be expected to have at http://www.bls.gov/oco/ocos144.htm. 
 

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