Reading Between the Numbers . . . Providing Knowledge, Insight, Experience and Creativity for our Clients' Benefit.

Visit our blog frequently to read our take on developments and news about taxes, accounting, financial and retirement planning.

A Dozen Deductions For Your Small Business

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

small business tax deductions

A small business offers plenty of opportunities for tax deductions. Just be sure to follow IRS rules.

Here are 12 that even savvy small-business owners and entrepreneurs sometimes forget.

the deductible dozen

1. Home office

To claim your home office on your taxes, the IRS says it must be a space devoted to your business and absolutely nothing else.

The deduction isn’t limited to a full room. Your home office can be part of a room. Measure your work area and divide by the square footage of your home.

That percentage is the fraction of your home-related business expenses — rent, mortgage, insurance, electricity, etc. — that you can claim.

There’s also a simpler way to claim a home office deduction. Consider both the regular and simplified methods of writing off your home office.

“I don’t agree that chances of getting audited are greater with a home office deduction,” says Zobel, a San Francisco Bay-area tax expert who specializes in serving the self-employed. The key is that you use the term “home office” the same way the IRS does. The tax agency says it must be a space devoted to your business and absolutely nothing else. Deducting the den that houses the family computer and serves as a guest bedroom won’t fly with Uncle Sam.

“If you only have one computer and you have a child over 4, the IRS is going to be pretty certain that the child is using the computer,” says Zobel. “And the burden of proof is on you.”

The deduction, however, isn’t limited to a full room. Your home office can be part of a room. Just how much of the space is deductible? Measure your work area and divide by the square footage of your home. That percentage is the fraction of your home-related business expenses — rent, mortgage, insurance, electricity, etc. — that you can claim.

There’s also a newer way to claim a home office deduction. Read “Use newer, simplified home office deduction” for details.

2. Office supplies

Even if you don’t take the home office deduction, you can deduct the business supplies you buy. Hang on to those receipts, because these expenditures will offset your taxable business income.

3. Furniture

Office-furniture acquisitions provide two choices:

  1. Deduct 100 percent of the cost in the year of the purchase.
  2. Deduct a portion of the expense over seven years, also known as depreciation.

To take the whole cost in one tax year, use the Section 179 deduction. There deduction cap for 2016 taxes is $500,000, but may be adjusted for inflation in future years.

If you choose instead to depreciate the desks and filing cabinets, you can’t simply split the cost into equal portions over the depreciation period. Instead, you must use an IRS chart to make separate calculations each year.

Which is better for you? Anticipate the times that your business will need these deductions the most. Both options are reported on IRS Form 4562.

4. Other equipment

Items such as computers, copiers, fax machines and scanners are tax-deductible. As with furniture, you can take 100 percent upfront or depreciate (this time over five years).

Does your business need a new copier? Put it on a business credit card.

5. Software and subscriptions

Section 179 provides another tax break. New computer software a business buys can be fully expensed in the year purchased.

For business and industry-related magazine subscriptions you can deduct the total costs as a full deduction in the year spent.

6. Mileage

If you drive for business, the IRS wants to give you some of your money back. You’ll need documentation, so keep a notebook in your vehicle to record the date, mileage, tolls, parking costs and the purpose of your trip.

At the end of the year, you have two choices:

  1. Total the mileage and add in the tolls and parking to calculate your deduction. Once you have your mileage total, multiply it by 54 cents for your 2016 deduction. For 2017 business tax purposes, the rate drops to 53.5 cents a mile.
  2. Measure your business usage against your personal driving and deduct that portion of your auto-related expenses. Remember to include gas, repairs and insurance.

If you are leasing, include those payments.

If you are buying the car, factor in the interest on your loan and depreciation on your vehicle.

If your company’s office is at your house, you can deduct the entire business-related mileage, from the minute you pull out of the driveway until you return home.

If your business is not home-based, your mileage meter starts at your first business-related destination and ends at your last. You can’t include the drive to and from home. In this case, try to schedule several business appointments on the same day to allow you to take the mileage between stops as a tax write-off.

7. Travel, meals, entertainment and gifts

Good news, small-business travelers. You might as well stay in a nice hotel, because the entire cost is tax-deductible. Likewise, the cost of travel — air, rail or auto — is 100 percent deductible, as are costs associated with life on the road (dry cleaning, rental cars and tipping the bellboy).

The only exception is dining out. You can deduct only 50 percent of your meals while traveling. So stay at the Ritz and eat at Wendy’s.

Once you get home, your on-the-job meals aren’t deductible — unless you bring along a client to talk business. In this case, you might consider splurging on a fancier meal because then you can write off half such work-related dining costs.

The 50 percent deduction limit applies to most other client entertainment expenses, too. But a direct gift to a client or employee is 100 percent deductible, up to $25 per person per year.

8. Insurance premiums

Self-employed and paying your own health insurance premiums? These costs are 100 percent deductible.

This break primarily benefits proprietorships, but there are limits. The deduction can’t be more than your business’ net profit. And it’s not allowed if you were eligible for other health care coverage, including that offered by your employed spouse’s medical plan.

Did your spouse work for you last year? You can get the full medical premiums deduction on your return. As an employee, your spouse’s premiums are 100 percent deductible; if you and the children were on his or her policy as dependents, so are those costs.

Two caveats:

  1. Your spouse’s employment must be real, not in name only, and you must offer coverage equally to any other employees.
  2. Failure to meet these requirements could result in a lawsuit, an audit or both.

You also can include some of the premiums you pay for long-term care insurance for yourself, your spouse or dependents.

9. Retirement contributions

Are you self-employed and saving for your own retirement with a SEP IRA or Keogh? Don’t forget to deduct your contribution on your personal income tax return.

10. Social Security

The bad news: If you’re self-employed or starting a small business, you have to pay double the Social Security contributions you would as an employee. That’s because federal law requires the employer pay half and the employee pay half. Self-employed workers are both, meaning the total will equal 15.3 percent of your net profits.

The good news: You can deduct half of the contribution on your 1040.

11. Telephone charges

You can deduct the cost of the business calls you make for business from home. When your bill comes in, circle the business-related calls, total them up and keep a copy. At the end of the year, tally your 12 bills and deduct 100 percent.

Regular fees and charges on your phone line don’t count toward your deduction. But if you have a second line installed and use it only for business, all of these charges are deductible.

If you use your cellphone for your business, you can claim those calls as a tax deduction. If 30 percent of your time on the phone is spent on business, you could deduct 30 percent of your phone bill.

12. Child labor

If you hire your children as employees at your business, you may be able to deduct their salaries from your business income if they meet certain requirements.

Also, there is no Social Security tax when you hire your child who is 17 or younger and you can deduct the salary as a business expense.

This break is available, however, only if you operate as a sole proprietor or as a partnership in which you and your spouse are the only partners. If your business runs as a corporation, then it, not you, is considered the employer and the corporation is not relieved of the tax liabilities.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

 

How Much Money Can You Make in 2017?

golf pro advisor

In the January issue of the Golf Pro Advisor (Are You Ready for the 2017 Season?), I discussed the importance of setting both “performance” goals and overall financial goals.

A performance goal, for instance, would be the number of lessons you want to generate this year. That in turn drives your overall lesson revenue (financial goal).

In this issue, I provide an Excel model that will help you forecast your revenue with performance targets. Here is a link to the model.

To achieve your goals, you must have very specific performance targets such as “x” number of lessons per month.

How the Model Works

As an illustration, the model uses a hypothetical example -  the Fictional Golf and Country Club (FGCC) with a six month golf season. You, of course, should input the numbers that apply to your club.

FGCC has 500 member families. There are 1500 potential golfers (husbands, wives, and juniors). But there are only 500 active golfers.

The model covers four “revenue streams”:

  • Lessons
  • Clinics
  • Driving Range
  • Tournaments

Golf shop revenue is generally a big part of a head pro’s income. But that is a more complicated model. I plan to address the golf shop model in a future issue of the Golf Pro Advisor.

This model assumes that a certain percentage of Active Golfers will take lessons and clinics, spend time on the range, and play in tournaments. Key “performance drivers” are:

  • Active Golfers - Number of active golfers
  • Participation -  % of active golfers taking lessons, participating in clinics etc. (Participating members)
  • Frequency - Number of lessons, clinics etc per participating member per month
  • Fee - Average lesson fee, average clinic fee etc.

Here are FGCC’s performance drivers, based on 500 active golfers:

unnamed

 

The Excel model has two tabs: “Targets” and “Summary”. The “Targets” tab has grids for each of the four revenue streams (Lessons, Clinics, Tournaments, Range).

The “Summary” tab shows a summary of the performance drivers (see grid above) and a revenue summary (see “Set Your Targets” section below)

Make assumptions about your club’s performance drivers (Active golfers, Participation, Frequency, and Fee) and then set performance targets for each area.

Input that your performance drivers into the appropriate grid in the “Targets” tab and the model will generate monthly and seasonal performance goals as well as monthly and seasonal revenue.

The summary for all four revenue streams will appear in the Summary tab.

An Example

Let’s look at lesson revenue as an example. The other three revenue streams. (clinics, range, tournaments) work the same way.

unnamed (1)

 

The model assumes that 25% of active golfers take an average of two lessons a month during a six-month season. That’s a total of 250 lessons a month. Here are the calculations:

  • 500 active golfers x 25% = 125 Participating Golfers
  • 125 Participating Golfers x 2 lessons/month = 250 lessons a month
  • 250 lessons/month x $100 a lesson= $25,000 a month x 6 months = $150,000

Set Your Targets

Here is an overview of the annual revenue generated for FGCC. (See “Summary” tab in the Excel Model)

unnamed (2)

 

The key point is to set monthly goals for your golf operation. A lesson target of $150,000 is very vague. How are you going to achieve it?

A target of 250 lessons a month (10 lessons a day) is very specific.You can easily track it. Set monthly performance targets for each of your revenue streams.

If you have good records, you can set targets based on history. If not, make assumptions and then tweak them as you get more experience tracking activity.

Also, your targets should be ambitious but realistic.

Is it realistic to assume that on average each of your active golfers will take three lessons a season?

  • 1500 lessons divided by 500 Active Golfers = 3 lessons per golfer

Is it realistic to assume that that on average that each of your active golfers will spend $500 a season to improve his/her game?

  • $256,000 (Total Season Revenue) divided by 500 Active Golfers = $500 per golfer

Achieving Your Goals

Now comes the hard part. How do you achieve your goals?

If your goal is 250 lessons a month, does that mean:

  • 250 members each take one lesson?
  • 50 members each take five lessons?
  • 500 members take one lesson every two months?

There is a big difference.

If it’s 250 members, the challenge is to get each member to take more lessons. If it’s 50 members, the challenge is to get more members to take lessons.

In the next issue of the Golf Pro Advisor, I will explore this further.

I am happy to discuss the model at no charge. Interested golf pros should feel free to email me at paul@hermancpa.com to schedule a 30-minute consultation. 

7 Milestones In Life That Trigger Taxes: Birth, Marriage, Work, Homeownership and More

 

 

 

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

taxes

You were blissfully unaware of it, but taxes became a part of your life on the day you were born.

From that beginning as a spanking-new tax break for Mom and Dad, taxes have had an important role in all your major life events, from getting a job, saying “I do,” buying and selling homes, having kids of your own and even retiring.

In some cases, the involvement of the IRS is not such a good thing.

But in many ways, the tax code can be your best friend. You just need to know how it applies to your personal circumstances so you can take advantage of it. Read on to learn more about tax breaks for life’s big events.

Getting Your First Job

Uncle Sam gets a portion of your paycheck via payroll taxes. You do, however, have a bit of a say in how much comes out of your pay by adjusting your withholding.

If you have too much withheld, you’ll get a refund when you file. That’s not necessarily bad, but wouldn’t you rather have your own money year-round instead of giving the IRS an interest-free loan?

On the other hand, if you don’t have enough taken out, you could face a major tax bill, and possible underwithholding penalties, at filing time. Ask your boss for a new Form W-4 so you can run the numbers and adjust your withholding. You can change your withholding amount as often as you need to get your tax amount just right.

Your job likely offers several tax breaks. If your employer provides health care coverage, your medical insurance is a tax-free benefit to you. You’ll find out how much that’s worth on your W-2 earnings statement.

A flexible spending account, or FSA, also might be part of your job benefits. Here you can save pretax dollars to pay for medical care not covered by insurance.

You also want to take advantage of your workplace’s tax-deferred 401(k) retirement plan.

And if you move to take a job, even your first one, you can write off many of your relocation costs.

Getting Married

Uncle Sam probably wasn’t a guest at your wedding, but he becomes a big part of your life when you are a married taxpayer.

Most couples filed jointly because it generally produces the best tax result.

If both partners work, coordination of employer fringe benefits after marriage is key, says Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting.

Reassess your individual retirement accounts. Your new combined income could affect your retirement contributions. Income limits apply to tax-free Roth accounts and also to how much of a traditional IRA contribution you can deduct if you or your spouse put money into a workplace retirement plan.

Marriage also is one of the changes in family circumstances that allows you to revisit your tax-favored FSA. Newlyweds also should reevaluate how much each has withheld from their paychecks.

And what about your once-in-a-lifetime honeymoon? The tax code’s annual gift exclusion amount for 2017 is $14,000, the same as it was for 2016. It’s usually adjusted annually for inflation.

That means both a well-to-do mom and dad could give each newlywed $28,000 or a combined total of $56,000 to the wedded couple. That definitely would pay for an extravagant post-ceremony getaway.

Having Children

Congratulations on your new baby. Let Uncle Sam help cover some of your growing family’s costs.

A dependent youngster is an added exemption. Kids also allow parents to claim the child-tax credit as long as the youngster was 16 at the end of the tax year. Large families might be able to get money back from the IRS via the refundable additional child-tax credit.

If your family grew via an adoption, there’s a tax credit to cover some of the many costs of that process.

Working parents can use the child- and dependent-care credit to pay for some of the costs of caring for their kids while they are on the job.

And the tax code also offers several ways to save and pay for higher education costs, including 529 college savings plans, the Coverdell Education Savings Account and the American opportunity and lifetime learning tax credits.

Starting a Business

Once you decide it’s time to break out of the corporate cubicle and start a new business, the tax code can help.

Filing is relatively easy for sole proprietors. They report their income as part of their annual individual tax filing by attaching Schedule C to Form 1040. Schedule C also offers many ways for individual entrepreneurs to write off many of their business expenses.

Among the deductible small-business costs are home office expenses. Business use of a vehicle also is deductible, as are health insurance premiums and contributions to self-employed retirement plans. New businesses also are allowed to deduct thousands in certain startup costs.

If you have kids, putting them to work in your sole proprietorship could be a tax-smart move. Depending on how much you pay them, they might not owe income taxes and you can deduct the salary as a business expense.

But starting a business is not all about tax breaks. Sole proprietors also must pay self-employment taxes. These are the equivalent of the payroll taxes collected from wage-earning employees. As both the employer and employee, a sole proprietor has to pay the boss and worker components of Social Security and Medicare taxes.

And running your own business usually means you must file more tax forms, including estimated tax payments four times a year.

Buying a Home

Your home is probably your biggest investment. Homeownership also provides many tax breaks.

Interest paid on a primary residence mortgage up to $1 million is deductible as an itemized expense. If you take out a home equity loan or line of credit, interest on those loans up to $100,000 also is deductible. Even the interest on a second home is tax-deductible.

Property tax you pay on your main house — and any other residences you own — also is deductible.

The tax benefit of a home is even better when you sell it. Up to $250,000 in sales gain ($500,000 for married joint filers) on your home is tax-free, as long as you owned the property for two years and lived in it for two of the five years before the sale.

Many home improvements, such as structural additions, kitchen modernization and landscaping, can increase the basis in your home. This is essentially your investment in the home. A larger basis means less profit that might be taxable.

And some home upgrades, such as installing solar energy systems, also will get you an immediate tax credit to help offset the high cost of this type of improvement.

Dealing with Divorce

As with marriage, your filing status is determined on the last day of the tax year. If your divorce is final on Dec. 31, then you are considered unmarried for the full year.

One of the stickiest divorce issues is child custody. The parent who has physical custody of the children for most of the year usually gets to claim them as dependents. That means that parent gets the exemption, child-tax credit and child-care tax credit savings.

One spouse typically is granted sole ownership of the family home. This could, however, pose a problem for the solo owner. When the lone ex sells the property, the amount of profit exempt from capital gains is just $250,000 versus the $500,000 that married filing jointly homeowners can exclude. Because of that, some couples sell the house before they divorce and split the tax-free profits.

Similarly, take into account the cash the recipient partner will net after taxes when dividing other marital assets.

And note that alimony has tax implications for both ex-spouses. It is taxable income to the recipient and can be deducted by the paying ex. Child support, however, offers no tax breaks to the paying ex, as it is not deductible. However, to the recipient, it isn’t taxable.

Retiring

Your golden years will be more enjoyable if you take advantage of the many tax breaks afforded by retirement plans.

A traditional IRA contribution could produce a tax deduction when you file your tax return. Remember, though, that you’ll have to pay taxes on this account when you start taking out money in retirement.

With a Roth IRA, you put in already-taxed money, but that means eventual distributions from a Roth are tax-free. The biggest drawback to a Roth is that you can’t open or contribute to a Roth if you make a lot of money. However, regardless of your income, you can convert a traditional IRA to a Roth.

Workplace retirement plans, usually known as 401(k)s or Roth 401(k)s, offer similar retirement saving options, but with a nice bonus. Many employers match some of your plan contributions, which helps your retirement savings grow more quickly.

Social Security benefits generally are tax-free as long as you don’t have a lot of other income.

And if you do have to file a tax return when you’re older, you can claim a larger standard deduction amount simply because you’re age 65 or older.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.