One of the large business expenses available to business owners is the auto expense. Many business owners have been advised by their accountants to purchase a vehicle to reduce their tax liability. While this advice may have merit, it almost never makes sense to buy something you do not need in order to reduce your tax liability.

When it comes to getting that new vehicle, you can either buy or lease the vehicle. For this article, I am going to assume that you understand the difference between buying and leasing.

Tony Robbins is quoted as saying that the quality of your life is determined by the quality of the questions you ask. 

The problem with the question here is that “better” is different for different people. So instead of answering, which is better, I am going to explain the things you should be considering as you approach this type of decision.

The first concept to understand is that when analyzing a purchase or lease decision it all comes down to the comparison of the present value of the transaction in today’s dollars. If we look at a benefit of a purchase that you have an asset to sell later when you are ready to dispose of it, that future sale needs to be translated back to today’s dollars.

Whenever calculating present value, we need a factor to use or the presumption of interest that you could accrue in lieu of using the funds in this way. Typically, if we look at regular market returns that factor would be between 8-12%. However, business owners may have a much larger factor, say 25%. Why? Because they can turn a cash investment inside their business into something much more.

So, a rapidly growing business will likely be better off keeping as much up-front cash while a slow growth business may be better off spending the cash up-front.

The second concept to consider are the tax implications of the transaction. I didn’t use the words “tax benefits” because not all implications are beneficial.

In a purchase with a loan, you will be able to potentially accelerate the depreciation of the vehicle, creating an up-front tax savings. You also will deduct interest expense. Finally, when you sell the vehicle, you will likely recognize a gain or a loss.

A lease on the other hand, is much simpler. You deduct the lease payments as a business expense.

All these tax implications need to be brought forward to present value so that it can be compared to the lease option fairly.

The third and final concept affecting this decision is that it is not all about the money. There are non-monetary factors at play as well and these should be considered carefully.

How often do you want a new vehicle? – Leasing will most often get you replacing vehicles more often.

How much do you drive? – Leasing is best for people who will keep below the annual mileage allowance.

Life stability and status – Is your life situation likely to change soon? Will leasing cause you to get a vehicle you cannot afford or allow you to drive around in a vehicle that makes you feel important even though you really cannot afford it?

So, when we evaluate the buy vs. lease decision, we need to remember that buying will require more up-front cash but also carries more up-front tax reductions. Leasing will take less initial cash and lower monthly payments freeing up more capital for re-investment in the business.

If you would like help determining the best course of action for your own situation, reach out to us, we can calculate the best option based on present value for you.

I recently had a conversation with a prospective client and he said, “Will you get me a better refund than my accountant last year?” This person was asking the wrong question.

The question stems from a misconception many Americans have on how our tax system works. A tax refund is not an indication of paying less in taxes, it is only an indication that you paid too much in advance for your tax liability. Allow me to explain…

The US Tax System is a pay as you go system. As you earn money, you have a responsibility to pay taxes on the money earned. Typically, if you have a job with earnings reported to you on a W2, then taxes are withheld every paycheck. If you are a business owner or independent contractor then you are obligated to make quarterly estimated tax payments, 4 times each year.

Herein lies the source of the confusion and the inherent problem. Due to circumstances that can change throughout the year and each person’s eligible tax credits and family tax situation, the actual amount in taxes owed for the year are not actually determined until you prepare your tax return 2-4 months after the year is over.

Therefore, all taxes paid through your paycheck withholding or estimated taxes are simply deposits with the government to settle your ultimate tax bill. In other words, a refund simply means you gave them too much money during the year and if you owe money, it means you didn’t withhold or estimate enough during the year.

The real measure of how well you are doing from a tax perspective is if you calculate your effective tax rate or the amount of tax you had to pay divided by the amount of income you had. The lower the rate, the more tax efficient you are.

So, is a tax refund good or bad?

This depends on a few things. First, was it done on purpose? Some people lack the discipline to save and find overpaying their taxes a good way to ensure they have the funds for a family vacation in the spring via their tax refund. From a financial advice perspective, why would you give the government a free loan? If your household budget is tight all year but you get a $6,000 refund at tax time, how much easier would life had been if you had $500 additional income each month?

The good news is you get to decide.

If you need help correcting your situation of consistently overpaying or underpaying your taxes, then we can help.

One of the most highly audited business deductions is the auto expense. The regulations require documentation of every trip taken by car and justification that it is a business expense. If you opt to take the direct expenses method, you could accelerate the depreciation of a large SUV and get a massive business write-off. However, the write-off is only to the extent that the vehicle is used for business.

Many business owners, like most Americans, do the majority of their driving between home and the office. The trip between home and the office is considered commuting miles and they are specifically excluded from being taken as a business deduction. However, if the drive from your home to the office is a trip between two work locations, it is a valid business trip.

In a previous article, we talked about the fact that the home office needs to be exclusively used for business. So how do we make your home a business location, even if you do not have the space to dedicate to a home office.

There are 3 key points that set the stage for using a tiny 1 square foot spot in your home as a home office unlocking massive auto expense deductions!

1. No Walls Needed
2. Break for Small Homes – “de minimis”
3. The 1 square foot office

No walls needed – Although the area must be exclusively used for business, it does not need to be a separate room, nor does it need to be partitioned off.

The IRS and the tax courts have allowed office space where the personal use is “de minimis” this means that the office can have an area where you walk through for personal use. For example, in Hughes v. Commissioner the court allowed a walk-through closet to be a home office even though the taxpayer had to walk-through the office to get to his bedroom.

Don’t be tempted to stretch the meaning of de minimis though. The IRS and the tax courts have specifically denied storage of personal items and occasionally hosting family meals as de minimis.

Here is how to create the 1 square foot office: Buy a storage cabinet or filing cabinet that extends all the way to the floor. Use it to store business items only, such as business files and business supplies. When you perform work at home, pull a chair and a table or desk next to the cabinet and perform your work. When you are done, you can put the table or desk and the chair back. Claim only the space for the cabinet. This will not create big deductions for the home office itself but will unlock big deductions for your auto expenses.

Last week, we covered what type of work deems the home office a valid office, make sure that you follow those guidelines, so it qualifies.

As you can see from this 3-part series of articles, something as simple as the home office deduction is actually quite complex and can have a significant amount of untapped benefits.

I encourage you to consult a tax professional such as myself so that you do not end up paying more than your lowest required amount in taxes.

What if I told you it was possible to write-off half of your personal residence as a tax deduction? You’d probably ask me if that was legal and was there jail-time involved. Here’s the great news, it is entirely possible to do and within the framework of today’s tax code. For a resident of metropolitan NYC, this could translate to deductions of $30-50,000 or tax savings in the 5 figures!

Last week, I made the case for 2 compelling reasons to maintain an office in your home. One reason is for the home office deduction itself and the second reason is for the auto expense benefit. This article will cover how to maximize the home office deduction if you want to have a dedicated room or multiple rooms in your home for your office space. Next week, we will cover how to take the deduction with the smallest possible space for the purpose of unlocking the auto expense deduction benefit.

There are two very important rules to cover. The first is that the home office must be exclusively used for the business. This means that you cannot use a guest room that only has guests a few times a year, the personal use a few times a year, removes the exclusive use requirement. There are of course exceptions to every rule and a day care and storage are the exceptions to this rule, please consult a tax professional like myself before claiming a mixed use space.

The second rule is that it must be the principal place of business. This rule causes a lot of business owners to think they are not eligible to claim this deduction if they have another office elsewhere. In IRC Section 280A(c) the tax code uses this language “as the principal place of business for any trade or business of the taxpayer” and then clarifies with this statement:

For purposes of subparagraph (A), the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.

If you use your office in the home as the primary location for any administrative or management function for example bookkeeping or HR activities then it qualifies.

Now that we know you can maintain an office in the home and qualify to deduct it as a business expense, let’s talk about how the allocation of home expenses gets allocated.

In IRS Publication 587, the IRS says that “you can use any reasonable method to determine the business percentage” of your home that you use for business. The publication provides 2 examples of such methods:

Gross square footage: Divide the area of the home used by the office by the total area of your home.

Number of rooms: If the rooms in your home are all around the same size, you can divide the number of rooms used for the business by the total number of rooms.

One method that I end using for many of our clients is not listed in the publication but is a common method for accounting for space and is the net square footage method. In this method, you calculate the interior area of each room in the home, excluding bathrooms, hallways, etc. You then total the usable areas as the denominator and use the area used for business as the numerator. This very often results in the best outcome because you have eliminated the space between the walls, the hallways, bathrooms and closets which were included in the denominator in the Gross square footage method.

If you have a home with 3 floors and your downstairs is not used for personal use and is finished as one big open area, using the net square footage area, that one floor which is 1/3 of your home could end up being 50% of the usable area of the entire home, creating a very lucrative tax benefit for you.

As you can see, there is a lot of thought and calculations that go into something that seemingly seems basic like the home office deduction. Without this knowledge, you could follow the form instructions and end up leaving a lot of money on the table. It pays to have a tax professional that is willing to take the time and ask the right questions to create these tax saving opportunities for you.

I will close the article with one final point. If your business is setup as a S-Corporation for tax purposes, then you cannot deduct the home office deduction using the tax forms on a personal income tax return. The method that should be used is the employee reimbursement method. Some may advise you to use the rental method but this would be a mistake. If you fall into this category, give my office a call so we can help you take the deduction correctly.

Let me tell you about one of the most overlooked tax strategies of small business owners. First, however, it would be prudent to define who is a business owner. If you receive income as an independent contractor and are issued a form 1099-NEC at the end of the year then technically you are a business owner. If you operate a sole-proprietorship, partnership or corporation then you are a business owner.

In this article, we will discuss the advantages of having a home office for tax purposes. In the subsequent two articles we will discuss how to maximize the home office deduction for writing off your home as much as possible and how to maximize the vehicle deduction benefit even if you don’t have space for a full-room home office.

In 2017, President Donald Trump pushed forward his agenda of tax reform and the Tax Cuts and Jobs Act was the result. In this new tax reform, some changes were made that adversely affected New York and New Jersey taxpayers in a big way. The deduction for state and local taxes were capped at $10,000 and at the same time the standard deduction was increased to what is this year $27,700 for a married couple filing jointly. This eliminated the tax advantage of owning a home.

However, business owners have a way of circumventing that by creating a home office. The home office allows you to allocate the mortgage interest, real estate taxes, utilities and depreciation to the business for the part of the home used for the business. This creates a great opportunity to take an expense that offers you no tax benefit right now and create a potentially significant tax benefit from it.

Just for illustrative purposes, a home with 10 rooms and 1 room is used for the home office (there are primarily 3 ways to calculate the home office allocation, sum of rooms is one of them and can be used if all rooms are similar in size). This allows for 10% home office allocation. Let’s assume the home was purchased for $500,000 ($350,000 for the house and $150,000 for the land – you cannot depreciate land) and carries a mortgage paying $8,000 of interest along with property taxes of $15,000. The monthly gas, electric and water bill is $400. The homeowners insurance policy is $1,200. Repairs were made on the heating and A/C systems totaling $1,200. This is how the home office expense would be calculated:

A business owner pays 15.3% self-employment tax, let’s assume you are in the 22% federal tax bracket and you pay 8% in state income taxes. This is a total of 45.3% in taxes. If you write off $3,906 that saves you $1,769.42 in taxes!

There is one more benefit to maintaining a home office and it relates to your business vehicle expense. Without a home office, when you leave your home and head to work you are commuting and the drive is not allowed to be deducted as a business expense. With a home office, you are now traveling between two places of business and this trip is now considered a business expense. This can have a significant effect on your vehicle expenses especially if you claim direct expenses which follow the percentage of business use for your vehicle. If most of your trips are between home and the office then this will swing the percentage of use from nearly 0% to nearly 100% business use.

To illustrate, let’s assume that your office is 10 miles away and you drive 20 miles round trip each day between home and the office. Let’s also assume that you do this 5 days a week for 46 weeks. That is 4,600 miles (20 x 5 x 46). At 65.5 cents per mile that is an expense of $3,013. Using the above tax percentage of 45.3% this creates a tax savings of $1,365!

Bottom line, not using the home office deduction could be causing you to pay significantly more taxes than necessary. However, there are a lot of rules surrounding how this deduction is taken and calculated and I encourage you to discuss your personal situation with a tax professional.

As the old saying goes, there are only two certainties, death and taxes. Like a birthday, taxes are due the same day every year (well, almost). Yet, people still wait until the due date to send in their tax return. Read on to find out why you should be different.

To most people February means snow, mid-winter vacations, fireplaces and skis. For tax professionals like myself, it means busy season. However, most clients procrastinate their tax return appointments to the last minute. According to the IRS, more than two thirds of tax returns are filed in the last 6 weeks of the filing season. Some of the reasons people state for delaying their tax return filing are:

• I owe money so I want to delay paying it
• It is a lot of work to gather all those pesky medical receipts and charitable donations
• I am getting a refund, so there is no rush, I will get to it eventually
• I am afraid of finding out I might owe money
• I have no idea where to turn to get my taxes filed

If you relate to these or have another excuse of your own, you are not alone. According to the IRS, nearly half of the 2014 Federal Income Tax Returns filed in 2015 were filed in the final four weeks before the due date. However, you may be causing yourself a lot of pain by procrastinating. Here are 5 reasons why you should gather your papers and head straight to your accountant’s office:

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1. Tax return fraud has become a huge business for identity thieves. According to the IRS “In calendar year 2015, through November, the IRS rejected or suspended the processing of 4.8 million suspicious returns” and “that’s a total of $10.9 billion in confirmed fraudulent refunds protected”. Fraudsters will file batches of hundreds of returns electronically using stolen identity information and some of these will get accepted by the IRS allowing the fraudster to monetize on a refund. The taxpayer finds out about the fraud when their own return is rejected because a return was already filed for their social security number. It can take many hours to rectify the issue with the IRS and will delay a tax refund for a considerable amount of time, sometimes years.The best way to prevent this from happening to you is to file early. By doing so, you limit the window of time for a fraudulent return to be filed with your social security number. Once you file your return, other attempts to file with your social security number will be rejected automatically.
2. When you meet with your tax professional, they may very likely find ways to help you save on taxes that may require additional information or documentation. It may take additional time to produce this documentation causing you to be unable to file as quickly as you had hoped. Beginning this process too close to the deadline may force you to file an extension, thereby, costing you more in fees to your accountant, delaying your refund (if you owe taxes, they still must be paid at the time of filing the extension) and dragging out the process even longer.
3. Accountants are busy people from January 19^th through April 15^th (this year in 2016 the date is April 18^th). Imagine if all of Walmart’s customers in a single day showed up 10 minutes before closing. You would have a stampede, massive lines and probably not get the attention of any staff members should you need it. Getting your tax bill to the lowest amount possible within the confines of the tax law is an art that takes time to run various calculations and scenarios and ask many questions. If you join the last minute mad rush, it is almost guaranteed that less effort will be made on your return and without knowing it, you could be paying more taxes than necessary. That is IF you are able to get an appointment at all.
4. If you anticipate a refund, filing early will get that refund processed more quickly. Not every taxing authority processes refunds in the same manner. Last year, clients of mine waited until June to receive a refund from the State of New Jersey. The later you wait in the filing season the more likely it is for a problem to occur such as a backlog, computer glitch or simply errors on both ends. Additionally, don’t you have something you would like to do with this refund? You can’t do anything with it until you get it.
5. If you anticipate owing money on your taxes, you should know that you can e-file today and schedule an electronic payment to process on the due date or if mailing a check, mail it on the due date. Filing and paying your taxes are two independent actions and you do not need to delay filing just because you are not ready to pay yet. Wouldn’t it be helpful to know two and half months before the due date that you owe a significant amount of tax? Most of my clients who did not anticipate owing money on their taxes, when filing within the last few weeks of the due date, end up requesting a payment plan. This causes increased fees and interest payments that may have been avoidable had they filed earlier.

The bottom line is file early, keep the thieves at bay, pay the least amount of taxes and get an early refund or leg up on your taxes owed.

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