Most of us are not looking forward to completing our tax return, but it is that time of the year, so here are some tips from two former CPAs. You can expense just about anything in your business, but not every expense is tax-deductible.
These tips are general in nature and no specific advice is offered or intended. You may use these tips as a reference in filing your tax return, but we also strongly recommend the help of a tax adviser, tax lawyer, accountant or CPA.
According to Intuit, Kiplinger Letter and Money Magazine, here are a few of the most commonly missed deductions:
State income tax - If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn’t exceed the state’s general sales tax rate. The same goes for home building materials you purchased. These items are easy to overlook. The IRS even has a calculator on its Web site to help you figure out the deduction, which varies by your state and income level.
Out-of-pocket charitable contributions - The little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. For example, the cost of stamps you buy for your school’s fundraiser counts as a charitable contribution. If you drove your car for charity in 2014, remember to deduct 14 cents per mile.
We recommend considering classifying some of your business contributions as advertising. As long as your company was listed and advertised as a sponsor or contributor, you may be able to avoid some charitable giving limitations.
Student loan paid by Mom and Dad - In the past, if parents paid back a student loan incurred by their children, no one got a tax break. To get a deduction, the law said that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception. If Mom and Dad pay back the loan, the IRS treats it as though they gave the money to their child, who then paid the debt. So a child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by Mom and Dad.
State income taxes you paid last year - Did you owe taxes when you filed your 2013 state tax return in 2014? If so, then remember to include that amount with your state tax itemized deduction on your 2014 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.
Refinancing mortgage points - When you buy a house, you get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, however, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid.
Also, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender.
Vehicle deduction - In 2014 the IRS allows 56 cents per mile for business miles driven, 23.5 cents for medical or moving expenses and 14 cents for charitable work. With business mileage, the IRS frowns on deducting 100%, realizing your work vehicle can be used personally as well. If you keep track of annual miles driven, the IRS allows for up to 80% of those miles deducted. Remember if you use mileage you cannot deduct any car expenses such as gas, service, depreciation or auto insurance.
Deduction for Medicare premiums for the self-employed - Folks who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan. This deduction is available whether or not you itemize and is not subject to the 7.5% of AGI test that applies to itemized medical expenses. One caveat: You can't claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have a job as well as your business) or your spouse’s employer (if he or she has a job that offers family medical coverage).
Planning for the future - It is now February 2015. The best time to plan for next April 15 is now, starting today. The list of deductions listed before is to help you this year. It is hard to do any major tax planning after the year-end has passed. To insure you don’t miss getting all of your tax deductions next year, keep a good set of records. Most of us are operating as a sole practitioner, partnership or LLC. All will have a December 31 year-end and report income and expenses on the CASH basis. Meaning you only can deduct expenses paid and report income earned and paid to you. You can’t deduct accounts payable or include accounts receivable in income. Year-end tax planning starts with an accurate and current set of accounting records. With good data and an up-to-date set of financial records, you can be proactive prior to year-end, accurately estimate profit and take steps to reduce taxable profit. We recommend using QuickBooks and saving all of your receipts.
Reducing your tax liability – One way to reduce profit and taxable income is by paying expenses. Pay all of your current bills; purchase any needed supplies like business cards, brochures, paper for the printer and ink cartridges; fill your inspection truck’s gas tank; go ahead and purchase that inspection tool you have been wanting to get, and renew your dues and subscriptions. If you are paying a loan from the bank and it is due on the first of the month, go ahead and pay it before year-end. The interest between the first of the month and the last day of the month is deductible (make sure it is recorded by the bank as a monthly payment and not a principal-only payment).
It is up to you to keep abreast of the current tax law changes and keep up-to-date accurate financials in order to take advantage of all the deductions due you to minimize your taxes.
We always teach Realtors® and home buyers that the cost of hiring a professional home inspector is well worth the investment. We will tell you that hiring a professional tax lawyer or CPA to advise you on tax saving strategies is well worth the investment, too.
Tim Buell, ACI, ASHI Treasurer – 2015 http://timbuell.pillartopost.com
Dave Haught, ACI, MIES, EP, Director – Ohio Chapter http://www.wvchi.com