Topic: Member Workshop: 10 Most Frequently Missed Business Deductions
Host: dkennedycpa Date: Wednesday 06/11 Time: 10:00 a.m. to 11:00 a.m. Pacific time Location:Workshop Board
Description: If you’ve started a new eBay business this year, this is one workshop you won’t want to miss. Most new business owners are so busy setting up his or her new business that deductions gets missed. Please join best selling-author and CPA Diane Kennedy to learn about the 10 items that most people forget, helping to ensure you get the most deductions possible.
Hello. My name is Diane Kennedy. I’ve been a CPA and Tax Strategist for over 25 years. My specialty is working with small business owners and real estate investors. My tax education company, Tax Loopholes, LLC, teaches people through books like Tax Loopholes for eBay Sellers, tapes and seminars on how to take advantage of the legal tax-reduction strategies that available to everyone. Please remember that laws and practices vary from state to state and if tax, accounting, legal and other specific expert advice is required, the services of a professional should be obtained. Diane Kennedy, CPA www.taxloopholes.com
When the government wants to promote a specific public policy it often uses tax breaks to get the public interested. After all, who doesn't want to pay less taxes? There are two things that the government wants you to do: (1) Start a business and (2) Invest in real estate. So, to encourage you, the government offers all kinds of tax breaks. Because these tax breaks are sponsored and created by the government, they're safe, legal, and meant to be used. Diane Kennedy, CPA www.taxloopholes.com
eBay has generously set aside time for us to present these business-related sessions designed to help you make more and keep more money. We have a new workshop every month. Mark your calendars! Diane Kennedy, CPA www.taxloopholes.com
Today we're talking about the 10 most frequently-overlooked tax deductions eBay business owners miss. Most new business owners are so busy setting up and running their businesses that tax planning takes a back seat. Yet a tax strategy doesn't have to be complicated! Here are 10 tips to help you keep more of what you earn - safely and legally. Diane Kennedy, CPA www.taxloopholes.com
Just before we get started, I want to tell you about this month's free offer. The first 10 people who post on this workshop will be entitled to receive a free copy of our audio download, 25 Tax Strategies For High-Income Employees. We'll be tracking posts throughout the workshop and will announce the recipients at the end, together with instructions on how to get your free download.
Now, on with the workshop! Diane Kennedy, CPA www.taxloopholes.com
The IRS loves home offices, despite what you may have heard or read to the contrary. In fact, this is a deduction that the IRS gets almost aggressive in pushing taxpayers to take advantage of.
There are two simple rules to taking a home office deduction:
1. You must have a space in your home that is exclusively used by the business. It cannot be, for example, the corner of the dining room table, the living room, or a family room, and
2. You must perform business work in this space on a regular basis. Diane Kennedy, CPA www.taxloopholes.com
Once this has been established, you can calculate how much the deduction for your home office will be. The deduction is calculated as the ratio between the square footage of your home office and the square footage of your entire home. Now you can take that same percentage of most house-related expenses, including mortgage interest, home insurance, utilities, dues, taxes, and so on) out of your business's income. And, direct costs for your home office are also deductible. So, if you paint or remodel a spare bedroom to become a home office, those costs are deductible as direct costs of the business. Diane Kennedy, CPA www.taxloopholes.com
It’s a little less clear on what happens if you have a smaller house or apartment and don't have a spare room you can use. In some cases, the IRS has allowed the business owner to use a part of another room, as long as he made a clear distinction as to what is your office space. If you rely on these past decisions (there have also been decisions that have gone the other way), you will want to use room dividers or some other way to mark off what is considered office and what's considered personal space, and take pictures to back up your claim. Be prepared to fight a little harder for this one - but you might be able to take it! Diane Kennedy, CPA www.taxloopholes.com
If you rent (instead of own) your home, that’s okay – follow the same percentage calculation we outlined above and apply that to your rent and utilities. Diane Kennedy, CPA www.taxloopholes.com
The Section 179 deduction (which refers to Section 179 of the Income Tax Code) applies to "qualified personal property" which is bought and placed into active service in the year you take the deduction (in other words, you can take this deduction for any property or equipment you buy this year on your 2008 tax return). Diane Kennedy, CPA www.taxloopholes.com
"Qualified personal property" means, roughly, any type of assets that aren't fixed in place and are used in the active conduct of a trade or business. That means your inventory won't qualify. But the shelves you store it on will, and so will the computer you use, the desk and chair you're sitting in the printer you print your shipping labels from, the filing cabinet your store your records in, and so on. Diane Kennedy, CPA www.taxloopholes.com
Qualified personal property also includes vehicles - in fact, you may even know the Section 179 deduction by either the "SUV" deduction, or the "heavy vehicle" deduction. Essentially if you buy a large vehicle that weighs over 6,000 lbs, or a pick-up truck with at least a 6-foot bed, you can take a deduction in the year you buy it of $25,000 using Section 179. Diane Kennedy, CPA www.taxloopholes.com
It's a very important deduction, tax-wise, too, because what it allows you to do is essentially trade a multi-year depreciation deduction in exchange for one big write-off - as long as those values fit under the yearly limit. That limit is currently $250,000.
You can only use Section 179 once per tax return per year. If you are involved in a "controlled group" of companies you'll be limited to spreading one Section 179 deduction out over all of your companies if they are all “flow through” entities such as S Corporations, partnerships or Schedule C companies, rather than giving you $250,000 for each company. Diane Kennedy, CPA www.taxloopholes.com
And, you can't use Section 179 to create a loss in your business. You can only offset your business's taxable income to zero. But that's okay - you can carry through any leftover Section 179 deduction to next year, the year after, and so on, and keep using it up until it's all gone. Diane Kennedy, CPA www.taxloopholes.com
This year the government has given us an extra depreciation deduction – it’s called “bonus” depreciation, and it works by letting you take another 50% of the value of equipment this year. And, unlike the Section 179 deduction, the Bonus Depreciation deduction CAN put you into a loss. So if you’re looking at buying equipment, but don’t expect to make much, or any profit this year, this Bonus Depreciation deduction can be just what you’re looking for. Diane Kennedy, CPA www.taxloopholes.com
Strategy #3: Home Office Helps High-Income Earners to Save Deductions
One of the worst surprises that can happen at tax time is when a taxpayer discovers that a bonus or raise meant he or she couldn’t take the tax deductions he or she used to get! If you itemize your deductions, then you probably know that once your income tops $105,000, you begin losing certain deductions - including the valuable mortgage interest deduction! Diane Kennedy, CPA www.taxloopholes.com
But here's a strategy to offset some of that loss. With a home office, remember, you can deduct a portion of your mortgage interest and other expenses. And that portion of your mortgage interest isn't included in any reduction caused by your high income. Depending on the percentage of expense allocated to your home office, you may find that this completely offsets that reduction! Diane Kennedy, CPA www.taxloopholes.com
Strategy #4: Inventory Storage Space is Deductible
Many of you reading this have eBay businesses that you operate from your home. You, perhaps more than anyone else, understand that accommodating your inventory isn't always easy! But did you know that the space your inventory takes up is a deduction? Diane Kennedy, CPA www.taxloopholes.com
You can take a square footage deduction for your inventory storage, just the same as you do for your home office. But even better, you don't have that "exclusive use" restriction that your home office space has, nor are you required to store your inventory in your home office space. So that inventory taking up half of your garage or your closet space can save you some tax dollars - something to keep in mind when you're feeling crowded out! Diane Kennedy, CPA www.taxloopholes.com
Strategy #5: Invest Home Equity into your eBay Business and Save
If you're a homeowner with equity in your house, the chances are you may have at least thought about tapping that equity to finance a vacation or some home improvement projects. However, not everyone is aware that you may not be able to write off all of the increased mortgage interest. Diane Kennedy, CPA www.taxloopholes.com
Normally there is a limit to the amount of home equity interest you can deduct each year. But, you can break through the limit if you can prove that the money was used for business or investment purposes. So if you use some equity to remodel your home to provide a new business office for your eBay business, all mortgage interest associated with that equity remains deductible, even if it's over the regular deductibility limit. Diane Kennedy, CPA www.taxloopholes.com
As a business owner, you probably use your car at least once a day on business, whether it's going to Office Depot for shipping supplies or the daily slog to the post office. So why not shift the costs that come with a vehicle from your wallet to your business instead? Diane Kennedy, CPA www.taxloopholes.com
Here are four different ways to take a write-off for your car:
1. The Section 179 deduction we referred to earlier lets you take an immediate $25,000 deduction for vehicles weighing more than 6,000 lbs, or a pickup with a bed more than 6 feet long. If the vehicle is less than $25,000, you just get to deduct your actual purchase costs. You don't even have to buy a new vehicle, either - Section 179 applies to anything - as long as it's new to you. Diane Kennedy, CPA www.taxloopholes.com
2. If you don't want to drive something that large or you already own a vehicle, you can take a percentage of your vehicle's running costs (depreciation, gas, oil, tires, repairs, insurance and so on) equivalent to the amount of time you use your car on business. So if you spend 80% of your time in the vehicle on business, you can deduct 80% of these costs. Track them and keep receipts though! Diane Kennedy, CPA www.taxloopholes.com
3. You can also take a deduction for your vehicle using a "cents per mile" method. This is just as it sounds – you keep a mileage log for business-related trips, and multiply the miles you drive times the allowable deduction, which is currently $0.505 cents per mile. This is usually a better choice for older vehicles that are already heavily depreciated. Two points to remember: (1) you can take the percentage deduction OR the mileage deduction, but not both, and (2) make sure you keep your mileage log up to date, as this is something the IRS call you out on if you are claiming a lot of miles. Diane Kennedy, CPA www.taxloopholes.com
4. If you are leasing a vehicle you can take a percentage of your lease payment - based on the ratio of business to personal miles driven as a deduction. This is often the best way to write off a personal vehicle, especially if you want something smaller (and more gas efficient!) than an SUV.
By the way - Section 179 doesn’t care if you paid cash or financed your vehicle. You get to take the entire deduction even if you bought your vehicle on the last day of the year and put $500 down! Diane Kennedy, CPA www.taxloopholes.com
Strategy #7: Use the Right Business Structure for your eBay Business
Something I hear all the time from people at seminars, through online workshops and through emails to our web site goes something like this: "I heard that an LLC (limited liability company) was the best business structure to use for my business because it's the cheapest to form and has the least amount of paperwork requirements." Diane Kennedy, CPA www.taxloopholes.com
The problem with that kind of statement is that there's no tax strategy planning involved - it's totally centered around the amount of money you'll pay to set it up. And I have to tell you, if that's all you want, then the cheapest business structure out there is a sole proprietorship - it costs almost nothing to set up. But (and this is a big "but") it also pays the most taxes and has zero legal protection for you personally. Diane Kennedy, CPA www.taxloopholes.com
Business structuring can't be looked at as a "one-size-fits-all" decision, because we're all different. All kinds of things go into the choice, from your personal income level, to the state you're operating your eBay business in. You can find help at our website forum on www.taxloopholes.com, where my colleague and business structure specialist, Megan Hughes, is available to help you plan your personalized structure. Diane Kennedy, CPA www.taxloopholes.com
However, I can give you a couple of generalizations to get started.
1. If you sell and carry valuable inventory, or if you have a lot of personal assets, an LLC taxed as either an S or a C Corporation may be your best bet. It will combine the beneficial taxation of the C or S Corporation along with the strong legal protections the LLC offers. Diane Kennedy, CPA www.taxloopholes.com
2. If you don't have a lot of valuable inventory or personal assets at risk, then depending on the state you live in an S Corporation may be a good choice, depending on your personal tax level. If you are currently paying 35% or more in personal income taxes, a C Corporation will likely save you some money. Diane Kennedy, CPA www.taxloopholes.com
The money you spend getting ready to do business is one of the most overlooked expense categories, because you’re typically spending your own money, and your business hasn’t been formed yet. Most people don’t realize that this doesn’t matter - those expenses are still business-related and perfectly deductible. Diane Kennedy, CPA www.taxloopholes.com
Incorporation costs. Both hard costs such as filing fees and other costs such as lawyer’s fees, resident agent fees, and incorporator fees
Licensing costs. State and local business licenses, seller license, and similar costs
Bookkeeping and recordkeeping setup costs. Purchasing accounting software, hiring a bookkeeper to set up your books and similar costs
Computer equipment costs Computers, printers, cables, network switches and routers, Internet costs, and similar costs
Software costs. QuickBooks or other accounting programs, eBay software costs such as Accounting Assistant, Selling Manager, Selling Manager Pro, and other costs
Office equipment costs. Desks, office chairs, bookshelves, filing cabinets, fax machine—even the art you hang on your office wall
Business-specific equipment costs. Cell-phones for you and each employee, digital cameras to take pictures of items, a postage-scale capable of weighing larger items, and other costs
Inventory purchase costs. Once you’ve cleaned out your garage or attic and valued the items you will be selling, transfer those to your corporation and record the cost to your business of purchasing those items
Inventory storage costs. Shelving or other storage-related costs for your inventory
Other inventory-related costs. Cleaning supplies if you need to clean or recondition items before sale, batteries or power cords if necessary to test or sell with items, any replacement parts required before items are in saleable condition, and similar costs
Office supplies. Paper, pens, ink, and shipping supplies such as boxes, packing peanuts, packing tape, tape dispensers, and other costs
I love to travel, and so this is one of my favorite tax strategies. If you can do business while you're traveling, then you have a huge potential deduction available to you. Here's how it works:
If you're traveling within the United States, you can deduct your travel expenses (hotel, airfare, car rental, gas, etc.) as long as you do business on the first and last days of your trip. In fact, every day that you do actually do some kind of business also earns some sort of deduction. Now, when I say "doing business" I mean more than a single phone call to the office to check for messages. You'll need to be doing things like managing your eBay listings, responding to emails, shopping for, or purchasing inventory, for example. Diane Kennedy, CPA www.taxloopholes.com
If you're combining business with pleasure, you can only write off your business-related expenses (after the main travel costs). So, for example, if you spend the morning looking for inventory and the afternoon take your family to an amusement park, your costs associated with the amusement park aren't deductible. Diane Kennedy, CPA www.taxloopholes.com
In addition to the obvious personal benefits of vacations, they are also a great way to hold an annual meeting for your business. If you have an S Corporation or a C Corporation, you are required by law to hold an annual meeting and produce annual minutes. You are entitled to a deduction for the expenses incurred to hold that annual meeting. So while on your vacation reserve some time one day to hold your company’s annual meeting. Now your travel costs and vacation costs that day have become deducible as a business expense. Diane Kennedy, CPA www.taxloopholes.com
Strategy #10: Move Personal Expenses to Business Expenses and Pay With Pre-Tax Dollars
There are two areas that many, many new business owners overlook when they are first getting started: the value of things they transfer into their business, and the value of things they continue to pay personally that could legitimately be transferred into their businesses. Diane Kennedy, CPA www.taxloopholes.com
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