Monday, October 18, 2010

Questions from taxpayers

October 15th has passed and all extensions have been complete. Now I can get back to my tax blog. I apologies to those that I have kept waiting ;) As promised here are some questions that I have received from clients/friends that I though some of you folks might find interesting.

Question #1: I am a business owner/independent contractor, can I expense the use of my vehicle?

Answer #1:  To expense the use of your personal vehicle, the IRS requires that your vehicle use be ordinary and necessary to perform your day to day business operation and your evidence supporting the expense must be in writing.

You must have a mileage log that supports your business trips/miles driven and must describe the business purpose of the trip.

Microsoft Office has a great template that many of my clients use and taxpayers that I have represented in audit have used. 

Mileage Log Template

Taxpayers can either choose the Actual Expense Method or the Standard Mileage Rate Method.

Under the Actual Expense Method, actual car or truck expenses include: Depreciation, Lease payments, Registration fees, Licenses, Gas, Insurance, Repairs, Oil, Garage rent, Tires, Tolls, and Parking fees.  For example, if, based on records maintained by a taxpayer, total actual vehicle expenses for a given year are $2,500 and the vehicle is used 75 percent for business, the allowable deduction using the actual expense method is $1,875 ($2,500 x 75 percent).

Under the Standard Mileage Rate Method, vehicle expenses are based on amount of miles driven and calculated by the standard mileage rate that is determined by the IRS.  For 2010, the standard mileage rate is $.50 per mile.  For example, if, based on records maintained by a taxpayer, total business miles driven for a given year is 10,000 miles, the allowable deduction using the standard mileage rate method is $5,000 (10,000 miles x $.50 per miles).

Which ever method you choose, you must keep records to support your expenses.

IRS Publication 463, page 14-24 provide additional information to taxpayers.

Question #2: I keep hearing about Bush Tax Cuts that are set to expire, what are these tax cuts?

Answer #2: During 2001 and 2003 there were many tax cuts and credits that were enacted by the Bush administration, many  of these tax cuts and credits are set to expire at the end of 2010.

Here what this means for most taxpayers:

The standard percent rates -- the baseline percentage of your income that goes to the government -- will universally rise from 10% to 15% (for lowest-income earners), from 25% to 28%, from 28% to 31%, from 33% to 36%, and from 35% to 39.6% (for highest-income earners).  So what this means is if you are in the 10% tax bracket, in 2011 you will most likely be in the 15% and so on.  This is estimated to generate roughly about $157 billion in additional tax revenue.

Taxes on capital gains and dividends will increase.  No more reduced tax on long-term capital gains.

Child tax credit will go back down to $500 per child, currently $1,000 per child.

Below are some example based on Tax Foundation's 2011 Income Tax Calculator of what the effect of these expired tax cuts may be.

Family of four, combined income of $75,000, tax increase of $2,143 next year (2011).

Family of four earning $150,000, tax increase by $4,510.

Single filers earning $50,000, tax increase of $605.

Single filers earning $75,000, tax increase of $1,355.

Single parent with one child earning $25,000, tax increase of $955, decreasing his tax refund of $1,856 to just more than $900.

Low-income family of five earning $45,000 would see their taxes increase by $2,538.

Retired married couple with income of $60,000  ($10,000 in qualified dividends, $25,000 in Social Security benefits and $10,000 in 401k) tax increase by $2,676.

Question #3: What are high IRS Audit areas?

Answer #3: From my 5+ years of representation taxpayers in audit, I have noticed the areas that the IRS continues to focus over and over gain on are Car & Truck Expense, Meals & Entertainment Expenses, and Travel Expenses.

Why? Because these areas are common for taxpayers to hide personal expenses.  The IRS rules for any business expenses are "the expense must be ordinary and necessary to run your business."

The IRS may disallow these expenses in an audit if you do not meet the IRS record keeping requirements.  All of these expenses require proof of expense and a log describing the 5 W's (When, Where, Who, What, &Why)

IRS Publication 583 provide some useful information on starting a business and keeping records.

Please feel free to contact me with any of your questions/concerns

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

1 comment:

  1. Thanks Solomia, this info has been helpful. I'm sure to have some more questions down the road.
    Cheers...Your client....John T.