If You Buy Online You Might Owe Use Tax

Joe Popp | March 2nd, 2015
Do You Owe Use Tax?

Amazon purchases aren’t the only ones to consider when you sit down to file your tax return this year. Other popular online retailers and groups, including Etsy, are also depending on their consumers to pay use taxes on the products they sell.

If you are one of the millions of people who love to browse and buy online, it may shock you to learn that the Ohio Department of Taxation is looking at you to declare and pay a little more when you go to file your 2014 tax return. From gifts to grocery shopping, many of us use the ease of online shopping to snag a good deal and avoid the hassle of braving the brick-and-mortar shops – especially during the holidays, but sometimes that convenience might come at a price.

Were you charged sales tax for that pair of shoes you bought last October or those books you had shipped to your house in June? If the company you made purchases from doesn’t have facilities in the state or a law that requires it to collect sales taxes for your state, then it’s likely you owe use tax to Ohio – and you have to report your use tax on Line 19 of your Ohio Form IT 1040.

Use Tax Is Not A New Tax

Declaring and paying sales and use tax on your state tax return is not a new responsibility. The Ohio Department of Taxation states that “in transactions where sales tax was due but not collected by the vendor or seller, a use tax of equal amount is due from the consumer.” In Ohio, the use tax rate is the same as sales tax rate you would have paid if sales tax was correctly charged by the vendor.  This is usually the place of purchase (or your home address for shipments from outside Ohio). You can read Ohio’s use tax law in its entirety here.

As a courtesy, Amazon provides a brief explanation of the consumer’s responsibility to pay use tax on its website. Because Amazon suspects its customers aren’t keeping a file of receipts, the online retailer provides customers with the option to create and download an Order History Report, which compiles your download, shipment, return and refund activity and can be used to help calculate use tax.

But your Amazon purchases aren’t the only ones to consider when you sit down to file your tax return this year. Other popular online retailers and groups, including Etsy, are also depending on their consumers to pay use taxes on the products they sell. So make sure you take a second look at that packing slip and receipt.

Little Box, Big Pause

While the responsibility of paying use tax isn’t new, this is the first year taxpayers in Ohio are required to certify their use tax claim before filing their return with the state. If you didn’t shop online or make a “sales tax-free” purchase, you should have nothing to worry about – simply check the box and continue on. On the other hand, if you did partake in online retail therapy in 2014 and don’t have your receipts handy, you may have to pause your tax preparation to give yourself a little more time to find out what you owe.

To find out more use tax, email Rea & Associates.

By Joe Popp, JD, LLM (Dublin office)

 

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Who’s Fishing For Your Data Today?

Joe Welker | February 23rd, 2015
Computer company Lenovo informed the public that  desktop and laptop devices it sold between September 2015 and January 2015 may have arrived to users loaded with an extra (and unwelcome) feature - SuperFish.

Computer company Lenovo informed the public that desktop and laptop devices it sold between September 2015 and January 2015 may have arrived to users loaded with an extra (and unwelcome) feature – SuperFish. Users should not enter secure information on their device until they are certain that their security was not compromised.

If you purchased a Lenovo desktop or laptop between September 2014 and January 2015 you could be susceptible to “SuperFish” – adware that can be found lurking in the depths of your device.

Capable of hijacking Internet traffic data typically used for securing Internet transactions, SuperFish was installed on Lenovo devices by the manufacturer per an agreement with Superfish Advertising, a third-party software developer based out of Palo Alto, Calif.

“In our effort to enhance our user experience, we pre-installed a piece of third-party software … on some of our consumer notebooks. The goal was to improve the shopping experience using their virtual discovery techniques,” said the company in a prepared statement. “In reality, we had customer complaints about the software. … We stopped the preloads beginning in January. We shut down the server connections that enable the software (also in January), and we are providing online resources to help users remove this software.”

Until you are certain that your Lenovo system is safe from adware, refrain from online banking, making online purchases or engaging in any other online activity were security is critical.

To determine if SuperFish is present on your device and how to remove it, Lenovo released step-by-step SuperFish Uninstall Instructions on its website. You can also visit this secure site, which will run a basic scan on your device to determine if SuperFish is intercepting your connections.

Unfortunately, in his article about the Lenovo crisis, Zack Wittaker cites ZDNet’s Chris Duckett as saying that “the only confirmed way of completely removing SuperFish appears to be reinstalling Windows … or moving to another operating system entirely” as simply uninstalling the adware may not remove the root certificate authority.

According to reports from IDC Worldwide Quarterly PC Tracker and Gartner, Lenovo shipped more than 16 million desktops and notebooks worldwide during the fourth quarter of 2014. Lenovo’s statement indicates that following models may have been effected:

  • G Series: G410, G510, G710, G40-70, G50-70, G40-30, G50-30, G40-45, G50-45, G40-80
  • U Series: U330P, U430P, U330Touch, U430Touch, U530Touch
  • Y Series: Y430P, Y40-70, Y50-70, Y40-80, Y70-70
  • Z Series: Z40-75, Z50-75, Z40-70, Z50-70, Z70-80
  • S Series: S310, S410, S40-70, S415, S415Touch, S435, S20-30, S20-30Touch
  • Flex Series: Flex2 14D, Flex2 15D, Flex2 14, Flex2 15, Flex2 Pro, Flex 10
  • MIIX Series: MIIX2-8, MIIX2-10, MIIX2-11, MIIX 3 1030
  • YOGA Series: YOGA2Pro-13, YOGA2-13, YOGA2-11, YOGA3 Pro
  • E Series: E10-30

Email Rea & Associates to learn more about the importance of protecting your virtual assets against cyber threats.

By Joe Welker, CISA (New Philadelphia office)

 

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Obamacare: Discrimination Is Not An Option

Joe Popp | February 20th, 2015

Do you provide health care benefits to a few of your employees and not others? This is an eligibility and richness of benefits issue. You may find yourself at risk for eligibility discrimination if, for example, you offer coverage only to the owner and an employee or two and not to the rest of your team. You also run into problems if you are found to be discriminating in the benefits your company provides. An example could be if you offer your management group 100 percent of premiums paid by the company and only offer your staff 50 percent of premiums paid. This is not related to the 50 full-time equivalent (FTE) large employer status.

While it might be possible to set up a plan to comply with the tax non-discrimination rules where employees throughout the company are offered different benefits, you also have to navigate through federal and state insurance laws and other Department of Labor regulations – the short answer is just don’t do it! The penalty for non-compliance is $100 per failure per day.

Do You Qualify For The Self-Insured Health Deduction?

Are you seeking to claim the self-insured health deduction (SIHD) on your 1040? If so, one of the following statements must be true:

  • You were self- employed and had a net profit for the year. (Profits should be reported on Schedule C, C-EZ or F).
  • You were a partner with net earnings from self-employment.
  • You received wages in 2014 from an S corporation in which you:

-        Owned more than 2 percent of shares and
-        Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2.

Easy enough … until it isn’t.

S Corps: Catch 22

If you are basing your self-insured health deduction on only the S Corp eligibility criterion above, you have to be very careful to a.) not violate ACA non-discrimination and, b.) maintain your eligibility for the self-insured health deduction.

In order to get the self-insured health deduction, S Corp either needs to pay directly or reimburse the owner and include the amount on form W-2. Whichever of those two choices the S Corp makes, the S Corp is providing coverage to that owner.  And, if you remember in the non-discrimination section above, ALL employees of the S Corp must receive the same benefit in order to comply with the non-discrimination rule.  So by doing the actions required to get that owner eligibly for the self-insured health deduction, S Corp is covered by the ACA non-discrimination testing and it had better be sure to offer coverage to everybody.

And if you think you can just get around the rule by simply increasing wages in lieu of paying for or reimbursing shareholder’s premiums, you’re wrong.  Doing this will put you at odds of the self-insured health deduction eligibility rules, making it impossible for your shareholders to claim the deduction.

Let this be your guide:

A shareholder of an S corporation (who doesn’t have a schedule C or one of the other SIHD criteria) will not be able to take the self-insured health deduction unless the S corporation is providing similar coverage to ALL other S corporation employees AND is including the amounts paid directly to the insurance provider or in payments reimbursed to the shareholder on Form W-2.

Remember, you do have options. A tax professional can help identify yours. Email Rea & Associates to learn more.

By Joseph Popp, JD, LLM (Dublin office)

 

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How To Phone For Help

Charlene Meadows, CPA | February 17th, 2015
Phone Interview - Rea & Associates - Ohio CPA Firm

While you should never consider a phone interview to be a shortcut, with a little practice and preparation a brief phone screen can be an effective hiring tool.

We’ve all been there. You need to hire a new employee – fast. But you dread the process of advertising for the position and being inundated with countless inquiries and resumes. Going through the process of finding the right employee for the job can be a huge time commitment for everyone involved. And, let’s face it; if you had the time needed to properly filter candidates you wouldn’t be looking to hire a new employee in the first place. For those in need of a better way to winnow the applicant pool, help may be closer than you think.

Instead of filling your calendar with interviews, why not pick up the phone instead.

A brief phone interview is a great tool for employers. Not only does this method of communication allow you to assess their interest in the position, it helps you identify whether the candidate demonstrates specific professional qualities that you are looking for in an employee.

“A good initial phone screen can reveal a wealth of important information, including a candidates skills, experience, motivation, professionalism and salary expectations,” stated Kathryn Tyler in an article about pre-employment screening for the Society of Human Resources Management. “Phone screens can also give under-the-radar applicants – those who might be overlooked if HR were doing only in-person interviews – an opportunity to shine.”

When its time to bring in a new employee, make sure to use all the tools available to you to ensure the person you hire is truly the best fit for the job. A phone screen is just one of your many, many options. Email Rea & Associates to learn more about hiring top-notch employees and the overall impact they have on your company’s bottom line.

By Charlene Meadows, CPA (Mentor office)

 

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Is Your Cash Flow Ready For Spring?

Dave Cain | February 17th, 2015
cash flow - Rea & Associates - Ohio CPA Firm

Cash flow is arguably more important to your company’s success than your bottom line because it takes your past, present and future projections into consideration to arrive at a comprehensive analysis of your financial wellness.

Spring is the season of renewal. It’s the time of year when we emerge from our dens to enjoy warmer weather, the melting of snow and an abundance of greenery as nature appears to come alive. Spring is also an opportune time in the business world. And before we lose ourselves in the hustle and bustle of increased production and revamped initiatives, take this time to review and solidify your company’s cash flow projection.

Managing your cash flow now will help minimize mistakes later – when business and economic trends become more favorable. Still not convinced? Here are five more reasons to consider maintaining your company’s cash flow projection.

5 Reasons Why Managing A Solid Cash Flow Is Just Good Business Sense

  1. A cash flow projection will provide you with the information you need to make better, more lucrative decisions. For example, if you had insight into which of your company’s non-core assets are viable would you make changes to support future growth or would you simply maintain the status quo? With a well-maintained cash flow projection at your fingertips you can make decisions that will help secure a more lucrative future for your company.
  2. If you’re looking for a way to hold you and your team accountable for the company’s success and failures, look no further than your cash flow model. This tool can help you fine-tune your management strategy, which can help you and your team achieve better quality standards, increased production, enhanced efficiency and an improved reaction time.
  3. Your cash flow strategies can empower your team to take further ownership of their work and pride in the company. When they have a chance to see that their actions influence how well the business does as a whole they will be more likely to seek out opportunities for improvement.
  4. When you have a cash flow projection then you have the tool needed to develop timely and attainable goals. When you have a better idea as to how much money is going out and coming in (and why), you and your management team can put plans in place to better manage the company’s cash flow in a more favorable way.
  5. Are you managing cash that you acquired from an external source? Will you manage acquired cash in the future? Stakeholders love cash flow projections because they provide them with the information they need to monitor their investment. Oftentimes banks require you to provide quarterly financial information to prove that you’re complying with the terms of the loan package.

Cash flow is arguably more important to your company’s success than your bottom line because it takes your past, present and future projections into consideration to arrive at a compressive analysis of your financial wellness. Email Rea & Associates to learn more about the importance of cash flow projections and how you can use yours as a valuable management tool.

By Dave Cain, CPA (Dublin office)

 

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Don’t Forget About Your ERISA Fidelity Bond

Paul McEwan | February 11th, 2015
Don't Forget About Your ERISA Fidelity Bond

Avoid problems with the Department of Labor, make sure you know the ERISA fidelity bonding requirements.

If your company offers a retirement plan to its employees, make sure you are familiar with the Employee Retirement Income Security Act’s (ERISA) fidelity bonding requirements and the information you must include on your plan’s annual Form 5500.

Over the years we have noticed that many clients struggle with obtaining and keeping an active and accurate ERISA fidelity bond because of a general lack of understanding. The purpose of the fidelity bond is to protect your plan’s assets from the risk of loss due to fraud or dishonesty by employees handling the plan’s funds, such as when remitting plan contributions.

The required bonding amount is “10 percent of plan assets handled.” Because this is a difficult number to know with certainty, most plan trustee’s make sure the plan is bonded for at least 10 percent of all plan assets. This means that as your plan’s assets grow, so does your required bonding amount. There are two primary exceptions to this rule:

  1. The maximum required amount is $500,000 – regardless of your plan assets.
  2. If your plan has more than 5 percent non-qualifying plan assets, then a bond is needed to cover the amount of non-qualifying plan assets.
    • “Non-qualifying plan assets” includes anything that is not a marketable security held by a bank, trust company, registered broker-dealer or insurance company.
    • If a bond in the correct amount is not established, then an independent plan audit by a certified public accountant is required. These audits cost about $10,000 annually.

Even if your plan only contains qualifying plan assets, not maintaining a fidelity bond in the proper amount can be a red flag to the Department of Labor, which could prompt them to take a closer look at your plan.

NOTE: A fidelity bond is different than fiduciary insurance. Fiduciary insurance is not required, but should be in place to protect your plan fiduciaries from personal risk of loss. Your plan fiduciaries include any employee who serves as a plan trustee or who is on a plan investment committee tasked with ensuring that your plan is free from errors or omissions that could result in loss to your plan. Plan fiduciaries are personally liable for these potential losses, so having fiduciary insurance coverage is prudent (albeit not required).

To learn more about the ERISA fidelity bond requirements, email Rea & Associates.

By Paul McEwan, CPA, MT, AIFA (New Philadelphia office)

 

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Governor’s Budget Proposal Makes The Case For Tax Reform

Lesley Mast | February 11th, 2015
Proposed tax increase on oil and gas production

If the proposed two-year state budget proposal passes, oil and gas produced by horizontal wells will be taxed at a 6.5 percent tax rate for product sold at the wellhead. If sold downstream, a 4.5 percent tax will be applied.

Since it was unveiled last month, Gov. John Kasich’s proposed two-year state budget has many individuals, businesses, school districts, not-for-profit organizations and others scrambling to find out how his proposed tax reform package will affect them. In his recommendation, Gov. Kasich says his proposal seeks to “create more opportunities for each and every Ohioan.” To this end, the budget focuses on four primary objectives:

  1. To ensure that students are ready for college and careers
  2. To help more students get degrees
  3. To cut and reform taxes
  4. To help Ohioans move up and out of poverty and into jobs

To achieve these goals, Gov. Kasich has proposed implementation of several tactics to help fund his $35.5 billion 2016 budget, which is up 15.5 percent over the state’s projected spending in fiscal year 2015. Of those tactics, a slew of tax cuts and increases are central to his budget initiative. The following points address some primary changes Ohioans can expect to see if Gov. Kasich’s 2016-2017 budget plan is approved.

Proposed Tax Cuts

  • A 23 percent across-the-board income tax rate reduction. This proposed cut would drop the top income tax rate to 4.1 percent, the current from 5.33 percent.
  • Business owners of pass-through entities with gross receipts less than $2 million will pay no income tax on their business income.
  • Other Ohio business owners will see the 50 percent reduction incentive on income that totals $250,000 and less become permanent.
  • Individuals who earn less than $40,000 will see a $1,600 increase in their personal exemption (from $2,400 to $4,000). The personal exemption for those who make between $40,000 and $80,000 will increase by $900 (from $1,950 to $2,850).

Proposed Tax Increases

  • The commercial activity tax (CAT), which is measured by a business’s gross receipts on business activities in the state, will increase 0.6 percent to 0.32 percent.
  • The state’s sales tax will increase to 6.25 percent. The current sales tax rate is 5.75 percent and would be expanded to include management consulting, lobbying, market research and opinion polling, public relations, debt collection services, cable subscriptions and parking and travel services.
  • Means-tested tax credits and exemptions for retired taxpayers who earn more than $100,000.
  • Oil and gas produced by horizontal wells will be taxed at a 6.5 percent tax rate for product sold at the wellhead. If sold downstream, a 4.5 percent tax will be applied.
  • The state currently reduces the price paid for the new car or boat by the value of the trade-in. The proposal calls for a 50 percent deduction in this exemption.
  • The discount vendors receive for collecting, reporting and remitting sales tax will be capped at $1,000 per month.

To learn more about how tax reform could affect you, email Rea & Associates.

By Lesley Mast, CPA (Wooster office)

 

 

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Is It A Charity Or A Scam?

Maribeth Wright | February 3rd, 2015

Remember when writing a check to a charity left you with a feeling of satisfaction and accomplishment? Unfortunately that feeling has been replaced with vulnerability and uncertainty as soliciting for fake charities has become a common way for scammers to prey on the generosity of strangers.

Remember when writing a check to a charity left you with a feeling of satisfaction and accomplishment? Unfortunately that feeling has been replaced with vulnerability and uncertainty as soliciting for fake charities has become a common way for scammers to prey on the generosity of strangers. Before you tear that check from your checkbook, take another look at the “Pay to the Order Of” line. That person who just spent the last 15 minutes explaining why your donation is critical to their organization might have less-than-admirable intentions.

Every year the Internal Revenue Service (IRS) warns taxpayers about what it considers to be the “Dirty Dozen” of tax scams. The annual report identifies schemes that appear to be more prevalent during filing season. And while you may be inclined to use some of your refund to help a worthwhile charity, the IRS reminds taxpayers to remain vigilant against scammers “masquerading as a charitable organization to attract donations from unsuspecting contributors” – particularly this time of year when scammers appear to be more active.

If you are approached by somebody who claims to be soliciting money for charity, here are a few tips to ensure that your money will be used for a worthwhile cause.

What’s In A Name?

Sometimes fake charities will adopt a name that’s similar to one you are sure to recognize and consider to be a respected organization within your community or nationwide. Even if you are confident that the not-for-profit you are about to donate to is reputable, a quick online search can remove any doubt. The IRS provides access to a search tool designed to help the public identify valid charitable organizations. You can also find registered 501(c)(3) organizations on Guidestar, an online tool that provides users with data and information about tax-exempt organizations and other faith-based nonprofits, community foundations and other groups typically not required to register with the IRS.

Keep Personal Information Private

Nonprofit organizations do not need your Social Security Number to complete the transaction, nor do they need to retain it for their files. So if someone claims to represent a charity and asks for any of your personal information (including passwords) – don’t give it to them! Scammers use this information to steal their victim’s identity. Protect yourself from fraud and remember to keep your personal information private.

Where’s The Proof?

When you make a decision to donate to a tax-exempt organization, make sure to have proof of the transaction. For your own security – and for tax record purposes – you should never make a cash donation. Use a check or credit card every time you give money to charity. Doing so not only proves that you made the donation; it will help you claim the contribution on next year’s tax return.

Ask An Expert

A trusted advisor can help you identify whether a particular charitable organization is reputable or not and can help you make the most of your donated dollars. Email Rea & Associates for more information.

By Maribeth Wright, CPA (Cambridge office)

 

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From Toddler To Teen And Beyond: Tax Breaks For Families

Jordan Miller, CPA | February 2nd, 2015
Families of all kinds can take advantage of a variety of tax incentives, which can ease some of the financial burden.

Families of all kinds can take advantage of a variety of tax incentives, which can ease some of the financial burden.

With parenthood comes many rewarding experiences – and expenses. You hear about how expensive it is to raise a child, but you never really know what to expect until that little bundle of joy enters your life. From diapers, pre-school, extracurricular activities and saving for college, the costs of raising kids adds up fast. My wife and I welcomed our daughter into our family last year; and this life-changing event got me thinking: What tax breaks are available to families?

Relief for New Parents

Families of all kinds can take advantage of a variety of tax incentives, which can ease some of the financial burden. From deductions to credits, this list will give you a good idea as to what is available to you.

  • Adoption Credit

-         A credit of up to $13,190 – dollar for dollar of qualified expenses – is available to families who have adopted children.

-         Qualified expenses include adoption fees, attorney fees, court costs, etc.

-         Adopting a child with special needs results in the full credit amount regardless of whether qualifying expenses were made.

  • Child Credit/Additional Child Credit/Dependent

-         Child Credit – This credit applies to up to $1,000 for qualifying children younger than 17. This credit is generally non-refundable, but the taxpayer may be able to qualify for the additional child credit if he/she has enough earned income.

-         Additional Child Credit – Part of the child credit may be refundable for taxpayers with more than $3,000 worth of earned income.

-         Dependent – Each child listed on a tax return may be eligible to be listed as a dependent, which results in an additional $3,950 exemption per dependent.

  • Earned Income Credit

-         This is one of the largest credits available to taxpayers and claiming it can save you thousands of dollars in taxes. Taxpayers with three or more children and who have earned income as high as $52,427 may qualify for the earned income credit. This credit generally decreases with fewer qualifying children or for those with higher income levels.

More To Know As They Grow

In addition to child and earned income credits, here are some additional ways to save on your taxes as your children continue to grow.

  • Dependent Care Credit

-         This non-refundable credit goes toward a portion of a dependent’s child care expenses. Common qualifying expenses include day care, pre-school, day camps and similar programs.

  • Preempting College Costs

-         Education Savings Accounts allow taxpayers to contribute up to $2,000 per year for children younger than 17. While there are no tax benefits for the year of the contribution, distributions toward qualified higher education expenses (including earnings on contributions) are tax-free. Taxes and penalties may apply if the funds are not used for qualified education expenses.

-         State College Savings (529 plans) allow taxpayers to make contributions to an investment account and take a deduction toward their state income tax. (There is no federal income tax deduction available when taking this option.) Similar to education savings accounts, taxes and penalties may apply to funds used on unqualified expenses.

  • Flexible Spending Plans

-         If you have a flexible spending plan through your employer, remember that your child-related medical expenses qualify under the plan too. The funds you already contribute to your plan are deducted pre-tax up to certain thresholds. But don’t forget to use the entire amount withheld in your plan before March 15 of the following year or you will lose it.

The College Years

It probably seems like it was just yesterday that your son or daughter was crawling across the living room floor – now you are preparing to send them off to college. But just because they are all grown up doesn’t mean that the tax incentives end. Here are some tax perks to help during your child’s transition into adulthood:

  • Dependency Extension

-         You can claim your child as a dependent until they are 19-years-old as long as you continue to provide more than half of their support and they lived with you for more than half the year. You may also continue to claim your child if they are younger than 24 and a full-time student.

  • Tax Relief For Education

When it comes to paying for higher education, there are a few opportunities for tax relief. Below are a few of your options. Remember that you may only claim one of these options. A financial advisor can help you determine which option is right for you.

-         You can claim the American Opportunity Credit for up to $2,500 (100 percent of the first $2,000 and 25 percent of next $2,000) for qualified education expenses. This tax credit is only available for undergraduate students. Qualified expenses include tuition, fees, books, supplies, etc. This credit is also 40 percent refundable.

-         Qualified education expenses, such as tuition, fees, books, etc., qualify you to claim the Lifetime Learning Credit, which could total up to $2,000 (20 percent of up to $10,000). Even though this credit is entirely nonrefundable, it helps reduce your tax bill.

-         If you are paying for tuition, fees, books and other school supplies for your student, you may find this above the line deduction of up to $4,000 for these expenses to be beneficial.

  • Student Loan Relief

-         Help is also available to those making payments on student loans. An above the line deduction of up to $2,500 is available for interest paid on education loans.

In addition to being expensive, taking care of children can be confusing at times. Claiming these tax deductions and tax credits doesn’t have to be. Email Rea & Associates to learn more.

By Jordan Miller, CPA (Millersburg office)

 

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How To Drive For Business And Save On Your Tax Bill

Tom Jeffries | February 2nd, 2015
Deducting expenses related to your car or truck is an allowable business expense – as long as the vehicle is used for business purposes.

Deducting expenses related to your car or truck is an allowable business expense – as long as the vehicle is used for business purposes.

If you are one of the many men and women who drive their personal vehicles for business, don’t forget to claim the appropriate tax deduction on your tax return – the savings just might help you keep more cash in your bank account and more gas in your tank.

Here’s what you need to know. …

Deducting expenses related to your car or truck is an allowable business expense – as long as the vehicle is used for business purposes. And if you use it exclusively for business purposes, you may be able to deduct the full cost of your vehicle. But before you start claiming deductions on your tax return, make sure you understand what the IRS considers to be a valid business purpose. Hint: Commuting from your home to work is not considered a valid business purpose.

When To Claim A Deduction

Do – claim a deduction if you use your vehicle for travel between two places of business.

Do – claim travel expenses that result from traveling from one job to another, traveling from one customer or client to another and traveling from your office or business location to perform other business tasks.

Do – claim your travel expenses that accrue between your home and a business destination if you have a home office that is considered your primary place of business.

Which Deduction Is Better?

There are many factors to consider when choosing a deduction method that will result in the most tax savings. The two biggest factors are the cost of the vehicle and how many business miles you drive each year. Here are the nuts and bolts of your two options:

  • Standard Mileage Method – If you keep good notes, then you may prefer the standard mileage method to keep track of your deduction. Here’s how it works: Start by keeping a log or a journal of all your business trips – include who, what, when and where. Then add up all the miles you racked up on your trips and multiply that number by the IRS’s standard mileage rate – which currently stands at 57.5 cents per mile. For example: if you were to drive 15,000 business miles over the year, you can multiply that number by 57.5 cents per mile to claim an $8,625 deduction.
  • Actual Costs Method – This method requires that you to keep track of all costs associated with your vehicle, including depreciation, repairs, maintenance, gas, tires, etc. When you have collected all these costs and arrived at a total, multiply this number by the percentage of time the vehicle is used for business purposes. Your deduction is limited to the percentage of time the vehicle was used for business purposes.

So, which deduction method is better?

Say you purchased a car for $30,000 and you use it exclusively for business purposes. You have figured that you drive about 10,000 miles for business each year. If you use the standard mileage method, you could claim a $5,750 deduction each year. But if you were to use the actual costs method, instead you would find that during the first five years of owning the car the actual vehicle expenses significantly add up to a larger tax deduction.

If you use your vehicle for business purposes, a financial advisor can help you identify the best route to maximize your tax savings. Email Rea & Associates to learn more.

By Tom Jeffries, CPA (Millersburg office)

 

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