There was a time when Tax Simplification was a major issue. Now, as a CPA, my biggest concern is simply to be able to shovel through the massive tax law changes passed in 2010 and keeping my clients on the straight and narrow as far as tax reporting, while still finding all of the deductions and credits they are eligible for.
Much of tax law is full of gray areas, and every time a new exemption, deduction, or credit pops up, there are a myriad of complex rules to follow in order to benefit from the tax savings, and exceptions to the rules to factor in. Bear in mind that, for anything you read in the following paragraphs, you should consult your tax advisor for its applicability to your own situation.
First, some indisputable facts for you: For 2010 individual and partnership returns, the filing deadline (or extension deadline) has been extended to Monday, April 18, 2011 because of a District of Columbia legal holiday, Emancipation Day, which falls on April 15 this year. Good news for procrastinators! Also, if you itemize your deductions on Schedule A, you will not be able to file your 2010 return until after mid-February, because of changes to the form required by the Middle Class Tax Relief Act passed in December.
More facts: the business mileage reimbursement rate for 2011 has gone up to $.51, from $.50 in 2010. And for 2011 only, the employee portion of the FICA tax rate has dropped from 6.2% to 4.2%. The employer portion remains at 6.2%. This means that most employees will get a boost in their net checks, even if they don’t get a raise. For self-employed individuals, this tax break is manifested as a drop in the self-employment tax rate from 15.3% to 13.3%. You should figure this decrease into your estimated tax payments for 2011.
If you own a small business which is reported on Schedule C of your 1040, be aware that the IRS is paying particular attention your deductions for home office, travel & entertainment, and auto expenses. For a home office space to give rise to deductions, it must be used regularly and exclusively for business purposes. Any combination of the following activities, among others, conducted on a regular basis should qualify your home office: meeting clients, billing, research, telephone calls and conferences, or bookkeeping or other administrative duties. If you work on your dining room table and clear it off for dinner with the family, your dining room does not meet the exclusivity test. You can use a portion of a room, rather than an entire room, as a deductible home office if you can some clear delineation (such as an area rug under the business portion). If you have a full time job and also have a home-based business, your home-office deduction may come under extra scrutiny.
If you claim deductions for business meals & entertainment and auto expenses, your first line of defense in an IRS audit is proper, contemporaneous documentation. IRS Publications 587 (Business use of Your Home), 334 (tax Guide for Small Businesses), and 463 (Travel, Entertainment, Gift & Car Expenses) provide a wealth of information on what is deductible and the types of records you should keep to support these deductions.
These are responses to some common questions I get or misconceptions I frequently hear:
1. Meals when you are traveling out of town on business are NOT 100% deductible
– they are still subject to the 50% limitation on all business meals and entertainment.
2. You cannot deduct the cost of your business clothing, even if you always wear jeans and would not dress up except for your business. There are exceptions if your business outfit would not customarily be worn as normal street attire (think Barney costume, medical scrubs, etc.).
3. If you buy or lease a car that you plan to use for business purposes, should you title it in the name of the business or your own name? The answer to this depends on the facts and circumstances of your situation, and is best discussed with your tax advisor.
4. If you are a business owner, and your primary office is in a location other than your home, you may not deduct the mileage between your home and the office as a business expense. That is commuting mileage, which is never deductible. However, if you make a business stop on the way (Staples or the post office), the mileage from there to your office is deductible.
Again, your tax advisor should be your friend and guide through the complexities of the tax code. Prevention of a problem is always preferable to cleanup, so don’t hesitate to consult her before you make a questionable tax decision.