Contact Information

Phone: 915.562.9223
Toll-Free: 877.962.9223
Fax: 915.562.6919
Email: info@indivsys.com
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All examples are based on tax laws as they exist at the time of writing. Since tax laws change daily, the exact dollar amounts may be altered, but the underlying principals are the same. If an example seems out-dated, feel free to call us for a more-current explanation.

We've said before that knowledge, contingency planning and flexibility are the keys to success in any business. Most business owners try to fly by the seat of their pants for the first year and many fail as a result. Others hang on for a year or two, but their lack of accurate information and their inflexibility ensure failure within 5 years.

That is why it is so important to have a professional Financial Consultant working with you. No matter what size your company is, there are too many economic and tax pitfalls that only a trained, experienced professional can guide you safely around. Although we tend to be a pompous group as a whole, individually, we're not too bad, and most of us really are interested in your success.

Tax issues are, obviously, one of the more important concerns a business will encounter. As far as the Government is concerned, the burden of proof is on the business owner and ignorance of the rules and regulations is no excuse for doing something wrong. Many a business has gone under because lack of knowledge of tax rules put them in so much debt with the government they couldn't pay it off. Tax laws are too complicated for any 6-week course to even scratch the surface, let alone cover adequately. A degreed, experienced professional knows, at the very least, where to find the answers to the issues that will come up. They know who to contact to get additional information they may not have at their fingertips. Most have routine issues memorized and keep an adequate library on hand for research.

Another pitfall is understanding your financial data. Having the information is easy in today's automated market. You can pick up any number of canned bookkeeping packages that will provide you with a sort of financial statement. But, do you know what the information means? Can you analyze it and determine where you are headed? So many businesses have gone bankrupt because they were inventory rich and cash poor or because they sold a lot, but were having trouble collecting what was due. Financial professionals are taught to look at this data not only for what it reports in the way of historical activity, but for what it tells them about the company's ability to pay its debts, how it is covering its expenses, what products are making the most profit, and where it can cut costs or increase prices safely in order to increase profitability. All of this information can help you better manage your business's finances and make the most out of your hard-earned dollars.

The word Professional does not necessarily refer only to a CPA (Certified Public Accountant). Besides, most small business cannot afford a CPA's hourly rates. A CPA is a person who has passed a two-day exam covering a variety of accounting information and become Certified by the State. There are many types of certification to include CIA (Certified Internal Auditor), CMA (Certified Management Accountant), CFP (Certified Financial Planner) and many others. Each type has its own strengths and weaknesses. CPA is simply the most common. Until recently, a degree was not required to take the certification exams so many certified professionals don't have degrees and few have more than a single tax course. However, nearly all certifications require at least 2 to 4 years of apprenticeship under a certified professional. Therefore Certification, although indicating a degree of expertise and experience, is not necessarily the only thing you should be looking for.

The person or firm you choose should have a solid background in finance and detailed records management and analysis (not just bookkeeping) with a good knowledge of the various tax laws in order to keep you on track. This means at least a bachelor's degree in accounting and several years of experience. Unfortunately, bookkeeping and records management is one of those areas of study that seem simple in theory, but don't really make sense until you get out in the real world and start applying it. Texts cannot even begin to cover all the problems and issues a financial analyst sees on a daily basis, so practical knowledge is more important. Therefore, someone with 10 years of experience in actual records management and financial analysis (not merely bookkeeping and data entry) might be better than a person who just got their degree. Weigh all this information when you interview your potential consultant to determine which you prefer and are more comfortable with.

This person or firm, if they are good, will be able to keep your financial records for you and spit out financial statements reasonably quickly for use at banks and in financing endeavors. They will be able to explain to you what the financial statements mean about what your business has done to date and help you plan and project the future of your business. They should be able to make recommendations on cuts and expansions as well as investing any extra funds that may become available. And lastly, they should be able to accurately and timely prepare any federal, state and/or local tax returns and defend their position to the officials involved.

When you look for such a professional, first see if they will let you interview them free of charge for at least 30 minutes. If not, don't waste your time, they'll be very expensive to use and you don't need anyone that highly-priced in your first few years. When you find one who will talk to you initially free of charge, make sure your interview is with the professional, not his/her clerk, and consider asking them the following questions:

What is your background in records management and analysis? In taxation? Would you consider yourself conservative or aggressive as a tax preparer? Are you certified? If so, in what area?

At the very least, they should have a degree in accounting with at least two or more courses in taxation. They should participate in a minimum of 40 annual hours of Continuing Professional Education to keep up their skills. They should have a working knowledge of the Taxpayer's Bill of Rights and know how to battle the various taxing entities should an examination or error arise. An aggressive preparer will get you every dime of deduction, but may open you up to audits. Such an examination is not a problem, providing they are willing to back up their work and defend it. Find out what their experience has been with tax examinations and their success rate. That will give you an idea of their expertise level and how much you can trust their assertions on your tax return. Whether or not they are certified can provide you with an understanding of how well they know their business. Most certifying exams are at least two days long and cover a lot of history, procedures, regulations and laws. The vast majority of individuals becoming certified have to take the exams more than once. The fewer times the person takes the exam, the better they learned the information. Persons passing "in one sitting" (meaning taking the exam only once before passing it) are a rare and elite group, regardless of the type of certification they have.

How many years have you worked in this business? What is your primary clientele? What is your area of specialty? Who answers your questions?

Any person who holds themselves out to be a professional should have at least 5 years in the profession working with the areas they are going to be providing to you. See that they have experience in your type of business or similar businesses of your size. No one is an expert at everything. See that your chosen specialist understands your business and your needs and can answer your questions. Where they go when they have a problem to get additional information and do research will give you insight to how they see themselves - as infallible, or as a professional with strengths and weaknesses. A good professional will have, at the very least, the Master Tax Guide and at least one current set of Internal Revenue Code books. He/she will not be afraid to say they don't know everything but are willing to find the answers either from other professionals or through research. The professional is the person you want because they are more realistic and will be straight with you about how you are really doing.

Do you have a list of references? May I contact some of your current clients?

Any professional worth their salt will be more than willing for you to speak with their clients or at least provide a list of people you may call to ask about them.

How do you charge your clients and what are your rates?

Most in this profession charge hourly rates based on the expertise required. These rates range from $20 per hour to $250 per hour. Many firms and individuals have some set rates for Write-up (monthly bookkeeping) and Tax Preparation (usually a charge by form filed) with hourly rates charged for unusual items. However, these standard rates are still based on the estimated hours necessary to complete them charged at a specified hourly rate. A good firm will be willing to give you an estimate in writing of what their services will cost you in an average month. Some will even write up a contract guaranteeing you certain rates for a specified period of time, usually 6 months to a year. Most companies bill either when the service is completed or by the month based on the Client Agreement.

Can I call you to ask questions? Who will I talk to when I do? What will I be charged, if anything?

A professional should be willing to back up their work with explanations or details if the client needs them. As long as the client doesn't abuse the service, this should be part of a package deal. Additionally, many financial professionals will not speak directly to the client, but refer them to the bookkeeping clerk or another staff member. Find out if this is the standard procedure and then determine if you are willing to accept that. Remember, just because they are clerks, doesn't mean they aren't qualified to answer your questions. Most Senior Financial Professionals start out as clerks right out of college and have more than enough education and knowledge to assist you. Further, if the firm charges hourly, the clerk will cost you less.

What will I need to provide you in the way of information and documents and what will I get back? Will you explain to me how I'm doing and make recommendations?

No professional can function without information, whether they be doctors, lawyers or financial examiners. You have to tell them what you did and they, in turn, organize it and record it so it makes sense and complies with current State and Federal regulations. You need to find out how much they will expect you to do and how much they are willing to do. You should also know what you will receive on the other end - a monthly set of financial statements, a complete set of books, just a tax return. If you don't understand, ask the consultant to explain what they mean and provide examples. Do they want original documents, copies, summarized lists, etc.? When do they need them, and how long will they take to process them? The more organized and easy-to-read your information is, the less time your professional will have to spend. Therefore, the more work you are willing to do up front, the less it will cost you. Be sure they are willing to explain your finances to you and make recommendations for improvements and/or changes to keep you growing.

After the interview is done, ask yourself the following questions:

• Did the consultant speak to me in English or Financeze? Did he/she make sure I understood what was being said?
• Did he/she seem genuinely interested in my business and its potential success? Will he/she treat me and my business as an individual with different needs than other businesses regardless of similarities?
• Did he/she ask me relevant questions about how I operate my business such as: how I pay my staff, how I bank and make deposits, how I pay my taxes, how I purchase inventory, how I track my transactions, and how I pay myself?
• Can I develop a working relationship with this person? Will he/she work with me? Will they return my calls timely.
• Can I afford their services? Will I get value from them for my payments? Were they clear as to exactly what services I will receive and at what cost?
• Did we reach an agreement on services and costs? If so, was it in writing?
• Most importantly ask yourself - Did I feel comfortable with this person? It is critical that you feel safe and comfortable with the individual as well as their level of knowledge and competence.

There is no such thing as a 'perfect' tax return. This is due to differing interpretations of the tax laws, human error and/or computer error. Further, tax returns may be chosen for examination on a random basis without any apparent errors. So, the question is not if you will be subjected to a tax audit but when. When that happens, the issues become which taxing authority is examining you, how good are your records, how much is it going to cost you in additional taxes, and who can help you keep that number as low as possible?

The following discussion will help you answer the most personally-manageable of those which is "How good are my records?" because supporting your numbers is more than half the battle.

Rule #1: Your tax return data is YOUR responsibility

1. Your Preparer is NOT responsible for your tax return. However, many preparers will defend their work.
2. Your Preparer MUST depend upon you for numbers and support. Your preparer's responsibility is limited to helping you determine what expenses are legitimate deductions, guiding you in proper tracking procedures, and making sure your taxes are prepared properly based on the information you have provided.
3. When you sign your tax return, you attest to its accuracy. You cannot avoid tax penalties and interest by claiming that you relied solely on a professional.

Rule #2: Documentation is the single most important part of surviving an audit.

1. It is the key to supporting your tax position. You have the burden of proof as far as the IRS is concerned.
2. It is required by law. If you don't have good records, you can be held liable for fraud.
3. Without it, your deductions may be disallowed. If your deductions are disallowed, you may end up with a huge tax debt plus penalties and interest on the tax.

Rule #3: The cost is high if your deductions are disallowed

Business owners are taxed on the profits of their business. Deduction disallowance increases taxable income and the resulting tax debt.

1. Businesses are taxed at 15.3% of profit for Social Security (Self-Employment)
2. PLUS the regular income tax on the profit of 10% or more
3. PLUS a standard 10% penalty for late payment past the due date of the return
4. PLUS .5% per month penalty during the period you fail to pay the tax
5. PLUS an increase to 1% per month if the tax isn't paid within 10 days of notice from the IRS that there is tax due
6. PLUS 20% of any underpayment due to negligence or lack of reasonable basis
7. PLUS 75% of any underpayment attributable to fraud

Rule #4: Avoid Penalties by Meeting Record Requirements

You can avoid most of the problems by maintaining accurate, reliable records of all activities.

1. Become a Pack Rat - save each and every receipt. There is no such thing as too much information when it come to protecting yourself in a audit.
2. Build a filing system separated into business and personal information by month and type of information.
1. Permanent Records should include your home and auto purchases plus the records of any other assets you will keep for more than 1 year.
2. Temporary or Regular Records should include any records that pertain to only one year such as checks, invoices and receipts and forms 1099 or other official tax paperwork.
3. Daily Diary should keep track of mileage, appointments, etc.
3. Use 3-part checks. Keep one copy in a numerical file and the other with the receipt.
4. Use a business credit card to reduce your need for record keeping. The credit card invoice details purchases and create a paper trail for you. Some even provide annual summaries by type of expense.

Rule #5: Retaining your Records

You must keep your records in sufficient detail to establish your income and deductions. Such records must be available for inspection for as long as the contents are material in the administration of any tax law. What that means in English is:

1. Three Year Rule - All taxes must be assessed by IRS within three years from the date the return is filed or due, whichever is later. The longer you wait to file, the longer they have to come after you and the longer you have to keep the records.
2. Six Year Rule - If you omit an amount in excess of 25% of gross income, the 3-year limitation is automatically extended back another 3 years to 6 full years.
3. No Limitation - If you fail to file or file a fraudulent return, there is no statute of limitations.
4. Extension by Agreement - The statute of limitations may be extended by a written agreement between you and the IRS. We recommend this be avoided if at all possible.

We recommend keeping records for 7 to 10 years AFTER the date the activity occurred and/or the asset was sold or disposed of. Make certain you make copies of heat-sensitive receipts as they will fade very quickly and become useless. Lastly, electronic copies of bank and credit card statements and reports can be very helpful in any audit.

The Internal Revenue Service does not allow a deduction for losses in an activity that is deemed a hobby. However, determination of hobby vs. business activities is not quite so black and white. A taxpayer may be trying to run a business, but, if it looks like a hobby, the deduction for activity expenses may be denied. You have to prove that you are in the activity for a profit. How can that be done?

Here are a variety of methods to help you get your maximum business deduction:

Show a profit in three (3) of the first five (5) years.

Although not required, this is the easiest and most secure method of having the business declared a business. Congress said that if you show a profit, you are engaged in a business - period. The IRS has no recourse and there is no 'minimum profit' you must make. If you cannot show a profit, make sure that you take steps to improve profitability on a regular basis and document the steps taken and their results.

Create a business plan.

Rarely will a person engaging in a hobby create a business plan. But, make sure it is realistic and your statistics are backed up. Research the business and investigate its probable success PRIOR to start up. When selling product, make sure you have sufficient inventory. Obviously, if you are selling a product and you don't have sufficient inventory on hand to make a profit, you aren't in the business for profit.

Watch what you say about your activities to anyone.

You must continually think of your business AS a business and not as a tax deduction or a hobby. Then you will not be tempted to accidentally call it something it is not. Statements such as "I'm just doing this to get a discount." or "I'm just doing this to save taxes." can sink you faster than any thing else. This is true regardless of who you say it to. Your family, friends and co-workers can be questioned in an audit and called to testify against you in tax court.

Run the activity like a business.

Keep accurate bookkeeping records of all income and expenses and be able to produce accurate financial statements. Having a professional do this for you is the best way to ensure this. Advertise, get letterhead and business cards done professionally, maintain a business telephone and a related phone-book listing, purchase and use promotional literature and make sure you are adequately marketing the business according to industry standards.

Make sure you have experience and keep your skills current.

Prior experience in the field is a plus and continued education indicates a commitment to the business as a business. Training should be documented in a Continuing Education file. If you are going into a new industry, the educational costs will not be deductible, so staying with what you know is best all around.

Consult with other professionals and experts.

Subscribing to professional publications and belonging to professional organizations where you consult and discuss professional issues shows intent to make a profit and keep skills current.

Work it like a business.

Make sure you spend on the business regularly. It need not be full-time, but it should regular, consistent and sufficient to support a profit motive.

Watch out for the ratio of income from other sources.

Although very unfair, the greater your income from other sources, the less likely the IRS is to accept a profit motive. Conversely, the IRS will be hard-pressed to prove your sole source of income is a hobby.

Be wary of activities that are Red Flags to Uncle Sam. These activities are suspect because of the inherent personal pleasure involved:

• Collecting - especially Antiques and Stamps
• Traveling
• Writing
• Ministerial Duties
• Professions in the Visual and Performing Arts
• Raising, training and showing animals
• Racing of any type

Most Charitable Contributions are not business deductions for Proprietorships or Partnerships. Even if the business makes the donation, the IRS considers them as made by the business owner(s), not the business and they must be reported on the Schedule A - Itemized Deductions which may or may not provide a bonafide deduction to the individual depending upon their particular circumstances. Also, there are new, stricter regulations requiring complete documentation of all donations whether in cash or other than cash.

Position of the Internal Revenue Service:

There are occasions where a Charitable Contribution can be treated as a business deduction. According to the IRS, Charitable Contributions are NOT business expenses UNLESS:

1. There is a direct relationship between your business and the gift
AND
2. You have reasonable expectation of a direct financial return that is commensurate with the amount of the donation.

Clarification:

If your business supports a Little League Team the costs can be treated as a business advertising expense deductible to the business or as a charitable donation that will be reported on your Schedule A, Itemized Deductions. The key is "How much money have you made from the parents and viewers of the team games?" If you make enough to cover the costs, it's advertising and 100% deductible. If not, it's charitable and goes to the Schedule A.

WARNING:

It is absolutely critical that you establish that the benefit to the business is relatively immediate and directly related to the contribution.

Having a Charitable Contribution treated as a Business Deduction has several tax reducing advantages:

• The gift reduces net income for Income Tax purposes saving at least 10% in taxes.
• The gift reduces net income for both FICA saving 15.3% on the first $65,400 of net earnings.
• Business deductions are fully deductible but Charitable Contributions are limited to 50% of income.

Entertainment of clients in the "ordinary and necessary course of your business" (meaning customary and/or helpful to) is a deductible business expense. Although stiffer requirements are in the works, there are still a lot of deductions allowed in this area. he best way to ensure you receive the maximum deduction is to meet the requirements listed below.

Method #1 - Receipts/Documentation

According to IRS Code section 1.274-5(c) and several notices and bulletins, only expenses over $75 per expense are required to have a receipt and backup. But, Auditors like to ignore that provision. Best to have the receipt and not need it than to need it and not have it.

Besides, keeping receipts is easy and will definitely go a long way to proving not only your entertainment expenses if you are audited but also the fact that you are diligent in your record-keeping. For receipts to be truly useful, they must have the following data:

• Who you entertained - the name of the client or business
• Where the entertainment occurred - the name of the restaurant or club
• When it occurred - a specific date
• Why the event took place - the purpose of the meeting
• The amount of the entertainment costs - meal, tips, parking, etc.

Most restaurants provide receipts with the name of the restaurant, the date, and the costs plus tips. Therefore, for most business meals, keeping adequate documentation would consist of simply writing on that receipt the name of the client and the reason for the meeting such as: "Obtain referrals" or "Discuss Expansion" and then filing the receipt someplace safe.

For example:
You take a client and his wife out to Jaxon's for dinner. Using your Credit Card, you pay the bill. The credit card receipt stapled to the restaurant receipt will provide the Date, Amount with tips, and the Place. YOU add "Mr. Jones and wife to discuss annuity plans for the business" and you're done. File the receipt in a special "Entertainment Receipts" folder/file where it cannot get lost.

Method #2 - Discussing Business

The meal must take place in surroundings that are conducive to having a business discussion.

If, for example, you have your meal at the Improv or the Comedy Club, the IRS will deny the deduction because the environment is not conducive to a productive business meeting. Cocktail parties are another no-no. Also, you MUST be present (otherwise how could you discuss business?).

A brief list of common non-business settings includes: Nightclubs, Golf courses, Theatres, Sports events, Hunting/fishing/skiing or other sports-related trips

Method #3 - Deducting Non-Business Entertainment

These can be deducted under the 'associated entertainment' rules which is considered 'GOODWILL' entertainment and must precede or follow a substantial and bona fide business discussion - usually on the same day as the entertainment.

Season tickets and the like are deducted by event, but not as a package.

KEY - there must be a link between the business and the entertainment. To prove this, record the link in a log or on the tickets/receipt.

For example:
Let's say you follow dinner at Jaxon's with tickets to the El Paso Symphony. Attach your ticket stubs to the dinner receipt we previously mentioned, and add "followed by Symphony" and be sure to include your parking tickets and any drinks you buy to the package.

Method #4 - Entertainment as Gifts

When you have used your home for business, selling it can result in some undesirable tax consequences. However, a little pre-planning can go a long way to eliminate these. For example, under current laws, conversion of the property to personal use at least 3 full years and one day before the sale of your home after you reach the age of 55 can allow you to take advantage of the one-time taxable profit exclusion of up to $125,000 on the sale of a personal residence.

Anytime you are thinking of selling your home when you have used it for business, you should consult with your tax advisor about the current laws and how they might impact the sale of your home.

Method #5 - Exam-Proof the Home Office Deduction

Your home is already an environment conducive to discussing business. Therefore, any business meetings, including small parties (fewer than 12 business associates), can be deductible as long as you fully document the event as indicated in item #1 above.

For larger parties, you must establish a type of commercial motivation that can be presented to larger crowds such as "promotional meeting to introduce new product". In this way, sales seminars and presentation can be given at home with a good party afterwards, and the whole thing is deductible (including utilities if you can track them).

KEY: Never mix business parties with personal ones such as birthdays or anniversaries. Uncle Sam WILL find out and deny you the deductions for the business part of the evening.

Method #6 - Deducting Office Parties, Club Dues and Lunches

The reasonable cost of holiday parties or summer get-togethers for your employees and their families is 100% deductible.

Dues to professionally-related clubs and/or organizations where you socialize with other professional and/or potential clients are fully deductible. This includes networking organizations where you are required to purchase a meal during the meeting.  

Caution!

The "Sutter Rule" allows the IRS at its whim to disallow a portion of your business meals when they absorb a substantial amount of your typical living expenses. Check with your professional on what that is for you.

NOTE ON MEALS : If you are not eating but actually making a presentation, the meal is not 'entertainment' but 'promotional' and fully deductible.

Hiring and leasing from relatives is one of the few ways left to keep the money in the family and still have a business tax deduction.

Method #1: Employ your Spouse at minimum wage

Minimum wage is easily allowable, you pay social security taxes at the minimum rates and all the money stays in the family.

Method #2: Establish an Employee Benefits Program and deduct 100% of your medical insurance costs Currently, Self Employment Health Insurance Deduction is only partially deductible to the business owner.

As an employer, you can pay for medical insurance to cover your employees and their families.
If your spouse is employed by you and includes you as a dependent, your medical insurance is paid by the business and is 100% deductible.
Medical benefits must be the same for ALL employees or the deduction will not be allowed.

Method #3: Employ your Children from age 7 to age 17

The first $4,150 paid to children is tax free to the child and to the employer because of the standard deduction.
The payment is 100% deductible to the business.
Payment must be comparable for type of duties performed and time sheets and a list of tasks completed should be kept.
Putting part of this 'allowance' into a college fund will allow your business to pay for your children's education.

Method #4: Gift fully-depreciated but useful equipment to your relatives

Then rent it back from them. This continues to give you a deduction for the equipment while you use it, reduces your taxable income, and adds income to your household.

NOTES: Anytime you do business of any type with relatives, make sure you:

1. Fully document every transaction, in fact, over-document
2. Make every payment by check
3. Complete all required IRS forms

Home office deductions are becoming harder and harder, but they can still increase your overall cash-in-pocket by lowering your overall taxes as long as you follow the rules.

Method #1: The IRS's Stand

The safest way to get all your home office deductions is to do what the IRS wants and that is to meet all the following criteria:

1. The home office must be your PRIMARY PLACE OF BUSINESS.
   It must be the place where the most important tasks of your business are performed.
2. You must REGULARLY SEE CLIENTS at the home office.
   Regularly is interpreted as "Ordinarily" and "Mostly" by the IRS.
3. You must CLOSE THE TRANSACTIONS at the home office.
   In other words, you must get paid at your home office.
4. You must SPEND OVER 1/2 OF YOUR WORK TIME at the home office. Usually, you must spend at least 30 hours of your work time at the home office.
5. The area claimed must be used EXCLUSIVELY FOR BUSINESS, You can't use the kitchen or the TV room

All these criteria must be met even if the home office is your only office. If you meet clients elsewhere and are paid other than at your home office, the chances are the deduction will be denied. However, the tax courts have been supporting deductions for home office when no other location is provable.

For example:
A trucker was allowed a deduction for home office in spite of the fact that his 'primary place of business' was his truck and he met most clients and closed the deals in their offices, not his. It was decided that the vehicle was not conducive to meeting, record-keeping and other 'office' duties of any business.

Method #2: Allowed Home Office Costs

1. Depreciation of Assets
1. The portion of your home that is designated as the office
2. All repairs and improvement on that portion
3. All furniture and equipment and other assets related to the home office
   NOTE:
   If Home office deduction is not allowed, you may still depreciate the furniture and equipment up to the percentage of time you work in the home office compared to all other work.
2. Expenses of Home office (providing the deduction is allowed):
1. 100% of separate business phone line - Business percentage only if shared phone line plus 100% of business long distance (this does not apply if there isonly one phone line to the home)
2. Business percentage of mortgage interest and/or apartment rent
3. Business percentage of structure and contents insurance
4. Business percentage of property taxes on structure
5. 100% of personal property taxes on business assets

Method #3: Determining Business Percentage

There are three ways to determine the business percentage of the home:

1. Number of Rooms: number of rooms the office occupies / total rooms in home
2. Total Square Footage: square footage of office / total square footage of home
3. Net Square Footage: square footage of office / net square footage of home*
   *total square footage - square footage of common areas

Of course the IRS wants you to use the square footage of the office divided by the total square footage of the home because it usually yields the smallest deduction. You and your preparer, should use whichever method yields the greater percentage of the home.

Method #4: Avoid Taxable Income When You Sell a Home Office

1. Convert the office to personal use on December 31 the year before the sale to take advantage of the tax-deferred gain rollover on the sale and repurchase of a personal residence.
2. Convert the office to personal use 3 years and one day before the sale of the home after age 55 in order to take the one time exclusion of up to $125,000 of taxable profit on the sale of a personal residence.

Method #5: Audit Proof the Home Office Deduction

1. Photograph the office and its contents at various times throughout its use and have it processed by a photo-finisher that dates the photos on the back.
2. Keep blueprints/surveys of your home to prove the amount of space occupied by the home office and indicating the relative square footage.
3. Prominently display your home office address and phone number on business cards and advertising.
4. Have guests sign a guest log when they visit your home office.
5. Keep a time and work activity log.
6. Retain all receipts and paid invoices as support for cancelled checks.

Method #6: Limitations and Carryforwards

The home office deduction is limited to the net income from the activity. However, any excess that is disallowed can be carried forward to subsequent years to offset those expenses.

There are many ways to get maximum deductions from business use of your automobiles. The fact that most families have more than one vehicle increases some of the benefits of this deduction. Below are several ideas to increase your automobile deduction:

Method # 1: Take the greater of standard IRS mileage or actual expenses

You cannot take BOTH. However, tracking both types of costs ensures that your tax preparer can determine which will get you the best deduction for that year.

To do this, you must keep all actual receipts for gas & oil, maintenance and repairs, insurance, titles, registrations and license as well as inspection costs.

Further, you must keep an accurate log of the actual business mileage driven for the year compared to the total mileage for the year in order to properly account for the business use percentage.

Recently the IRS has started demanding repair receipts to prove mileage records, so keep those especially even if you're going to use the mileage deduction 

Method # 2: Keep complete and accurate mileage records

This is critical for any vehicle that is used less than 100% for business & for all vehicles using the mileage deduction.

The best way to do this is to keep a mileage log in the car in a place you CANNOT forget to use it.

One man velcros his to his steering wheel when he gets out of the car so he has to log the odometer reading before he can drive. Then he velcros it to the door so he can't get out without logging the ending odometer reading.

Another is to have a list of standard mileages that are driven regularly. Keep a daily list of trips to and from those places and then track odometer readings for unusual or infrequent trips. Make sure that each trip is logged with the date, mileage and business reason for the trip (e.g. 'meeting with so and so', or 'purchase business supplies').

The key is to ensure that you can prove, beyond any doubt, that the mileage is accurate and business-related. There is not such thing as too much documentation for a mileage deduction. However, at the very least, use the following as a guideline.

Method # 3: Use the fastest depreciation method to get maximum deductions

Most tax preparers automatically use maximum depreciation on business tax returns, but this is not always the case. Make sure your tax preparer knows that you want the maximum deductions. Generally, this will be MACRS which stands for Modified Accelerated Cost Recovery System which is a system of depreciation created by the IRS.

Under MACRS, a business may take 20% of the cost in the first year, 32% in the second, 19.2% in the third year, and so on. There are limits on the deductions per year, but they are nearly always more than the 20% annual deduction (10% in year 1) allowed by Straight-Line.

For example:
A $20,000 automobile that is used 75% for business would have yielded the following for 1996:

• $3,000 under MACRS ($20,000 x 20% x 75%)
• $1,500 under Straight-Line ($20,000 x 10% x 75%)
• Your deduction would be limited to $2,295 which is the Luxury Limit (3,060 x 75%) for the year applied to the MACRS calculation.

Method # 4: When using standard mileage deduction, use the most efficient car for the deduction.

This one is fairly straight-forward. If one car costs you $0.23 per mile to operate (including depreciation), and the other costs you $0.32 per mile, use the least expensive vehicle for business since you will get $0.315 per business mile as a deduction.

If using two cars for business, consider the average cost of running two versus just one to make the comparison.

Method # 5: When using actual operating costs use both your cars for the deduction

By using two cars, you actually get a percentage of each rather than just one. This only works if you are converting a second already-owned personal vehicle to business use.

Nothing will get you in IRS trouble faster than incorrect, late or missing payroll tax returns and/or deposits. Many a business has gone merrily along for 3 to 5 years thinking everything was fine and then WHAM! The IRS hits them with errors, underpayments, missing returns and, before they can say "Oops", they are deep in debt and close to losing their business.

Employee Deductions and Form 941

According to the State Controller's office in Austin the vast majority (estimated at 60% to 65%) of the 16,600 businesses in El Paso are individually-owned and operated. Tax information for these small businesses is not easy for them to get both because many don't know where to look and because the people who do have it charge dearly for the information.

Employer Identification Number Required:

Each employer must have an Employer Identification Number or EIN. This number is assigned by the Internal Revenue Service by filing Form SS-4. This number is used on all employer tax forms.

Informational Booklets and Forms:

Once the EIN is assigned, the IRS will provide the employer with Circular E, Employer's Tax Guide and other instructional materials detailing the employers responsibility for withholding and remittance of Federal Taxes. Additionally, they send the appropriate Form 941, Employer's Quarterly Federal Tax Return, to the employer a month prior to the due date with additional information and instructions. There will also be instruction for using the EFTPS (Electronic Filing and Tax Payment Services) website for making your payments.

Deductions required:

Each employer must deduct from each paycheck of each employee, an amount for Federal Withholding which includes Income Tax based on the wage rate and total employee exemptions. Form W-4 which must be completed by each employee will provide the appropriate information necessary to determine this amount.

Also to be deducted is an amount from each employee for FICA and FICA MED which are the Social Security and Medicare amounts. These percentages are currently 6.2% (.062) and 1.45% (.0145) respectively.

Employer Matching:

Additionally, each employer must match the deductions for FICA and FICA MED. This brings the total amount dut to the Governmenr for FICA to 12.4% (.124) and for FICA MED to 2.9% (.029).

Remittance (Form Screen):

Required remittance depends upon the amount of tax due in a single period. If the taxes are $500 or more in a single quarter (3-months), the employer must deposit the deductions and matching amounts using the EFTPS website for making monthly deposits.

For those whose taxes are less than $500 in a quarter, they may remit the total amount due with the Form 941 which is filed once per quarter.

Form 941 contains information on:

• the number of employees (line 1)
• total compensation paid (line 2)
• income tax withheld (line 3)
• total social security (line 6)
• total medicare (line 7)
• total tax due (line 11)
• deposits made (line 14)
• balance due, if any (line 15)

Any business who pays more than $1,500 in wages is required to file and pay unemployment tax. Most small businesses will have to deal with this only once per year since the wages paid and tax due will be less than $400 per year. However, for an employer with at least $100 of tax due in any quarter, quarterly deposits are required. Since the maximum wages per year subject to the tax are $7,000 (see below), it is not easy to end up owing that much every quarter unless you have a lot of employees and a high employee turnover. Be sure to confer with your professional to ensure you are in compliance.

Unemployment in General

Unemployment tax is a tax each employer must pay to cover unemployment compensation for his/her employees. It is based on a percentage of the gross wages paid.

The Federal percentage is fixed and each employer receives a credit based on their state unemployment payments.

The State percentage is based on the business's historical track record of personnel turnover and unemployment claims. New businesses start at 2.7% and the fewer claims they have the lower the rate becomes. Conversely, the more claims they have, the higher it gets.

Federal Unemployment (FUTA)

Most small businesses will have to deal with this only once per year. Anyone who paid $1,500 or more in wages is required to file and pay unemployment tax.

Quarterly deposits are required for any employer who has $100 or more in unemployment due during a single quarter.

Internal Revenue Service FORM 940 is the federal form that will be sent to anyone with a Federal Employer Identification number.

The form should be received from the IRS in the month of December. The employer should complete it as soon as the information is available. Necessary data to be compiled is:

• Gross wages for the calendar year
• Exempt payments - there is a list in the instructions of types of payments that are exempt from unemployment tax
• Payment over $7,000 to any single employee - this is a ceiling of wages over which no unemployment tax is assessed
• All applicable State tax information to obtain your maximum credit.
• Record of gross wages paid by quarter.
• Any deposits made during the year.
• The return and any amounts due must be remitted by February 2.

State Unemployment (SUTA)

This is a Texas Workforce Commission (TWC) quarterly report made on Form C-3 in April, July, October and January.

Each report is pre-printed with the employer's data and their specific applicable unemployment percentage rate.

The information required to complete the form is:

• Total gross wages
• Taxable wages - in Texas any wages over $9,000 paid to a single employee are exempt from state unemployment tax.
• Information on each employee
1. Social Security Number
2. Name
3. Total wages paid during the quarter

The return and tax payment are due by January 31.

Because we are a multi-state organization, we cannot possibly provide information on every state in which we do business. However, Texas is representative of most states in regards to State Unemployment. We, therefore, offer the following as an example only. Please contact your professional to find out the specifics for your state.

1. Check Register
1. Checks
1. Name on Check
2. Amount and Date of the Check
3. What the check was for
2. Payroll checks include:
1. Gross amount (Salary or Hourly rate)
2. Amount of Withholding (Income Tax)
3. Amount of FICA (Social Security)
4. Amount of FICA med (Medicare)
3. Deposits
1. Amounts deposited
2. Where money came from (invoice payment, loan, contribution, name of payor)
4. Bank Statements
1. Original Statements by month
2. Monthly Reconciliations
2. Other Records
1. Sales
1. Receipts/Invoices
2. Contracts
3. Sales on Account
1. Name, Address, Social Security Number
2. Terms of sale and payments
3. Original Contract/Agreement
2. Expenses
1. Receipts (keep by type of expense/item purchased)
2. Bills/Invoices
3. Contracts
4. Purchases on Account
1. Name and Address of Company
2. Your Customer Number with them
3. Original Contract/Agreement
5. Auto Expenses
1. Keep mileage log (to and from work not allowed)
2. Keep all actual auto expenses on file
6. Home Office
1. All utilities
2. Original purchase/rental documents
3. Improvement/Repairs & Maintenance
4. Annual Mortgage report
3. Loans
1. Original Contract
2. Amortization Schedule
3. Records of any changes or alterations in loan documents
4. Payroll
1. Employee Name, Address, Social Security Number, Phone Number
2. I-9 information (form, copies of ID and SS card)
3. Employment agreement and Form W-2
4. All records of payments, withholding etc.
5. Copies of all Payroll Tax Returns (941, 940, TEC)
5. Cash Transactions
1. Keep all receipts
2. Keep a log of all transactions
6. Taxes
1. Keep all returns for at least 5 years and we recommend 7 to 10 years
2. Copy all checks sent - make sure check detail explicit
3. Mail all payments/correspondence certified return receipt
4. Keep records for different types of tax separate
7. Permanent Business Files
1. Sales Tax Number
2. Employer ID Number (Form SS-4)
3. Assumed Name Certificate
4. Partnership Agreement/Incorporation Papers, if applicable
5. Keep all returns for at least 5 years and we recommend 7 to 10 years
6. All fixed asset receipts and depreciation schedule

Records needed for bookkeeping, records management and tax preparation:

1. Detailed list of all assets, including cash
1. date of purchase/donation
2. cost/value
3. all loan/debt information related to the items, including contracts
2. Inventory breakdown/count
3. Copy of most recent Tax Return for the Business with detailed depreciation schedule
4. Bank Statements
5. Completed check register
6. Detail of all cash transactions to date for the year (including credit card purchases)
7. Payroll activity and Payroll tax payments/returns
1. 941 - Withholding, FICA, FICA med
2. 940 - Federal Unemployment (FUTA)
3. TWC - State Unemployment (SUTA)
4. ES - Estimated Tax payments on Business Net Income
5. List of all employees with
1. Name
2. Social Security Number
3. Address
4. Form W-2
8. Computer reports (if you use an in-house computer) as follows:
1. Cash Receipts (Deposits)
2. Cash Disbursements (Checks)
3. Sales (Invoices)
4. Purchases (Merchandise Bills)
5. General Ledger
6. General Journal
7. Balance Sheet
8. Income Statement
9. Listing of all Accounts Receivable with balances due you
10. Listing of all Accounts Payable with balances you owe each one
11. Copies of most recent Personal Federal Tax Returns filed (for proprietorship)
12. Copies of most recent Payroll (Federal and State) and Sales Tax Returns filed
13. Copies of all official business paperwork
1. Assumed name
2. State Tax ID
3. Parnership and/or Incorporation papers (if applicable)
14. Any bank or SBA loan papers
15. Individual Income Tax
1. SS Card and dates of birth for all dependents and family members, a Driver's license is required for one of the taxpayers
2. Forms W-2, 1099, Social Security or Pension payments
3. Receipts and/or Proof of expense & reimbursement for all medical and/or business payments
4. Purchase & Sale Papers on residence and/or business assets
5. Receipts for transportation, lodging and mileage for business or medical purposes
6. List of Assets, their cost and date of purchase & any prior depreciation
7. Reports, costs and/or insurance reimbursements for any accidents, thefts or casualty losses
8. Charitable contributions in cash or non-cash with detailed list and FMV of items donated
9. Mortgage papers; rents received or paid; utilities, insurance and other expenses for home office and/or rental properties
10. Medical, dental, optical, chiropractic, insurance, prescriptions, and any other costs of maintaining or regaining your health
11. Mortgage interest & property tax on residence
12. Unreimbursed employee expenses such as auto & travel, meals, entertainment, uniforms, licenses & memberships, etc.
13. Any and all gambling winnings and costs (include all gambling costs for the year if you had any winnings)
14. Any income, dividends and/or interest not listed elsewhere such as income from rent

What is the difference between a deduction and a credit? The definition is simple, but the explanation is not.

Definition:
A deduction reduces your taxable income
A credit reduces your tax

Explanation of a Deduction:

In calculating taxable income, the Internal Revenue Service allows certain reductions in the amount of income to which the relevant tax rate is applied. Some of these include:

• 1/2 of self employment tax for proprietors
• IRA contributions up to the current limit
• Standard or Itemized deductions for Medical, Interest, Taxes, Charitable Contributions, Unreimbursed Employee Expenses, Contributions, etc.
• Personal Exemptions are a form of deduction as well.

These deductions are subtracted from the Gross Income to arrive at the Taxable Income (TI) of the taxpayer. Therefore, any Deduction saves the taxpayer money only based on his tax rate.

For example:
Let's say that John has $40,000 in gross income, $11,000 in itemized deductions and three exemptions at $3,650 each. His Taxable Income (TI) is $18,050. At this net amount, his tax rate would be 10% so his tax would be $1,805

$ 40,000 Gross Income
( 11,000) Itemized Deductions
( 10,950) Personal Exemptions (3,650 x 2)
--------------
$ 18,050 Taxable Income
x .10 Tax Rate
-------------
$ 1,805 Tax Due

The tax amount the deductions saved him is $2,195 or 10% of the total deductions $21,950.

Explanation of a Tax Credit:

A credit is used to determine, finally, how much tax must be paid or how much of a refund the taxpayer will receive. There are many types of credits, but the most common are:

• Child Care Credit for day-care or after-school care if both parents work
• Elderly Credit for elderly earning below a certain level
• Earned Income Credit which is a refund of a portion of the taxpayers Social Security Tax for certain low-income individuals

Any amounts actually withheld from wages or salaries are fully credited against taxes due as are payments made by the taxpayers either from a prior year refund or directly as estimated tax deposits.

A Tax Credit reduces the actual tax due, dollar for dollar.

So, given the scenario above, if John had $500 withheld from his pay over the year, the tax rules allow $2,000 as a child tax credit and let's say he get's $400 in Child Care Credit. His tax would look like this:

$1,805 Total Tax
(  400) Child Care Credit
(1,405) Child Care Credit
--------------------
$     0 Total Tax Due
(  500) Federal Tax Withheld on Form W-2
(  595) Refundable Child Tax Credit
--------------------
$1,095 Tax Refund

Summary

A credit is better than a deduction, but deductions can add up to significant tax savings as well. So, save those medical receipts, track your business mileage, and make sure you get documentation on all of your charitable donations.

Date due:

All tax forms are to be sent to the recipients with a post mark not later than January 31.

Form 1099:

This form is required to be sent to people and/or businesses who are not employees but to whom certain payments were made as follows. Included in these are:

• Interest of $10 or more: Paid by you to individuals and/or businesses on investments, loans or other business transactions. Most people get this form from their bank.
• Dividends of $10 or more: Paid by Corporations to stockholders. Many people with investments get this form from their brokers.
• Non-Employee Compensation of $600 or more: Independent contractors and part-time non-employee workers or other professionals to whom th ese payments were made.
• Debt Extinguishment of any amount: Sent to persons who received goods and/or services from you for which they did not pay you.
• Miscellaneous payments of $600 or more:Any other payments not listed above which you made to individuals or businesses.

Form 1098:

Must be sent to anyone who paid you more than $600 in Mortgage interest.

Form W-2:

This form must be completed for each and every employee who worked for you during the year. It must contain the following information:

• Name, address and social security number of the employee
• Your name, address, and employer identification number
• The amount of gross wages earned by the employee
• The amounts taken for Federal Tax, Social Security (FICA) and Medicare (FICA MED) from the employee's check
• Any other amounts deducted for pensions, medical programs or third party payments such as child support.

Form W-3:

This summary form goes to the Government with copies of each W-2 sent out to employees. It contains a summary of all the information reported on the W-2's. This form is required even if only 1 W-2 is sent.

Please note that is NEVER advisable for a business owner to prepare the business tax return themselves.

The tax laws governing the different types of businesses are simply too complicated for any non-professional to fully understand and utilize effectively.

Business owners should ensure that their tax preparer is, at minimum, degreed and has at least two years experience in preparing tax returns for their type of business.

Proprietorship

A proprietorship is a business that is owned by one person that has not been Incorporated.

This form of business is easiest to set up since it requires little to no official tax paperwork other than what is required of an employer or for sales tax purposes if either condition applies.

The owner has absolute authority and responsibility for all the operations, debts and income of the business.

Many proprietorships are run as home-based businesses which afford the owners a great many tax breaks including: deduction of a portion of their rent or mortage payments, utilities, repairs and maintenance; all auto mileage related to the conducting of business is deductible since the office is at home; there are deductions for self-employment tax and self-employed medical costs as well as the opportunity to employee their non-adult family members whose wages, within certain limitations, will be deductible to the business without being taxable.

The owner will pay tax ONLY on the profits of the business and not on gross receipts. In many cases, profits can be reduced or completely negated by home-office expenses and depreciation which are not true out-of-pocket cash expenses to the owner. However, any money the owner pays him/herself is NOT deductible to the business as an expense.

The owner files a Form 1040 long form with a Schedule C for the business, Form 4562 for depreciation and a Schedule SE for their self employment tax. If there is a home office, Form 8829 will also need to be included.

The primary disadvantage is that the owner is responsible for ALL their social security tax which is about 15%. He/she can deduct 1/2 from his net income on his tax form, but he/she must plan for that tax bite at the end of the year. The best way is to put about 20% of the net monthly profit of the business into a special savings account. The second disadvantage is that there is NO legal protection of personal assets since there is no separation between owner and business.

As stated above, it is not a good idea for any business to try to do the business taxes themselves. This is especially true of proprietorships in light of the fact that the tax laws concerning proprietorships are spread throughout the IRS tax code.

Partnerships

A partnership is a non-incorporated business which is owned by two or more entities. An entity can be an individual or a business of some sort.

This is the next simplest form of business to start. There are only two pieces of official paperwork required (other than sales tax information if applicable). The first is a written agreement between the partners which outlines how they will determine the ownership and responsibility of the assets and liabilities and how the profits and losses are to be divided. The second is an Employer Identification Number. This number is required even if the business has no employees. It is used to identify the business for tax purposes.

This form of business has several advantages. There is more than one person responsible for all the expenses and the responsibilities and work are usually shared. Guaranteed wage payments (a very specific tax term) to the partners are deductible expenses to the business. There is some legal protection of personal assets (not much) for the owners. And, like a proprietorship, the owners pay tax ONLY on the profits of the business split between the owners per percentages outlined in the partnership agreement.

However, unlike the proprietorship, there is a completely separate set of tax forms that must be filed just for the partnership and then the owners must file their personal returns separately. The Form 1065, Partnership Return, and its related schedules K, L, M and K-1 must be prepared by a professional tax preparer experienced in partnership returns. The tax laws are extremely complicated for this form of business, especially when it comes to getting rid of a partner or changing the percentage of ownership of any of the owners.

Corporations

A regular Corporation (also referred to as a C-Corp for tax purposes) is a legal business entity that has filed appropriate paperwork called Incorporation Papers with the appropriate state authorities and has sold and issued stock to its owners. It can have as few as one owner (called a shareholder). There are no upper limits on the number of owners a corporation may have. Each shareholder is an owner and becomes so by buying shares of stock in the corporation.

A Corporation is the most complicated and expensive form of business to set up and more complicated to get rid of. It is nearly always essential for an Attorney to compile the Incorporation Papers which can get costly and filing the papers with the State costs money as well.

Its primary advantages are that all officer and employee salaries are deductible as expenses to the business; raising capital is, generally, a matter of selling more stock; and there is a greater protection of the owners' personal assets.

One of the major disadvantages is that it is required to pay Federal Tax on its net earnings separate from the owners and must pay annual Franchise Taxes to the State. Corporations used to be taxed at preferred rates. This is no longer the case. Also, the tax return is due 2 1/2 months after its year-end rather than 3 1/2 months.

S-Corporation

A Corporation with fewer than 75 shareholders is eligible to be treated as an S-Corporation for tax purposes. This tax status must be CHOSEN with the filing of a special tax form.

The S-Corporation has the advantages of being treated as a partnership for tax purposes in that net earnings flow through to the owners who report it on their personal tax returns which is divided based on their percentage of ownership. It also has with all the legal advantages of the Corporate limited liability and ability to sell stock for capital.

Unfortunately, it still has to pay State Franchise Tax and file its return in 2 1/2 months.

Limited Liability Company (LLC)

Again, this is a legal, not a tax designation.

They are owned, usually treated as a partnership, but not always. It can be any form of business that chooses to be a Limited Liability Company.

It is characterized as a partnership for tax purposes with all the same advantages of flow-through of income/loss to the owners. It may choose to be treated as a Corporation or an S-Corporation for tax purposes but it must do so in writing.

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