Tag: Itemized Deduction

Small Business Expense Tracking

Published on by MBJ AccountingLeave a comment

Congratulations!  You’ve started working for yourself.  Whether you are now the owner of a small business or have just started a new side hustle, expense tracking is key to your tax preparation success.  Expenses detract from your taxable income, providing an accurate picture of what you actually took home. 

How Do I Track Expenses? 

As you get started in your new business, MBJ Accounting recommends two ways to keep track of your expenses – either through Quickbooks or the use of a spreadsheet.  

Quickbooks is a popular accounting software for small businesses and is a great tool if your spreadsheets become too difficult to manage.  Services include payroll, inventory control, invoicing, bill paying and time tracking and range in cost from $15 to $200 per month.  Learn more at quickbooks.com. 

If your accounting needs are minimal, or you are just getting started, spreadsheets are a great way for low-cost tracking (for free through Google Sheets or with your Microsoft Office Excel license). 

What Expenses Should I Track? 

The purpose of tracking expenses is to understand the cost of your business and provide an accurate picture of your net revenue.  So, you should track all expenses related to your business including: 

  • Start Up Costs:  Legal fees and costs to the Secretary of State for establishing your LLC are tax-deductible.  Unsure if you should create an LLC?  MBJ Accounting can help you navigate the pros and cons. 
     
  • Professional Services:  Any support you receive from paid professionals like mechanics, attorneys, accountants, marketing specialists, etc. 
     
  • Utilities / Rent:  Including lease payments, phone, electric, internet, etc.  Keep reading for more guidance if you work from home or use your personal cell phone for business. 
     
  • Cost of Goods:  This refers to materials or products that you purchase to resell to clients.  Goods are different from supplies, which you use to do your job.  These are different classifications so should be kept separate.  
  • Freight / Shipping:  The costs to ship goods is also tax deductible. 
     
  • Supplies:  These are items that are used regularly in the course of business.  This can include everything from printer paper to specialized tools.   
     
  • Insurance:  Any specialized insurance you have for your small business is tax deductible. 
     
  • Travel:  Mileage, tolls and parking costs are small business write offs.  Keep reading for more information on what you can deduct. 
     
  • Meals:  Meals and entertainment purchased while doing business are tax deductible.  However, the IRS does require an itemized meal receipt with the name of the establishment, the date of service, the items purchased, the amount paid for each item and the tax. If the tip is not included in the total, it should be written on the receipt.  You should also be sure to log who and what the meal was for in case of audit.  
  • Marketing Expenses:  Costs for printing, advertising, website, etc. are tax deductible. 

I Work from Home.  How Much Can I Deduct? 

If you work from home exclusively (as in, have no other place to do business), there are two ways to capture the costs of working from home.  You must select one option or the other. 

  • Regular / Actual Expense Home Office Deduction:  To use the regular method for deducting your home office, you must determine the actual expenses of your home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. 

Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.  Learn more about home office deduction from the IRS. 

  • Simplified Home Office Deduction:  Allows for $5 per square foot up to 300 square feet or $1,500, as well as allowable home-related itemized deductions.  Learn more from the IRS about a simplified home office deduction. 

What about Cell Phone and Internet? 

Cell phone and internet costs are most likely shared between business and personal use, especially if you work from home.  A portion of the overall costs can be deducted for the months that you were in business.  50 percent of the overall costs is a safe amount.  If you feel that you use a more significant percentage, you may need to provide additional documentation, like an itemized phone bill. 

How Do I Track Mileage and Vehicle Expenses? 

Similar to the home office deduction, there are two ways to track vehicle expenses, and you cannot switch between the two. 

  • Actual Expenses:  To use the actual expense method, you must determine what it actually costs to operate the vehicle for the business portion of its use.  This includes gas, oil, repairs, tires, insurance, registration fees, licenses and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles. 
     
  • Standard Mileage Rate:  As of July 1, 2022, the standard mileage rate is 62.5 cents per mile.  In order to calculate your mileage deduction, you need to keep a careful log.  Whether you keep a log book in your car, maintain a spreadsheet or utilize an app like MileIQ or Driversnote for tracking, you must be able to provide documentation for your claimed mileage. 

Additional Tips for Expense Tracking: 

  • Track the Details:  Your accountant is not liable for the expenses you provide.  Thus, it is important to log expense details.  As you track your expenses, be sure to log the vendor, amount paid, date paid and a description of the expense.  This information can help your accountant identify any trends and help you be prepared in case of an audit, especially for mileage and meals. 
      
  • Keep Your Receipts:  Whether you keep physical copies or electronic versions, you need to keep all expense receipts for at least three years for audit verification.  Tax returns should be kept for at least seven years. 
     
  • Up-to-Date Expenses Can Help with Tax Projections:  If you make quarterly payments or want to be prepared for what you will owe in April, having current expense logs can help you and your accountant make accurate projections of your tax liability. 

Looking for a handy tool to track your expenses?  We’ve developed a two different spreadsheets for you to utilize – for free!  Happy accounting! 

Small-Business-Expense-TrackingDownload
Small-Business-Expense-Tracking-2Download

Itemized Deductions vs. Standard Deduction: Which is Best for You?

Published on by MBJ Accounting

If you’ve been used to tracking down every receipt for a donation to Goodwill to ensure you receive the maximum tax refund, the 2018 tax reform may have you questioning the best way to file your taxes. While your accountant will ultimately determine if you have enough deductions to be beneficial, educating yourself on the law will help you understand what documentation is worth the effort of obtaining when it’s time to file.

What Are the Benefits of Tax Deductions?

All citizens pay taxes according to the amount of money they earned in a given tax year.  The amount owed varies depending on the income bracket that your household falls under.  By documenting significant expenses – which has generally been done through itemized deductions in the past, you can show that you didn’t actually have access to as much money as you earned, because of your expenses.  This can lower your taxable income and thus the amount of taxes you are required to pay.

Recent tax reforms significantly shifted this process for individuals, dramatically changing the guidelines for tax deductions.

What is the Tax Cuts and Jobs Act of 2017?

The Tax Cuts and Jobs Act was passed into law at the end of 2017, amending the Internal Revenue Code of 1986.  This tax reform legislation impacts nearly all taxpayers.  Major components relating to itemized deductions of the new law include:

  • Reduced tax rates for both businesses and individuals
  • Increasing the standard deduction and family tax credits
  • Limiting state and local income tax (including property tax) deductions
  • Further limiting mortgage interest deductions

What Does this Mean for Me?

With this new legislation, the standard deduction increased for the 2018 Tax Year and then again with inflation for 2019.  The following threshold now applies as you prepare to file your taxes from last year:

  • $12,200 for individuals
  • $18,350 for heads of household
  • $24,400 for married couples filing jointly and surviving spouses

This means that every individual filing taxes and claiming themselves automatically receive $12,200 in deductions and refers to “taking the standard deduction.”  In this case, unless you have deductions above and beyond the $12,200 standard for an individual, it does not make sense for you to itemize your deductions.

Every individual filing taxes and claiming themselves automatically receive $12,200 in deductions and refers to “taking the standard deduction.”  In this case, unless you have deductions above and beyond the $12,200 standard for an individual, it does not make sense for you to itemize your deductions.

How Do I Know If My Deductions are above the Standard?

In most cases, the following elements are tax deductions that could be itemized.  You can see the full list on the IRS website here.

  • Mortgage interest
  • Medical expenses (more than 7.5 percent of your Adjusted Gross Income)
  • Excise tax with car registrations (in the state of Indiana)
  • State and local income taxes, including property taxes
  • Charitable contributions

That being said, if you have documentation of expenses in these areas that are above the standard deduction, an itemized filing may still make sense for you.

Medical Expenses
For example, almost everyone has some type of medical expense.  These costs can be part of the itemized deductions but must be over 7.5 percent of your total income to be beneficial from a tax perspective.  Thus, only major / catastrophic medical issues such as nursing home care or cancer treatment are typically worth itemizing.

State and Local Taxes
Another area that saw significant change is the deductions for state and local taxes, which also includes property tax.  There is now a $10,000 cap for all these areas, meaning that you’re only permitted to deduct $10,000 of state and local taxes – including real estate taxes – regardless of how much you paid.

While there is a cap for the amount of state and local taxes that you can deduct on your federal return, property taxes are an important component of filing your state tax return.  Thus, its important to share the amount of money you paid in property taxes for a given tax year – and the corresponding documentation – with your accountant.

Charitable Contributions
In the past you may have kept track of every dollar you put in the church offering plate or every time you supported a school fundraiser for tax purposes.  Now, unless your charitable contributions in conjunction with your other itemized deductions are above the standard deduction, it is no longer necessary to keep such meticulous records.  To compensate, some donors have moved to an “every other year” method, making larger, two-year donations so that they can qualify for the deduction the year of their gift and then take only the standard deduction the following year.

Remember that Itemized Deductions are Separate from Work-Related Deductions

These itemized expenses that have been discussed thus far are only one type of tax deduction.  If you have a small business, the expenses you incur in order to do your work are not included as part of this calculation.  These are tracked on a separate tax schedule, so you should be sure to continue to track business-related expenses.  The same may be said for education-related expenses, such as student loan interest, and investment-related deductions. 

Conclusion

The new standard deduction amount means that itemization no longer makes sense for most individuals.  So before you start digging through purses and pants pockets for receipts, do some quick math to determine if your expenses will be higher than the standard threshold. 

If itemization remains the best choice for you, make sure that you have all your documentation in order.  Refer to our handy checklist (insert link) for guidance.

Changes in deductions are just a few of the significant differences in the new tax law.  Contact us now for help navigating all components of the tax reform to ensure that you receive the maximum refund with the least headache.