Tax Tips for the Self-Employed

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Congratulations, you’ve just stepped into the wonderful world of entrepreneurship. Whether you’ve opened your own vintage vinyl record store or begun freelancing your writing, you have an array of tax implications to consider.

Here are a few things to help you to navigate your first tax season as a business owner:

Home Offices

Working from the comfort of your own home can help you maximize your write-offs. If you regularly, and exclusively, use a particular part of your home for the purpose of your business, you can claim tax deductions on that space.

Expenses that may be deducted include a portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, and repairs based on the square footage of your home used for your business.

Business Trips

If you’re flying within the U.S. primarily for business you can deduct the cost of that trip, you can also expense your hotel and 50 percent of your meals. However these deductions are only applicable for the days you’re spending on business.

Mileage is Key

You can claim 54 cents per mile for 2017, plus the cost of parking and any tolls you paid. Be sure to track your business mileage so that you have evidence to support your mileage deduction.

Retirement Planning

Opening a retirement plan can help save for the future, with the added bonus of lowering your taxable income. A great option would be a SEP IRA, you can put in up to 25 percent of your net earnings from self-employment or $54,000 for 2017 and your contributions are deductible as a business expense.

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Tips to Help You Win This Tax Season

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It’s that time again; tax season is upon us, as some of you may know the IRS will begin processing returns on January 29th!  Here are some tips to get your documents in order and avoid the potential stressors of tax season.

Get Organized

By nature most people tend to procrastinate and this remains the same when it comes to preparing for tax season. In general, people tend to wait until the very last-minute to gather the necessary documentation needed to file your taxes. Not having your documentation in order can delay the filing of your return. Furthermore, in the event you are ever asked to provide evidence for the information stated on your return, you have to be able to provide the support for the items in question or you could be subjected to fines and penalties. A list of the most common documents needed for tax season is outlined below:

  • Personal Information (identification, social security number, banking routing and checking number, etc.)
  • Income information (W-2, 1099(s), business income, miscellaneous income, etc.)
  • Tax payment records (if applicable)
  • Dependent information (social security numbers, childcare records, birth dates)
  • Expense related information (medical, dental, student loan interest, mortgage interest, etc.)

Prior to your appointment, your accountant should inform you of all of the documents you will need. My suggestion would be to start a folder and make a checklist for yourself so you know what documents you have and what needs to be added to complete your tax folder.

 Review Your Prior Year Return

If you’re like most people once you complete your current year’s tax return, you file it away to never look at your return again. This is a practice that is repeated annually; unfortunately this is not good practice for many reasons. For one, I have reviewed prior year returns with clients and many have no idea about certain items included on their return! Furthermore, some of those items discovered were obviously incorrect. How is it that possible? They didn’t bother to review their return, which leads to my second point; although you hire someone to prepare your return it is ultimately your responsibility to ensure the accuracy of the tax return. So, if any issues arise it will be you on hook not your preparer! Another reason to review your prior year return is to refresh your memory. You can also determine what credits and deductions you claimed in order to reasonably anticipate what to expect this year (if your tax scenario remained relatively the same). If this year you decide on going with a new preparer, it is best practice to bring your prior return with you to the appointment. If your tax scenario is similar to previous year, they would like to review what was done previously. It’s a good starting point and can answer a lot of their questions.

Make An Appointment With A Tax Preparer

Due to constant changes in tax laws it may be in your best interest to hire an experienced tax professional. As someone who has been preparing taxes for many years, my clients not only walk away with the peace of mind of having a complete and accurate return but also a greater understanding of their financial position. It’s not enough to just have your return prepared, you also need a clear understanding of your tax situation and the various things you can implement during the year which will benefit you in future tax periods.

 

*Bonus Tip*

Squirrel Money Away Now

Some of us aren’t lucky enough to receive a refund during tax time. It’s an amazing feeling not having the stress of dealing with a tax bill in April. However, for others the tax bill in April is inevitable. If you normally have a tax liability at the end of the year, the chances of you having the same fate this year is highly likely. Taxpayers tend to be unprepared when it’s time to pay their tax liability. The IRS expects taxpayers to pay any outstanding liability due as of the tax deadline April 17th, 2018. Even if you file an extension for your return, you are still expected to pay any tax balance at the deadline. If you are unable to pay, you can apply for an online payment agreement and in some cases you can settle the debt. Don’t wait until the last-minute! If you’re unsure how to proceed with making a payment, have your preparer assist you!

 

Tax Deductions for Ride share Drivers

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Around this time every year, Uber and Lyft drivers are also expected to be a tax accountant, as an independent contractor you’re responsible for your own taxes. Every year in early February, Uber and Lyft send out 1099s for the prior tax year that detail how much you made, what fees they took out and the miles you drove. As an independent contractor, you’ll have to file a Schedule C in addition to your 1040.

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Although this may cause an extra burden the status of independent contractor allows you to take advantage of a number of tax deductions, which means more money in your pocket. Our mission at Imperial Acquisitions LLC is to simplify the pains that come with being an independent contractor. Below is a list of the most common ride share expenses, and when they should be considered tax deductible.

Parking Fees

The cost of parking fees incurred while working are deductible. These include garages and meters.

AAA membership

If AAA membership or other similar roadside assistance plan because of your driving business and don’t use it during a personal trip, then you can deduct the entire amount.

Car Washes

A driver needs to provide car washes to keep his or her customers happy. Because car washes are considered part of your business’s “ordinary and necessary” operating expenses, you can deduct a portion of those expenses on your tax returns.

Wireless Plan

If all of your phone calls are business related, you can deduct the total amount of your cell phone bills, including any activation fees. However, if you’re like most people, and you use your phone for both business and personal use, then you will have to determine the deductible business usage percentage.

Maintenance

Since you are probably using your vehicle for a combination of business and personal use, you will be able to deduct a proportion of your maintenance costs at tax time. This includes oil changes, tire rotations, inspecting and replacing brake pads, and anything else required to keep your car running smoothly

Gas

You can deduct your gas costs as long as its business related. This means that you can deduct gas costs that you incur while picking up customers and driving them to their destinations.

Insurance

Car insurance is just another critical cost of running your ride share business – you can’t drive without it! Like other actual expense deductions, remember that you can only deduction the amount proportionate to your business usage.

Standard Mileage

When filing taxes, you have a choice between two deduction methods: Standard Mileage or Actual Expenses, not both. The Standard Mileage deduction method is the easiest, but may not give you the largest deduction. The Actual Auto deduction method allows you to depreciate your vehicle and deduct most of your vehicle-related expenses by the percentage of business use but requires more detailed expense tracking.

Car Payment

Even if you lease, and don’t own your car, you can deduct a portion of the lease payment proportional to the business use of your vehicle.

Food and Drinks for Passengers

The IRS says that you can deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. That includes the food and drinks you purchase for your passengers. However, you can generally only deduct 50% of business-related food and drinks, so don’t go crazy spending because you will only be reimbursed for half of it.

Creative Ways to Lower Your Tax Liability After The Tax Year

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Listed below are a few innovative ways to lower your tax liability after the tax year has ended.

Contribute to retirement accounts

If you have not funded your retirement account for 2016 time is ticking! April 17, 2017 is the deadline for contributions to a Roth IRA and traditional IRA, deductible or not.

Making a deductible contribution will help lower your tax bill for the year. Plus, your contributions will compound tax-deferred. For 2016, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2016 is $53,000.

 

Itemize your tax deductions

For those who are self-employed, own a home or live in a high-tax area. It’s really advantageous for you to itemize your deductions if you qualify. To be eligible itemize in 2016 you must have qualified expenses of more than $6,300 for singles and $12,600 for married couples filing jointly. Many deductions are well known, such as those for mortgage interest and charitable donations. However, taxpayers sometimes overlook miscellaneous expenses, which are deductible if the combined amount adds up to more than two percent of your adjusted gross income. These deductions include tax-preparation fees, job-searching expenses, business car expenses, and professional dues. You can also deduct the portion of medical expenses that exceed 10% percent of your adjusted gross income.

 

Home office tax deduction

People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they do not meet clients there. Doctors, for example, who consult at various hospitals, or plumbers who make house calls qualify. As always, you must use the space exclusively for business.

You are entitled to write off expenses that are associated with the portion of your home where you exclusively conduct business (such as rent, utilities, insurance and housekeeping). The percentage of these costs that is deductible is based on the square footage of the office to the total area of the house.

 

Frequently Asked Tax Questions

FAQs

What if I miss the tax deadline?

About ¼ of filers wait until the last two weeks to get their taxes done. If you cannot make the deadline there is an option to file for a 6 month extension using form 4868. However, please be aware you are still responsible for paying an estimated amount of what you may possibly owe on the day of the deadline (Tuesday April 18, 2017).

Where’s my refund?

For e-filers your average wait is approximately 21 days, you can check the status after 24 hours on the IRS website.  For those who choose not to file electronically your refund taxes approximately 4 weeks.

How much will I received in my refund?

The IRS reports the average refund is $3,120.

What happens if I do not file for the year?

There are two scenarios, first the government owes you. In this case you must file within three years to get the refund owed to you. Second, if you owe the government and you fail to file you will be subjected to penalties and interest for not filing; chronic non-filers may face criminal prosecution.

 

What You Need to Know This Tax Season

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  1. Tax season begins January 23, 2017; taxpayers who elect to e-file can submit returns to their software provider or tax professional before that date. But the returns will not be accepted by IRS until the systems open.
  2. Taxpayers have a few extra days to file their 2016 returns this year. The due date is April 18, 2017, and not April 15, 2017. The 15th is a Saturday which would normally result in a move to the following Monday (April 17, 2017). However, this year, Emancipation Day falls on Monday, April 17. Since that is a holiday the tax filing deadline will be postponed until Tuesday, April 18, 2017.
  3. Some taxpayers will have their tax refunds delayed. A new law requires the IRS to hold refunds tied to the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until February 15th. The hold allows IRS to match information from forms W-2 and 1099 with information reported on tax returns. In prior years, refunds could be issued before forms were matched which increased the likelihood of fraud. This hold means that some taxpayers may need to wait until the week of February 27th for the refund.

Tips to Avoid Income Tax Fraud

Tax Season is under way and with that brings the very threat of income tax fraud. For those unaware; income tax fraud is a form of identity theft. Thieves will use your personal information to file an income tax return in your name. Most people only become aware they have been the victim of this act when they file their own income tax return and they are waiting for their refund, but instead they are notified by the IRS that they have already file a tax return and the refund has been distributed. In fact according to the IRS, this problem has been increasing in great numbers over the years.

Not only may you miss out on a potential refund, you may also run into trouble with the IRS; there is a possibility that IRS can send you inquiries regarding unreported income because someone may file using falsified w-2s.

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Here’s how perpetrators can possibly get your information:

  • Documents that are stolen
  • Carelessness
    • Not properly destroying critical information
    • Misplacing previous year tax returns
  • A dishonest preparer who may sell your information to identity thieves
  • Keep an eye of for odd emails, requesting you to click on a link

Here’s how you can protect yourself:

Find a reputable tax preparer. This is where I insert the shameless plug, come visit Imperial Acquisitions LLC, full service CPA & tax professionals. Find us on the web at www.imperialacq.com or visit us at 4 Sloan St., South Orange, NJ, 07079.

File early, preferably electronically (e-file)

Be careful how you mail you return (preferably drop it in a USPS or shipping location of your preference).

Secure or destroy all vital documents

In the case you do find out that someone has taken your information and filed a return. Contact the IRS immediately, and run your credit report. Because you are already a victim you want to access the damage and find out if anyone has opened up lines of credit in your name.