A Therapist's Guide to Business Expenses

Transcription

1 WCA Conference November 15, 2014 Developing a Strong Root System for Your Practice: A Therapist's Guide to Business Expenses Business/Tax Structure (sole proprietor, LLC, partnership, sub-chapter S Corp) (handout) Self-Employment Tax (handout) Income Cash vs. Accrual Barter Bad checks Refunds to clients 1099 income vs. client payments Guide to Business Expenses (handout) Receipts Neat Financial record-keeping Quicken Quickbooks Excel Home Office (3 handouts) Hiring Spouse/Children (yes, this is a good thing!) (2 handouts) Health Reimbursement Account (HRA Section 105) (handout)

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8 Maximizing Schedule C Tax Deductions Sandy Voit, MS, EdS, LMHC, CDFA, owner, Tangible Solutions sandyvoit@gmail.com There are several ways to increase your business net profit. You can increase your income by seeing more patients, or increasing your fees, or take on other paying gigs (teaching, writing, consulting, etc.). However don t overlook the advantages of either reducing your expenses, or make sure that your expenses are recorded in order to provide you a tax deduction. For every dollar you get to claim as a deduction, you not only save the marginal tax rate (such as being in the 25% tax bracket), but you also get to save the 15.3% in self-employment taxes, which means a combined 42.3% savings! Most of us are conducting business as sole proprietors (and I include those of us who are partnerships, LLCs, and Subchapter S Corporations, as we all are pass-through tax entities meaning we complete Schedule C on our 1040s). (By the way, if you have more than one business, you need to complete a separate Schedule C for each one.) I ve compiled an alphabetical list of the categories of acceptable business tax deductions. My Bible for this is Schedule C: A to Z. The Sole Proprietor s Guide to Tax Savings published by NASE (National Association for the Self-Employed, Advertising Include expenses for: signs, business cards (great promotions at for 500 business cards for $10), online (such as Google pay per click) and print advertising, newsletters, marketing, public relations, promotions, etc. Auto expenses From Part I article on home office, remember that mileage between home and professional office are tax deductible. Mileage to and from local meetings, conferences, consults, even having coffee/tea or a meal with someone with whom you are discussing bona fide business, such as referral sources, discuss marketing ideas, or better ways to do your business are all legitimate for deducting your mileage. Remember that you must keep mileage log! Commissions/Fees This refers to items such as online directory fees, or if you pay a percentage or fee to a referral source, or if you work in a clinic for a 60/40 split the 40% that you give to the landlord is deductible here. Depreciation Most of us spend a lot of money to get our first office started from equipment and furnishings and such. Under section 179 you can probably write off most of your ongoing capital expenses in one year although you should discuss this with your tax professional as sometimes it may be prudent to amortize this over the expected life of the purchase (depreciation) such as if you think taxes will be increasing. If your income is low you also may want to spread out these expenses as you already will be in a low tax bracket and this would help you reduce future income. When you are starting out it almost always pays to use the depreciation tables as your income is lower. Employee Benefits This is probably the biggest potential source of tax savings for you and will be the focus of Part 3. There are a lot of advantages for someone who is married and can employ their spouse. Even if just part-time for administrative, bookkeeping, website, etc., you will be able to pay a salary, a wash in terms of self-employment taxes, but allows you to offer full benefits to your employee, and their dependents, which includes you, making expenses for health insurance, accident insurance, group term life, dependent care assistance, medical reimbursement plans (HRAs Section 105), educational assistance, bus/parking, all legitimate tax deductions, which means you also get to save the 15.3% self-employment tax in addition to your income taxes Insurance Not health insurance that s an employee benefit, but for malpractice, liability, business interruption, workers compensation, etc. Sandy Voit / Tangible Solutions sandyvoit@gmail.com

9 Interest If you have a mortgage for your office (other than for your principle residence), deduct it here, as well as with interest charged on your line of credit, credit card, business loan, etc. Legal & Professional Services This includes a variety of services, such as accounting, billing/ bookkeeping, legal, start-up expenses, consultation, research, virtual assistant, business coach, etc.) Office This area refers to costs associated with cleaning, coffee/water, office décor, landscaping, window washing, waiting room subscriptions, etc. Pension/Profit Sharing Here is the way to start putting away money for your retirement. These funds are a tax deduction now, so you don t pay taxes on them and the amount fully goes into whatever investment vehicle you choose, growing tax free (at least until you start taking the money out, when it is taxed). This includes matching contributions to 401(k), SEP, SIMPLE, Keogh, Annuity, Profit-Sharing Pension, Stock (assuming you are a corporation), pension, retirement plan fees, etc. Rent or Lease This is for vehicles you might be leasing/renting, your outside office rent, nonrefundable deposits, (but not for home office rent). Repairs These expenses are for general maintenance, repairs, repainting, etc.) Not for improvements (these would be captured under depreciation ). Supplies The usual office supplies forms, paper, pens, clips, tape, medical (for items that are considered disposable), computer supplies, stationery, etc. but not for software (depreciation). Taxes/Licenses This can include a variety, such as employment, business licenses/permits, state B&O (or income) taxes, real estate taxes, excise taxes. Not income taxes, nor gas taxes. Estimated Taxes you need to file quarterly unless you, or your spouse, has a job where taxes are withheld at least at the previous year s amount, or pay at least 90% of actual tax obligation, or owe less than $1000. Otherwise you need to pay estimated quarterly taxes or be hit with penalties! Travel Travel must be overnight, must be ordinary and necessary business expense (ordinary is customary for your profession; necessary is what is helpful and appropriate for business), must be reasonable incurred for existing business. Includes lodging, air fare, tips, local transportation (bus, ferry, taxi, tolls, car rental not your own car, that s entered under auto expenses), internet access, etc. Meals and entertainment. When conducting business with business associates or employees, while at home or while traveling, and meals alone when traveling overnight on business trip. Meal should be directly related or associated with active conduct of your business must realistically connect the meal with specifically your business in some way. And remember that the deduction for meals and entertainment is only 50% at most, so it doesn t pay to pick up the expenses of the other person, unless there is a good reason to do so, otherwise you ve lost the value of the deduction. Utilities This is for the basics - electricity, heat, water, sewage, trash removal (alarm, telephone and internet are included in Other Expenses). Wages This is for employees, not for you. Remember that you will be paying taxes on the income left over from your gross income after business expenses. Other expenses This might include: banking, dues, continuing ed, professional subscriptions/books, telephone, alarm, internet service, postage/shipping, gifts that are business-related (a maximum of $25/yr./recipient, such as a Starbucks card for a referral source, or as a holiday gift to employees, etc.) Remember that the Schedule C expenses follow these topics, so whatever record-keeping system you use, such as Quickbooks or Quicken, etc., should be set up to look like this so when it comes time to do your taxes, all the categorization is already done for you. Makes it much easier. Please feel free to contact me if you have any questions or need additional information. I am not an accountant and cannot give tax or legal advice, but I am very educated in this area, and willing to help. Sandy Voit / Tangible Solutions sandyvoit@gmail.com

10 Tangible Solutions Financial Information to Meet Your Needs Winter 2015 Introduction Many of my clients are seeking useful information to help them make educated decisions on financial matters. Each issue focuses on a specific topic to provide pertinent information which I believe that you will find valuable. If you have a suggestion for a future topic or concern, please let me know. I look forward to your input and feedback. - Sandy Voit, Owner & Publisher, Tangible Solutions FOCUS: Tax Savings of a Home Office If you are in business for yourself (such as a partnership, sole proprietor, LLC, or a subchapter S corporation), and your run practice in a location other than your house, you should seriously consider setting up an office in your home to maximize your bona fide business deductions. The IRS, in publication 463 states: If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. The only rule is that you have to set up your home office and use it regularly and exclusively to administer your business. This means that you can t use this office space for a guest room, or for viewing tv/cable/video, or allow your children to do their homework in it. It must be used solely to conduct your business. If you have a spare den or bedroom, or want to build an office in your basement, this can produce savings for you on several levels. First, driving from your home to your other office is now business travel, not commuting. The deduction for 2014 is $.56/mile. If the distance between your home and other office is 10 miles, then each day you go to your other office means you get an $11 tax deduction. If you work only 200 days a year, that translates to a $2200/year deduction. [Note: If you are not using mileage, but actual costs, the shifting of mileage from commuting would significantly increase the business percentage of the costs, especially if you are leasing or making payments on the car, or depreciation ] Second, you get to deduct a percentage of your home s operating costs. This is determined by the number of square feet of your office divided by the total square footage of your home. So, if your office is 10% of the total square footage, then you get to deduct 10% of costs such as: Rent (or mortgage) Utilities (heat, electricity, water, alarm, garbage, internet, sewer, etc.) Insurance (homeowners be sure to inform your insurance agent that you have a home business - or renters) Property taxes (if you own) Tangible Solutions Sandy Voit

11 Maintenance and repairs (including housecleaning, cleaning your windows, gutters, and roof, and repairs to house) Direct Expenses used solely for your business, such as installing internet in your office, furniture, computers, file cabinets, telephone, other equipment, etc. So, let s see what this might save you. Assuming that you are paying the following costs to operate your home: Proportional Costs: Mortgage or rent: $18,000 Utilities $ 3,600 Homeowner s Insurance $ 1,000 Property Taxes $ 5,000 Maintenance/Repairs $ 2,000 Total $29,600 Direct Costs: Mileage $.55) $ 2,200 Equipment $ 1,000 Total $ 3,200 Assuming that your office represents 10% of your square footage, you would be able to deduct $2960 as your proportional costs, plus your direct costs of $3,200, for a total deduction of $6,160. If you are in the 25% tax bracket, you would save $1,540 in income taxes, plus $942 in selfemployment taxes (15.3%), for a total tax savings of $2,482. Of course your individual savings would depend upon your actual costs and your tax bracket, but you can see that you will save you a considerable amount. Now the question is how do ensure that you qualify. Remember that in addition to the home office being used exclusively for your business, you must show evidence of such, especially when you want to be able to deduct the mileage between your home office and your other office. We all take some work home, So, every day, before leaving home to go to your other office, you go to your home office and log on to your computer, and answer and send s regarding your business. As long as you don t delete your messages you have a log of business activity. Upon your return, again, go on your and read/write s. You also should enter into your business calendar when you are home working on issues such as appointments, billing and bookkeeping, writing reports, ordering supplies and such. One last item of note: If you own your home, and have a home office, talk to your tax advisor about issues of deducting depreciation, as when you sell your house you would have to pay capital gains taxes on the recaptured depreciation you ve deducted (which would work in your favor as capital gains taxes are likely to lower than your income taxes, and the deferral of payment of these taxes reduces your tax bill as inflation works in your favor. End Note: Thank you for taking the time to read this article. I hope you have found it useful. If you have any questions or concerns about this topic, or any other topic, please contact: Sandy Voit, Tangible Solutions, , or sandyvoit@gmail.com. Tangible Solutions Sandy Voit

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18 Tangible Solutions Financial Information to Meet Your Needs Winter 2015 Introduction Many of my clients are seeking useful information to help them make educated decisions on financial matters. Each issue focuses on a specific topic to provide pertinent information which I believe that you will find valuable. If you have a suggestion for a future topic or concern, please let me know. I look forward to your input and feedback. - Sandy Voit, Owner & Publisher, Tangible Solutions FOCUS: Tax Savings of a Home Office If you are in business for yourself (such as a partnership, sole proprietor, LLC, or a subchapter S corporation), and your run practice in a location other than your house, you should seriously consider setting up an office in your home to maximize your bona fide business deductions. The IRS, in publication 463 states: If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. The only rule is that you have to set up your home office and use it regularly and exclusively to administer your business. This means that you can t use this office space for a guest room, or for viewing tv/cable/video, or allow your children to do their homework in it. It must be used solely to conduct your business. If you have a spare den or bedroom, or want to build an office in your basement, this can produce savings for you on several levels. First, driving from your home to your other office is now business travel, not commuting. The deduction for 2014 is $.56/mile. If the distance between your home and other office is 10 miles, then each day you go to your other office means you get an $11 tax deduction. If you work only 200 days a year, that translates to a $2200/year deduction. [Note: If you are not using mileage, but actual costs, the shifting of mileage from commuting would significantly increase the business percentage of the costs, especially if you are leasing or making payments on the car, or depreciation ] Second, you get to deduct a percentage of your home s operating costs. This is determined by the number of square feet of your office divided by the total square footage of your home. So, if your office is 10% of the total square footage, then you get to deduct 10% of costs such as: Rent (or mortgage) Utilities (heat, electricity, water, alarm, garbage, internet, sewer, etc.) Insurance (homeowners be sure to inform your insurance agent that you have a home business - or renters) Property taxes (if you own) Tangible Solutions Sandy Voit

19 Maintenance and repairs (including housecleaning, cleaning your windows, gutters, and roof, and repairs to house) Direct Expenses used solely for your business, such as installing internet in your office, furniture, computers, file cabinets, telephone, other equipment, etc. So, let s see what this might save you. Assuming that you are paying the following costs to operate your home: Proportional Costs: Mortgage or rent: $18,000 Utilities $ 3,600 Homeowner s Insurance $ 1,000 Property Taxes $ 5,000 Maintenance/Repairs $ 2,000 Total $29,600 Direct Costs: Mileage $.55) $ 2,200 Equipment $ 1,000 Total $ 3,200 Assuming that your office represents 10% of your square footage, you would be able to deduct $2960 as your proportional costs, plus your direct costs of $3,200, for a total deduction of $6,160. If you are in the 25% tax bracket, you would save $1,540 in income taxes, plus $942 in selfemployment taxes (15.3%), for a total tax savings of $2,482. Of course your individual savings would depend upon your actual costs and your tax bracket, but you can see that you will save you a considerable amount. Now the question is how do ensure that you qualify. Remember that in addition to the home office being used exclusively for your business, you must show evidence of such, especially when you want to be able to deduct the mileage between your home office and your other office. We all take some work home, So, every day, before leaving home to go to your other office, you go to your home office and log on to your computer, and answer and send s regarding your business. As long as you don t delete your messages you have a log of business activity. Upon your return, again, go on your and read/write s. You also should enter into your business calendar when you are home working on issues such as appointments, billing and bookkeeping, writing reports, ordering supplies and such. One last item of note: If you own your home, and have a home office, talk to your tax advisor about issues of deducting depreciation, as when you sell your house you would have to pay capital gains taxes on the recaptured depreciation you ve deducted (which would work in your favor as capital gains taxes are likely to lower than your income taxes, and the deferral of payment of these taxes reduces your tax bill as inflation works in your favor. End Note: Thank you for taking the time to read this article. I hope you have found it useful. If you have any questions or concerns about this topic, or any other topic, please contact: Sandy Voit, Tangible Solutions, , or sandyvoit@gmail.com. Tangible Solutions Sandy Voit

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