As the tax deadline looms in two weeks, the Association of Chartered Certified Accountants has some advice for businesses and individual taxpayers.
“Businesses and individuals must make informed decisions on their tax returns in order to secure the maximum refund – a goal that’s more important than ever during this unstable economy,” said ACCA head of taxation Chas Roy-Chowdhury. He made the following recommendations:
1. Be careful not to confuse capital expenditure with business supplies and add the two together. Equipment is a capital expenditure, and has to be depreciated rather than taken as a straight deduction. This means it is written off over a number of years. Special rules do allow most small businesses to write off up to $250,000 in capital expenditures for tangible personal property (such as computers and office furnishings) in the year of purchase. However, you still have to report these purchases as capital expenditures and elect to use this special method of expensing the costs.
2. Understanding what constitutes a legitimate business expense is important. There are also business expenses that are deductible but could become non-deductible if not appropriately handled. For example, entertainment is deductible where it is undertaken and is both ordinary and necessary.
3. It is always important to keep records of anything you are deducting. This is especially the case where you work in a cash-based enterprise or such areas as trucking and construction. The Internal Revenue Service, if or when they audit your tax return, will want to see records to back up your deductions, i.e., invoices.
4. In the current economic climate where people are looking for work, you may be able to deduct work-search-related expenses. That includes the costs of attending interviews, costs of publishing your details for circulation and the mailing costs, as well as any counseling. In order to obtain the deductions, you need to be looking for a job in the same field as before.
5. It is important that a business does not automatically assume that all payroll costs are deductible. The costs need to pass the reasonableness test. While a number of factors can determine what is reasonable, broadly it can be summarized as the amount you might pay someone who you employed on a temporary basis.
6. Make sure you are taking full deductions for all the business-related expenses you are entitled to. If your home is your office, then you should ensure that those elements of your expenses which you can justify as business related, which might be a proportion of your utility bills, are also deducted.
7. Note that some expenses are deductible where they exceed a certain percentage of your income. Hence, in a climate of layoffs and reduced earnings, some expenses that you previously could not deduct may now be deductible.
8. Make sure that if you are self-employed, you do not slip up on paying the self-employment tax. If you work for yourself, make sure your Social Security and Medicare tax is paid. Look at the IRS Web site and use Schedule SE form 1040. You must make estimated quarterly tax payments.
9. If you have unfortunately lost your job and had to move to take up a new job, make sure you keep your receipts and expense records. As long as you had to relocate more than 50 miles from your old home, you can take a deduction for the moving expenses.
10. In the current economic conditions, many homeowners have found it difficult to keep up their mortgage payments. The Mortgage Forgiveness Debt Relief Act 2007 has created important relief for those who have had their debts restructured or suffered a foreclosure. Without the act, the amount of the forgiven debt would have been treated as taxable income. However, due to the act, there is no tax to pay on the first $2 million for a married couple or $1 million for a single person.