Posted on July 2, 2013May 31, 2016 by Michael Siebert

Some Hidden Truths About the Standard Mileage Rate

Photo by Yul B Karel at Flickr.com

Hello again. Mike here. Today I am going to discuss some issues regarding automobiles. Don’t worry—I won’t get too crazy with the details as one could write an entire novel on this subject. It will be rather minor things that can have a big impact on your tax return. Also keep in mind that this is geared towards self employed taxpayers who use their auto for business and report income and expenses on Schedule C and not necessarily employees who use their vehicle for business and report it on a Form 2106.

Let’s get started with some numbers. The 2012 Standard mileage rate is 55.5 cents per mile. It is expected to be 56.5 cents per mile in 2013. A taxpayer can either deduct actual costs incurred by the taxpayer’s automobile, or use the standard mileage rate method to calculate the amount deductible by business use.

Most people use the standard mileage rate for whatever reason – it produces more of a tax benefit or he or she has not been keeping track of actual expenses. What makes up this seemingly arbitrary 55.5 cents(2012) or 56.5 cents (2013) per mile anyway? The IRS says that depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, and vehicle registration fees all make up this cents per mile figure.

Where most people jump off the diving board too early is figuring the costs NOT included in the standard mileage rate. These are costs IN ADDITION to deducting the standard mileage rate and it is applied using the business percentage of the vehicle. Parking fees and tolls are applied 100%.

These costs include:

Interest Expense
Personal Property Taxes
Parking Fees
Parking Tolls

Let’s do a quick example to demonstrate your tax savings. A single, self employed individual (we’ll call her Mary) makes $50,000 doing a catering business. Her cost of goods sold is $25,000 making gross income $25,000. She records 20,000 business miles out of 25,000 miles for the year. The overall balance due for this taxpayer is $2,061. Keep it simple here; don’t worry about dependents, adjustments to income, credits, etc.

She just records her mileage and nothing else because that is what she has been doing for years.
However, after talking to her astute accountant, she later points out that she paid $100 parking fees, a few tolls at $50, $300 in interest on the car, and paid considerate personal property taxes of $308.

The parking fees and tolls get added dollar for dollar to the standard mileage rate calculation. The interest and the personal property taxes are added by the business percentage or 80% (20,000 business miles/25,000 total miles). This “extra” $636 ($100 parking fees + $50 tolls + (80% * $300 interest) + (80% * 308 personal property tax)) is added IN ADDITION to the business mileage calculation.
After adding to additional information to the automobile, her balance due becomes $1,922.

Her tax savings are $139 ($2,061 – $1,922).

Happy Savings!

-Michael

P.S. Attached is a 2012 auto expense worksheet that will help you organize your automobile expenses and help you decide whether to do the standard mileage rate or actual expenses method.
2012 Auto Expense Worksheet

Posted on February 12, 2013May 31, 2016 by Jan Roberg

Deducting Employee Business Expenses on Your Tax Return (Part 1)

Photo by brizzle born and bred on Flickr.com

People ask me every day, “I heard I can claim driving for my job on my taxes, can I?” Or, “I spend a lot of money on lunches with clients, how do I deduct that?” Or the most common one, “I just bought a new computer for home but I use it mostly for work, how do I write that off?”

These things all fall under the category of “employee business expenses”. You’ll see a section for that on your Schedule A of your tax return, but if you’re serious about claiming them, you’ll be using form 2106—the number from that form gets rolled onto your schedule A.

Before you even try to start deducting employee business expenses—here’s some things you need to know.

The Basics

1. If your employer reimburses you for something—you can’t deduct it… Example: you fly to Chicago for a business trip and charge it all on your American Express Card. You pay American Express but then you submit an expense report to your employer who writes you a check reimbursing you for your trip expenses. That’s called a reimbursable plan and you cannot claim the trip as a deduction.

2. If your employer pays for the expense up front—you can’t deduct it. Recently I had a young man in my office wanting to claim 69,000 miles on his taxes. Yes, that’s a lot of miles but it was perfectly in line with his occupation and he had the documentation to prove it. But the income didn’t match up—there wasn’t enough income in his W2 to pay for the gas to drive the vehicle that far. It turns out that the vehicle was owned by his employer and his employer paid for all the gas and maintenance. There’s no deduction to the employee in this case.

3. If your employer pays you a stipend for something, you may still be able to claim the expense, but you have to deduct the stipend from your claim. For example, I have a client who requires a cell phone and needs to drive for his job. His employer gives him $100 a month towards the cost of the cell phone and gas. The employee doesn’t submit any special paperwork to his boss; he just gets the $100 a month no matter what. That’s called a “non-reimbursable plan. “ We prepare his 2106 form claiming all of his business related expenses, and then we back out the $1200 extra that his employer pays him for his phone and gas expense. It’s important to show on your tax return the stipend and that you’ve backed it out of your calculations. This is probably the number one point of contention when these returns get audited.

4. In order to claim an employee business expense deduction, your business expenses must be more than 2% of your adjusted gross income for it to even register on your tax return. For example, let’s say you made $50,000 last year and you took a special training class for work which cost $950. Well, 2% of $50,000 is $1,000 so you wouldn’t have even spent enough for it to begin to count. But let’s say you spent $1,350 on that training class. Well now you’ve got enough to make a claim—you could claim $350 on your schedule A. But here’s the next issue—if you don’t have enough other items on your Schedule A to make itemizing your deductions worth it, then you still don’t have a deduction.

5. it’s harder to claim employee business expenses if you’re married. If you are married, when figuring the 2% threshold figure, you use both incomes together. For example, let’s say you have a job where you make $30,000 a year and you have $1,000 in employee business expenses. You’re clearly over the threshold (30,000 x 2% is $600) so you have a $400 deduction. But if you’re married and your spouse also makes $30,000 a year, then the threshold just moved to $1,200 and you’ve completely lost that deduction. (30K plus 30K = 60K. 60K times 2% = $1,200.)

You hear a lot in the news about claiming employee business expenses, and for some people, it’s a great deduction. But as you can see from the list above, it’s a rather limited deduction for many people.

Posted on February 15, 2012May 31, 2016 by Jan Roberg

More Tax Tips for People Who Pay Alternative Minimum Tax

Photo by Jeremy Schultz on flickr.com

If you’ve done your taxes and there’s an amount in box 45 for Alternative Minimum Tax (AMT), then you should read this because it might help. If the box is blank, you don’t have to bother with this post.

Also, this post is going to be a little more geeky and technical. If you’d like a basic introduction to AMT then you might want to check out my AMT for Dummies post first: http://robergtaxsolutions.com/2011/03/the-alternative-minimum-tax-for-dummies/

Now for the geeky part:

AMT is a pretty sneaky little tax. A lot of the issues with AMT revolve around what goes on your Schedule A-Itemized Deductions form. If you do your own taxes you can go in and play with the numbers to see what I mean. Let’s say that your real estate taxes were $4000. If you go into your tax software and change that number to $2000 or $6000, your final tax bill will probably stay the same. The AMT will rise and fall to adjust to the regular tax change. (Make sure you put your real estate tax number back to where it belongs.)

You can’t lie about what you put on your tax return, but sometimes you can choose which deductions you want to take. You may take a deduction for the state income tax that you pay on your wages, or you can take a deduction for the state sales tax that you pay. In most cases, the state sales tax is a smaller deduction, but if you’re using a computer program the computer will always choose the bigger deduction for you. The AMT can make your bigger deduction worthless, so in this case you want to take the smaller one. Why? First, if you claim sales tax instead of income tax as a deduction, you won’t have to pay income tax on your state tax refund next year. Second, in some states, like here in Missouri, although you can’t claim a deduction for your income taxes paid, you can claim a deduction for your sales tax that you paid.

So, the bottom line is you’re not changing what your total federal tax is. You are preventing taxable income on next year’s return and potentially reducing state income tax. For some people, this will do nothing at all because it depends upon your state.

The other category that has room for movement is your miscellaneous deductions; they wind up on line 27 of your Schedule A. For the most part, this includes your Form 2106 Employee Business Expenses. If you’re in the AMT category, you’ve already been dinged pretty hard by the 2% rule, because to claim a deduction here your expenses have to be more than 2% of your adjusted gross income. The AMT is like a double shot – first you lose part of the deduction due to the 2% AGI rule, and then the AMT takes the rest of the deduction away. A lot of people with AMT don’t even bother claiming their employee business expenses because of it. But don’t forget your state income tax return. Here in Missouri, your Schedule A deductions still carry through to the state tax return so you really should include your deductions even if they don’t help your federal return.

A suggestion for AMT payers with employee business expenses: If you’re in a sales position, or any job that has high employee business expenses, and you’re in a position to negotiate a salary increase. You might want to toss in having your business expenses reimbursed. Let’s say for example that you make an annual salary plus commissions of $200,000 a year and you average $10,000 a year in employee business expenses. You put those expenses on form 2106 and after the AGI limitation you only get a $6,000 deduction for it. (200,000 x 2% = 4,000. $10,000 – 4,000 = 6,000) But once you add AMT in there, your $6,000 is worth nothing.

So, by having your employer reimburse your business expenses on an “accountable plan” (that means you submit expense reports for your mileage and meals and stuff) then that money comes to you tax free. It’s a win/win for you and your boss: $10,000 tax free income to you and a $10,000 business expense write off for your employer.

Think about it, what would you rather have; a $10,000 pay raise that you have to pay state and federal income tax on or a $10,000 tax free reimbursement on money that you already spend anyway? I thought so.

AMT is a hard tax to manage. These little tips barely make a dent, but there’s not much there to work with. Hopefully it’s been some help to you.

Posted on September 30, 2011May 31, 2016 by Jan Roberg

Audit Proofing Your Employee Business Expenses

Photo by Kelly on Flickr.com

I recently attended the national conference of the National Association of Tax Preparers. It was easy to get to as it was in St. Louis this year. As much as I enjoyed taking the classes and meeting new people, sometimes the best information you get at these things is not in the actual classes, but in the scuttlebutt that you hear about what’s going on across the country. One of the issues that people were talking about was that the IRS has really stepped up the audits on Employee Business Expenses (Form 2106).

Just because certain types of forms might be susceptible to an audit doesn’t mean you shouldn’t claim legitimate deductible expenses on your tax return. If you are entitled to a deduction, you should take it. (Let me tell you, Warren Buffet’s not skipping out on his legal deductions). Just make sure you can back up your claims.

If you plan on claiming Employee Business Expenses on your tax return this year, the one thing you’re going to want is a copy of your company’s policy on employee reimbursements. If you get audited for your Employee Business Expenses, the first thing the IRS will ask you for is your official company policy on official company letterhead. If your company has a full reimbursement policy—you will automatically lose the audit. You may not claim a deduction for expenses that could have been reimbursed by your company.

Major companies like GM or Citibank will definitely have a policy. Smaller companies often don’t. To be honest, on more than one occasion I’ve written the reimbursement policy for a small company so they could submit something to the IRS when an employee was being audited. (Now that I think about it, I guess I should write one for my own company).

If you are claiming business mileage, you want to have a mileage log. This is the big IRS “gotcha” because so many people just guess a number and it’s wrong. For some reason, people seem to think that they drive 20,000 miles a year for business. Some people actually do. Some drive even more. But if you say that you drive 20,000 miles for business, you had better be able to back it up with a mileage log. For one thing, “20,000” is like a guaranteed audit flag. If you keep a mileage log, all you have to do is just whip it out and show the IRS agent and you’re done, end of story.

People who claim 20,000 miles and don’t keep mileage logs have a tougher sell. You’ll need outside proof, like your oil change statements to show your overall mileage, plus some type of record to show where you’ve been. Like hotel receipts to prove you drove to various places on business. I charge $100 an hour to recreate those statements for you and it takes time to recreate 20,000 miles. You’ll save yourself a boatload of money and a big headache if you just keep the log.

Don’t make up mileage numbers. I’m serious about the 20,000 being an audit red flag. One audit I worked on the gentleman asked me why I thought he got pulled for an audit. It was obviously his miles. Everything about his tax return had looked pretty normal, except for his 20,000 business miles. Hint: round numbers in multiple thousands look suspicious. He had no mileage log so I had him get me his odometer readings from his oil change company. Well it turns out, not only did he not have 20,000 miles of business driving, he drove less than 5,000 miles during any given year for the past three years!

I’m good at what I do, but this guy wound up paying the IRS some money. I asked him, why did he claim so much in mileage when he only drove 5,000 miles altogether. He said that was what the other guys in his office claimed. Don’t do that! Use your own numbers.

The other thing that gets a lot of IRS attention is the meals and entertainment expense. This trick is so easy it’s ridiculous. Let’s say you take John Smith to lunch to talk about him buying your product. The waitress brings you the check and you get out your credit card. She brings the receipt back for you to sign and add the tip. You also write on the top copy: John Smith sales widgets. Or you may write Jane Doe, advertising; or Fred Bird IT consulting; or whatever. The bottom line is that this note tells you who you were with and what the meeting was about. The receipt itself gives the date, time and place. The waitress may wonder why you wrote about Jon Doe and the widgets on the receipt, but that’s fine, (she’s seen it before.) But by writing on the top copy of the sales receipt, you made the yellow copy a time recording stamp. As the yellow copy of your sales receipt ages it changes color. This shows that you wrote your note a long time ago – remember that an audit will be two or three years after the fact. This proves to the IRS that you were – time for the big word here—contemporaneously recording your business expenses. It gives you street cred with the IRS agent. You took care of business, back when you were supposed to instead of trying to make up stuff after it’s too late.

Bottom line, if you want to audit proof your employee business expenses, you want a copy of your company’s expense reimbursement plan, a solid mileage log, and notations made on the top copy of your meal receipts.