Welcome to another installment of the Affordable Communication’s blog.  My name is John Carvelli and I am the office manager at Affordable Communications Inc.  Prior to taking this position at Affordable, I worked in the bookkeeping industry for nearly four years.  I obtained a bachelors degree in accounting from the University of Nevada Las Vegas in the end of 2004.  After that, I went right into the bookkeeping field so I could help business owners keep an accurate set of records and get the most information possible from their financial statements.

In this article, we will be discussing some tax savings tips that any business owner should be aware of.  While not all of these suggestions will pertain to everyone, we hope you find a couple of tips to help you at the year’s end, when you begin your filling process.

Home Office

One area where people don’t always look for deductions is their home office.  An article by Dana Dratch of Bankrate.com states, “The key is that you use the term “home office” the same way the IRS does. The tax agency says it must be a space devoted to your business and absolutely nothing else.”  This means that you cannot deduct your living room just because you have a computer that you check business E-mails from.

If you have determined that you have a qualifying home office, then the method of deducting these expenses is fairly simply.  Measure the square footage of your office and then divide it by the square footage of your home.  This will give you the percentage of your home you use as an office.  Then, take all your yearly totals for personal expenses that relate to that office (internet, rent, electric, etc.) and multiply them by the percentage you just calculated.  To read Dana Dratch’s entire article, click here.

Section 179 Expense

Tracking depreciation on your assets can be very stressful and time consuming, especially if it is an asset with a short shelf life, such as a laptop.  The Section 179 expense rule allows business owners to deduct the full amount assets purchased in the tax filing year, thus eliminating the need to depreciate the item.

Some restrictions on the Section 179 rule are that this deduction may not exceed the maximum set amount as determined by the IRS.  In 2009, the maximum amount has been set at $250,000.00.  Also, The Section 179 rule cannot be used if it will make your bottom line for the year a loss.  To explain it better, let’s imagine a small business is showing a $3000.00 profit for the year.  Let’s also say they just purchased $5000.00 in office computers that year.  They will only be able to deduct $3000.00 under the Section 179 rule.  The other $2000.00 in assets will have to be depreciated.

There are other factors pertaining to this rule depending on what type of business you are in.  To learn more about Section 179 expenses, click here to read an article posted on the Internal Revenue Service’s website or contact your CPA.

Travel expenses

Another topic that confuses business owners is traveling expenses.  When you are on a business trip, any travel and lodging fees are fully deductible.  If your business is doing well and you’re expecting a profit for the year, don’t be afraid to indulge a little bit and go for a nicer room.  It will still be a full write off. 

Besides the lodging, airfare, and rental car there are other expenses on a business trip that are fully deductable.  One example is parking fees.  Whether you are parking your car in long term parking while you fly to your destination, or if you are parking your rental car in a garage next to your meeting, the full amount of these expenses are deductible.  Also, if you give a tip to a bell hop or a concierge at your hotel, that is also deductible.  As far as meals go, only 50% of meals on a business trip are considered deductible. 

If you bring along a family member or a friend on your trip, you will not be able to deduct their expenses, unless they are involved with the business at hand, which required the trip.  You can read more about deducting travel expense in IRS publication 463.

Net Operating Loss

With the current state of the economy, if you own a small business there is a good chance you are expecting a loss this year.  As disappointing as it sounds there is still no reason you can’t make the best of a bad situation.  With the Net Operating Loss law, you can use your reported loss for the year and offset it against your profit from previous or future years.

Originally, a business could use its Net Operating Loss to amend their returns for the previous 2 years or to offset income through the next 7 years.  However, previsions in the American Recovery and Reinvestment Act of 2009 now allow for small business owners to use a Net Operating Loss to amend their returns for the previous 5 years.

For an example of this let’s assume a company posts a $30,000.00 profit in 2007, a $20,000.00 profit in 2008, and a $50,000.00 loss in 2009.   This company would then be allowed to amend their tax returns for the previous 2 years and receive a credit for the taxes paid the previous 2 years.  You can read a full article published on this subject on the Lafayette Online News by clicking here.

Bad Debt

Another good write off for business owners can be their bad debt.  A quick explanation of Bad Debt is when money or compensation that is owed to your company becomes worthless.  It may become worthless for a variety of reasons.  Some examples are: the customer that owes the debt may file for bankruptcy; the customer that owes the debt may have passed away; or the payment may be considered uncollectable after all reasonable methods have failed.

An important factor pertaining to bad debts is whether a company is on a cash or accrual accounting basis.  In cash basis accounting, income is not realized until payment is received and expenses are not realized until they are paid.  Therefore, you would not be able to write off bad debt in this situation, because you never realized the income.  In accrual basis accounting, you realize income at the time of the sale, whether you receive immediate payment or not.  You also recognize expenses when the bill is received, no matter when you plan on paying the bill.  .  Therefore, in this situation you would be able to write off your uncollectable debt, because you will have already recognized it as income.  The bottom line is, if it hasn’t been recognized as income, it cannot be written off as bad debt.  For more information about bad debt procedures click here to read an article by Joyce M. Rosenberg on www.allbusiness.com

Thank you for taking the time to read the Affordable Blog.  We hope you found it informative, helpful, and interesting.  Also, we hope some of our tax tips will help you save money in the near future.  Be sure to check back regularly for new articles and information. 

John Carvelli

HopeLink Resource Center had a phone system failure and one of their board members asked them to contact Affordable Communications for an analysis of the existing hardware and  their needs.

After a site visit and discussion with the management team, we recommended 2 systems and as we are finding more often than not, price won out.  One more thing to do was to verify we had not missed any future needs, just to make sure the less expensive system would meet their needs today and into the future.    

On Friday we arrived just after lunch and began the clean-up of the backboard where the phone and network hardware is kept.  We then mounted the new hardware and towards the end of the day, we, move the phone lines and installed the new phones in the offices.  A bit of testing, recording of new Automated Attendant greetings, creating documents and custom labels and all was completed by 6 PM.

We will be at HopeLink Resource Center Monday morning for training and to solve anything we might have missed.    

Leasing companies are continually contacting us telling us how much they want us to use them.  They are all offering all the standard leases and something new, no payments for 90 days:

Fair Market Value; it seems like it is somewhere between 20 and 22% of original purchase value to own the hardware at the end of the term.

10% and $1.00 Buy Out, are what they say, at the end of the term.

Also keep in mind that with a lease everything is taxable. You pay the taxes at the time of the payment.   Since in Nevada labor is non-taxable, if you lease the complete install, and there is a lot of labor then you will pay taxes on the labor and the interest.   

Recently I gave, a well funded new startup an estimate for a small phone system and voice mail system including the labor to install it. Here is how it broke down to purchase and lease for 36 months.

Phone and voice mail hardware    $2623.00

Labor                                                $   795.00

Total hardware and labor               $ 3418.00

Taxes                                                $   212.46

Total (Purchase Price, installed)    $ 3630.46

Using the standard rate calculator you multiply $3418.00 X the rate factor for 36 months  no payment for 90 days and $1.00 buy out, of .03397 and you get 116.10/month plus Nevada Sales taxes of 8.1% for a total $4179.60 after 39 months. So the cost of owner ship is $4180.60 for a total $550.14 in taxes and interest.  That seems OK to me, to keep my money in my pocket.

Remember I said they are a well funded startup…..When the lease came back, the lease company said, since they are a startup here is the lease amount and new terms for 36 months with 3 payments in front. So here it is.   $3418.00 X .037130 = $126.91 +Tax = $137.19 per month for 36 months plus a pre payment of $411.57 for a grand total cost of ownership $4980.33.  That means that the interest and taxes are now $1350.87.  That seems high to me.  

It all seems great however if you are a new startup, then most of the leases are unavailable to you, and if they are then it would be at a much higher rate. 

One more thing to keep in mind, this is not like a loan, if you pay early there is no financial advantage.  If you lease something for $100.00 per month for 36 months, and if you want to pay it off in 6 months, you owe them $3000.00.

So I am going to offer this new startup, 3 payments, no interest.

Do the math, read what you sign.