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Business Auto Deductions: Two Ways to Calculate

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Curcuru & Associates CPA PLCDo you drive your car for business purposes? The costs of operating and maintaining your vehicle are potentially deductible. Here are some guidelines.

Two Methods

The IRS provides two basic methods for computing deductions for the business use of an automobile.

Actual expense method. With the actual expense method, you deduct the actual costs of operation, including licenses, registration fees, garage rent, repairs, gas, oil, tolls, and insurance. Additionally, you may claim depreciation deductions (and/or elect expensing under Section 179). If the car is leased, you deduct your lease payments rather than depreciation. (Certain limits apply.)

Standard mileage rate. Alternatively, you may choose to use an IRS-provided standard mileage rate. With this method, you multiply the number of business miles you drive during the year by the applicable rate (58¢ per mile for 2019). When you use the standard mileage rate, you don’t separately deduct expenses such as gasoline, oil, insurance, repairs and maintenance, depreciation, or lease payments. However, business-related parking fees and tolls are separately deductible.

Which Should You Use?

Generally, you will want to use the method that produces the largest deduction. If your vehicle is costly to own and operate, the actual expense method may be more advantageous. Conversely, if your vehicle is fuel efficient and/or inexpensive, the simpler standard mileage rate method may be a better choice.

With either method, the IRS requires that you keep records that substantiate your business use of the car: the date, place, business purpose, and number of miles you travel. When you use the actual expense method, you’ll also need records substantiating the amount and date of car-related expenditures. You can avoid having to retain receipts by using the standard mileage rate.

If you decide to use the standard mileage rate for a car you own, you may switch to the actual expense method in a later year. However, you won’t be able to claim accelerated depreciation deductions for the car. With a leased car, you have less flexibility. If you choose the standard mileage rate the first year, you must use it for the entire lease period.

Personal and Business Use

If you use your car for both personal and business purposes, you must keep track of your mileage for each purpose. To figure the percentage of qualified business use, you divide the business mileage by the total mileage driven. Then multiply that percentage by your total expenses.

We invite you to call our office at 248-538-5331 if you have any questions. We offer an introductory consultation at no cost or obligation.

Smart Pricing Strategies

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It’s a given that businesses need to be profitable to survive. A key element in making a profit is pricing. Here are some suggestions that can help you get your pricing right.

Identify Your Costs

If you don’t know what your product’s or service’s total costs are, you can’t price them accurately. What makes up total cost? The components may include:

  • Cost of materials or merchandise
  • Labor costs, including salaries plus benefits
  • Overhead costs, such as taxes, rent, insurance, marketing, utilities, and transportation

Determining how much you need to charge just to cover your costs is an essential first step in setting prices. Be sure to reevaluate your costs regularly. If you are experiencing difficulty moving certain products at an acceptable profit, your costs could be too high.

Know Your Customers

Customers generally fall into distinct categories. Some are very price sensitive. Others focus less on price and more on convenience. The implied status or exclusivity of certain goods and services is very important to certain other customers. Once you identify the type of customer you are targeting, it becomes easier to set your prices accordingly.

Know Your Competitors

Knowing what your competitors charge for similar products or services helps you position your business in the marketplace. For example, if you determine your competitors focus on low prices, you can decide if you want to differentiate your business by focusing on superior service.

Leveraging service as a value proposition may justify charging higher prices than your competition. Or there may be other differentiators that allow you to charge higher prices, such as exclusive merchandise or highly knowledgeable employees.

Experiment and Monitor

Look for ways you can sell options, service contracts, and add-ons to a primary product or service, perhaps by offering several “packages” at different prices. Or consider applying discounts based on the quantity ordered.

Continuously monitor your prices and your profitability. Knowing which products or services are making you money allows you to make data-driven decisions about inventory and pricing.

Traveling for Business and Pleasure — What’s Deductible?

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Curcuru & Associates CPA, PLC Business TaxBusiness owners who travel out of town on business sometimes like to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic Travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities.1 Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, are deductible.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

Foreign Travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

  • The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
  • Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
  • The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip.
  • For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

As this brief overview suggests, with smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.

Source/Disclaimer:

1Under The Tax Cuts and Jobs Act of 2017, employees may no longer deduct unreimbursed employee business expenses as a miscellaneous deduction, effective with the 2018 tax year.

We invite you to call our office at 248-538-5331. There is no cost or obligation for the introductory tax planning and preparation consultation.

Do You Truly Know Your Business Costs – You Better

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Curcuru & Associates CPA PLCYour company’s profitability depends not only on sales, but also on effective cost management. Are you adequately addressing the cost side of the business equation?

Analyze Your Cost Structure

You probably can readily identify the products and/or services that are generating your greatest sales volume. But can you identify all the costs associated with providing each product or service? Only when you know your true costs can you effectively allocate resources to the work that is most profitable for your company.

Actively Monitor Operations

As the busy owner of a small business, you can’t be everywhere all the time. But you do need to stay in circulation, regularly observing the day-to-day operations of your business and talking to your managers and employees. By staying visible and encouraging an open dialogue, you’ll be in a better position to uncover costly problems before they seriously erode your company’s bottom line.

Solicit Bids

Even if you are satisfied with a current vendor, you may want to talk to the competition from time to time. You won’t necessarily want to switch vendors simply because you are quoted a better price. But you may be able to use that price in negotiating more favorable terms from your existing supplier.

Watch for Discounts

In the interests of cash flow, your company may routinely pay its bills only when they come due. While this generally is a sensible strategy, it may not be wise if you are passing up generous cash discounts for earlier payment. In the current low interest rate environment, borrowing the funds you need to take advantage of discounts may be a better move. For example, suppose a vendor offers your company a 2% discount for paying a $10,000 invoice 20 days early. Passing up the discount will cost you $200. Instead, you might borrow $9,800 from your bank, pay the discounted invoice, and repay the loan in 20 days. If the rate on your bank line of credit is 8%, you’ll owe about $45 of interest — for a net savings of $155 on just one invoice.

Effective cost management requires good information and careful planning.

Please call Curcuru & Associates CPA PLC at 248-538-5331 about all of our small business accounting services. There is no cost or obligation for the introductory consultation.

The Basics of the New Section 199A and How It Affects the Self-Employed

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Curcuru & Associates CPA PLCAffectionately being referred to as the Pass-Through Deduction, the new tax law will allow partnerships, LLCs, S corporations and sole proprietorships (in other words, pass-throughs) to deduct up to 20% of their Qualified Business Income under revised provisions of IRC § 199A.

How is the Pass-Through Deduction Calculated?

The Pass-Through Deduction usually will be whichever is smaller between 20% of the household’s Qualified Business Income or 20% of the household’s taxable ordinary income. For example, assume a self-employed plumber has $50,000 of Qualified Business Income in 2018, with no other sources of income. If the plumber is a single filer he may claim a $12,000 standard deduction, resulting in $38,000 in taxable income. Therefore, 20% of the plumber’s Qualified Business Income is $10,000 ($50,000 x 20%), while 20% of his taxable income is $7,600 ($38,000 x 20%). The plumber may claim a $7,600 Pass-Through Deduction, the smaller of the two amounts.

What is Qualified Business Income?

In general, Qualified Business Income is net income that is received from a Qualified Trade or Business. However, there are some exclusions, the most common of which are capital gains, dividend and interest income. Additionally, any guaranteed payments or “reasonable compensation” paid to owners must be excluded.

What is a Qualified Trade or Business?

In general, a Qualified Trade or Business is any trade or business that is not a “Specified Service Trade or Business” or the trade or business of performing services as an employee.

The IRS Defines a Specified Service Trade or Business as:

  • any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners,
  • any banking, insurance, financing, leasing, investing, or similar business,
  • any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A,
  • any business of operating a hotel, motel, restaurant, or similar business, and
  • any business which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

Income Based Exception for Specified Service Trade or Business Owners

An income-based exception exists for owners of a Specified Service Trade or Business which will allow them to take the Pass-Through Deduction as long as their income is below a certain amount. For 2018, that amount is $207,500 (or $415,000, for MFJ) to be eligible for a partial deduction and $157,500 (or $315,000, for MFJ) to be eligible for the full deduction. Therefore, even if a taxpayer owns a Specified Service Trade or Business if her income is below $157,500 (or $315,000, for MFJ) for the year she may still take the full 20% pass-through deduction. While, if her income is greater than $157,500 (or $315,000, for MFJ) but below $207,500 (or $415,000, for MFJ), she may take a partial deduction.

Phase Out Provisions and other Requirements for Certain Taxpayers

The New Pass-Through Deduction is very complex. While we have discussed the basics here, the new law contains numerous nuances. For example, for taxpayers who have income greater than $207,500 (or $415,000 for MFJ) the deduction must be calculated in a different manner. It is advised that you speak with a tax professional to determine your specific eligibility for the new Pass-Through Deduction.

Curcuru & Associates CPA PLC offers a variety of tax planning services to both businesses and individuals. Proactive tax planning now can save you money and make tax time a breeze. Call us at 248-538-5331 and request a free initial consultation to learn more.

Don’t Forget – You are Responsible for Payroll Taxes

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Any business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld taxes in a timely manner will find itself in trouble with the IRS.

The IRS may levy a penalty, known as the trust fund recovery penalty, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person?

Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.

The IRS states that a responsible person may be:

  • An officer or an employee of a corporation
  • A member or employee of a partnership
  • A corporate director or shareholder
  • Another person with authority and control over funds to direct their disbursement
  • Another corporation or third-party payer
  • Payroll service providers

The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.

Working With the IRS

If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to a tax advisor if you need to know more about the requirements.

If you have further questions, we invite you to call our office at 248-538-5331 and ask to speak with Vito J. Curcuru or Sal Curcuru. There is no cost or obligation for the introductory consultation.