Business Start-up Costs — What’s Deductible?

Start UpLaunching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

  • No deduction is available until the business becomes active.
  • Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
  • Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.

Example. Gina spent $20,000 on start-up costs before her new business began on July 1, 2015. In 2015, she may deduct $5,000 and the portion of the remaining $15,000 allocable to July through December of 2015 ($15,000/180 × 6 = $500), a total of $5,500. The remaining $14,500 may be deducted ratably over the remaining 174 months.

 

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.

If you want to be more aggressive lowering your tax obligations but stay within the legal limits, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a Southern California CPA Accounting Firm with offices in Newport Beach and San Clemente CA.  Our clients are located throughout Los Angeles and Orange County.

 

Real Estate Gains – Property Exchange Can Defer Taxes

Commercial PropertyIf you are fortunate enough to own real estate that has appreciated substantially, you may be hesitant to sell the property and reinvest in another property because of the taxes you’d have to pay on your profit. Instead of selling, you might want to consider a “like-kind exchange.”

A like-kind exchange is a property swap. When all tax law requirements are met, a like-kind exchange allows you to defer your gain for tax purposes.

An Example

Pete exchanges a tract of land worth $500,000 for a building, also appraised at $500,000. He originally paid $300,000 for the land and he made no improvements to it. Because the deal is structured as a like-kind exchange, Pete’s $200,000 gain on the land ($500,000 value minus $300,000 cost) is tax deferred.

Tax deferred doesn’t mean tax free. For tax purposes, Pete’s cost basis in the building he acquired in the exchange is $300,000, the same as his cost basis in the land he gave up. So, if Pete were to turn around and sell the building for $500,000, he’d have to report a taxable gain of $200,000 at that time.

Which Assets Qualify?

The like-kind exchange strategy is available for investment property and property used in a trade or business. Real estate has to be exchanged for real estate, and personal property for personal property. Inventory and shares of stock aren’t eligible for like-kind exchange treatment, and various other restrictions apply.

Making a Deal

A like-kind exchange can be accomplished when properties are not of equal value. Typically, the owner of the less valuable property turns over enough cash (or other assets) to even out the exchange. Or one owner might agree to assume the other’s debt. Note that transactions involving cash, additional assets, and debt relief are not completely tax deferred.
Other variations on the basic like-kind exchange are possible. For example, it’s possible to structure an exchange that isn’t simultaneous. Or more than two property owners can be involved in the deal.

In the right situation, a like-kind exchange can be a significant tax-saving opportunity. We’d be happy to discuss it with you.

If you would like to learn more, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a California CPA Firm providing real estate accounting throughout Los Angeles and Orange County. Our founder has been licensed in California for over twenty years and we work with Real Estate Investement Trusts (REIT), Property Management companies, Real Estate Developers and Investment Groups, and Owner Operators.

Don’t Let Taxes Trip You Up

The last thing you need as a small business owner is to have to spend time unraveling tax problems you could have avoided. There are many tax issues that can trip up small business owners — here are a few.

Mixing Business and Personal

Keeping your personal bank and credit card accounts separate from your business accounts isn’t always easy. But “commingling” business and personal accounts creates a recordkeeping nightmare. When it’s tax time, you may not be able to identify all the appropriate business expenses. As a result, it could be difficult to accurately determine your business income and you might lose deductions.

Not Keeping Track

Keeping track of business expenses can be a challenge. However, you’ll need proof of purchase for any expenses you plan to deduct. Proof can be a canceled check (or legible image of the check) or a credit card, debit card, or electronic funds transfer (EFT) statement showing the payee, the amount of the purchase or transfer, and the transaction date.

You’ll also need an invoice or a receipt identifying the purchase. If the business purpose for the purchase isn’t immediately obvious, attaching a note of explanation or writing directly on the invoice or receipt can save time later should questions arise. There are specific substantiation requirements for business travel and entertainment expenses. Check with us if you have questions.

Making the IRS Wait

The employment taxes you collect should always be remitted to the IRS in a timely manner — without exception. As an employer, you’re responsible for withholding federal income tax and FICA (Social Security and Medicare) taxes from your employees’ wages and remitting them, along with your company’s FICA contributions, to the IRS. Penalties for noncompliance can be harsh.

Misclassifying Workers

Misclassifying workers as independent contractors when they are actually employees can be a thorny issue because they are treated differently for income-tax withholding and employment-tax purposes.

 

> Employees: You must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes.

> Independent contractors: You’re not required to withhold income tax, and the worker is fully liable for his or her own self-employment taxes. FICA and unemployment taxes do not apply.

 

It’s important to get it right to avoid penalties. Generally, the more control you have, the more likely it is that the worker is an employee.

 

Taxing Decisions for Orange County Residents

Do you use your car for business driving or maintain an office in your home? In either situation, you may have a choice of methods for figuring your tax deduction.

Car Expenses

When you use your car for both business and personal purposes, you have to keep track of your mileage so that your car expenses may be divided between the two purposes. Only the business portion is deductible. That much is a given. The choice involves whether to use the actual amounts you spend on gas, oil, repairs, insurance, etc., to figure your deduction or the IRS standard mileage rate. Usually, you will want to use actual expenses if it produces a larger deduction. But, if keeping receipts is a burden, the simpler standard mileage rate may be best. (Requirements apply.)

Home Office Expenses

There are strict requirements for claiming the home office deduction, but it can be a tax saver if you qualify for it. Assuming you do, you’ll have to decide between deducting actual expenses allocated to the home office (usually based on square footage) or using a simplified method (deducting $5 per square foot for up to 300 square feet of office space). Again, you will usually want to use the actual expense method if it produces a larger deduction. But, if you want to minimize recordkeeping and don’t want tax complications when you sell your home, you may lean toward the simplified method.*

 

If you want to be more aggressive lowering your tax obligations but stay within the legal limits, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a Southern California CPA Accounting Firm with offices in Newport Beach and San Clemente CA.  Our clients are located throughout Los Angeles and Orange County.

 

 

* Capital gain attributable to depreciation of your home will be taxable. Unlike with the actual expense method, there is no depreciation claimed when using the simplified method.

Lock In Tax Breaks You Deserve

Tax BreaksIf you run a small business, you already have a full plate. The last thing you need is for the IRS to question any of your business expense deductions. But it could happen. And that’s why having records that prove your expenses is so important. Even deductions for routine business expenses could be disallowed if you don’t have appropriate records.

What Records Are Required?

Except in a few instances, the tax law does not require any special kind of records. You’re free to have a recordkeeping system that is suited to your business, as long as it clearly shows your expenses. In addition to books that allow you to track and summarize your business transactions, you should keep supporting documents, such as:

  • Canceled checks
  • Cash register receipts
  • Credit card sales slips
  • Invoices
  • Account statements

The rules are stricter for travel, entertainment, and transportation expenses. You should retain hotel bills or other documentary evidence (e.g., receipts, canceled checks) for each lodging expense and for any other expense of $75 or more. In addition, you should maintain a diary, log, or account book with the information described below.

Travel. Your records should show the cost of each separate expense for travel, lodging, and meals. For each trip, record your destination, the dates you left and returned, and the number of days spent on business. Also record the business purpose for the expense or the business benefit you gained or expected to gain. Incidental expenses, such as taxi fares, may be totaled in reasonable categories.

Entertainment. Record the date the entertainment took place and the amount of each separate expense, along with the name and address or location of the place of entertainment. Note the business purpose for the expense or the business benefit you gained or expected to gain and the nature of any business discussion or activity that took place. Also list the identities and occupations of the individuals you were entertaining or other information that indicates their business relationship to you.

If the entertainment was directly before or after a business discussion, be sure to indicate the date, place, nature, and duration of the discussion and the individuals who took part in both the discussion and the entertainment activity. For a business meal, you must prove that either you or your employee was present.

Transportation. As with travel and entertainment, you should record the amount and date of each separate expense. Note your business destination and the business purpose for the expense. If you are deducting actual car expenses, you’ll need to record the cost of the car and the date you started using it for business (for depreciation purposes). If you drive the car for both business and personal purposes or claim the standard mileage rate, keep records of the mileage for each business use and the total miles driven during the year.

Don’t Mix Business and Personal Expenses

Things can get tangled if you intermingle business and personal expenses. You can avoid headaches by having a separate business bank account and credit card.

If you want to be more aggressive lowering your tax obligations but stay within the legal limits, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a Southern California CPA Accounting Firm with offices in Newport Beach and San Clemente CA.  Our clients are located throughout Los Angeles and Orange County.

 

Why Hire a Real Estate CPA Firm

Real Estate - O CtyThe real estate industry is very different from other industries, especially when it comes to accounting and tax issues.

The tax incentives for real estate are very different than other industries.  The timing of expenses, specialized services like cost segregation and 1031 exchanges, debt restructuring and tax deferral strategies can have huge consequences.  For instance, a real estate CPA firm can pull together these strategic pieces that will improve your bottom line that a local generalist can’t replicate.

Second, working with a CPA Firm that works with a wide variety of real estate clients enables them to add more value to your day-to-day business and key business decisions.  If warranted, they can bring specialized services to the table that a local generalist can’t possibly provide.  In other words, working with a CPA Firm that works with the right specialists reduces the risk of making business mistakes, missing key tax incentives, and add value immediately to you.

Third, having a small team of accountants that specializes in real estate accounting reduces your annual costs because their depth of knowledge on the subject matter is deeper and without having to charge you more.

As in any industry, there are economies of scale that can be gleaned by working with a specialist.  It is important to let specialists and experts handle matters that require additional expertise and can save you money.  A real estate business can benefit from specialized services when it comes to tax planning, capital spending, budgeting, accounting and estate planning.

And after you hire the best CPA Firm for your industry, you’ll soon realize how easy they make it appear on the surface.

If you would like to learn more, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a California CPA Firm providing real estate accounting in Southern and Northern California.  Our founder has been licensed in California for over twenty years.

Foreign Bank Accounting Reporting – FBAR – IRS Priority List

IRSIf you have a foreign bank account that has not been reported to the IRS, then you could be facing serious civil penalties and even criminal penalties. These penalties fall under the Foreign Bank Account Report, FBAR violations.

To illustrate, the IRS Dirty Dozen tax scam list for 2016 clearly illustrates the emphasis placed upon hiding money or foreign bank accounts (see excerpt below).

The Internal Revenue Service today said avoiding taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

“Our continued enforcement actions should discourage anyone from trying to illegally hide money and income offshore,” said IRS Commissioner John Koskinen. “We have voluntary options to help taxpayers get their taxes and filing obligations in order.”

Since the first Offshore Voluntary Disclosure Program (OVDP) opened in 2009, there have been more than 54,000 disclosures and we have collected more than $8 billion from this initiative alone. The IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

The IRS continues to beat this drum more aggressively each year. If you would like to discuss this situation, simply call 949-486-2011 and ask for Jerry Morey, CPA.  

 

Morey & Associates CPA is a Southern California CPA Accounting Firm with offices in Newport Beach and San Clemente.  We work with businesses throughout Los Angeles and Orange County.  For additional expertise, we provide boutique services for dentists, doctorsreal estate accounting and high net worth accounting.

Net Operating Losses Provide Tax Benefits

Net Operating LossFor many businesses, profits vary from year to year. However, with proper planning, even a bad year can be helpful from a tax perspective. Where business deductions exceed gross income, a taxpayer may have a net operating loss (NOL) that can be used to offset income in another tax year, potentially generating a refund of previously paid taxes.

Who May Use an NOL?

NOLs are available to individual business owners, corporations, estates, and trusts. Partnerships and S corporations do not take NOL deductions, though their partners and shareholders may use “passed through” losses on their own returns.

How Is an NOL Applied?

The general rule is that a taxpayer may carry an NOL back two years and forward 20 years, though certain limited exceptions may apply. For example, an individual with an NOL that was caused by a casualty, theft, or disaster may use a three-year carryback period.

In general, the taxpayer will carry back an NOL to the earliest year it can be used and then carry it forward, year by year, until it is used up. The taxpayer may also elect to forego the two-year carryback and carry the loss forward for the 20-year period. However, the general preference is to use an NOL sooner rather than later because a dollar of tax saved today is generally worth more than a dollar saved in the future.

How Is an NOL Calculated?

Calculations of NOLs can be complicated. For example, a noncorporate taxpayer’s NOL is calculated without regard to any personal exemptions or NOLs from other years, and certain deductions for capital losses and nonbusiness items are limited.

If you are tired of overpaying taxes, call 949-759-5626 and ask for Jerry Morey.  Lowering your taxes legally is our specialty.

Office Space Decisions for Small Business Owner

Office SpaceBuy or lease?

It’s a decision many Orange County businesses face. Owning real estate certainly can have advantages, including the opportunity to build equity. But many small businesses in need of space choose the rental route instead.

Cash Flow Considerations

By leasing, a company can avoid taking on debt to acquire a property. Less debt on the balance sheet may allow the company to finance other things, such as receivables or inventory and equipment purchases. And the upfront cash commitment needed to enter a lease agreement may be much lower than the down payment required for a property purchase.

Shopping Tips

If your business is looking around for the right rental location, here are a few suggestions to keep in mind. Not all of these tips are appropriate for all businesses, but some may help you get a lead on a good spot — and a good deal.

  • Find an eager landlord. Rental spots that have been on the market for a while could have some negative features, but they may be worth a look. If you find a location that suits you, you might also find a landlord who is anxious to negotiate.
  • Think about the term. A long-term lease locks in your rental rate — and that can be an advantage if you expect the market to trend upward. But leasing for short periods is often less expensive than leasing for longer periods. If your business is in its formative years, significant changes may lie ahead, so a short-term arrangement could be more practical, too. Adding an “option to renew” clause can help keep your costs down and your options open.
  • Divide and conquer. Could you make do with two smaller spaces instead of one large space? The more flexible you can be, the better your chances of finding a good deal.
  • Check rental comps. Commercial property markets can be very localized. Rents may vary considerably between one locality and another just a few miles away. Unless you’re limited to a specific location, compare rates in several areas.

At Morey & Associates, we help many of our small business clients with the office space decision and help them lower their overall taxes.  If you are struggling with this decision, simply call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates works with all types of small businesses throughout Orange County to minimize their taxes legally.  We provide additional expertise in real estate accounting, dental practice accounting and high net worth accounting.

Why Foreign Bank Account Violations are Ultra Expensive

Bank AccountIf you have a foreign bank account that has not been reported to the IRS, then you could be facing serious civil penalties and even criminal penalties. These penalties fall under the Foreign Bank Account Report, (FBAR) violations.

First, it is important to determine if you are required to report your foreign bank account. It comes down to being able to say yes to the following four questions:

  • You are now a US citizen or permanent resident or have been in the last six years.
  • You have had a foreign bank account for a year or longer since 2008.
  • Your balances in all of your foreign accounts exceed $10K
  • You have not reported the account through the FBAR paperwork to the IRS.

The civil penalties for not filing the FBAR will be the greater of 50% of your bank account or $100K. The IRS has also indicated that it is willing to charge these penalties cumulatively for up to four or even six years.

This means that you can be charged these penalties for each year you have had the foreign bank account and not reported it to the IRS regardless of the fact that the penalties may well out pace the actual dollar amount in your account.

In addition to expensive civil penalties, you can also face criminal penalties. If the IRS determines that you willfully knew that you should have filed a FBAR and didn’t, they can charge you under FBAR violation laws as well as normal criminal tax prosecution laws.

A criminal prosecution typically occurs when a person has a large amount of taxable income in their foreign bank account that has not been claimed on their tax return.

A tax accountant or tax attorney can walk you through your options if you find yourself in this situation, as the IRS does offer voluntary disclosure programs, but even with taking advantage of one of these programs, you will still suffer the sting of IRS penalties.

If you are tired of overpaying taxes and would like to lower your tax compliance risk, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a Orange County CPA Accounting Firm with offices in Newport Beach and San Clemente.  We service High Net Worth clients and small businesses.  We also provide additional expertise for real estate accounting, dental practice accounting, and medical practice accounting.