As the name suggests, a calendar year begins on January 1 and ends on Dec 31. Amazon uses this calendar year system for tax reporting.

What is a fiscal year?

A fiscal and a calendar year are two different things. A fiscal year is the 12-month accounting period for a business cycle. A fiscal year-end date is different than the end of the calendar year. It’s the financial reporting cycle business uses for tax purposes. That’s one of the key differences.

What is a calendar year?

A calendar year is a one-year period starting on January 1 and ending on December 31.

Differences Between a Calendar Year Vs Fiscal Year

There are several differences between a fiscal year and a calendar year.

• The calendar year begins on New Year’s Day and follows the Gregorian calendar. In the business sector, a calendar year can be utilized for tax returns, starting on January 1 and concluding on December 31.
• The fiscal year starts on any date. They require more complicated financial reporting. Fiscal years need to end 365 days later or within a twelve-month period.
• The calendar year is more aligned with IRS systems.
• A calendar year may not always yield the most precise financial reports. For seasonal businesses, utilizing a fiscal year enhances the accuracy of income and expense reporting.

Here’s an interesting aside. Residents can use the same tax return as U.S citizens. It doesn’t matter what choice they’ve made between a fiscal and calendar year.

Can you change your tax year with the IRS?

The IRS bases its operations on the calendar tax year. If you choose to follow your own fiscal year, you will need to adjust your deadlines accordingly. Specifically, your payment is due on the 15th day of the fourth month following the conclusion of your selected fiscal year.

Seasonal business taxes differ from those paid by individuals following a more conventional calendar year. For most taxpayers, the deadline is April 15th.

Are you a business that wants to use a fiscal year to report taxes? Your first income tax return needs to use the fiscal tax year you’ve selected.

Choosing Between Fiscal Vs Calendar Year for Accounting Purposes

Using a fiscal year offers several advantages. Similarly, calendar years have their own benefits. Below are some pros and cons of both the fiscal year and calendar year to assist you in making your decision.

Fiscal Year Benefits

Using the fiscal year during tax season offers several benefits for businesses. Seasonal enterprises can produce more accurate financial statements for the Internal Revenue Service. This alignment allows their revenues and expenses to match more effectively on a business tax return. For retailers, having a fiscal year that includes the holiday season is particularly advantageous.

Implementing a fiscal year can increase your business’s visibility to your accountant. Tax preparation firms are typically busiest from January to April. Since fiscal years often conclude on various dates, you can maximize the value of any user fees they charge.

Here’s an example. The “fiscal” school year begins on July 1 and concludes on June 30. Here’s some info regarding how a leap year affects the fiscal year that taxpayers and businesses should be aware of.

Calendar Year Benefits

Using a calendar year for financial and accounting affairs has benefits. For sole proprietors and small businesses using the calendar year reporting method is simpler. When a tax return for a business and its owner match up, putting together all the financial statement is easier. The default system that the IRS uses is based on the calendar year.

Other Considerations

It’s important to remember that for many individuals and S corporations, there’s no difference between a fiscal or calendar year. The twelve months for tax filing are the same. But of course, that’s not always the case. This startup checklist also has some other matters you should consider about the finances of your business.

How do you change your reporting calendar with the IRS?

Here’s a scenario you’ll want to look at. Your business has already filed for your tax year. But you want to change your income tax return by adjusting the schedule. You need to file the request with the federal government generally and the IRS specifically.

Small businesses need to file Form 1128. It’s the Application to Adopt, Change or Retain a Tax Year. There’s a section on this for an automatic approval request. And space for your employer identification number. All the information needs to be carefully detailed.

Can a fiscal year and a calendar year be the same?

For most small businesses the fiscal year and the calendar year are different. However, a fiscal year can fit inside a calendar year. But it cannot be longer than 371 days or 53 weeks.

Do income tax regulations require a fiscal year or a calendar year?

Companies can file business taxes using a fiscal year. Or a business owner can choose to use the calendar year. Choosing either annual accounting period is about staying abreast of any Income Tax Regulations and Internal Revenue Codes. Tax filing might have a mandated start date and end date.

When is the fiscal year?

The fiscal year for the federal government in the United States begins on Oct 1 and ends on September 30, which is the last day. Many nonprofit organizations use a period from July 1 to June 30 when selecting their fiscal years. Both are early months compared to the calendar year.

Fiscal years apply differently depending on the Internal Revenue Code. For example, an S corporation needs to fill out Form 1128 to file using a different fiscal year.

On the other hand, not all fiscal years use the same last day. If you’re a sole proprietor, you’ll end your year on Dec 31. The fiscal year taxpayers use is the same–Jan 1 to Dec 31.

Some businesses make installment payments on estimated taxes. These paid estimated taxes are divided into four installments. Here’s a link to some of the payment periods.

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This article, "Fiscal Year Vs Calendar Year: What’s Best for Your Business?" was first published on Small Business Trends

The IRS just announced the official standard mileage rates for 2017, and there have been some minor decreases.

IRS Mileage Rates for 2017

The IRS mileage rates for 2017 for the use of a vehicle are:

• 53.5 cents per mile for business miles driven, down from 54 cents for 2016;
• 17 cents per mile driven for medical or moving purposes, down from 19 cents in 2016;
• 14 cents per mile driven in service of charitable organizations.

The IRS mileage rates for 2017 apply to miles driven starting January 1, 2017.

According to the announcement, the business mileage rate decreased half a cent per mile, and the medical and moving expense rates each dropped 2 cents per mile from 2016. The charitable rate is set by statute and remains unchanged.

The IRS sets mileage rates each year for business, moving, and medical purposes after studying the fixed and variable costs of operating a vehicle. It calculates variable expenses using the average cost of driving a vehicle and factors in gas usage, maintenance, and repair. Only the variable rate applies for medical and moving purposes.

Since mileage rates are contingent upon the costs of driving a vehicle, it’s likely the current drop in oil prices factored into the IRS’s decision to decrease rates.

The 2017 mileage rates apply to miles driven in the following types of vehicles: cars, vans, panel vans and pickup trucks.

Claiming Standard Mileage Rate versus Actual Expenses

Business owners or employees who use their personal vehicle for work have two options for keeping up with mileage: utilize the standard mileage rate (SMR) or track actual expenses.

Which is better? “It depends,” says a blog post on the MileIQ website. (MileIQ is an app for tracking mileage.)

Using the SMR may be the easiest of the two, MileIQ says, but it’s not as simple as it sounds. Not only do you need to keep track of the number of miles driven along with the total miles but also the dates of trips, business destinations, and business purposes.

The second option, tracking actual expenses, can result in a larger deduction but demands meticulous record keeping that includes gas and oil, repairs and maintenance, depreciation, fees, insurance, and more.

The choice of which to use may come down to the vehicle in question. For example, you may benefit from the standard rate if you drive a smaller car that uses less gas. A larger vehicle, such as a panel van, costs more to operate, and as a result, the actual expense method may serve you best.

MileIQ recommends keeping track of costs the first year you use the vehicle for business. Then, at tax time, run the numbers to determine if the deduction will be larger using the standard mileage rate or actual expense method.

Reimbursing Employees for Mileage

Should businesses reimburse employees for mileage associated with the use of their personal vehicle in a work-related context?

According to Pam Steverson, CPA, with the accounting firm Kemp, Williams, Steverson & Bernard, who spoke with Small Business Trends by phone, an employer does not have to reimburse an employee for business miles, although most do.

“The employer does not have to use the standard mileage rate for reimbursement,” she said. “Whatever the reimbursement, the employer gets a business deduction. As long as the reimbursement is done via an accountable plan (i.e., expense report detailing the business purpose, miles, client, date), the employee does not have to pick this up as income.”

If the reimbursement is not via an accountable plan — the employer just gives the employee $500 a month for the use of his vehicle, for example — the employer can still get a business deduction, Steverson said. However, the reimbursement should be reported as wages and not travel reimbursement, with all of the applicable payroll taxes being paid.

Employees should reference their employee handbook to determine the employer’s reimbursement policy. If no official policy exists, they should ask their supervisor or contact the human resource department for information.

Employers, be sure to update any written policies to reflect changes in the SMR for 2017 and notify employees of those.

Other Mileage Rate Tips and Info

If you are working on the prior year’s tax returns, remember to revert to the mileage rates for that year. Your tax professional can assist you regarding the implementation of mileage rules for a given situation.

Also, once announced, the SMR applies for the entire year. At times, however, the IRS has made mid-year adjustments based on fluctuations in gas prices.

Related resources:

• Official IRS notice for 2017 mileage rates
• 2016 mileage rate for miles driven in 2016
• 2015 mileage rate for miles driven in 2015

Image: Small Business Trends

This article, "IRS Mileage Rates for 2017 Announced — with Minor Decreases" was first published on Small Business Trends

Businesses present themselves as accountable and build trust among stakeholders and customers through these audits. They also highlight areas for improvement. 

What is a Business Audit?

Business audits examine a company’s accounting and financial records. The goal is to ensure a small business’s financial reporting and business practices are accurate, compliant, and credible. That’s why some are independent.

Small businesses need to pay special attention because business audits identify areas for improvement and discrepancies that might not be noticed otherwise. Systematic audit processes provide reliable financial documents.

For example, an annual audit might find inventory items that are overvalued. That will result in inflated profit figures. Fixing the issue provides compliance with accounting standards and a more accurate picture of a company’s finances.

The Purpose of a Business Audit

There are different reasons why a business audit is essential, including adherence to the generally accepted accounting principles (GAAP).

For Legal Compliance 

These audits help small businesses stay legal, adhering to financial reporting standards, tax laws, and industry-specific regulations.

For Transparency

These also supply unbiased verification of financial documents, accurately reflecting any small business’s financial status. That kind of transparency is essential for creditors, investors, and management.

Business audits also build trust and credibility among stakeholders, customers, lenders and the public.

Types of Audits

There are several different types of audits.

• As the name suggests, internal audits are conducted by your staff.
• Accounting firms perform external audits. 
• IRS audits look to see if financial information is reported correctly according to tax law.
• Financial audits look at financial statements and records. 

Internal Audit

Internal audits are essential for risk management and operations. They provide an objective, independent assessment.

The Process 

These are usually carried out by staff from the internal audit department. They review documents, interview staff, and observe operations. The team compiles recommendations, conclusions, and findings.

The Goals 

One of the big goals here is to improve risk management strategies and operations.

The Benefits 

These audits improve risk management practices and strengthen internal controls. They also identify any efficiencies and bottlenecks to help streamline processes. 

External Audit

Financial records need to be accurate and fair. That’s why external auditors carry out external audits.

• These audits let everyone know financial statements accurately reflect a business’s performance and position.
• They verify the accuracy of financial data and ensure a company’s statements comply with accounting standards and legal requirements.

Hiring an external auditor begins with submitting a Request For Proposal (RFP). External auditors are more independent than their internal counterparts. Internal audits have a bigger scope, including risk management and operational efficiency. External versions focus more on compliance with accounting laws and standards.

IRS Audit

IRS audits check to ensure data is reported correctly according to tax law and the correct tax amount.

A business or individual can be selected when algorithms flag their returns. Taxpayers can be audited by the Internal Revenue Service when doing business with someone being audited. The IRS also matches tax returns with data and makes sure businesses are following 1099 rules and other regulations.  Discrepancies can get you flagged.

The IRS Business Audit Process

Small businesses usually receive a notice of an IRS business audit through the mail. The audit can be conducted via mail, at an IRS office, or at a small business location. A field audit is held at the office of a business’s accountant.  

Financial Statements Audit

Auditing financial statements is about making sure they are accurate and free from error or fraud. They can identify weaknesses in internal controls and financial reporting to boost investor confidence.

Auditors begin by studying and then testing a small business’s internal controls. This can involve examining how transactions are reported, recorded, and authorized.

How to Prepare for a Business Audit

Preparing for a business audit can seem daunting, but with proper organization and understanding of what’s expected, you can navigate the process more smoothly. Here are some detailed steps and considerations to help small business owners get ready for an audit:

• Organize Your Financial Records: Ensure all your financial documents are orderly and accessible. This includes:
  • Digitizing receipts, invoices, and payroll records for easy retrieval.
  • Maintaining organized bank statements and financial transactions.
  • Keeping tax returns and previous audit reports well-filed.
• Understand the Audit Type: Each audit has its own focus, so preparation varies:
  • For an internal audit, be ready to discuss risk management strategies and operational processes.
  • In an external audit, focus on the accuracy and compliance of your financial statements.
  • For an IRS audit, ensure all tax-related documents are correct and substantiated.
  • When preparing for a financial statements audit, be ready to demonstrate the integrity of your financial reporting and internal controls.
• Review Legal and Regulatory Requirements: Make sure your business complies with applicable laws and standards relevant to your industry and the type of audit:
  • Stay updated on accounting standards and tax laws.
  • Ensure your business practices adhere to regulatory requirements.
• Consult Professionals:
  • Engage with a certified public accountant (CPA) or a professional auditor for advice and insights.
  • Their expertise can help you understand complex audit areas and how to present your records.
• Prepare Your Team: Inform any staff involved about the audit process:
  • Assign roles and responsibilities for gathering and presenting information.
  • Ensure employees understand the importance of the audit and are cooperative.
• Perform a Self-Audit: Conducting an internal review before the actual audit can help identify and rectify potential issues:
  • Check for discrepancies in financial records.
  • Review compliance with internal policies and procedures.
• Plan for Document Retrieval: Have a system in place for quick access to requested documents:
  • Use a digital filing system with clear labels and secure backups.
  • Test the retrieval process to ensure efficiency during the audit.
• Stay Calm and Cooperative: Approach the audit with a positive attitude:
  • See it as an opportunity to improve your business operations and financial management.
  • Respond to auditor requests promptly and with the required detail.

By taking these steps, you can approach the audit process with confidence, knowing that you’re well-prepared to present your business operations and financials transparently and accurately.

Essential Documentation for an Audit

If you want an audit to go smoothly, you must corral these financial records.

Financial Statements 

These are the meat and potatoes of the documents you must assemble. Providing a snapshot of your small business’s financial health means gathering balance sheets, income statements, and cash flow statements.

Tax Returns 

These must be cross-referenced with financial data to demonstrate a company’s compliance with tax laws. Auditors look for accuracy in reported income.

Transaction Records 

Receipts and invoices prove and verify the accuracy and legitimacy of items like revenue and expenses. Bank statements are essential to validate the numbers shown on a balance sheet.

Implementing Audit Findings

Implementing audit findings effectively is crucial for enhancing your business operations and compliance. Here’s how to approach this process systematically:

• Understand the Audit Report: Begin with a comprehensive review of the audit findings to grasp the details and implications.
  • Identify critical issues, such as inefficiencies, gaps in controls, and areas of non-compliance.
  • Prioritize the findings based on their impact on your business operations and risk exposure.
• Conduct a Root Cause Analysis: For each identified issue, delve into the underlying reasons.
  • Use analytical techniques to uncover the root causes of inefficiencies and compliance gaps.
  • Involve relevant team members in the analysis to gain diverse insights and more accurate conclusions.
• Develop a Corrective Action Plan: Based on the root cause analysis, outline specific steps to address each issue.
  • Assign clear responsibilities and deadlines for implementing these actions.
  • Ensure the plan includes both short-term fixes and long-term solutions to prevent recurrence.
• Implement Temporary Controls: If immediate risks are identified, put in place temporary measures to mitigate them.
  • These could include additional oversight, manual checks, or temporary halts of certain processes.
• Communicate Findings and Actions: Keep all stakeholders informed about the audit findings and your planned response.
  • Explain the implications of the findings and the importance of the corrective actions.
  • Encourage feedback and suggestions from employees to enhance the action plan.
• Train and Educate Your Team: If audit findings relate to operational practices or lack of knowledge, provide necessary training.
  • Develop training programs to address specific gaps identified in the audit.
  • Reinforce the importance of compliance and efficient processes through regular training sessions.
• Monitor the Implementation: Establish a monitoring mechanism to track the progress of corrective actions.
  • Use key performance indicators (KPIs) and milestones to assess the effectiveness of implemented changes.
  • Regularly review the progress and make adjustments to the action plan as necessary.
• Schedule Follow-Up Audits: Plan for follow-up audits to ensure the corrective actions have been effectively implemented and are sustaining their intended effects.
  • Use these audits to identify any ongoing issues or emerging challenges.
  • Consider the feedback from follow-up audits to continuously improve your processes and controls.
• Document Everything: Maintain detailed records of the audit findings, your responses, and the outcomes of implemented actions.
  • Documentation is essential for accountability, future reference, and compliance purposes.

By adopting this structured approach, you can turn audit findings into opportunities for improving your business operations, pivoting business strategy, enhancing compliance, and fostering a culture of continuous improvement.

FAQs: Business Audit

Following are some common answers to FAQs.

How often should a small business conduct an internal audit?

A good baseline for an internal audit is once a year. 

What are the most common triggers for an IRS audit?

There are several, including significant income discrepancies and above-average income. Large tax deductions and credits will red-flag you, too. 

How can a business dispute findings in an external audit?

They need to provide detailed explanations and documented evidence to challenge external audits.

How do external auditors contribute to corporate governance?

External auditors play a significant role here by providing objective and independent assessments of a company’s financial statements. They evaluate internal controls and promote compliance so a small business can avoid regulatory and legal issues.

Can a small business conduct an audit without hiring external professionals?

An internal audit doesn’t always need professionals. However, a small business must define its scope and objectives before starting one. The next step is to create a checklist of the items to assess and review. They need to conduct interviews, identify issues, and gather and analyze data before reporting findings. 

Read More:

• What is financial accounting
• What is cost accounting
• How to do an energy audit

Image: Envato Elements

This article, "What is a Business Audit?" was first published on Small Business Trends

Are you curious about who should get a 1099 form, how to issue one, or what rules apply in different scenarios? In this article, we’ll provide the answers to these questions about 1099 forms and more.

What Is a 1099 Form?

The 1099 form, issued by the Internal Revenue Service in the United States, serves several specific purposes, each with a different variant of the form. Some of these include:

• Form 1099-MISC: This version is issued when a business pays a non-employee more than $600 in a year. It’s often used for independent contractors, freelancers, or other non-employee workers.
• Form 1099-INT: This version is for reporting interest income, for instance from a bank or other financial institution.
• Form 1099-DIV: This version reports dividend payments made by corporations to their shareholders.

Just as businesses use W2 forms to report wages, tips, and other compensation paid to employees, 1099 forms are used to report different types of income received by individuals or entities.

The use of these forms helps the IRS ensure accurate reporting and payment of taxes, while allowing individuals and entities to correctly calculate their tax liabilities based on their total annual income.

Despite the similarities with W2, a key distinction is that 1099 forms don’t account for any tax withholdings, as taxes are typically not withheld from the types of income these forms report.

• READ MORE: Basics ABout 1099 forms for Small Business Owners

What Types of Income Payments Are Reported on a 1099 Form?

While 1099 forms often are associated with income paid to independent contractors, they also can be used to report a variety of other income payments and miscellaneous income. Some of the more common types of income payments reported on a 1099 include (but aren’t limited to):

• Non-employee compensation
• Rent or royalty payments
• State or local tax refunds
• Gambling winnings
• Brokerage gains or losses
• Dividends and interest payments
• Commissions
• Non-qualified deferred compensation
• Medical and healthcare payments
• Prizes and awards
• Crop insurance proceeds
• Fishing boat proceeds

What Are the Types of 1099 Forms?

A 1099 might be a common IRS form, but it’s available in multiple versions. A few of the most common types of 1099 forms include:

• 1099-NEC reports nonemployee compensation such as income earned as an independent contractor, freelancer or self-employed individual.
• 1099-MISC reports payments like rent, royalties, prizes and awards, substitute payments in lieu of dividends, medical and health care payments and crop insurance proceeds.
• 1099-INT reports interest payments from banks, brokerage firms and other investment firms.
• 1099-DIV reports payments to investors including cash dividends.
• 1099-G reports unemployment payments or local tax refunds.
• 1099-R reports payments from taxable pension retirement plans or individual retirement accounts (IRAs), as well as certain life insurance plans and annuities.
• 1099-B reports income from commodities, stock sales, certain types of bartering and other securities.
• 1099-S reports real estate transactions that gain money, including the sales of land, residential properties and commercial or industrial properties.
• 1099-K reports payments received through reportable payment card transactions of third-party payment network transactions. These include sources like PayPal and Venmo.

1099 for Digital Payments

With the rise of digital payment platforms like PayPal and Venmo, businesses must be aware of the 1099 reporting requirements for transactions made through these services. The IRS requires reporting for business-related digital payments that exceed specific thresholds.

For instance, if transactions surpass $600, they may necessitate a 1099 form. This requirement calls for businesses to stay updated on the tax implications of digital transactions and ensure compliance with these evolving IRS guidelines.

Ultimately, providers like PayPal may be required to issue a 1099-K for all users earning more than $600. However, that requirement has been postponed again in 2024, and they are thus only required to issue the form to users earning more than $20,000 with at least 200 transactions.

• READ MORE: How to File Self Employment Taxes

What Common 1099 Rules Must a Business Owner Follow?

Like many other aspects of filing income taxes in the United States, 1099 forms have undergone their share of changes in recent years, so it’s important for a small business owner to keep abreast of the newest applicable rules, such as the following:

New Forms

Beginning with the 2020 tax year, the IRS reintroduced the 1099-NEC, which hadn’t been used for decades. Prior to 2020, payments to non-employees such as independent contractors, which were subject to self-employment taxes, were reported on a 1099-MISC. Such income is now reported on a 1099-NEC.

$600 Threshold

Businesses are required to send copies of Form 1099-NEC to the IRS and contractors if they pay $600 or more in compensation. The $600 threshold also applies to other 1099 forms to report payments such as non-qualified deferred compensation, crop insurance proceeds, rent, prizes and more.

Taxpayers who earn less than $600 usually are still required to report the income with their tax obligations, even if they did not receive a 1099.

Dates and Deadlines

Businesses must supply 1099 to contractors and vendors and file a copy with the IRS by Jan. 31. However, if that date falls on a weekend, the due date is the following Monday. Some types of 1099 forms require IRS filing by Feb. 28, but copies should still be furnished to recipients by Jan. 31.

Foreign Workers

If you hire a non-U.S. citizen who works remotely via the Internet from another country, generally speaking, you do not need to file a 1099 for that person. However, if the foreign worker performs any work inside the United States, you would need to file the 1099.

Payments to Corporations

Businesses usually do not need to issue 1099 forms for payments made to corporations.  For example, if paying a corporation that provides web design services or some other business service, they do not need to issue a 1099.

This can include independent contracts operating as an S Corp, as well. However, it’s important to remember that an LLC, or limited liability company, is not the same as a corporation.  In general, an entity is expected to send 1099 forms to most small business LLCs.

PayPal and Credit Card Payments

In most cases, businesses are not required to send 1099 forms to independent contractors or unincorporated businesses if they were paid electronically via PayPal or credit cards. Instead, the credit card companies and payment companies will handle any required reporting.

Personal Payments

1099 forms are not required for personal payments. Entities are required to issue 1099-MISC reports only for payments made in the course of doing a trade or business. If you run a non-profit organization, however, that’s considered a business for purposes of 1099s.

1099 Errors

A payer who later discovers an error should re-issue a corrected 1099 form to that payee, and correct the filing with the IRS. If a payee receives a 1099 with an error, the recipient should contact the payer to correct the form. If they cannot get the form corrected, they must attach an explanation to their tax return and report the income correctly.

Record-Keeping and Compliance

Maintaining accurate records is vital for adhering to 1099 compliance. Businesses need to track all payments to contractors, freelancers, and other non-employees throughout the year.

Proper documentation is key, including detailed logs of payments and retaining copies of contracts and work orders. Timely filing of 1099 forms and accurate reporting of payment amounts are crucial for smooth tax processing and avoiding any penalties from the IRS.

• READ MORE: Best Tax Software for Self-Employed People

How to Issue and File 1099 Forms

Issuing and filing a 1099 form is simple once the payer has the proper information. To fill out a 1099 form, a business needs four pieces of information:

• Payer’s information
• Payee’s information
• Nonemployee compensation amount
• Tax information, such as Social Security number or tax ID number

The first box of the 1099-NEC contains the information on the paying business. There is only one box for this information, and you must include your name and business name, street address and phone number.

The second section of the 1099-NEC is for the paid contractor’s information. To obtain this, the payer will send the payee a W-9 form requesting their name, address and taxpayer identification number. However, if the contractor is not a U.S. resident, the payer will need a W-8BEN or W-8BEN to certify that they reside outside the country.

After a business fills out these sections, it needs only to input the compensation amount that the contractor received during the tax year.

Once the 1099 form is completed, check for state 1099 form requirements. Some states require forms to be submitted to them, while others don’t. To meet federal requirements, the business must send two copies, one to the IRS and one to the payee, which must arrive at their locations by Jan. 31. The detailed procedures for filing each of these is explained on the 1099 form’s first page.

A new IRS online portal allowing users to create and file 1099 forms, known as the Information Return Intake System, is also available.

• READ MORE: Don’t Forget This New Tax Rule for Small Business

1099 Related Penalties

Businesses that fail to issue a 1099-NEC or 1099-MISC by the filing deadline could face penalties ranging from $50 to $280 per form for the current tax year, depending on how late the form was submitted.

Businesses that intentionally disregard a payee’s request to correct 1099 with errors can be subject to a minimum penalty of $570 per form, or 10% of the income reported on the form, with no maximum.

Automating 1099 Processes

The advent of technology has made managing 1099 forms more efficient. Many modern accounting software solutions offer features to automate the generation, filing, and tracking of 1099 forms. This automation enhances accuracy, saves time, and reduces administrative burdens.

When choosing a 1099 automation tool, consider factors like integration with existing accounting systems, e-filing capabilities, and secure data handling.

This technological shift is reshaping how businesses handle their 1099 processes, offering a more streamlined approach to financial management.

FAQ

What If You Don’t Receive a 1099?

Taxpayers earning qualified income should receive a 1099 form from the payer no later than early February, but what happens when they don’t? The first step to take if a 1099 isn’t received is to contact the payer. If it’s still not received by Feb. 15, the party should call the IRS for help at 1-800-829-1040.

Whether or not a 1099 is received, the taxpayer is still obliged to report the income on their tax return, which sometimes can be achieved by pulling the data from other sources such as bank statements.

What Is an Author’s Income Threshold for Book Royalties?

Royalties paid to an artist, such as an author, musician, songwriter, or singer, are considered taxable income. Whether or not those royalties are subject to self-employment tax depends largely on whether the artist is a professional or a hobbyist.

The United States Tax Code requires publishers to report royalties paid that exceed $10 in Form 1099-MISC.

What are Other income payments considered on a 1099?

Form 1099-MISC reports payments “other” than nonemployee compensation made by a trade or business to others. Examples of this “other” income include payments for rent, royalties, prizes and awards, as well as substitute payments in lieu of dividends.

The 1099-MISC even includes an area for payments that don’t fall into its defined categories, labeled “other income.”

This is where a business will report payments of $600 or more made for activities including participation in a medical research study, monetary prizes or awards, termination of self-employed insurance salespeople and punitive damages, damages for nonphysical injuries or sickness and any other taxable damages.

How Do You Report Interest Income to the IRS?

Most interest that can be withdrawn by a taxpayer without penalty is considered taxable income by the IRS, with some exceptions.

Interest recipients should receive Copy B of form 1099-INT or form 1099-OID, which report taxable or tax-exempt interest payments of $10 or more.

These forms are typically issued by a broker as part of a composite statement. Interest earners must report all taxable and tax-exempt interest on their federal income tax returns, whether or not they receive a Form 1099.

Where Can You Get 1099 Forms?

Blank 1099 forms are available from a variety of convenient locations. Businesses can get paper copies at many post offices, public libraries and even office supply stores.

They also can request 1099 forms from the IRS, which can be mailed to them in paper form or downloaded to print. However, it’s important to know the correct 1099 form to request.

A new IRS online portal, known as the Information Return Intake System allows users to electronically create and file 1099 forms. Some accounting and tax-preparation software services also will prepare, print and file certain 1099 forms, such as the 1099-NEC.

An accountant or tax preparer also can e-file 1099 forms along with a business’s own taxes. It should be noted that if a business needs to file more than 250 1099s, it must file electronically. Those that fail to comply and don’t have an approved waiver could be subject to penalties of up to $100 per return.

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This article, "Form 1099 Rules for Employers" was first published on Small Business Trends

Based on U.S. Census Bureau data for business applications, new business formation is on the uptick. The pandemic forced many business closures, but this data show the entrepreneurial spirit will not be stifled.

Allowance for start-up and organizational costs

Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation or partnership. These are explained in greater detail later.

These costs usually must be capitalized. This means the costs are added to the balance sheet as an investment in the business. But you may elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs simply by claiming the deduction on your return for the first year you’re in business (what this means is discussed below). No separate election statement or attachment is required. For example, a sole proprietor claims the deduction in Part V of Schedule C (Form 1040 or 1040-SR).

The $5,000 cap is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized and deducted ratably (evenly) over 15 years. For example, if your start-up costs are $53,000, your initial deduction is limited to $2,000 ($5,000 – $3,000 excess over $50,000). Once expenses are $55,000 or more, that $5,000 allowance is reduced to zero. If you have to amortize costs (e.g., total expenses are more than $55,000), do this on Form 4562, Depreciation and Amortization.

When to claim the deduction

The election to deduct start-up costs is made in the year you commence business. It’s not always easy to know when this occurs. It’s commonly thought to be when a business is positioned to begin generating income. You may think of this in terms of when you “open your doors to the public.”

Some steps that indicate you’re in business:

• You attempt to sell your products or services
• Your website launches

One district court case several years ago said a retailer was “in business” for purposes of depreciation once it had done all its shelving, obtained its inventory, and received a certificate of occupancy. This was so even though it hadn’t yet opened its doors to customers or made any sales. Does this reasoning apply to start-up costs? Who knows?

What costs are deductible

Various costs may be treated as start-up or organization costs. But not every cost is deductible.

Deductible start-up costs. These are expenses that would have been deductible had they been incurred when the business was operational. They include:

• An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. (“investigatory costs”).
• Ads/promotions for the opening of the business.
• Rent
• Insurance
• Salaries and wages for employees while they’re being trained.
• Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
• Professional and consulting fees.

You can’t treat as deductible start-up costs any expenses to attempt to buy a business. Only costs to investigate one (i.e., costs to help you deduct whether to buy a business and which one to buy) are deductible. Also, the cost of interest, taxes, and research and experimental costs before commencing business are not deductible start-up costs.

Deductible organizational costs. Costs for organizing a partnership or corporation include expenses for this purpose, such as costs for:

• Legal services
• State fees for incorporation or filing fees for partnerships
• Temporary directors and organizational meetings for corporations

Corporations may not treat as organizational costs any expenses for issuing and selling stock or those associated with the transfer of assets to the corporation. Partnerships may not treat as organization expenses any costs for acquiring and transferring assets to the partnership, admitting new partners, or for contracts between the partnership and its partners.

Conclusion

If you’re just getting started, it’s advisable to work with a CPA or other knowledgeable tax adviser to optimize your deductions for start-up costs and organizational expenses.

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This article, "Deducting Start-Up and Organizational Costs" was first published on Small Business Trends

What is the personal use of a company car?

Personal use of a company car refers to using an employer-provided vehicle for non-business purposes such as commuting to and from work, running errands, or taking personal trips. This can include both owned and leased vehicles and is subject to tax implications that employees should be aware of.

Company Car Tax Rules

The IRS has specific rules about the taxation of personal use of company cars. Generally, any personal use of a company car is considered taxable income, except for commuting to and from work.

However, there are certain exemptions, such as using the vehicle for business purposes or in case of an emergency. The value of this personal use is calculated based on the fair market value of the vehicle and can be reported by either the employer or employee. It’s important to keep accurate records and understand these rules to avoid any tax liabilities.

Personal Use of Company Vehicle Valuation Options

There are several options available to determine the value of personal use of a company vehicle.

Each method has its own set of rules and requirements for calculating the value of personal use. Let’s take a closer look at each one.

General Valuation Rule

Under this rule, the value of personal use is determined by taking the fair market value of the car and multiplying it by the percentage of personal use. This amount is then reported as taxable income by the employee.

Cents-per-mile Rule

The Cents-per-mile Rule is a method of valuing the personal use of a company or personal vehicle based on the number of miles driven for non-business purposes. The IRS sets a standard mileage rate each year that can be used to calculate the value of personal use under this rule. For 2024, the Internal Revenue Services’ standard mileage rate is 67 cents per mile.

Commuting Rule

The Commuting Rule applies to the valuation of personal use of company vehicles for tax purposes. Commuting miles are considered personal use and are not deductible or excludable from an employee’s income. Exceptions exist, such as when an employee’s home is also their primary place of business.

Lease Value Rule

This rule applies only to leased vehicles and uses a formula that takes into account factors such as annual lease value, lease payments, depreciation, and other costs associated with leasing a car. Learn how to lease a car through your business for more details about these expenses.

Why You Should Establish a Personal Use of Company Vehicle Policy

Establishing a personal use of company vehicle policy can provide your company with significant benefits. By creating this policy, you can take advantage of taxation and valuation benefits that can save you money in the long run.

Here are five reasons why you should consider implementing a personal use of company vehicle policy:

• Tax Savings: By establishing a company car policy, you may be able to deduct expenses related to the vehicle on your tax returns. The best tax software for self employed individuals and businesses may walk you through these deductions.
• Reduced Liability: A clear personal use policy can protect your business from liability if an employee gets into an accident while driving a company car.
• Improved Employee Morale: Providing access to company cars for personal use can boost employee morale and job satisfaction.
• Simplified Valuation: A personal use policy makes it easier to determine the value of your company’s vehicles for financial reporting purposes.
• Increased Control: Having a clear personal use policy allows you to control how employees use company vehicles, which helps prevent abuse or misuse.

What to Include in a Company Car Policy

An effective company car policy is essential for managing the use of company vehicles and protecting your business from liability. Here are some key elements that should be included in a comprehensive company car policy:

• Vehicle Use Guidelines: Clearly outline when and how an employee’s personal use of company cars is acceptable.
• Driver Requirements: Establish minimum requirements for drivers, such as age and license status.
• Insurance Coverage: Specify the type and amount of business auto insurance coverage required for all company vehicles.
• Maintenance Procedures: Detail maintenance responsibilities, including regular inspections, repairs, and record keeping. You may even detail what to keep in company vehicles during winter.
• Accident Reporting Protocol: Provide a clear procedure for reporting accidents involving company cars.
• Penalties for Violations: Clearly state the consequences of violating the policy, including disciplinary action or loss of driving privileges.

How to Withhold and Report Taxes on Personal use of Company Vehicles

To ensure compliance, it is important to understand the process of withholding taxes from employee paychecks and reporting them accurately to the IRS.

Withholding Taxes

Taxes on personal use of company vehicles should be withheld from an employee’s paycheck in accordance with IRS guidelines. This includes calculating the fair market value of the vehicle, determining the percentage of personal use, and subtracting any reimbursements or payments made by the employee.

Reporting Taxes

Employers must report taxes on the personal use of company vehicles accurately to avoid penalties. This involves filing Form 941 quarterly and Form W-2 at year-end, which includes information such as total compensation, taxable wages, and federal income tax withheld.

FAQ

How does personal use of a company vehicle appear on a W-2?

Personal use of a company vehicle appears on an employee’s W-2 form as taxable income. Employers must report the fair market value of the personal usage, either using the general valuation method or the vehicle cents-per-mile rule and include it in the appropriate box of the W-2.

Is personal use of a company car subject to FICA?

Yes, personal use of a company car is subject to FICA (Federal Insurance Contributions Act) taxes. The value of the personal usage is added to an employee’s wages and is subject to Social Security tax and Medicare tax, which are both part of FICA taxes.

What is the fair market value of a company car?

The fair market value of a company car is the price it would sell for on the open market. It’s determined by factors such as the make, model, age, condition, and mileage of the vehicle. For example, the best work trucks for your small business are likely to have a higher fair market value than a basic company lease. Employers must use this value to calculate an employee’s taxable income from the personal use of a company car.

What happens if you use a business vehicle for personal use?

Using a business vehicle for personal use results in the fair market value of the personal usage being added to an employee’s wages. This value is subject to Social Security tax, Medicare tax, and federal income tax withholding. Employers must report this value on the employee’s W-2 form at year-end.

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This article, "Personal Use of Company Vehicle: What You Need to Know for Tax Purposes in 2024" was first published on Small Business Trends

With a number of sources providing free advice, it’s easy to find the help you need to navigate the tax preparation process. In this article, we’ll look at several places to get free tax advice so you can take control of your taxes.

Where can you ask tax-related questions?

If you’re looking for help with tax-related questions, there are many resources available to assist you. Here’s a list of just a few:

• Volunteer Income Tax Assistance (VITA) – VITA is an IRS-sponsored program that provides free tax return preparation and filing at local centers.
• Tax Counseling for the Elderly (TCE) – TCE offers tax guidance specifically focused on the needs of elderly taxpayers, including pension and retirement issues.
• H&R Block – H&R Block is a global tax services provider which offers both online and in-person filing options.
• IRS Help Line – The IRS operates several toll-free phone lines and online tools to answer questions about filing taxes.
• State Tax Office– Each state has its own tax office which provides information on state-specific laws and regulations related to taxation.

Can you ask for tax advice for free?

Yes, there are plenty of sources to get free tax advice in 2024. Professional tax advisors, online resources, and government organizations all provide free advice to help you understand which deductions you can take, how to maximize your returns and more.

Depending on your situation, it may also be beneficial to speak with a professional who can provide more comprehensive advice tailored to your individual needs. Be aware that some free resources require your adjusted gross income to be below a certain level.

Free In-person Tax Advice

Free in-person tax advice is a valuable resource for individuals and businesses seeking guidance on their own tax returns, tax debt, and other tax matters. Here are four options:

Volunteer Income Tax Assistance (VITA)

VITA IRS-certified volunteers provide free tax preparation and filing services to individuals and families with low to moderate income levels.

Tax Counseling for the Elderly (TCE)

TCE is a program that provides free tax preparation and assistance services specifically to individuals who are 60 years of age or older.

AARP Foundation Tax-Aide

AARP Foundation Tax-Aide is a program that provides free tax services to individuals with low to moderate income levels, with a special focus on those 50 years of age or older.

Free Taxpayer Clinics

These clinics offer a range of services, including help with tax preparation, resolving tax disputes, and navigating complex tax laws.

Free Tax Advice Online Chat

Free tax advice online chat provides a convenient and accessible way for individuals and businesses to receive guidance on tax-related issues in real-time. Here are several options:

Military OneSource Tax Resource Center

The U.S. Defense Department’s Military OneSource Tax Resource Center provides free tax software, live chat, and referrals to military tax consultants, for service members and eligible veterans.

Taxpayer Advocate Service (TAS)

TAS is an IRS organization dedicated to the fair treatment of taxpayers and the promotion of their rights. TAS advocates offer assistance to taxpayers with unresolved tax issues.

H&R Block

H&R Block offers free live chat support for online tax filing, excluding users of the free product who must upgrade to H&R Block Plus.

TurboTax Live

Get free, expert assistance with filing your taxes with TurboTax, plus enjoy live support and a final review before submitting, at no cost. Offers vary, but look for Early Bird pricing specials.

Free Tax Advice by Phone

Whether you’re preparing for tax season, have questions about deductions, or need help navigating complex tax laws, free tax advice by phone can provide the support you need. Here are some options:

IRS Help Line

Individuals with tax inquiries can reach the IRS by dialing 800-829-1040. The IRS also provides specialized phone support for business, non-profit, estate and gift taxes, excise taxes, and international callers.

State Tax Office

For state-specific tax questions, consider contacting your state’s tax office for assistance, available through email or phone. No need to go to the IRS for all tax issues.

TaxRise

TaxRise is a leading and rapidly growing tax relief company in the US, credited to its innovative two-phase approach and in-house software.

The firm’s success starts with a thorough initial tax consultation, during which clients are pre-qualified through realistic resolutions and access to a free tax consultant.

Community Tax

Community Tax experts offer comprehensive tax assistance. They simplify the often confusing and stressful process of taxes, beginning with a free consultation.

With a range of services to tackle any tax problems, the company has successfully assisted thousands of clients.

FAQ

Does the IRS offer free tax preparation advice?

Yes, the Internal Revenue Service offers free tax preparation advice for individual taxpayers and business owners.

The IRS website provides comprehensive information about filing taxes, with an emphasis on understanding deductions and credits.

You can also visit an IRS Taxpayer Assistance Center to speak with a tax professional one-on-one about your specific situation.

The Volunteer Income Tax Assistance Program also offers free assistance from trained volunteers regarding any questions you have about preparing your taxes.

Is there a live chat for IRS tax counseling?

The Internal Revenue Service has started employing voice and chatbots on two of its specialized toll-free lines and its website, IRS.gov.

This move allows taxpayers with basic payment or collection notice inquiries to get prompt assistance and avoid delays.

If necessary, taxpayers can still opt to talk to an IRS representative on the telephone.

What is the best option for free tax help?

The best option depends on the complexity of the tax situation and personal preference.

For free tax help, eligible taxpayers can use the IRS Free File program to prepare and file their federal return, or they can receive assistance through the Volunteer Income Tax Assistance program for low-to-moderate income individuals, the Tax Counseling for the Elderly program for those 60 and over, IRS Taxpayer Assistance Centers for in-person help, or the IRS toll-free telephone lines for tax information and assistance.

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This article, "Where to Get Free Tax Advice in 2024" was first published on Small Business Trends

In this guide, we’ll explain everything you need to know about startup costs deduction and how to take advantage of it in 2024.

What is the startup cost deduction?

The startup cost deduction is a tax provision that allows entrepreneurs and small business owners to deduct a portion of their startup expenses from their taxable income in the year they begin conducting business.

The deduction is intended to help offset the costs involved with starting a business, which can include expenses such as market research, legal fees, incorporation fees, and advertising costs.

To qualify for the startup cost deduction, the business must be a new business, the expenses must be incurred before the business begins operations, and the expenses must be necessary and ordinary for the type of business being started.

The amount of the startup cost deduction is limited to $5,000 for the first year of business, with any remaining startup costs being amortized over a 15-year period.

However, businesses with startup costs that exceed $50,000 in total are subject to a reduced deduction limit.

The best way to get you going in the right direction is to have a business startup checklist. The list can include anything from getting financing to finding legal help and even knowing tax terms. A thorough checklist can keep you from making rash decisions.

Who can benefit from the startup costs deduction?

New businesses that have incurred startup costs can benefit from the startup cost deduction. This includes entrepreneurs who have recently started a business, as well as those who are in the process of starting one.

The deduction is available to businesses of all types and sizes, including sole proprietorships, partnerships, and corporations.

What business startup costs are deductible?

When starting a business, it’s essential to understand what costs are deductible. Deductible startup costs and deductible organizational costs are two categories that can help new business owners save on taxes.

Knowing which costs fall into these categories can make a significant difference in the financial success of a business.

Deductible Startup Costs

When starting a new business, there are many costs that need to be considered. Fortunately, some of these costs may be tax-deductible, helping new business owners save money on their taxes.

These deductible business startup expenses include costs that are necessary when starting or buying an active trade or business, such as:

• Research and development expenses may include costs incurred related to the creation and testing of prototypes, the development of new technologies, labor supply, or the refinement of existing products or services.
• Market research expenses may include costs paid related to surveys, focus groups, or other research methods to understand potential customers’ needs and preferences.
• Advertising and promotion costs may include expenses related to creating and distributing marketing materials, such as brochures, flyers, or advertisements.
• Employee training costs may include expenses related to onboarding new employees, such as training materials, instructor fees, and travel expenses.
• Equipment and supplies costs may include expenses related to purchasing or leasing equipment and supplies necessary to operate the business.
• Professional fees, such as legal and accounting fees, may be incurred to help with business registration, tax preparation, and other legal or financial matters.
• Rent and utilities during the startup phase such as rent for office or retail space, as well as utilities such as electricity, water, and internet service.

Deductible Organizational Costs

Deductible organizational costs are those incurred during the formation of a corporation or partnership. These costs include:

• Legal and accounting fees for incorporation or partnership formation may include expenses related to the preparation of legal documents such as articles of incorporation or partnership agreements, as well as any consulting fees charged by accountants or lawyers.
• State fees for incorporating or registering the business may include expenses such as filing fees or franchise taxes required to register the business with the state.
• Organizational meeting costs may include expenses related to the initial meetings of the corporation or partnership, such as travel and lodging expenses for shareholders or partners.
• Fees for obtaining licenses and permits may include expenses related to obtaining the necessary permits and licenses required to operate the business.
• Costs associated with transferring assets to the new business may also be tax-deductible. These costs may include expenses related to transferring assets such as real estate, inventory, or intellectual property to the new business.

What startup business expenses are not deductible?

While there are many startup costs that are deductible, not all expenses qualify. Some costs, such as personal expenses or those incurred before the business is operational, cannot be deducted. Here are examples of startup costs that are not deductible:

• Personal expenses
• Capital expenses
• Research and experimentation costs before the business begins operations
• Expenses for acquiring intangible assets like patents and copyrights
• Costs related to acquiring an existing business
• Expenses related to issuing stock or other securities
• Fines and penalties
• Expenses for lobbying or political activities
• Costs related to tax-exempt income or other tax-exempt entities
• Expenses for creating or administering a pension plan or trust
• Costs related to issuing tax-exempt securities or financing through tax-exempt bonds

When can you take the startup costs deduction?

You can take the startup costs deduction in the year that your business begins. The deduction is available for expenses incurred during the process of creating or investigating a new business, such as market research and advertising costs.

The maximum amount of startup costs that can be deducted in the first year is $5,000, with any remaining balance being amortized over a period of 15 years.

It’s important to keep accurate records and consult with a tax professional to ensure you are taking advantage of all available tax deductions.

How do you calculate startup costs for a small business?

Calculating startup costs for a small business involves identifying all expenses necessary to get the business up and running.

These expenses can include everything from market research and legal fees to equipment and supplies.

To calculate the total startup costs, list each expense and its associated cost, and add them together.

It’s important to be thorough in identifying all necessary expenses, as underestimating startup costs can lead to financial strain later on.

A solid understanding of startup costs is critical for creating a viable business plan and securing the necessary funding for a successful launch.

How do you claim the startup costs deduction?

Claiming the startup costs deduction can help reduce the tax burden for new businesses. To take advantage of this deduction, there are specific steps that must be followed when filing an IRS tax return. Here are the steps to claim the startup costs deduction:

1. Determine if your business is eligible: To claim the startup costs deduction, your business must have started within the current tax year and incurred expenses related to starting up the business.
2. Calculate your startup costs: The startup costs include any expenses incurred in preparing to operate the business, such as legal and accounting fees, market research, and advertising costs.
3. Choose between deduction or amortization: You have the option of either deducting startup costs up to $5,000 in the first year or amortizing the expenses over a period of time, generally 15 years.
4. File the correct tax form: Depending on the type of business entity you have, you will need to file either Form 1120, 1120-S, 1065, or 1040. It is important to file the correct form to claim the startup costs deduction.
5. Include the deduction on your tax return: Once you have determined the amount of the deduction or amortization, it is important to include it on the appropriate line of your tax return. This will ensure that you receive the maximum tax benefit from the startup costs deduction.

How much can be claimed with the startup costs deduction?

The amount that can be claimed with the startup costs deduction is limited to $5,000 in the first year of business. If your total startup costs exceed $50,000, the deduction will be reduced by the excess amount. Any remaining expenses not deducted in the first year can be amortized and claimed over a period of 180 months.

Can an LLC deduct startup costs?

Yes, an LLC can deduct startup costs on its tax return. However, the deduction is subject to certain limitations and eligibility requirements. The IRS considers startup costs as capital expenses that are necessary to get the business up and running.

It’s important to consult with a tax professional to ensure you are accurately reporting all eligible expenses and taking advantage of all available deductions.

Can a sole proprietor deduct startup costs?

Yes, a sole proprietor can deduct startup costs on their tax return, subject to certain limits and requirements. The startup costs must be ordinary and necessary expenses incurred in the course of starting the business and cannot exceed $5,000 in the first year, with any remaining costs spread out over 15 years.

Can an independent contractor deduct startup costs?

Yes, independent contractors may be able to deduct startup costs associated with their business, such as equipment purchases and marketing expenses, on their tax returns. Just like for LLCs and sole proprietors, the deduction is limited to $5,000 in the first year of business and any remaining costs can be spread out.

Can you deduct startup costs with no income?

If a business owner has no income during the year in which they incur startup costs, they may still be able to deduct these costs on their tax return. The deduction may be limited in the first year and carried forward to future years.

Can you depreciate startup costs?

Some startup costs, such as equipment purchases or property improvements, may be depreciated over time on a business owner’s tax return. As mentioned previously, the ability to depreciate startup costs on a business owner’s tax return may be limited by certain eligibility requirements established by the IRS.

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This article, "Your Guide to the Startup Costs Deduction" was first published on Small Business Trends

Keeping up with estimated taxes throughout the year in 2024 will help you avoid paying too much (or too little) come tax day. In this article, we’ll discuss when estimated taxes are due as well as how much you’re required to pay.

Estimated tax payments are periodic payments made to the government by individuals or businesses during the year in order to pay their expected tax liability.

These payments are typically made quarterly in four equal installments and are estimated based on an individual’s or business’s expected income not subject to federal tax withholding minus deductions for the current year.

Estimated tax payments are used to ensure that the tax owed is paid in a timely manner rather than as a lump sum at the end of the year, avoiding underpayment penalties.

Who should make quarterly estimated tax payments?

The Internal Revenue Service requires certain taxpayers to pay estimated tax quarterly to ensure that they are paying their fair share of taxes throughout the year. The following are the different categories of taxpayers who are required to pay estimated taxes:

• Self-Employed Individuals: If you are self-employed or run a sole proprietorship, you are required to make estimated tax payments if you expect to owe $1,000 or more in taxes for the year.
• Small Business Owners: Owners of small businesses, including S corporations, partnerships, and limited liability companies (LLCs), are required to make estimated tax payments if they expect to owe $1,000 or more in taxes for the year.
• Investors: Investors who receive income from dividends, rent, capital gains, and other sources must make estimated tax payments if they expect to owe $1,000 or more in taxes for the year.
• High-Income Taxpayers: Taxpayers with high income, including those who receive salaries, bonuses, and other forms of taxable income, may be required to make estimated state and federal income tax payments if they expect to owe $1,000 or more in taxes for the year.

When are estimated tax payments not required?

Many businesses are required to make estimated quarterly tax payments throughout the year. However, there are certain scenarios when estimated tax payments do not need to be made. These include if a business:

• is expected to owe $1,000 or less for the year in taxes
• has zero income for a particular quarter
• was not operational for the full taxable year
• filed and paid their taxes on time for the previous year

How do you calculate estimated tax payments?

It’s important to calculate your estimated tax payments accurately to avoid underpayment penalties and interest charges from the IRS. There are two methods for calculating estimated tax payments: the annualized income installment method and the prior year safe harbor method.

The Safe Harbor Method

The safe harbor method is an easy way to calculate estimated taxes and can help avoid any penalties from underpayment. To use this method, simply take the lesser of 90% of that year’s total tax liability or 100% of the previous year’s total tax liability. Plus, account for any credits taken during the taxable period when calculating estimated taxes.

The Annualized Income Installment Method

The annualized income installment method is more complicated than the safe harbor option but allows taxpayers to better account for any changes in income during their taxable period. With this approach, make four separate calculations at equal intervals during your taxable period. These calculations should include all sources of taxed income, credits awarded, and deductions made during each portion of your taxable period to accurately determine what amount needs to be paid for that quarter.

What are the quarterly tax dates for 2024?

Paying taxes can be a tricky process, especially when dealing with quarterly estimated tax payments. There are four different deadlines throughout the year for estimated taxes in 2024. Knowing these dates will help ensure that you pay your taxes on time and avoid any potential penalties. Here is an overview of the quarterly estimated tax payment deadlines for 2024:

• April 15, 2024: First estimated tax payment due
• June 17, 2024: Second quarter estimated tax payment due
• September 16, 2024: Third quarter estimated tax payment due
• January 15, 2025: Fourth quarter estimated tax payment due

How do you make an estimated tax payment?

Making estimated tax payments is a crucial step in avoiding underpayment penalties and interest charges from the IRS. Here are the steps to make an estimated tax payment:

1. Determine your estimated tax liability

The first step in making an estimated tax payment is to determine your expected tax liability for the year. You can use one of the two methods for calculating estimated tax payments, the annualized income installment method or the prior year safe harbor method, to determine your estimated tax liability.

2. Choose a payment method

Once you have determined your estimated tax liability, you need to choose a payment method to make your estimated tax payment. You can make estimated tax payments online, by mail, or through a bank or financial institution.

3. Make your payment

After choosing your payment method, you can make your estimated tax payment. Be sure to include your business name, Employer Identification Number (EIN), and the tax year and quarter for which you are making the payment. If you are making a payment for a sole proprietorship, be sure to include your name and Social Security Number instead of a business name and EIN.

4. Keep a record of your payment

It’s important to keep a record of your estimated tax payment, including the date, amount, and method of payment, to ensure that you have proof of payment in case of any issues or questions from the IRS.

What happens if a business doesn’t make estimated tax payments?

If a business fails to make estimated payments, the IRS may assess underpayment penalties and interest on the owed amount. The longer the income tax remains unpaid, the higher the estimated tax penalty will be and interest will accrue. This can also result in tax liens, wage garnishments, bank levies, and the seizure of assets. To avoid these consequences, it’s important to make accurate and timely estimated tax payments with the help of a tax professional.

Do you have to pay estimated taxes quarterly?

Estimate taxes are generally due on a quarterly basis. This means that estimated taxes must be paid four times per year – April 15 (for Q1), June 17 (for Q2), Sept. 16 (for Q3), and Jan. 15, 2025 (for Q4). Taxpayers may also choose to make advance payments in order to reduce their tax burden at the end of the year.

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This article, "Estimated Tax Payments: What to Pay and When in 2024" was first published on Small Business Trends

Read on for 10 tax deductions for travel expenses in the 2023 tax year.

Are business travel expenses tax deductible?

Business travel expenses incurred while away from your home and principal place of business are tax deductible. These expenses may include transportation costs, baggage fees, car rentals, taxis, shuttles, lodging, tips, and fees.

It is important to keep receipts and records of the actual expenses for tax purposes and deduct the actual cost.

To deduct business travel expenses, they must meet certain criteria set by the IRS.

The following are the primary requirements that a travel expense must meet in order to be eligible for a tax deduction:

• Ordinary and necessary expenses: The expense must be common and accepted in the trade or business and be helpful and appropriate for the business.
• Directly related to trade or business: The expense must be directly related to the trade or business and not of a personal nature.
• Away from home overnight: The expense must have been incurred while away from both the taxpayer’s home and the location of their main place of business (tax home) overnight.
• Proper documentation: The taxpayer must keep proper documentation, such as receipts and records, of the expenses incurred.

Eligible Business Travel Tax Deductions

Business travel expenses can quickly add up. Fortunately, many of these expenses are tax deductible for businesses and business owners.

Here is an overview of the types of business travel expenses that are eligible for tax deductions in the United States:

Accommodation Expenses

Accommodation expenses can be claimed as tax deductions on business trips. This includes lodging at hotels, rental costs of vacation homes, and other lodgings while traveling.

Meal Expenses

Food and beverage expenses incurred on a business trip may be deducted from taxes. This includes meals while traveling and meals during meetings with clients or contractors.

Transportation Expenses

Deducting business travel expenses incurred while on a business trip may also be claimed.

This includes flights, train tickets, car rentals, gas for personal vehicles used for the business trip, toll fees, parking fees, taxi rides to and from the airport or train station, and more.

Expenses of operating and maintaining a car

Expenses of operating and maintaining a car used for business travel may also be claimed as tax deductions.

This includes fuel, insurance, registration costs, actual costs of repairs, and maintenance fees. Fees paid to hire a chauffeur or driver may also be deducted.

Operating and maintaining house-trailers

Operating and maintaining house trailers for business travel may be eligible for tax deductions, provided that the use of such trailers is considered “ordinary” and “necessary” for your business.

This includes any costs associated with renting or owning a trailer, such as fuel costs, repair and maintenance fees, insurance, and registration charges.

Internet and phone expenses

Internet and phone expenses associated with business travel can also be claimed as tax deductions. This includes the cost of any internet service, such as Wi-Fi or data plans, and phone services, such as roaming charges or international calls.

Any communication devices purchased for business use, such as smartphones and laptops, may also be eligible for tax deductions.

Computer rental fees

Rental fees for computers and other computing devices used during business travel may also be deducted from taxes. This includes any applicable charges for purchasing, leasing, or renting a computer, as well as the related costs of connecting to the Internet and other digital services.

All such expenses must be necessary for the success of the business trip in order to qualify for a tax deduction.

Travel supplies

Travel supplies, such as suitcases and other bags, are also eligible for tax deductions when used for business travel. Any costs associated with keeping the items protected, such as locks and tracking devices, can also be claimed as tax deductions.

Other necessary supplies, such as office equipment or reference materials, may also be eligible for deductions.

Conference fees and events

Conference fees and events related to business travel may also be eligible for tax deductions. This includes fees associated with attending a conference, such as registration, accommodation, and meals.

Any costs related to the organization of business events, such as venue hire and catering, may also be claimed as tax deductions.

Cleaning and laundry expenses

Business travel expenses associated with cleaning and laundry may also be claimed as tax deductions. This includes a portion of the cost of hotel and motel services, such as cleaning fees charged for laundering clothing, as well as any other reasonable expenses related to keeping clean clothes while traveling away from home.

Ineligible Travel Expenses Deductions

When it comes to business expenses and taxes, not all travel expenses are created equal. Some expenses are considered “Ineligible Travel Expenses Deductions” and cannot be claimed as deductions on your income taxes.

Here is a list of common travel expenses that cannot be deducted, with a brief explanation of each:

• Personal Vacations: Expenses incurred during a personal vacation are not deductible, even if you conduct some business while on the trip. In addition, expenses related to personal pleasure or recreation activities are also not eligible for deductions.
• Gifts: Gifts purchased for business reasons during travel are not deductible, even if the gifts are intended to benefit the business in some way.
• Commuting: The cost of commuting between your home and regular place of business is not considered a deductible expense.
• Meals: Meals consumed while traveling on business can only be partially deducted, with certain limits on the amount.
• Lodging: The cost of lodging is a deductible expense, but only if it is deemed reasonable and necessary for the business trip.
• Entertainment: Entertainment expenses, such as tickets to a show or sporting event, are not deductible, even if they are associated with a business trip.

How to Deduct Travel Expenses

To deduct travel expenses from income taxes, the expenses must be considered ordinary and necessary for the operation of the business. This means the expenses must be common and accepted business activities in your industry, and they must be helpful, appropriate, and for business purposes.

In order to claim travel expenses as a deduction, they must be itemized on Form 2106 for employees or Schedule C for self-employed individuals.

FAQ

How much can you deduct for travel expenses?

While on a business trip, the full cost of transportation to your destination, whether it’s by plane, train, or bus, is eligible for deduction.

Similarly, if you rent a car for transportation to and around your destination, the cost of the rental is also deductible. For food expenses incurred during a business trip, only 50% of the cost is eligible for a write-off.

How do you prove your tax deductions for travel expenses?

To prove your tax deductions for travel expenses, you should maintain accurate records such as receipts, invoices, and any other supporting documentation that shows the amount and purpose of the expenses.

Some of the documentation you may need to provide include receipts for transportation, lodging, and meals, a detailed itinerary or schedule of the trip, an explanation of the bona fide business purpose of the trip, or proof of payment for all expenses.

What are the penalties for deducting a disallowed business expense?

Deducting a disallowed business expense can result in accuracy-related penalties of 20% of the underpayment, interest charges, re-assessment of the tax return, and in severe cases, fines and imprisonment for tax fraud. To avoid these penalties, it’s important to understand expense deduction rules and keep accurate records.

Can you deduct travel expenses when you bring family or friends on a business trip?

It is not usually possible to deduct the expenses of taking family or friends on a business trip. However, if these individuals provided value to the company, it may be possible. It’s advisable to speak with an accountant or financial expert before claiming any deductions related to bringing family and friends on a business trip.

Can you deduct business-related expenses incurred while on vacation?

Expenses incurred while on a personal vacation are not deductible, even if some business is conducted during the trip. To be eligible for a deduction, the primary purpose of the trip must be for business and the expenses must be directly related to conducting that business.

Can you claim a travel expenses tax deduction for employees?

Employers can deduct employee travel expenses if they are ordinary, necessary, and adequately documented. The expenses must also be reported as taxable income on the employee’s W-2.

What are the limits on deducting the cost of meals during business travel?

The IRS permits a 50% deduction of meal and hotel expenses for business travelers that are reasonable and not lavish. If no meal expenses are incurred, $5.00 daily can be deducted for incidental expenses. The federal meals and incidental expense per diem rate is what determines the standard meal allowance.

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This article, "10 Tax Deductions for Travel Expenses (2023 Tax Year)" was first published on Small Business Trends