Huddleston Tax Weekly

Property acquired for business use, rental use, or any other income producing use that is expected to last more than one year cannot be deducted as a business expense all in the year it was aquired.  This is where depreciation comes into play.  You must deduct the expense over the usual life of the asset.  The useful life of an asset is defined by the IRS and gets deducted on form 4562. 

For property to be depreciated on your tax return you must own the property, it must be used on your business or rental activity, it must have a determinable useful life, and it must be expected to last more than one year.  Some examples of depreciable property are, buildings, computers, autos, copy machines, furniture, and large equipment.  There are some things that are not depreciable, such as land, property placed in service and disposed of in the same year, and some intangibles.  If you have a home that is used in both business and personal, then only the business portion can be depreciated. 

In order to compute deprecation you must know when the asset was placed in service, what the basis of the asset is (usually the purchase price of the asset), and the appropriate depreciation method and usefull life.  When an asset was placed in service isn’t always the date it was purchased.  If you buy a car for your business on June 15th, but don’t start using it in your business until August 1st, then you must start depreciating it as of August 1st, not June 15th.  Also, if you have a rental house then depreciation should start as soon as it is available for rental, even if it has not yet been rented. 

There is a way for some taxpayers to elected to expense all or some of an assets cost in the year of purchase using Section 179.  Section 179 allows you to deduct all of the depreciation up front rather than spreading it over the useful life.  Section 179 may only be taken on business assets, not rental assets.  

For more information on Section 179 and general deprecation you should consult your tax professional.

A sole proprietorship is undeniably the easiest, lowest-costing entity to form and manage.  Here are some of the advantages of a sole proprietorship:

1. Simplicity - This is by far the least complicated type of entity to form and administer.  If you have no employees, the only form you need to file with the IRS is Schedule C on your 1040 tax return.

2. Low costs of formation - It  may not cost anything to begin operations as a sole proprietor, unless you wish to have employees.

3. Control - Since there can only be one owner of a sole proprietorship (you), there is no hassle with other owners or partners.

4. Flexibility - A sole proprietorship is easy to sell or to end.

5. Great tax benefits - As the owner of a sole propriertorship, you are entitled to the many tax benefits of operating a small business.

Unfortunately, along with the ease and simplicity of operating as a sole proprietorship come the following disadvantages:

1.  Unlimited liability - This is undoubtedly the sole proprietorship’s greatest disadvantage.  If you are sued for any business problem or if your business incurrs any debts, you are personally liable.  Therefore, if there is any chance someone could sue you, if you have any employees, or if you have substantial assets to protect, you should definitely not operate as a sole proprietor. 

2. No managerial oversight - By definition, a sole propriertorship has only one owner.  So, there is no partner or board of directors to provide business advice about decisions.

3. Difficulty raising money - A sole proprietor generally has more trouble securing loans for the business, since the owner’s assets are collateral.

4. Low stability - if the owner dies or becomes disabled, there may be no one else who could run the business.  Therefore, the business could end abruptly at any time.

Overall, a sole proprietorship is wonderfully simple to begin and to operate, but the unlimited liability potential can outweigh these benefits.  The only people who should consider this entity for their business are those who have almost no possibility of liability problems, no employees and few assets that need protection. 

Probably those who would benefit most from this choice of entity are people with a home-based businesses, like network marketers or free-lance writers.  However, if your tax accountant or attorney feels that you should chose another entity, you should take his or her advice.

When you use your car or truck for business, generally the expenses associated with that are deductible as business expenses.  You can deduct the auto expenses for business when you are traveling from one work location to another, visiting customers, attending business meetings away from your regular workplace, or getting from home to a temporary workplace.  You should remember that auto expenses related to travel between your home and your regular place of work are considered commuting expenses and are not deductible.

There are two options for deducting auto expense on your tax return.  You can choose to use either the standard mileage rate or actual expenses. 

The standard mileage rate can be used to figure the auto deduction if the car or truck is owned or leased.  When your auto is leased and you use the standard mileage rate, it must be used for the entire lease period.  The standard mileage rate is adjusted annually by the Internal Revenue Service.  For 2009 the rate is 55 cents per mile.  There are a few cases when you are not allowed to use the standard mileage rate and that is when you use the car for hire, use more than five cars at a time, claim depreciation on the auto, or are a rural mail carrier.

The actual expense method includes deducting expenses for depreciation, gas, insurance, repairs, oil changes, registration, etc.   In the case of the actual expense method, if your business use is less than 100% you must allocate the expenses between business and personal use. 

No matter which method you choose it is important to keep good records of your expenses and your miles driven both personal and business.  It is important to keep a mileage log and the receipts for gas, repairs, etc. If you have questions on whether or not an auto expenses is deductible or about which method is better for your situation then please contact your tax advisor.

Jessica Chisholm, CPA
Seattle/Bellevue Tax Accountants

Taxpayers must report all income they earn and receive in a year on their tax return.  Often times, however, people neglect to report several types of miscellanous income.  The types of income that are often not reported are self-employment income where no 1099-misc is received, bartering income, gambling winnings, and prizes. 

A business owner is only required to send an independent contractor a 1099-misc if the work they did for them exceeds $600 in compensation.  This does not mean that the independent contractor does not need to report the income on their tax return if they do not receive a 1099-misc.  Any income needs to be reported, no matter how small the amount.

Bartering income is also often times not reported.  If you are a small business owner who trades services with another business owner, this counts as income and must be reported as such on your tax return.  For example, if you are a landscaper and you agree to landscape your Accountants yard in exchange for bookkeeping services, then the value of the bookkeeping services are taxable income to you.

Gambling winnings from such things as lottery tickets, horse racing, casinos are also taxable.  Just because you are not issued a W-2G does not mean you are exempt from reporting your winnings.  Gambling losses may be deducted if you itemizes, but only to the extent of winnings.

When you win prizes from things like game shows and contests, the cash value of the prize is considered taxable income to the person who won.  This should be reported as other income on line 21 of your 1040.

If you ever have a question about what income should be reported on your tax return you should discuss it with your tax advisor to make sure you have correctly reported all taxable income for the year.