|
|
|
|
SERVICES
AVAILABLE
Accounting
All Taxes
Audits
Computer Installation
Financial Planning
Peer Review
SEPTEMBER 2003
MAIL CALL
Business Driving: Must it Exceed
50%?
Q. Based on my driving history for this
year, I'll drive about 16,000 miles in 2003. About 5,000 of those miles are
for business (about 30%). For planning purposes, am I required to use the car
at least 50% for business to deduct any expenses?
A.
No. Falling under the 50% limit won't erase your driving deductions. You
can use the flat per mile deduction (36 cents per mile in 2003, plus
tolls and parking) for any business driving. But if you're deducting
your actual business car expenses (gas, repairs, etc.), you can claim
only 30% of the otherwise allowable depreciation deduction if you're
business use falls below 50%. So you definitely have some extra tax
incentive to clear the 50% mark. For more advice, obtain a copy of IRS
form 463, Travel, Entertainment, Gift and Car Expenses, at www.irs.gov/pub/irs-pdf/p2053.pdf
Understanding Roth IRAs
Q. I opened a Roth IRA for the
first time in 2002 (I'm age 32). I put $3,000 in my Roth, but it
reduced my tax refund. Will this occur again if I make a contribution
for 2003?
A. No. You're a bit confused. Both IRA contributions
don't affect your current tax liability. Your contributions aren't
deductible, but you're withdrawals from the Roth IRA will be tax free if
you hold on to the funds until you turn 59 1/2. Unfortunately for you,
that's almost 28 years away. In contrast, contributions to a traditional
IRA may be partially or wholly tax deductible, which would reduce your
current tax liability. Note: You can split annual contributions
between a Roth IRA and a traditional IRA, but the total contribution for
2003 can't exceed $3,000.
The End of Paper Savings Bonds
Q. Even though inflation isn't
high now, I'm thinking about buying Series I bonds to protect against
this possibility. Did I hear correctly that these bonds were being
eliminated?
A. No. The US Treasury recently announced that it
plans to eliminate paper savings bonds over the next few years.
But it will continue to issue new savings bonds, including Series I
Bonds. These bonds accumulate interest on a monthly basis. Their
earnings reflect a fixed rate for the entire 30-year term as well as an
inflation adjustment every six months. Series I Bonds purchased before
Nov. 1, 2003, will earn 4.66% for the first six months of the
investment. Note: As with Series EE Bonds, you can report accrued
interest from I Bonds annually or pay the full amount of tax in the year
of maturity or disposition.
Section 179 Write-off Can't Exceed Income
Q. After deducting the business expenses from
my sole proprietorship, I report about $80,000 of net income a year. I'm
a bit confused on the new Section 179 rules. If I buy new equipment for
my business costing $100,000, can I deduct the entire amount?
A.
No. It's true that the new Section 179 election approved in the new tax
law allows you to write-off up to $100,000 worth of qualified equipment
bought in 2003, 2004 and 2005. That's four times the allowance under
previous law. But, as was the case before, the amount of the Section 179
write-off can't exceed the amount of your taxable income from the
business-in your case $80,000. The good news: Any excess can be carried
over indefinitely to future years. Note: The section 179
allowance reduces dollar-for dollar for assets costing above $400,000.
Source: Research Recommendations
File a Gift-Tax Return Even When It's Not
Required
To escape IRS claims that you've low-balled your
gift valuation, it's often wise to submit an independent appraisal with
your gift-tax return. What's more, you may want to file a gift tax
return even when it's not necessary. Here's why:
This year, you can give
away up to $11,000 worth of assets per recipient per year, free of gift
tax, under the annual gift-tax exclusion. With 2 children, 2 sons-or
daughter-in-laws and 4 grandchildren, you can give away up to $88,000 a
year, and so can your spouse.
You won't have to file tax returns for
gifts covered by annual gift-tax exclusion. If you're giving away
hard-to-value items such as real-estate or shares in a family business,
file gift-tax returns anyway, with full disclosure. That will start the
clock running on the 3 year statute of limitations. If you don't file
gift-tax returns, the IRS has no limits on its ability to challenge
those gifts and impose higher taxes.
Source: Research Recommendations
Switch to Cash-Method Accounting; New Rules
Make it More Possible
Using the cash method of accounting is usually
a great idea-when its allowed. Your tax recordkeeping is much simpler
and you have great flexibility to manage your tax bills by timing the
receiving income and payment of expenses. Now, more businesses than ever
are eligible. Here's the deal:
Gross receipts under $1 million. If your company's average annual
gross receipts (based on 1999 to 2001) are below $1 million,
you're now eligible to use cash-method accounting on your 2002 return.
This is true even if you sell merchandise or maintain inventories. Previously,
the IRS tried to force less-beneficial accrual accounting on firms that
sold merchandise or kept inventories.
Gross receipts between $1 million and $10 million. If average
annual gross receipts (based on 1999 to 2001) fall in this range
and your firm is not a C corporation, you can still use cash-method
of accounting for 2002. (Average receipts for a C Corporation cannot
exceed $5 million). This special exception is unavailable to mining,
manufacturing, wholesaling, retailing, publishing and sound-recording
operations.
Strategy for 2002 return. If your business qualifies, make the
switch starting with your 2002 return. To make the accrual-to cash switch,
file form 3115, Application for Change in Accounting Method.
Source: Research Recommendations
Section 179 Deduction: Know the Ground
Rules
The new section 179 rules let you write off up to $100,000 worth of
business equipment bought each year. But remember this key point: Your
annual Section 179 deduction can't exceed that year's net business taxable
income from all sources (calculated before the Section 179- write-off).
This rule prevents taxpayers from claiming giant Section 179 deductions
in an effort to create tax losses that are carried back to earlier years.
The good news: If you run your business as a sole proprietorship
or as a single-member LLC, you can count any salary that you earn as
an employee as additional business taxable income. And if you're married
and file jointly, you can also count your spouses earnings as an employee
or self-employment income.
Also, the law says your Section 179 deduction is reduced dollar for
dollar once your qualifying purchases top $400,000 for the year.
The old-law phase out threshold was only $200,000. The new law doubled
the threshold for tax years beginning 2003, 2004 and 2005.
Example: Say your business buys $460,000 worth of Section 179
equipment during 2003. Your maximum Section 179 deduction would be reduced
to only $40,000 ($100,000 minus $60,000)Source: Research
Recommendations
Caution Do not adopt any of our recommendations
without consulting a tax professional
Return to Top of Page
|
|
