Why mileage?

When it comes to cars, self employed individuals and small business owners usually have the same two questions: how much of the initial purchase can I write off, and should I keep up with mileage or actual expenses?  I will address the first question in a later article once Congress retroactively increases the depreciation limits for 2015.  The second question is a little more straightforward but with a few special circumstances to consider.  

Taxpayers that use a vehicle for business purposes and are not eligible to be reimbursed for their expenses can deduct either mileage or actual expenses on their tax return.  This is especially handy for self employed individuals that spend quite a bit of time in the car, such as real estate agents or commercial salespeople.  Often, taxpayers assume actual expenses will generate a higher deduction, but that is not always the case.  

Consider this: taxpayer drives a Toyota Camry that has a 17 gallon gas tank and gets 25 miles per gallon on average.  Assuming gas is $2/gallon, that means the taxpayer could drive 425 miles for $34.  The mileage rate for 2015 is 57.5 cents per mile, which means that same 425 miles would generate a $245 deduction using the standard mileage rate.  In this case, mileage is a much better method to use than actual expenses, and that will almost always be the case when the taxpayer has a fuel efficient vehicle in an environment of low gas prices.  

There are a few precautions to take when deciding whether to use actual expenses or mileage on a vehicle.  One is once the decision is made, it usually cannot be changed in the future i.e. a taxpayer cannot take actual expenses one year and mileage the next.  Another is the historical trend that the IRS is usually 1-2 years behind in aligning the mileage rate with expected actual expenses.  The mileage rate is designed to be one number that covers gas, maintenance, and depreciation on a per-mile basis.  From 2014 to 2015 the standard mileage rate increased 1.5 cents, while average gas prices decreased.  It can be expected then that the 2016 rate most likely will be less than 57.5 cents per mile due to the decrease in gas prices, but that will not necessarily be consistent with gas prices in 2016 (which could go up).

Mileage rates for 2016 are expected to be released close to the end of the year (December 2015).  My guess is 55 cents per mile.   

New tax due dates

At the end of July, Congress passed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.  This bill includes several provisions related to the Highway Trust Fund, road improvements, and health care for veterans.  But, it also included changes to tax return due dates which will take effect for tax years beginning after December 31, 2015.  

Background

Prior to the passage of this law, tax return due dates followed a schedule we have all been familiar with for many years.  For calendar year taxpayers, the due dates were March 15 for corporations (C and S) and April 15 for partnerships, individuals, and trusts.  Corporations, partnerships and trusts got an extension to September 15, and individuals to October 15.  Also, calendar year benefit plans (Form 5500) were due July 31 with an extension to October 15, and annual reports of foreign bank accounts (Form 114) were due June 30 with no extension.

For years, the AICPA and other tax advocacy groups pushed to change the deadlines of corporations and partnerships.  Corporations claimed March 15 was too soon to complete their return, especially large corporations that filed in several states.  Individuals would also find themselves in a bind if they received a K-1 from a partnership at 5pm on April 15th, not giving them enough time to complete their 1040.  The new dates are designed to alleviate some of these time constraints.  

New due dates

For tax years beginning after December 31, 2015 (2016 tax year, filed in 2017), the new due dates are as follows: S-corporations and partnerships are due March 15, and C-corporations, individuals, and trusts are due April 15.  Partnerships and S-corps, will get an extension to September 15, while C-corps and individuals get until October 15 on extension.  Trusts on extension will get until September 30.  Form 5500 will still be due July 31, but will get an extension until November 15.  Finally, Form 114 will now be due on April 15 with an available 6 month extension to October 15.  

Practical application

There are a few benefits to the new deadline structure.  For large partnerships with several unrelated partners, potentially having a K-1 in March as opposed to April will allow individual taxpayers to file on time when they might not have been able to before.  And, for large C-corporations, the added month to close out the year and finalize the tax return will reduce some of the pressure to complete the return, especially if there are many states involved.  The true burden will be placed on the tax preparer, who will have to juggle the new deadlines for partnership and C-corporations.  

Keep in mind there is nothing stopping partnerships and S-corps from requesting an automatic extension on March 15 and completing the returns under the same timeframe as in the past.  By doing this, the time burden will ultimately stay with the individual to complete their return by the due date once their K-1 is received.  The hope is that everyone will abide by the new deadlines as best as possible, and the Treasury can count on the majority of their tax revenue coming on April 15 of each year.  

How Being Politically Active Can Help Your Business

I went to a small liberal arts school in college and, as a result, I have a lot of friends that are very interested in politics.  When I scroll through my Twitter feed or my Facebook timeline, there is no shortage of opinions on everything from taxes to immigration to funding for the local library.  I have never been heavily active in politics, meaning I have done the bare minimum in keeping myself up to date from whatever Matt Lauer says in the first 10 minutes of the Today show in the mornings.  But, in my career both as a CPA advising clients and as a small business owner, I have found myself paying more attention not to what elected officials are saying, but to how new laws could affect businesses, both mine and my client's.  

I heard a speaker a few weeks ago tell a story about a state legislator here in Arkansas.  The legislator said that all it took was 10 people from his district to voice an opinion on a matter to cause him to vote one way or another.  Legislators are meant to be guided by the people that they represent, which is the exact reason why business owners should stay on top of legislative issues, both at the Federal level and in their local communities.  

At the Federal level, the biggest issue I have is the delay in extending tax law.  Because I serve many small business clients, I am a huge proponent of Section 179 and Bonus depreciation.  In 2014, they passed this extender in late December.  What was the business supposed to do?  I'm not a huge fan of saying "I don't know" to a client (unless I really don't know), but last October and November I had to say that a lot when clients asked if they should buy their new truck/x-ray machine/tractor.  I could not advise them one way or another because I did not know what the depreciation benefit would be.  

States also have a tricky way of garnering more tax revenue through a well known method called sales tax.  Here's a good example: the sales tax rate in Little Rock is a cumulative 9% (6.5% state, 1.5% city, 1% county).  The sales tax in Bryant, which is a whopping 10 miles down the road is 9.5% (6.5% state, 3% city, 0% county).  That means that buying a product in Bryant will cost 0.5% more than buying a product in Little Rock.  If you're a business owner trying to decide where to open your next store, isn't Little Rock the more attractive option?  

As a business owner, it is important to stay up to date on what your Federal and local legislators are up to.  A sudden change in Federal tax law or an incremental increase in a sales tax rate could have a big impact on the business's bottom line.  Keep up with changes that are in the works and write to your legislators.  They have a responsibility to vote with the voice of the people, so let your voice be heard.  

Taxes in retirement

As you go through life, you will encounter several "life-changing" moments.  Some are good, such as graduating college or having a child, while others are bad, such as losing a parent or going through a divorce.  These moments can also bring changes to your financial life, including how much tax you owe and how it is paid.  

This article addresses taxes in retirement.  I realize this is not chronologically accurate, but it is an issue that several people are not prepared for when they enter retirement.  

Income and deductions

A retired taxpayer will likely have very different income and deductions than they had earlier in life, maybe even than the year before.  Their wage income will be replaced by distributions from retirement plans, investment income and Social Security.  Personal exemptions for children and mortgage interest will be replaced by charitable contributions and medical expenses.  Changes in income and deductions must be considered when determining how much tax will be owed each year.

Social Security

There's no easy way to say it: if you have other sources of income, up to 85% of the gross Social Security benefits you receive are taxable.   This often comes as a surprise to retired taxpayers, because there is often no tax withholding against this income.  However, you can elect to have Federal withholding taken from your SS benefits if you don't want to change the withholding on your retirement distributions.  Fortunately, SS benefits are not taxed in several states.

Paying taxes

The most challenging part of determining taxes in retirement is determining your income from all sources and electing tax withholding to cover all of it (or pay estimated taxes).  If you are taking distributions from a retirement plan, they will give you the option to withhold taxes on that distribution.  But, this withholding will be based on that distribution alone, and most likely will not cover investment income or Social Security benefits.  The key is to set your withholding high enough to cover taxes on all of your income, not just one source.  

In all, it is important for individuals that are nearing or entering retirement to meet with their tax advisor to determine tax implications of retirement.  Your tax advisor will consider changes in your income and deductions and advise on how much to withhold from retirement distributions or quarterly estimated tax payments that need to be made.  

2015 filing season in review

Now that I have had a day to recharge after the April 15 deadline, it's always fun to look back at the last few months and analyze what went well and what didn't.  Although a lot of this will be more relatable for other tax practitioners, it does give an insight into the variety of issues CPAs deal with during the course of tax season.  

Health insurance

"I know I've never asked you this before, but you do have health insurance, right?"  I got so tired of that question.  But, it had to be asked to be in compliance with the new Affordable Care Act minimum required coverage rules.  This was a challenge because you not only had to make sure the coverage met minimum requirements, but if they received a 1095 then there were additional forms to complete.  Then, you had to hope the 1095 they received wasn't incorrect the first time.  

Late 1099's

I gained some respect for the big brokerage houses this year because they started printing "THIS IS NOT A FINAL 1099" on the 1099 they sent out at the end of February.  They also tried to identify the transactions that were not final, making it easier to get the return completed when the final 1099 was received.  Now, I'm not saying that made it less stressful to get an amended 1099 on April 14, but at least you could anticipate a change.  

The IRS

I'm not going to be too critical of the IRS because it is a busy time of year for them and they are, reportedly, heavily understaffed and underfunded.  But, it is very difficult to discuss anything with the IRS on the telephone.  Wait times are long and agents spend a lot of time encouraging the taxpayer to go to IRS.gov.  And, I think the IRS has a real problem on their hand with the identity theft issue.  The increase in electronic filing has created an opportunity for computer savvy criminals to get a hold of taxpayer money.  I hope the 6 digit pin numbers become mandatory in the near future.  

Financial aid

Thank you, financial aid forms, for asking of an estimate of the applicant's taxable income due by January 31.  This is a double-edged sword because it is difficult to meet those early deadlines, however the financial aid forms encourage clients to get their organized tax information in quickly, expediting the completion of the return.