When does tax preparation start?
If you are doing it right it is January 1st.
Does that mean after the year is done and you are gathering your documents?
No, that means the first day of the year. That way when the year ends, all you have to do is grab a couple pending documents and set an appointment with your tax specialist.
Here are 10 steps that you can start now, even if it isn’t January 1, it is better sooner than later. This will save you and your tax specialist during the tax time. It is important to remember, if you are saving your tax specialist time, you are saving yourself money. Because complex clients are charged more.
- Track your mileage, there are a lot of ways to do it, some are more technical than others. There are some great apps that can help track your mileage.
- If you are using Freshbooks or Quickbooks Self Employed as your accounting software, it can track your mileage and input it into your expenses for you. This is our recommended approach.
- A mileage specific tracking app. C-Net recommends Mileage Expense Log, MileIQ, and TripLog. None of them are free, and data rates apply, but they are easy options.
- If you are not using software, a manual tracking book can be used, but if you are anything like us, we forget to input it.
- If you have a work only vehicle it is easy, subtract your odometer reading at the end of last year from your current and that is it. But that isn’t a feasible option for everyone.
- There is an option to estimate based upon total miles driven, and applying a percentage for personal vs business use.
Something to consider is the exactness, and level of documentation behind each option as they move down the list. In the unfortunate even to of an audit the better your documentation, the better your chances of coming out ahead. Additionally, we know that you have the option of using the $.555 per mile rate, or a by expense method. We recommend using the mileage rate as it is easier to apply and document, as opposed to a thousand receipts for gas, car washes, repairs, and a depreciation schedule.
- Legal and professional services, which include all legal and professional fees as long as they are an ordinary part of your business.
What does “ordinary part of your business” mean?
A rule of thumb is that if you need the service to continue operations of your business you can deduct it. So, if you are paying an accountant to do your bookkeeping, and taxes, those are deductible. And if you are paying a lawyer for ordinary business activities, or defense during a law suit (Your fines, if incurred are not tax deductible.). However, if you are going through a divorce, that is outside the ordinary course of business and not tax deductible.
- Home office deduction, there are more details on this, one so please consult with your tax specialist. But if you perform work out of a home office, it is deductible. As long as that home office is only for the purpose of a home office. Repurposing your kitchen table doesn’t count.
- Marketing expenses, if in the course of ordinary business, you incur advertising costs they are fully deductible. This includes staging, brochures, and photography costs used in an open house.
- Business Entertainment, which is probably the most fun, but also subject to additional consideration. If in order to attract a potential client or improve your professional network you go out to lunch, the expense is cut in half for tax deduction purposes. The simple way to document this is using Freshbooks or Quickbooks Self Employed. Through that software, you can take a picture of the receipt through your app, and label it as entertainment or food. The software will know that for tax purposes, your $100 bill is only deductible up to $50. Otherwise you can save your receipt and make a quick note of who you were meeting on your receipt and tuck it into your shoebox when you get home.
- Membership dues are deductible. If you pay any amount to be a member of a professional organization, such as your pre-licensing training, exam fees, membership dues, broker fees, broker fees, and dues to any other professional organization fees such as REALTOR ®.
- State and Local Income taxes, are deductible as they apply to your commissions, when determining your federal income tax return.
- Office Expenses, none of us can avoid them, expenses such furniture, rent and other fixed office expense. These can range from software costs, like Microsoft office to the company that comes into handle shredding.
- Employee wages, if you are paying an amount to an employee for their work, then it is deductible, this includes taxes and benefits.
- Business travel, expenses include airfare, meals, car rental, parking/tolls, tips, and lodging are tax deductible. There are limitations, and paring a business trip with a personal vacation can create tax complexities which you need to consult your tax specialist on.
It is important with any of these that you maintain supporting documentation for your expenses, if you do not take advantage of the excellent software solutions out there like Freshbooks and Quickbooks Self Employed to track and document your expenses, you will need to be organized, saving receipts and labeling them for what they are attributed to. Being prepared, and organized will save you and your tax specialist a big headache during tax season.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate legal professional, financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.