With show season behind us for most parts of the country, it's a good time to discuss which expenses which are incurred while you are showing "away from home" are deductible. This will help you when getting information together for your current year tax return as well as preparing for next season's expenses.
In general travel expenses are deductible if they are directly related to conducting your business. "Ordinary and necessary" (as defined by the IRS: an ordinary expense is an expense that is common or accepted in the taxpayer's trade or business; a necessary expense is one that is appropriate for the business) travel expenses such as transportation, lodging and incidental travel costs, such as laundry, tips etc. would be deductible if supported by documentation such as receipts. Be sure to document the business purpose of each expense.
The cost of meals consumed on a business trip are deductible, subject to a 50% limit. Again,only the ordinary and necessary costs of meals are deductible. Facts and circumstances dictate what is considered ordinary and necessary but keep in mind the ultimate determination is made by the IRS (if your are audited).
If you engage in both personal and business activities while on your trip, be sure to document in detail which costs are associated with your business. If you travel to a location for primarily personal purposes and while there, transact business, the costs of travelling to and from the location would NOT be deductible. But if you travel for primarily business purposes, then your costs of travelling to and from the location would be deductible. You would allocate the costs incurred while there between personal and business and only the business portion would be deductible. If your transportation costs for showing are significant, the tax savings of determining those costs to be deductible could b substantial.
If anyone else (including your spouse) accompanies you on your business trip, in order for those expenses to be deductible, the person accompanying you must work for your business, their presence must serve a bona fide business purpose and the costs would have been deductible had they been incurred by someone who was not accompanying you.
There MUST be a business purpose for showing, in order for the related expenses to be tax deductible. Don't rely on theory and generalities to prove your point to the IRS if you are audited. At every show, keep a record of who you coached, what potential clients you met, the sales horses you rode, etc. If you need to accumulate certain scores or ribbons in order to be certified as a judge/instructor/etc., document which shows and which classes you entered in order to fulfill your requirement. You can use this information not just in case of an audit but in planning for the same show next year, to send out marketing materials and to track fulfillment of any continuing education requirements.
Showing can be a great marketing tool and a legitimate tax deduction. Keep detailed records and follow IRS regulations. Best wishes at the show!
Friday, November 12, 2010
Equine Accounting: Entity ABCs
SP, LLC and Subchapter S - what does it all mean and why do you need to know? These are several of the different types of legal entities that businesses adopt, which allow the business to take on an existence apart from it's owners - though the owners still control the business.
The type of entity that you choose will affect your personal responsibility for the liabilities of the business. A lawyer can best advise you as to which entity would be the optimum solution for your personal situation.
But the choice of legal entity also affects your personal income tax liability. In order to best utilize the tax advantages of each type of entity, you need to understand how the incomes goes from your business cash register through your tax return and into your pocket.
Flow through entity types: An entity is considered a "Flow through" type because the income of the entity is treated as the income of the owners. For Federal tax purposes, a flow through entity avoids double taxation because only owners themselves are taxed on the revenue. Net Income is divided among the owners and each owner pays taxes on that income as part of their personal income tax return. Generally, losses from the business can be applied against income from other sources (investment income, salary of spouse, etc), which will decrease the individual tax liability. Whether these losses can be applied against other income is subject to regulations on hobby loss, tax shelters and material participation, among others.
Types of flow through entities include:
1. Sole Proprietorship: This is the simplest form of doing business for tax purposes. a business operated by one individual owner (or married couple who jointly own and operate a business may elect for each spouse to be treated as a sole proprietor) is a sole proprietorship. You file a Schedule C or F (Farm income) as a schedule of your personal Form 1040 and the business is not required to file a separate tax return.
2. Partnership: When a business is operated by two or more owners (in this type of entity, owners are known as "partners"), with each owner contributing to the business and each sharing in the profits and losses of the business, the owners may elect the partnership as the legal form of entity for that business. The partnership is required to file a tax return (Form 1065) but the form is informational only. There is no tax liability for the business itself.
3. Subchapter S Corporation: A business with 100 or fewer ownrs (in this type of entity, owners are known as "Shareholders") may elect to be a Subchapter S Corporation. As a type of flow through entity, income or loss of the business is included as part of the personal income of each shareholder and except for under very limited circumstances, the business has no income tax liability. The corporation is required to file a tax return (Form 1120S) but the form is for informational purposes only.
4. LLC: The LLC (Limited Liability Company) is a legal entity but is not recognized by the IRS for tax purposes. So a business organized as an LLC would be required to elet to be taxed otherwise - as a Sole Proprietorship, Partnership or C Corporation. Owners in an LLC are known as "Members".
Non flow through entity type:
C Corporation: This probably the most complex form of doing business. A C Corporation is a separate taxable entity from its owners. It not only files a separate tax return but has its own tax liability. Profits by the business are taxed on a corporate level and if distributed to the owners, taxed again on an individual level.
Some important considerations when determining the best type of entity for your business would be the extent to which you need to limit legal liability and the future plans for your business in years and generations to come. In some cases, relief from personal legal liability has more value to the owner than simplicity of operation or tax benefits. Seek the advice of an attorney when making this important decision. Be sure you understand not only the benefits but the future responsibilities involved in your choice.
The type of entity that you choose will affect your personal responsibility for the liabilities of the business. A lawyer can best advise you as to which entity would be the optimum solution for your personal situation.
But the choice of legal entity also affects your personal income tax liability. In order to best utilize the tax advantages of each type of entity, you need to understand how the incomes goes from your business cash register through your tax return and into your pocket.
Flow through entity types: An entity is considered a "Flow through" type because the income of the entity is treated as the income of the owners. For Federal tax purposes, a flow through entity avoids double taxation because only owners themselves are taxed on the revenue. Net Income is divided among the owners and each owner pays taxes on that income as part of their personal income tax return. Generally, losses from the business can be applied against income from other sources (investment income, salary of spouse, etc), which will decrease the individual tax liability. Whether these losses can be applied against other income is subject to regulations on hobby loss, tax shelters and material participation, among others.
Types of flow through entities include:
1. Sole Proprietorship: This is the simplest form of doing business for tax purposes. a business operated by one individual owner (or married couple who jointly own and operate a business may elect for each spouse to be treated as a sole proprietor) is a sole proprietorship. You file a Schedule C or F (Farm income) as a schedule of your personal Form 1040 and the business is not required to file a separate tax return.
2. Partnership: When a business is operated by two or more owners (in this type of entity, owners are known as "partners"), with each owner contributing to the business and each sharing in the profits and losses of the business, the owners may elect the partnership as the legal form of entity for that business. The partnership is required to file a tax return (Form 1065) but the form is informational only. There is no tax liability for the business itself.
3. Subchapter S Corporation: A business with 100 or fewer ownrs (in this type of entity, owners are known as "Shareholders") may elect to be a Subchapter S Corporation. As a type of flow through entity, income or loss of the business is included as part of the personal income of each shareholder and except for under very limited circumstances, the business has no income tax liability. The corporation is required to file a tax return (Form 1120S) but the form is for informational purposes only.
4. LLC: The LLC (Limited Liability Company) is a legal entity but is not recognized by the IRS for tax purposes. So a business organized as an LLC would be required to elet to be taxed otherwise - as a Sole Proprietorship, Partnership or C Corporation. Owners in an LLC are known as "Members".
Non flow through entity type:
C Corporation: This probably the most complex form of doing business. A C Corporation is a separate taxable entity from its owners. It not only files a separate tax return but has its own tax liability. Profits by the business are taxed on a corporate level and if distributed to the owners, taxed again on an individual level.
Some important considerations when determining the best type of entity for your business would be the extent to which you need to limit legal liability and the future plans for your business in years and generations to come. In some cases, relief from personal legal liability has more value to the owner than simplicity of operation or tax benefits. Seek the advice of an attorney when making this important decision. Be sure you understand not only the benefits but the future responsibilities involved in your choice.
Tuesday, August 31, 2010
For this newsletter, the information will be delivered in audio, rather than written format. Recently, I had the opportunity to be a guest on the Horse Tip Daily Show on Horse Radio Network. I've provided the links to those broadcasts below.
Thanks so much to Glenn the Geek at HRN for the invitation. For those of you who aren't familiar with HRN, please check it out. The Horse Tip Daily Show is 5-10 minutes on just about any horse topic you can imagine, by an expert in the field. HRN also has shows dedicated to the disciplines of Jumping, Eventing, Dressage and much more. Something for everyone, in interesting, bite-sized pieces. Thanks for listening.
http://horsetipdaily.horseradionetwork.com/horse-tip-daily-226-carol-gordon-on-the-hit-list-part-1/
http://horsetipdaily.horseradionetwork.com/horse-tip-daily-227-carol-gordon-on-the-hit-list-part-2/
Thanks so much to Glenn the Geek at HRN for the invitation. For those of you who aren't familiar with HRN, please check it out. The Horse Tip Daily Show is 5-10 minutes on just about any horse topic you can imagine, by an expert in the field. HRN also has shows dedicated to the disciplines of Jumping, Eventing, Dressage and much more. Something for everyone, in interesting, bite-sized pieces. Thanks for listening.
http://horsetipdaily.horseradionetwork.com/horse-tip-daily-226-carol-gordon-on-the-hit-list-part-1/
http://horsetipdaily.horseradionetwork.com/horse-tip-daily-227-carol-gordon-on-the-hit-list-part-2/
Saturday, July 24, 2010
Equine Accounting: Audit Red Flags
No one wants to see the IRS knocking at their door, requesting an audit of a prior year tax return. Sometimes, it's just the luck of the draw. But there are things that you can do (and NOT DO!!!) to decrease your chances of being audited.
Who is audited? Estimates vary but approximately 1 to 1.5 percent of all taxpayers are audited. Most tax returns singled out by the IRS for audit contain either tax deductions that appear to be too high in relationship to the person's income, or tax items that are erroneous, tax items that require proof or an explanation, or are on the IRS' list of hot tax issues. About 16 million tax returns each year are tagged as having a potential discrepancy -- out of 140 million returns filed in 2008. Of those approximately one third are actually reviewed by an auditor.
What happens with pulled returns varies from taxpayer to taxpayer based on your individual circumstances. You may simply receive a notice that your taxes have been recalculated with a request for more money. If there is a question about a specific deduction or expense, you may receive a request for more information. In some cases, you will be asked to sit down with an IRS examiner and answer questions and provide more information in person.
Why Me? Contrary to popular belief, the method used to submit your return is not a factor in the audit selection process. The selection is done after the data is entered, whether via e-filed return or the return being input by an employee. The IRS selects returns for examination based on a weighted analysis of the data provided on your return. For example, if your Adjusted Gross Income is $200,000 and your charitable contributions are $10,000, you would receive a low "weight" to your data. However, if your Adjusted Gross Income is $50,000 with the same $10,000 amount of charitable contributions, a "heavy" weight is assigned. The IRS selection process will give a higher score to the person with the lower income, even though the amount of the deduction is the same. Every line on the return is "scored" on a weighted scale and the weight varies based on the other factors on your return, like AGI or filing status. The weighted values are added together and a number is generated. Larger numbers have a great chance of an audit.
The High-Risk Audit Areas:
1. High Wages
IRS Audit Statistics
Income for Tax Returns
Tax Returns Filed
Tax Returns Examined
Percent Examined
Less Than $25,000
59,211,700
1,076,945
.81%
$25,000 to $50,000
27,263,000
259,794
.58%
$50,000 to $100,000
17,019,200
196,582
.62%
Greater Than 100,000
4,540,800
129,320
1.66%
As for the higher earners, returns showing income of $200,000 and above have a nearly 3 percent audit chance. The percentage jumps to more than 6 percent for returns with earnings of $1 million or more.
.
2. High Itemized Personal Deductions
You have large amounts of itemized deductions on your tax return that exceed IRS targets.
If your itemized tax deductions on your tax return exceed a target range as set by the IRS, the chances of being audited by the IRS increase. This is especially true if you claim large cash contributions to charities in relation to your income on your tax return. This does not mean that you should not take tax deductions on your tax return that you are entitled to, but you should realize that your chances for an audit increase if your tax deductions exceed the averages for your income level.
3. Tax Shelter Losses
You claim tax shelter investment losses on your tax return particularly if one or both taxpayers have high income from other sources. The IRS will question whether there is an attempt to use the horse business as a tax shelter.
4. Complex Expenses/Transactions
You have complex investment or business expenses or other transactions on your tax return.
5. Cash used routinely in your business
You own or work in a business which receives cash and/or tips in the ordinary course of business. Lesson income is definitely an example of a cash business so be sure that your day sheets include a list of checks received and those checks tie into your bank deposits.
6. High Business Expenses
Your business expenses are large in relation to your income on your tax return or show losses continually, year after year.
7. Rental Property
You have rental expenses on your tax return.
8. Prior/Related audit
A prior IRS audit resulted in a tax deficiency or you are a shareholder or partner in an audited partnership or corporation.
9. Unreported Taxable IncomeThe IRS discovers unreported taxable income when its computers match the taxable income you reported on your tax return with information gathered from banks, brokerages and customers of independent contractors. The most common example of this is unreported bank interest. To help avoid omitting income on your return, review last year's tax return to make sure you have the necessary 1099's, etc. from mutual funds, banks and other sources . Report income exactly as it appears on the 1099 Form.
10. Self Employment
The IRS believes most under-reporting of taxable income and abuse of tax deductions occurs among those who are self employed so they are audited by the IRS more frequently than employees. The temptation with some who are self employed is to deduct personal as well as business expenses on their tax return. Be sure there is a true business purposes for each expense.
The audit rate for self employed entities is greatest among sole proprietors. In 2008, a sole proprietor with gross receipts of between $100,000 and $200,000 had an audit rate of 3.9%. To minimize your risk of audit, consider changing your entity. You can, for example, incorporate and use S corporation status. The audit rates on S corporations, even if they are one-owner entities, are dramatically lower than the rates on sole proprietorships (S Corp audit rate was only 0.4% in 2008).
11. High Auto MileageOne of the most commonly audited items for self employeds and employees of companies who use their car in business is the deduction for business transportation. You need to keep good records of all tax deductible automobile expenses and a mileage log showing business miles driven. Try to keep the mileage log on a daily basis including the date, beginning and ending odometer readings, the location, the business purpose, and the client. At a minimum, record the automobile's odometer reading at the beginning and end of the tax year and have a calendar that you could use to reconstruct your deduction.
The IRS reviews your return to determine its accuracy. As a taxpayer, you have the burden of proof that your return is accurate. However an audit can be a time-consuming and frustrating process. Here are some steps you can take to avoid an audit:
Document All Income and Deductions-You can verify income, profits and earnings with supporting documentation. Large tax deductions are audit red flags, so make sure all are well-documented. If you think that there is anything on your tax return that may cause the IRS to take second look, attach a copy of the invoice or paid bill in question. Check the Numbers-You are ultimately responsible for what is on your returnso be sure to check that you or the preparer have entered the numbers correctly. I've seen $1,700 entered as $17,000 for farrier expense. The tax preparer reviewing the return didn't know what a farrier was and so the expense didn't look out of line to him. It definitely caught the attention of the IRS and an audit followed.
Use Your Common Sense- File your taxes on time and answer all of the questions asked. The cleaner the return, the less likely you are to attract the attention of the IRS.
Best Practices-Keep good records of your business activities: locations, times and dates, expenses, a description of what took place, along with accompanying receipts and cancelled checks. If you are audited, you have most of the work already done.
Report all your income-You are required to report all business income unless a special tax rule on tax-free treatment applies. So:
· Report "invisible" income- If you barter for goods and services, you are taxed on the value of what you received in the trade.
· Report cash-Tips and other cash payments are something that the IRS is focusing on. Based on your lifestyle and expenses, they can determine if you have been receiving additional income in the form of cash. This is particularly true in industries where payment in cash is common.
Keep the paperwork-Your records are the key to proving your right to deductions and credits. You may not be able to prevent a random audit but you will be able to survive it if paperwork is on your side. Types of records:
Receipts, invoices, and canceled checks for expenses paid.
Expense account worksheets, diaries and log books for travel and entertainment costs, including car usage.
Financial experts expect to see an increase in audits and assessments in the coming years because tax audits provide a revenue stream that the IRS currently is missing out on. The IRS estimates that it fails to collect about $345 billion in taxes each year. So it's even more important now that you keep clean, accurate records and understand what factors can cause your return to be audited.
When you first learned to ride, you learned how to do an emergency dismount and use a pulley rein to stop a runaway horse. Hopefully, you'll never have to use that knowledge but you are prepared - just in case. Think of this information as your audit "pulley rein".
Who is audited? Estimates vary but approximately 1 to 1.5 percent of all taxpayers are audited. Most tax returns singled out by the IRS for audit contain either tax deductions that appear to be too high in relationship to the person's income, or tax items that are erroneous, tax items that require proof or an explanation, or are on the IRS' list of hot tax issues. About 16 million tax returns each year are tagged as having a potential discrepancy -- out of 140 million returns filed in 2008. Of those approximately one third are actually reviewed by an auditor.
What happens with pulled returns varies from taxpayer to taxpayer based on your individual circumstances. You may simply receive a notice that your taxes have been recalculated with a request for more money. If there is a question about a specific deduction or expense, you may receive a request for more information. In some cases, you will be asked to sit down with an IRS examiner and answer questions and provide more information in person.
Why Me? Contrary to popular belief, the method used to submit your return is not a factor in the audit selection process. The selection is done after the data is entered, whether via e-filed return or the return being input by an employee. The IRS selects returns for examination based on a weighted analysis of the data provided on your return. For example, if your Adjusted Gross Income is $200,000 and your charitable contributions are $10,000, you would receive a low "weight" to your data. However, if your Adjusted Gross Income is $50,000 with the same $10,000 amount of charitable contributions, a "heavy" weight is assigned. The IRS selection process will give a higher score to the person with the lower income, even though the amount of the deduction is the same. Every line on the return is "scored" on a weighted scale and the weight varies based on the other factors on your return, like AGI or filing status. The weighted values are added together and a number is generated. Larger numbers have a great chance of an audit.
The High-Risk Audit Areas:
1. High Wages
IRS Audit Statistics
Income for Tax Returns
Tax Returns Filed
Tax Returns Examined
Percent Examined
Less Than $25,000
59,211,700
1,076,945
.81%
$25,000 to $50,000
27,263,000
259,794
.58%
$50,000 to $100,000
17,019,200
196,582
.62%
Greater Than 100,000
4,540,800
129,320
1.66%
As for the higher earners, returns showing income of $200,000 and above have a nearly 3 percent audit chance. The percentage jumps to more than 6 percent for returns with earnings of $1 million or more.
.
2. High Itemized Personal Deductions
You have large amounts of itemized deductions on your tax return that exceed IRS targets.
If your itemized tax deductions on your tax return exceed a target range as set by the IRS, the chances of being audited by the IRS increase. This is especially true if you claim large cash contributions to charities in relation to your income on your tax return. This does not mean that you should not take tax deductions on your tax return that you are entitled to, but you should realize that your chances for an audit increase if your tax deductions exceed the averages for your income level.
3. Tax Shelter Losses
You claim tax shelter investment losses on your tax return particularly if one or both taxpayers have high income from other sources. The IRS will question whether there is an attempt to use the horse business as a tax shelter.
4. Complex Expenses/Transactions
You have complex investment or business expenses or other transactions on your tax return.
5. Cash used routinely in your business
You own or work in a business which receives cash and/or tips in the ordinary course of business. Lesson income is definitely an example of a cash business so be sure that your day sheets include a list of checks received and those checks tie into your bank deposits.
6. High Business Expenses
Your business expenses are large in relation to your income on your tax return or show losses continually, year after year.
7. Rental Property
You have rental expenses on your tax return.
8. Prior/Related audit
A prior IRS audit resulted in a tax deficiency or you are a shareholder or partner in an audited partnership or corporation.
9. Unreported Taxable IncomeThe IRS discovers unreported taxable income when its computers match the taxable income you reported on your tax return with information gathered from banks, brokerages and customers of independent contractors. The most common example of this is unreported bank interest. To help avoid omitting income on your return, review last year's tax return to make sure you have the necessary 1099's, etc. from mutual funds, banks and other sources . Report income exactly as it appears on the 1099 Form.
10. Self Employment
The IRS believes most under-reporting of taxable income and abuse of tax deductions occurs among those who are self employed so they are audited by the IRS more frequently than employees. The temptation with some who are self employed is to deduct personal as well as business expenses on their tax return. Be sure there is a true business purposes for each expense.
The audit rate for self employed entities is greatest among sole proprietors. In 2008, a sole proprietor with gross receipts of between $100,000 and $200,000 had an audit rate of 3.9%. To minimize your risk of audit, consider changing your entity. You can, for example, incorporate and use S corporation status. The audit rates on S corporations, even if they are one-owner entities, are dramatically lower than the rates on sole proprietorships (S Corp audit rate was only 0.4% in 2008).
11. High Auto MileageOne of the most commonly audited items for self employeds and employees of companies who use their car in business is the deduction for business transportation. You need to keep good records of all tax deductible automobile expenses and a mileage log showing business miles driven. Try to keep the mileage log on a daily basis including the date, beginning and ending odometer readings, the location, the business purpose, and the client. At a minimum, record the automobile's odometer reading at the beginning and end of the tax year and have a calendar that you could use to reconstruct your deduction.
The IRS reviews your return to determine its accuracy. As a taxpayer, you have the burden of proof that your return is accurate. However an audit can be a time-consuming and frustrating process. Here are some steps you can take to avoid an audit:
Document All Income and Deductions-You can verify income, profits and earnings with supporting documentation. Large tax deductions are audit red flags, so make sure all are well-documented. If you think that there is anything on your tax return that may cause the IRS to take second look, attach a copy of the invoice or paid bill in question. Check the Numbers-You are ultimately responsible for what is on your returnso be sure to check that you or the preparer have entered the numbers correctly. I've seen $1,700 entered as $17,000 for farrier expense. The tax preparer reviewing the return didn't know what a farrier was and so the expense didn't look out of line to him. It definitely caught the attention of the IRS and an audit followed.
Use Your Common Sense- File your taxes on time and answer all of the questions asked. The cleaner the return, the less likely you are to attract the attention of the IRS.
Best Practices-Keep good records of your business activities: locations, times and dates, expenses, a description of what took place, along with accompanying receipts and cancelled checks. If you are audited, you have most of the work already done.
Report all your income-You are required to report all business income unless a special tax rule on tax-free treatment applies. So:
· Report "invisible" income- If you barter for goods and services, you are taxed on the value of what you received in the trade.
· Report cash-Tips and other cash payments are something that the IRS is focusing on. Based on your lifestyle and expenses, they can determine if you have been receiving additional income in the form of cash. This is particularly true in industries where payment in cash is common.
Keep the paperwork-Your records are the key to proving your right to deductions and credits. You may not be able to prevent a random audit but you will be able to survive it if paperwork is on your side. Types of records:
Receipts, invoices, and canceled checks for expenses paid.
Expense account worksheets, diaries and log books for travel and entertainment costs, including car usage.
Financial experts expect to see an increase in audits and assessments in the coming years because tax audits provide a revenue stream that the IRS currently is missing out on. The IRS estimates that it fails to collect about $345 billion in taxes each year. So it's even more important now that you keep clean, accurate records and understand what factors can cause your return to be audited.
When you first learned to ride, you learned how to do an emergency dismount and use a pulley rein to stop a runaway horse. Hopefully, you'll never have to use that knowledge but you are prepared - just in case. Think of this information as your audit "pulley rein".
Friday, July 23, 2010
Equine Accounting: Tax Return Review
When there are SO many more interesting subjects, WHY AM I WRITING ABOUT TAX RETURNS IN THE SUMMER? Some time ago, I had written an article on reviewing your tax return - intending to include it in a newsletter in March or April of next year. But based on several tax returns that I have reviewed recently upon taking on new clients, I've decided to publish the article ASAP. Lately, I've seen some returns that are just plain wrong. Ultimately, it is the responsibility of the taxpayer to review their tax return. Some of the consequences of errors on a return can be overpayment of tax or interest and penalty upon audit.
So please, dig out your 2009 tax return and run an eye over it after having read this month's newsletter. Anything really out of line will jump right off the page at you. It's worth the effort.
Your tax return -most of us have to submit one each year. You either do it yourself or you pay someone to do it for you. For some people, it may be the only form of financial statements that are prepared for their business each year. You want to be sure that it's been prepared correctly BEFORE you get a notice from the IRS that they "are proposing changes to your tax return". Ultimately, YOU are responsible for what is on that return. So take some time and look it over before giving the OK for it to be sent off to the IRS. I know this sounds painful but read this article (average reading time 4 minutes), print this page and set it aside until your tax return is ready. Better be safe than sorry.
Here is a brief guide to what should be entered where.
There are basically four sections where financial information is entered into your Form 1040 U.S. Individual Income Tax Return. The 1040 Form itself is just one page, front and back. All the other schedules and forms provide information which is entered (directly or indirectly) onto the 1040. On the front of the 1040, after the spaces for your name, etc., filing status and exemptions is the Income section of the form. You have 17 lines to enter every type of income you received for the tax year: wages, interest, dividends, business income, Social Security benefits, capital gains and the catch-all "Other Income".
If your business is a sole proprietorship, Schedule F (Farm Income) will be completed, or in some cases Schedule C. The "bottom line" from those schedules will be entered either on Line 18 for Schedule F or Line 12 for Schedule C. If your business is a partnership or S corporation, Schedule E will be completed and that result will be entered on Line 17.
You may feel a little unsure about reviewing other parts of your tax return but no one knows your business better than you. If the schedule doesn't look right to you, it probably isn't. No matter how fancy the tax software program, returns are ultimately prepared by people and people make mistakes.
Reviewing the return also might give you information about some aspect of your business of which you weren't really aware. (Did we really spend $10,000 on farrier bills this year?)
The bottom half of the front page addresses Adjustments to Income. There are only a few lines that are generally of interest to owners of horse-related businesses. Lines 27 through 29 are related to self-employment tax, retirement plans and health insurance and Line 35 would be of interest to breeders.
The top two sections of Page 2 cover Taxes and Credits. On Line 40a, either the Standard deduction or an itemized deduction is entered. The itemized deduction is calculated on Schedule A and consists of personal expenses such as medical, real estate tax, charitable contributions, interest, casualty and theft losses and other miscellaneous deductions. Once the itemized deduction is calculated, subject to certain limits, it is compared to the standard deduction and generally the larger of the two is entered onto the 1040 Form. Your exemptions are also deducted (generally $3650 for 2009/person for you, your spouse and each of your dependents).
Your preliminary tax is then calculated but you may be eligible for certain tax credits - which are deducted from your tax, rather than deductions, which are deducted from your taxable income. Two credits which may affect many owners of horse businesses are the Credit for Child Care Expenses on Line 48 and the Child Tax Credit (for dependent children under the age of 17) on Line 51.
You may also be subject to other taxes such as Self Employment Tax (Line 56). Finally, all of your taxes are totaled on Line 60.
Finally, the lower section of Page 2 calculates the Payments that you have made toward your tax liability in the form of estimated taxes, taxes withheld from your paycheck and/or checks from customers. Several other credits are thrown in for good measure and a final calculation is made of what you owe (final tax liability) or what is owed to you (refund).
The good news is this only happens once a year.
So please, dig out your 2009 tax return and run an eye over it after having read this month's newsletter. Anything really out of line will jump right off the page at you. It's worth the effort.
Your tax return -most of us have to submit one each year. You either do it yourself or you pay someone to do it for you. For some people, it may be the only form of financial statements that are prepared for their business each year. You want to be sure that it's been prepared correctly BEFORE you get a notice from the IRS that they "are proposing changes to your tax return". Ultimately, YOU are responsible for what is on that return. So take some time and look it over before giving the OK for it to be sent off to the IRS. I know this sounds painful but read this article (average reading time 4 minutes), print this page and set it aside until your tax return is ready. Better be safe than sorry.
Here is a brief guide to what should be entered where.
There are basically four sections where financial information is entered into your Form 1040 U.S. Individual Income Tax Return. The 1040 Form itself is just one page, front and back. All the other schedules and forms provide information which is entered (directly or indirectly) onto the 1040. On the front of the 1040, after the spaces for your name, etc., filing status and exemptions is the Income section of the form. You have 17 lines to enter every type of income you received for the tax year: wages, interest, dividends, business income, Social Security benefits, capital gains and the catch-all "Other Income".
If your business is a sole proprietorship, Schedule F (Farm Income) will be completed, or in some cases Schedule C. The "bottom line" from those schedules will be entered either on Line 18 for Schedule F or Line 12 for Schedule C. If your business is a partnership or S corporation, Schedule E will be completed and that result will be entered on Line 17.
You may feel a little unsure about reviewing other parts of your tax return but no one knows your business better than you. If the schedule doesn't look right to you, it probably isn't. No matter how fancy the tax software program, returns are ultimately prepared by people and people make mistakes.
Reviewing the return also might give you information about some aspect of your business of which you weren't really aware. (Did we really spend $10,000 on farrier bills this year?)
The bottom half of the front page addresses Adjustments to Income. There are only a few lines that are generally of interest to owners of horse-related businesses. Lines 27 through 29 are related to self-employment tax, retirement plans and health insurance and Line 35 would be of interest to breeders.
The top two sections of Page 2 cover Taxes and Credits. On Line 40a, either the Standard deduction or an itemized deduction is entered. The itemized deduction is calculated on Schedule A and consists of personal expenses such as medical, real estate tax, charitable contributions, interest, casualty and theft losses and other miscellaneous deductions. Once the itemized deduction is calculated, subject to certain limits, it is compared to the standard deduction and generally the larger of the two is entered onto the 1040 Form. Your exemptions are also deducted (generally $3650 for 2009/person for you, your spouse and each of your dependents).
Your preliminary tax is then calculated but you may be eligible for certain tax credits - which are deducted from your tax, rather than deductions, which are deducted from your taxable income. Two credits which may affect many owners of horse businesses are the Credit for Child Care Expenses on Line 48 and the Child Tax Credit (for dependent children under the age of 17) on Line 51.
You may also be subject to other taxes such as Self Employment Tax (Line 56). Finally, all of your taxes are totaled on Line 60.
Finally, the lower section of Page 2 calculates the Payments that you have made toward your tax liability in the form of estimated taxes, taxes withheld from your paycheck and/or checks from customers. Several other credits are thrown in for good measure and a final calculation is made of what you owe (final tax liability) or what is owed to you (refund).
The good news is this only happens once a year.
Saturday, June 26, 2010
Equine Accounting: These are the days of our lives...
In this era of Facebook, Twitter and YouTube, people document a lot of information about their lives - where they are, what they think and who they know. Documentation for business purposes is far less common but some might argue (particularly the IRS) far more necessary. What types of documentation does your business need and for what purpose?
Written Documents:
1. Contracts: boarding, training, leasing, sales, etc. To avoid any confusion or disagreement after the fact, you should document all of the terms of the arrangement in a contract. If it is a contract that you will use on a regular basis, such as a boarding contract at a boarding barn, you should have an attorney that specializes in equine law review the contract periodically.
2. Receipts: for all business expenses. When you get the receipt, take the time to write notes on the back regarding what the business purpose of the expense was - e.g. lunch with Sparky's owner, Chris, to discuss her show schedule this year. By tax season of the following year, you may not remember anything about the business purpose for the receipt so make a note when it happens. If you cannot document the business purpose of the expense, it may be disallowed by the IRS.
3. Daily Journal: Find some way to keep a daily journal of relevant business activity and ideas. All the information doesn't have to be included in one source document but there are a lot of pieces of information you need to include.
Let's use one day at a boarding and lesson barn as an example. Your day sheets should include the time of the lesson, the name of each student and the horse they are assigned, the name of the instructor, any management notes (use a different bridle, payment owed from last week, etc.), instructor notes after the lesson and payment information (paid with check # 123 for $45). There should be instructor notes for each rider every week. In one legal case, the lack of instructor notes was used by the plaintiff's attorney to attempt to prove negligence by the instructor.
Your day sheets will also be used for internal control purposes to track that each student has paid for their lesson and that all checks have been deposited to the bank.
You should also track daily farm activities and note any unusual occurrences. Document your order from the feed and grain store, the farrier's visit (who was shod, what customers owe you for holding their horse, etc). Make extensive notes about any activity that could possibly have legal/medical repercussions such as a bale of hay falling from the loft onto an employee, a horse demonstrating symptoms that could be the beginning of colic, etc.
4. Travel log: For any auto travel related to business, the IRS requires that you keep contemporaneous records which should preferably include the date, the business purpose (who and why) and the beginning and ending readings on the odometer. Remember that trips to the Post Office to mail marketing materials, the office supply store to buy file folders and other business related auto travel are all deductible.
Photo/Video Documents:
1. Marketing documents: Take photos/video of happy students, training horses going well, whatever your marketing focus - visually document your successes and use it in your marketing materials. If you are a clinician and want to expand your target market, create a DVD of one of your clinics, with snippets from various riders and send it to the appropriate potential clients.
2. Client relations: Use your happy student photos as Christmas presents for students or parents of students.
3. Insurance documents: Photograph the tree that fell on the fence BEFORE you begin to remove it. Take a photo of your boarder's horse after he is released from being cast in his stall to document his injuries (or lack of them).
4. Sales videos: enlarge the geographic market for your sales horse by posting the videos on You Tube and various equine sales websites.
When in doubt, write it down or take a picture of it! Your business will probably benefit from the information
Written Documents:
1. Contracts: boarding, training, leasing, sales, etc. To avoid any confusion or disagreement after the fact, you should document all of the terms of the arrangement in a contract. If it is a contract that you will use on a regular basis, such as a boarding contract at a boarding barn, you should have an attorney that specializes in equine law review the contract periodically.
2. Receipts: for all business expenses. When you get the receipt, take the time to write notes on the back regarding what the business purpose of the expense was - e.g. lunch with Sparky's owner, Chris, to discuss her show schedule this year. By tax season of the following year, you may not remember anything about the business purpose for the receipt so make a note when it happens. If you cannot document the business purpose of the expense, it may be disallowed by the IRS.
3. Daily Journal: Find some way to keep a daily journal of relevant business activity and ideas. All the information doesn't have to be included in one source document but there are a lot of pieces of information you need to include.
Let's use one day at a boarding and lesson barn as an example. Your day sheets should include the time of the lesson, the name of each student and the horse they are assigned, the name of the instructor, any management notes (use a different bridle, payment owed from last week, etc.), instructor notes after the lesson and payment information (paid with check # 123 for $45). There should be instructor notes for each rider every week. In one legal case, the lack of instructor notes was used by the plaintiff's attorney to attempt to prove negligence by the instructor.
Your day sheets will also be used for internal control purposes to track that each student has paid for their lesson and that all checks have been deposited to the bank.
You should also track daily farm activities and note any unusual occurrences. Document your order from the feed and grain store, the farrier's visit (who was shod, what customers owe you for holding their horse, etc). Make extensive notes about any activity that could possibly have legal/medical repercussions such as a bale of hay falling from the loft onto an employee, a horse demonstrating symptoms that could be the beginning of colic, etc.
4. Travel log: For any auto travel related to business, the IRS requires that you keep contemporaneous records which should preferably include the date, the business purpose (who and why) and the beginning and ending readings on the odometer. Remember that trips to the Post Office to mail marketing materials, the office supply store to buy file folders and other business related auto travel are all deductible.
Photo/Video Documents:
1. Marketing documents: Take photos/video of happy students, training horses going well, whatever your marketing focus - visually document your successes and use it in your marketing materials. If you are a clinician and want to expand your target market, create a DVD of one of your clinics, with snippets from various riders and send it to the appropriate potential clients.
2. Client relations: Use your happy student photos as Christmas presents for students or parents of students.
3. Insurance documents: Photograph the tree that fell on the fence BEFORE you begin to remove it. Take a photo of your boarder's horse after he is released from being cast in his stall to document his injuries (or lack of them).
4. Sales videos: enlarge the geographic market for your sales horse by posting the videos on You Tube and various equine sales websites.
When in doubt, write it down or take a picture of it! Your business will probably benefit from the information
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