Posts Tagged ‘automobile expenses’

In Part I of the Schedule C “Hot Buttons” we touched on Gross Receipts and Cost of Goods Sold (COGS), as well as an explanation of why the IRS salivates over Schedule C audit opportunities.  Remember, once the IRS begins an examination of your tax return, expect them to dig deep.  All those personal expenses you’ve been running through as a Schedule C deduction will likely be found and subsequently removed, causing a chain reaction of increasing taxes and penalties you owe.

Part II of the “Hot Buttons” has 2 points of emphasis:  Automobile Expenses and Contract Labor.

1)      Automobile Expenses – You can deduct the actual expenses of running your automobile or take the standard deduction rate for business miles driven (whichever is higher).  Most important is to keep a log of the business miles driven, as well as an odometer reading on January 1^st and December 31^st of each year.  This will help determine the business use of the vehicle.  (WARNING to California Residents:  the Franchise Tax Board typically finds a noncompliance rate of 80% each year, so they scrutinize automobile expenses extensively).  Keep good records or risk losing the deduction all together.  No proof, no deduction.

a)      Actual expenses can include depreciation, registration fees, gas, insurance, repairs/maintenance, lease payments, personal property taxes, and parking fees.  If business use of the vehicle is less than 100 percent, expenses must be allocated between business and personal use.

b)      The standard mileage for 2010 is 50 cents per mile.  This can only be applied to business miles.

2)      Contract Labor – This area can cause headaches for those attempting to avoid payroll taxes, worker’s compensation insurance, etc.  If it is determined by an IRS auditor that the hired help is actually considered an employee, be expected to pay unpaid payroll taxes and penalties.

a)      If you are unclear on whether the worker(s) you hire are considered employees or non-employees, fill out Form SS-8 and send in for a final determination.  When in doubt, consider the worker as an employee until it is determined otherwise.  Contact your accountant if you have any questions about filing payroll taxes and any other employee or payroll related forms.  Also take a look at our previous blog on making the determination.

Most of you will not read this on December 31st and say ,”I better get a log book placed in the glove compartment of my business vehicle in the morning!”  But what about for 2010?  The answer is that it’s best to start now and estimate what the first part of the year was like, and do it sooner rather than later so that the likelihood to reasonably estimate what occurred will be as accurate as possible (especially for those of you who like to extend to October 15^th to file your personal tax return).

Up next for the Schedule C “Hot Buttons”, Part III – Depreciation, Other Expenses and the Home Office Deduction.