KKAJ Blog Archives for January 2022

January 25, 2022

Deducting Business Expenses: Separating Fact From Myth

When you're filing your tax returns, what expenses can you deduct from business income? It's a complex question. To start with, a business expense must be both ordinary and necessary to be deductible, according to the IRS. An ordinary expense is one that's common and accepted in your trade or business. A necessary expense is one that's helpful and appropriate for your trade or business; it doesn't always mean an indispensable cost. Since only business expenses are deductible, they must be separated from other types of expenses: those that are included in the cost of goods sold, capital expenses and personal expenses.
The cost of goods sold is figured by valuing inventory at the beginning and end of each tax year. The total value is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
Such expenses as the cost of products or raw materials, freight, storage, and direct labor costs including contributions to pensions or annuities for workers who produce the products and factory overhead all go into figuring the cost of goods sold.
You must capitalize some costs rather than deduct them. These costs, part of your investment in your business, are called capital expenses and are considered assets in your business. Generally, there are three types of costs that you should capitalize:
  1. Startup costs.
  2. Assets.
  3. Improvements.
Note that you can decide to deduct or amortize some business startup costs.
You cannot deduct personal, living or family expenses. But if you have an expense for something used partly for business and partly for personal purposes, divide the total cost between the business and personal parts and then deduct the business part.
What if you use part of your home for business? You may be able to deduct expenses for the business use of your home. These may include mortgage interest, insurance, utilities, repairs and depreciation. If you use your car for your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Other common business expenses include:
  • Employees' pay — You can generally deduct the pay you give your employees for services they perform within your business.
  • Retirement plans — Retirement plans are savings plans offering tax advantages to set aside money for your and your employees' retirement funds.
  • Rent expenses — Rent is any amount you pay for the use of property you don't own. You can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in the title to the property, the rent is not deductible.
  • Interest — Business interest expense is an amount charged for the use of money you borrowed for business activities.
  • Taxes — You can deduct various federal, state, local and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance — Generally, you can deduct the ordinary and necessary cost of insurance as a business expense if it's for your trade, business or profession.
This is just an introduction to a technical topic. Be sure to work closely with a qualified tax professional.
January 14, 2022

IRS Presents Filing Tips for 2022

The IRS is encouraging taxpayers to make sure they're well-informed about their tax situation as the filing deadline approaches. The key topics include special steps related to charitable contributions, economic impact payments and advance child tax credit payments. Here are some key items for taxpayers to know before they file next year.

Changes to the charitable contribution deduction

Taxpayers who don't itemize deductions may qualify to take a deduction of up to $600 for married taxpayers filing joint returns and up to $300 for all other filers for cash contributions made in 2021 to qualifying organizations.

Check on advance child tax credit payments

Families that received advance payments will need to compare the advance child tax credit payments that they received in 2021 with the amount of the child tax credit they can properly claim on their 2021 tax return:

  • Taxpayers who received less than the amount for which they're eligible will claim a credit for the remaining amount of child tax credit on their 2021 tax return.
  • Eligible families that did not get monthly advance payments in 2021 can still get a lump-sum payment by claiming the child tax credit when they file a 2021 federal income tax return next year. This includes families that don't normally need to file a return.

In January 2022, the IRS will send Letter 6419 showing the total amount of advance child tax credit payments taxpayers received in 2021. People should keep this and any other IRS letters about advance child tax credit payments with their tax records to share with their preparers. Individuals can also create or log in to an IRS.gov online account to securely access their child tax credit payment amounts.

Economic impact payments and claiming the recovery rebate credit

Individuals who didn't qualify for the third economic impact payment or did not receive the full amount may be eligible for the recovery rebate credit based on their 2021 tax information. They'll need to file a 2021 tax return, even if they don't usually file, to claim the credit.

Individuals will need the amount of their third economic impact payment and any plus-up payments received to calculate their correct 2021 recovery rebate credit amount when they file their tax return.

In early 2022, the IRS will send Letter 6475, which contains the total amount of the third economic impact payment and any plus-up payments received. People should keep this and any other IRS letters about their stimulus payments with other tax records. Individuals can also create or log in to an IRS.gov online account to securely access their economic impact payment amounts.

There's a good chance you have other issues you should address to minimize any problems or hassle as the filing date approaches. Reach out to a qualified tax preparer to keep yourself on track.

January 14, 2022

IRS Presents Filing Tips for 2022

The IRS is encouraging taxpayers to make sure they're well-informed about their tax situation as the filing deadline approaches. The key topics include special steps related to charitable contributions, economic impact payments and advance child tax credit payments. Here are some key items for taxpayers to know before they file next year.

Changes to the charitable contribution deduction

Taxpayers who don't itemize deductions may qualify to take a deduction of up to $600 for married taxpayers filing joint returns and up to $300 for all other filers for cash contributions made in 2021 to qualifying organizations.

Check on advance child tax credit payments

Families that received advance payments will need to compare the advance child tax credit payments that they received in 2021 with the amount of the child tax credit they can properly claim on their 2021 tax return:

  • Taxpayers who received less than the amount for which they're eligible will claim a credit for the remaining amount of child tax credit on their 2021 tax return.
  • Eligible families that did not get monthly advance payments in 2021 can still get a lump-sum payment by claiming the child tax credit when they file a 2021 federal income tax return next year. This includes families that don't normally need to file a return.

In January 2022, the IRS will send Letter 6419 showing the total amount of advance child tax credit payments taxpayers received in 2021. People should keep this and any other IRS letters about advance child tax credit payments with their tax records to share with their preparers. Individuals can also create or log in to an IRS.gov online account to securely access their child tax credit payment amounts.

Economic impact payments and claiming the recovery rebate credit

Individuals who didn't qualify for the third economic impact payment or did not receive the full amount may be eligible for the recovery rebate credit based on their 2021 tax information. They'll need to file a 2021 tax return, even if they don't usually file, to claim the credit.

Individuals will need the amount of their third economic impact payment and any plus-up payments received to calculate their correct 2021 recovery rebate credit amount when they file their tax return.

In early 2022, the IRS will send Letter 6475, which contains the total amount of the third economic impact payment and any plus-up payments received. People should keep this and any other IRS letters about their stimulus payments with other tax records. Individuals can also create or log in to an IRS.gov online account to securely access their economic impact payment amounts.

There's a good chance you have other issues you should address to minimize any problems or hassle as the filing date approaches. Reach out to a qualified tax preparer to keep yourself on track.