Recoveries

Accounting Services For Small Businesses – If an expense is later recovered in the same tax year, such as a rebate or credit for a returned item, the recovery is treated as a reduction in the expense deduction for that category of expense. If an expense that was deducted in one tax year is later recovered in a different tax year, the recovery is included in income in the year of recovery, unless the expense did not reduce tax in  the  year it was originally deducted.

 Need More Information?

ABA Tax Accounting

Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php

Penalties and Fines

Accounting Services For Small Businesses – Penalties incurred for late performance or nonperformance of a contract, for example missing a deadline under a construction contract, are generally deductible.

Generally, no deduction is allowed for fines and penalties paid to a governmental or specified nongovernmental entity for the violation of any law, except in the following situations.

·         Amounts that constitute restitution.

·         Amounts paid to come into compliance with the law.

·         Amounts paid or incurred as the result of certain court orders in which no government or nongovernmental agency is a party.

·         Amounts paid or incurred for taxes due.

No deduction is allowed for the restitution amount or amount paid to come into compliance with the law unless the amounts are specifically identified in the settlement agreement or court order. Also, any amounts paid or incurred as reimbursement to a government for the costs of investigation or litigation are not deductible.

 

Need More Information?

ABA Tax Accounting

 Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php

Marijuana Sales

Accounting Services For Small Businesses – The sale of marijuana for medical or recreational purposes is legal in many states. However, it is classified as a Schedule I controlled substance under federal law, and considered illegal for federal income tax purposes. No deduction or credit is allowed for any amount paid during the year in carrying on a trade or business if such trade or business consists of trafficking in controlled sub-stances (IRC §280E). Even though gross income from the sale of marijuana is taxable under federal law, related business deductions are not allowed.

Exception: The only exception to this rule is the deduction for the cost of goods sold. Since the cost of goods sold is taken into consideration in the calculation of gross income, the direct costs of producing or purchasing the marijuana are allowed in calculating taxable income, while operational type expenses are not deductible (CCA 201504011).

Court Case: A California medical-marijuana dispensary deducted business expenses and adjusted for indirect cost of goods sold (COGS) per UNICAP  rules  for  producers.  The IRS  determined  that  the  taxpayer’s  sole trade or business was trafficking in a controlled substance and as a result business expenses are not deductible. The court agreed with the IRS and held that the taxpayer could not deduct the ordinary and necessary business expenses of an illegal trade or business. (Harbor-side Health Center, 151 T.C. No. 11)

Need More Information?

ABA Tax Accounting

 Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php

Life Insurance

Accounting Services For Small Businesses –  Death benefits paid on a life insurance policy are not taxable if proceeds are paid by reason of the death of the insured. No deduction is allowed by a taxpayer for life insurance premiums if the taxpayer is the beneficiary of the policy. If an employer is providing the cost of life insurance as a fringe benefit for employees, the cost is deductible if it is reasonable compensation to the employee.

 Need More Information?

ABA Tax Accounting

Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php

Intangible Drilling Costs

Accounting Services For Small Businesses –  Costs of developing oil, gas, or geothermal wells may be deducted currently by election, or capitalized and recovered through depreciation or depletion. An AMT adjustment is required if costs are not amortized over 60 months.

Need More Information?

ABA Tax Accounting

Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php

NON-Retiree Retirement Ideas

 Want money when you retire? Here are some tips.

 Here are five common retirement planning ideas and what you can do to take advantage of them. The key is retirement planning starts now, not decades from now when you are reaching retirement age.

 1. Having a plan

Surprisingly, most do not know how much money is needed for retirement. This is being made much more difficult with inflation playing a major role in finding the right answer. A retirement plan should consider how long you expect to live, an estimate of the amount of money you will need, and a description of your desired lifestyle during retirement. Your plan should have measurable goals that you aim to achieve.

Action item: If you have a plan, review it for possible revisions. If you do not, consider getting one put together as soon as possible.

2. Start early enough

One of the most powerful tools for a well-funded retirement is to start saving for your retirement at an early age. The sooner you start saving, the better off you will be.

Action item: Open a retirement account and start saving now. Increase the percent of your pay that you place in tax-advantaged retirement saving accounts. This includes IRAs, 401(k)s, and other plans.

3. Maximize employer contributions

Many employers have plans available to help their employees save for retirement. If your company has a pension plan, understand how it works and how much you can expect to receive upon retirement. If your company has a retirement plan contribution-matching program, take full advantage of this free money by making minimum contributions required to receive this employer match.

Action item: Review your employer-provided retirement saving options. Maximize the benefits they are providing.

4. Consider working after retiring

Do you plan on working during retirement or avoiding work at all costs? Do you plan on having a pension or Social Security covering all your retirement needs or none of it? Too often retirees plan the extremes, but reality is something in between. For example, if you are someone who plans to have your pension plan fail and Social Security go broke, you may be taking too conservative an approach.

Action item: Create a range of retirement funding scenarios, not just the worst-case or best-case scenario. Consider no work or part-time work. Think about some contribution from Social Security and potential pension income if your employer has a program.

5. Understand the true nature of your retirement

Are you being realistic in your future retirement plans? Have you correctly estimated the cost of health insurance? Have you really thought about the impact of relocating to a warmer climate? How important is living close to family and friends? Will you really downsize your home after the kids leave?

Action item: If you have a retirement plan that includes relocating or traveling to far-off places, consider test-driving this idea before you implement it. You may be surprised at the result.

Retirement should be something to look forward to, especially with a little planning.

Need More Information?

ABA Tax Accounting

Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php

Insurance

Accounting Services For Small Businesses – Insurance premiums (e.g., hazard, medical, liability, malpractice, etc.) paid for a trade or business are generally deductible.

 

Nondeductible insurance premiums include:

• Amounts paid into a self-insurance reserve fund even if the taxpayer cannot get business insurance coverage for certain business risks.
• Loss of earnings policy that pays for the taxpayer’s lost earnings due to sickness or disability. However, premiums for overhead insurance that pays for business overhead expenses during long periods of disability caused by the taxpayer’s injury or sickness are deductible.
• Life insurance and annuities if the taxpayer is directly or indirectly a beneficiary of the policy.
• Insurance to secure a loan.

 Need More Information?

ABA Tax Accounting

Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php

Gifts

Accounting Services For Small Businesses – Deductible business gifts for customers and clients are limited to $25 per individual per year [IRC §274(b)]. Items of small value, such  as  giving  away  pens  imprinted  with  the  business  name,  costing $4 or less, are not included in the $25 limit.

 Need More Information?

ABA Tax Accounting

 Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php

Education Expenses

Accounting Services For Small Businesses – Ordinary and necessary expenses paid for the cost of the education and training of a taxpayer’s employees are generally deductible. A taxpayer can also deduct the cost of his or her own education (including certain related travel) related to his or her trade or business. The taxpayer must be able to show the education maintains or improves skills required in his or her trade or business, or that it is required by law or regulations, for keeping his or her license to practice, status, or job.

For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law. Education expenses incurred to meet the minimum requirements of a present trade or business, or those that qualify the taxpayer for a new trade or business, are not deductible. This is true even if the education maintains or improves skills presently required in the taxpayer’s business.

Need More Information?

ABA Tax Accounting

 Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php

Demolition Expenses

Income Tax Service For Small Businesses – Amounts paid to demolish a structure are not deductible as a current expense.  They must be added to the cost basis of the land where the demolished structure was located. Any loss for the remaining undepreciated basis of the demolished structure is not recognized until the property is disposed of.

Need More Information?

ABA Tax Accounting

Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php

Cell Phones

Income Tax Service For Small Businesses – Employers may deduct, as a nontaxable fringe benefit, the cost of cell phones provided or reimbursed to employees for non-compensatory business reasons, such as the employer’s need to always contact the employee for work-related emergencies. Providing a cell phone to reward an employee or promote good will is not a non-compensatory reason. (Notice 2011-72)

Self-employed taxpayers may deduct the cost of business-use cell phones. If the taxpayer has no other telephone, costs must be allocated between business and personal use.

Need More Information?

ABA Tax Accounting

 Amare Berhie, Enrolled Agent

Licensed by the IRS

amare@abataxaccounting.com

651-300-4777

 

https://www.abataxaccounting.com/smallbiz.php