2012 Mileage Rates Announced

The IRS has announced 2012 mileage rates. From the IRS.gov website:

Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

It is the taxpayers option to use standard mileage rates for auto/small truck usage. You can always deduct actual cost as long as you are willing to meet the stringent record keeping requirements. If you are using standard mileage rates, make sure you are keeping a log. For a sample log, e-mail me and I'd be glad to send you one.

From IRS.gov IR-2011-116, Dec. 9, 2011

Taxes on Cash for Clunkers Rebate

There are a number of e-mails that have been floating around for the last month or so claiming that you have made a terrible financial mistake if you took part in the CARS or Cash for Clunkers program. The main claim being that the rebate itself is taxable and can cause you pay more for the car by inflated prices and in taxes than you get the benefit of in the rebate.

I don't know much about the pricing or whether dealers inflated prices. And I can't tell you whether or not you can afford a new car instead of a running vehicle that is paid off. What I can tell you is that the rebate specifically is NOT considered taxable income on your Federal or state tax return. It simply is not true that you will owe taxes on the rebate. It is true that certain states charged sales tax on the rebate portion of the purchase price. Below is a resource for the states that did charge sales tax, but you paid the tax at time of purchase and can deduct the sales tax if you itemize your Federal return.

States Charging Sales Tax on CARS Rebate

Rules of the CARS Program

As always, if you have any questions or I can help you with your particular situation, please feel free to e-mail me at James(at)RainwaterCPA.com.

How to pay taxes – two mistakes that can cost you!

This is the second in a series of articles themed around the recession-preneur. Tight budgets leave little room for error for the recession-preneur so this series is designed to help you avoid some of the more common pitfalls when starting a new business.

Starting a business is difficult enough. Suddenly there are all kinds of new responsibilities depending on your business. Today I want to talk briefly about the smaller and micro businesses. There is a ton to discuss about the type of entity you choose, but this is primarily aimed at individuals (stay tuned, we need to talk more about that choice in another post) and single member LLCs. These are the entity types that are mostly reported on a Schedule C of an individuals tax return.

The confusion I see most often comes from the following logic that many new (and too many experienced) business owners have: All I have to do is pay taxes based on the percentage from my tax bracket and I have until April 15th to pay it.

The first surprise comes when you discover yes, you will pay regular income taxes on the net profit (revenue minus all expenses) of the business based on your tax bracket. But, you also will pay an additional 15.3% in self-employment tax which is effectively the FICA you pay as an employee, but now you are both employee and employer (this is IRS logic, not mine!) so you get to pay the entire 15.3% tax. Now luckily, you get to take half of that tax to reduce your income. If you have not been working with someone to estimate your taxes or you have not done it yourself (I’ve never met the business owner who has time to do it themselves) you are in for your first big surprise depending on how much you made in your business.

The second big surprise is you have your taxes prepared on time, mail them and pay any taxes due by April 15th…but, you get a bill from the IRS and your state a few weeks later with penalties and interest on it! What, I thought I paid on time! Well, most likely what happened is you violated what is called the Safe Harbor Rule which basically says (I’m over-generalizing for a moment) that if you did not pay in at least as much tax during the tax year as you did in the previous tax year and you owe taxes on your return, you are subject to interest and penalties. Yep, the treasury wants to count on getting at least as much as last year from as many people as possible and this is where estimated tax payments come in. I found a great, not too technical synopsis of the actual Safe Harbor Rules if you are interested in reading them.

My advice for any business owner is to work year round with an experienced CPA tax preparer to avoid these and many other issues. As always, if I can answer any questions or help you, feel free to e-mail me at James(at)RainwaterCPA.com

First Time Homebuyers Tax Credit

There are just over two months left to take advantage of the first time home buyers tax credit signed into law earlier this year. The credit is worth $8,000 to home buyers buying a house before the November 30, 2009 deadline. It is important to note that the IRS requires a closing prior to November 30 to be eligible for the credit. So, while the deadline is two months away, if you are not already in the process of buying a house, you may already be running out of time.

The definition of a home can include a house, townhouse, condo, RV, etc. It just has to be a primary residence. Second homes, investment property or vacation homes do not qualify. "First time buyer" is a bit of a misnomer as the only requirement for qualifying as a first time buyer is that you have not owned a primary residence in the last three years. So, if you have owned a house in the past, but have been renting an apartment for the last three years, you would still qualify as a first time buyer.

There are several ways to claim the credit. The law allows you to claim the credit in 2008 if you want, which means you can ammend your 2008 return claiming the credit and receiving a refund immediately (well, as immediately as the IRS processes your return and refund), you can claim the credit on your 2009 return, or, if you have FHA financing you can take the credit directly against closing costs at closing.

Hope that helps make the credit a little more understandable. If you have questions or I can help you claim the credit, feel free to e-mail me at James(at)RainwaterCPA.com