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The Kentucky Red Tape Reduction Initiative: Top 3 Benefits to Kentucky Investors, Entrepreneurs, Start-Ups, and Small Businesses

Nick Eusanio, Esq., LL.M. Leave a comment

Governor Matt Bevin’s Kentucky Red Tape Reduction Initiative, formally announced on July 6, 2016, is further evidence that Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors. This is third article in this Biz&TaxHax series focused on key Kentucky-based programs, initiatives, credits, and incentives that benefit Kentucky small businesses, start-ups, entrepreneurs, and investors. Our prior posts in this series summarized the Top 5 Benefits of the Kentucky Small Business Tax Credit and the Top 5 Benefits of the Kentucky Angel Investment Tax Credit. In addition to those tax credit programs, Governor Bevin’s Red Tape Reduction Initiative is a strong pro-business step that Kentucky companies and business owners have desired for decades. This Kentucky Red Tape Reduction Initiative aims to provide the following key benefits to Kentucky investors, entrepreneurs, start-ups, and small businesses:

  1. Review, Identify, and Remove Burdensome Kentucky Business Regulations.

Governor Bevin began the Kentucky Red Tape Reduction Initiative by commissioning cabinet secretaries to begin a thorough review of Kentucky regulations currently in place, and has also asked Kentucky companies to weigh-in with their thoughts as to which regulations may be overly burdensome or unnecessary. Through the process, the state has determined that there are over 4,700 regulations currently on the books in Kentucky. In fact, Governor Bevin recently cited a report of findings in a study of the number and breadth of Kentucky administrative regulations, which shows that Kentucky administrative regulations increased by 250% between the years 1975 and 2015. This statistic is further proof of the problem that Governor Bevin is trying to remedy – that Kentucky has been one of the most highly regulated states in the U.S.

As a breath of fresh air for Kentucky small businesses, start-ups, entrepreneurs and investors, the Red Tape Reduction Initiative has already generated over 14,000 visits to the program’s website and over 500 suggestions from business owners to be evaluated. This is in addition to the review work that the Governor’s own staff members are conducting. By all outward appearances, it seems the Governor and his administration are committed to reducing the regulatory burden that has plagued Kentucky entrepreneurs, start-ups, and business owners for too long. This is a strong step in the right direction, and we’ll look forward to continuing updates that hopefully demonstrate progress in eliminating unnecessary and over-burdensome government regulation in Kentucky.

  1. Transform Government Regulators into Regulation Managers with an Attitude of Efficiency and Effectiveness.

The Governor’s above-noted call to current action for review, identification, and removal of unnecessary and over-burdensome Kentucky regulation was not his only directive. Governor Bevin is also encouraging regulators that are part of his Kentucky government administration to adopt a more pro-business attitude. Through this instruction, the administration hopes to create an environment of regulation managers who are focused more on the intent, efficiency, and effectiveness of Kentucky’s various regulatory frameworks and individual regulations as practically applied to the real here-and-now Kentucky businesses and issues they face. This is a key positive aspect of the Kentucky Red Tape Reduction Initiative. If Kentucky regulators maintain a pro-business attitude in the future, it will certainly help Kentucky entrepreneurs and start-ups get off the ground and small businesses expand, and should encourage investors to offer more capital, more frequently, to Kentucky companies.

  1. Encourage Job Creation and Investment.

A key stated purpose of the Kentucky Red Tape Reduction Initiative is to spark investment in existing Kentucky companies as well as new Kentucky business ventures, bringing additional jobs to the Commonwealth. Obviously, for entrepreneurs, start-ups, and small businesses seeking to grow, obtaining necessary capital is a key goal and access to capital can be a significant hurdle. Along with the Kentucky Small Business Tax Credit and Kentucky Angel Investment Tax Credit, the Red Tape Reduction Initiative provides additional incentive for: (i) Kentucky entrepreneurs, start-ups, and small businesses to expand their ventures and hire new employees in Kentucky; and (ii) investors to invest their capital in Kentucky entrepreneurs, start-ups, and small businesses. Not only should these initiatives and credits increase business growth and profits, but they should also lead to reduced costs to consumers, who often times pay increased rates for goods and services as a result of companies passing-through their internal costs of compliance with over-burdensome state regulations.

As always, for investors, entrepreneurs, start-ups, and small businesses dealing with Kentucky regulations, it is best to consult an experienced Kentucky business attorney. A Kentucky business lawyer can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky regulatory compliance and planning needs.

The Kentucky Angel Investment Tax Credit (KAITC): Top 5 Benefits to Kentucky Investors, Entrepreneurs, Start-Ups, and Small Businesses

Nick Eusanio, Esq., LL.M. 1 Comment

As noted in Biz&TaxHax’s prior article, outlining the Top 5 Benefits of the Kentucky Small Business Tax Credit, Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors alike. The second of this series, this article highlights the top 5 benefits the Kentucky Angel Investment Tax Credit provides for Kentucky investors, entrepreneurs, start-ups, and small businesses. The Kentucky Angel Investment Tax Credit has wide-ranging application, offering the following key benefits to Kentucky investors, entrepreneurs, start-ups, and small businesses:

  1. The KAITC Incentivizes Investment in Kentucky Start-Ups and Small Businesses.

The stated purpose of the Kentucky Angel Investment Tax Credit is to encourage qualified individual investors to make capital investments in Kentucky small businesses, create additional jobs, and promote the development of new products and technologies in Kentucky. Obviously, for entrepreneurs, start-ups, and small businesses seeking to grow, obtaining necessary capital is a key goal and access to capital can be a significant hurdle. The KAITC provides additional incentive for investors, both in Kentucky and those in other states, to invest their capital in Kentucky entrepreneurs, start-ups, and small businesses.

  1. Broad Eligibility: The Requirements for a Qualifying Investor, Qualified Investment, Qualified Small Business, and Qualified Activity Encompass a Wide Base.

The KAITC is available to Qualified Investors making Qualified Investments in Qualified Small Businesses that are conducting Qualified Activities. That sounds like a lot of qualifiers. But, in reality, the definitions of the terms are not overly restrictive. Below is a summary of the relevant qualifiers:

Qualified Investor: (1) an individual, accredited investor according to Reg. D of the U.S. Securities and Exchange Commission, who (2) holds no more than 20% ownership in and is not employed by the Qualified Small Business prior to making a Qualified Investment in the business, (3) is not the parent, spouse, or child of someone who would fail to satisfy requirement # 2, (4) seeks a financial return on the Qualified Investment, and  (5) has become a Kentucky Economic Development Finance Authority (KEDFA) certified Qualified Investor.

Qualified Investment: (1) a minimum cash investment of $10,000 made by a Qualified Investor in a Qualified Small Business, (2) offered and executed in compliance with all applicable state and federal securities laws and regulations, (3) in exchange for equity interest in the Qualified Small Business, (4) having been pre-approved by the KEDFA as a Qualified Investment.

Qualified Small Business: (1) a legal entity registered and in good standing with the Kentucky Secretary of State and otherwise maintaining all state licenses and other permits required, (2) comprised of 100 or fewer full-time employees, (3) actively and primarily conducting (or planning to conduct upon receiving a Qualified Investment) a Qualified Activity within Kentucky, (4) maintaining more than 50% of its assets, operations, and employees within Kentucky, that (5) either (a) has a net worth of $10 million or less, or (b) has had $3 million or less in net income after federal income taxes for each of the two preceding fiscal years, which (6) has not received investments qualifying for more than $1 million in total angel investor tax credits, and (7) has been pre-certified as a Qualified Small Business by the KEDFA.

Qualified Activity: A knowledge-based activity related to the Office of Entrepreneurship focus areas that include, but are not limited to: Bioscience; Materials Science and Advanced Manufacturing; Environmental and Energy Technology; Information Technology and Communications; and Health and Human Development.

If you are a Kentucky entrepreneur, own a Kentucky start-up, or run a Kentucky small business, there is a good chance your company could become a Qualified Small Business eligible to receive a Qualified Investment from a Qualified Investor. An experienced Kentucky tax lawyer or Kentucky tax consultant can help you navigate the process of applying to become a Kentucky Qualified Small Business, opening your company up to a larger pool of capital sources. Additionally, if you are an investor wishing to invest in Kentucky small businesses, a Kentucky tax attorney or Kentucky tax consultant can help you apply to become a Qualified Investor and take advantage of the Kentucky Angel Investment Tax Credit.

  1. Generous Credit Rate and Up to $200,000 in Credit Each Year.

The Kentucky Angel Investment Tax Credit provides Qualified Investors a credit of up to 50% (in enhanced incentive counties) or up to 40% (all other counties) of their Qualified Investments. Depending on the amount of the Qualified Investment and the location of the Qualified Small Business, the KAITC can provide up to $200,000 of tax benefit per calendar year.

  1. Carryforward of Unused Credits.

A credit approved under the KAITC program is first applied against any tax due on the return for the calendar year for which the credit was granted. But, if the credit is not fully utilized in the award year, the Qualified Investor may carry forward the remaining amount of credit to offset against tax due for up to the next 15 years. This is important, as often times entrepreneurs, start-ups, and small businesses may not have significant taxable income and tax liability in initial years. This 15 year carry forward enables a Qualified Investor in a Kentucky Qualified Small Business to recognize the benefit of the Kentucky Angel Investment Tax Credit in later years when their investment may be generating more taxable income and thus the investor may have more tax liability.

Biz&TaxHax Tip: The KAITC is a non-refundable credit, meaning that a taxpayer cannot obtain a cash refund for the difference between the credit and the taxpayer’s tax liability for a particular year. Rather, as noted above, the taxpayer may carry forward any unused portion of the credit for offsetting future tax liability, for up to 15 years.

The KAITC is transferrable for out-of-state investors, meaning investors who are located outside Kentucky, who may not have Kentucky tax liability, can still reap the benefit of this tax credit. To do so, a nonresident/out-of-state Qualified Investor may sell its Kentucky Angel Investment Tax Credit to a Kentucky taxpayer and that Kentucky taxpayer may use the credit to offset Kentucky tax liability.

Biz&TaxHax Tip: A nonresident Qualified Investor who wishes to transfer the KAITC to a Kentucky taxpayer must follow certain procedures outlined by the Kentucky Department of Revenue. So, it is best to consult an experienced Kentucky tax lawyer or Kentucky tax consultant to ensure proper transfer of the Kentucky Angel Investment Tax Credit.

As always, for investors, entrepreneurs, start-ups, and small businesses considering eligibility for the Kentucky Angel Investment Tax Credit and related planning, as well as Kentucky tax reporting and payment obligations, it is best to consult an experienced Kentucky tax attorney or Kentucky tax consultant. A Kentucky tax lawyer or Kentucky tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky tax compliance and planning needs.

The Kentucky Small Business Tax Credit (KSBTC): Top 5 Benefits to Kentucky Entrepreneurs, Start-Ups, and Small Businesses

Nick Eusanio, Esq., LL.M. 2 Comments

Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors alike. This article, focused on the Kentucky Small Business Tax Credit, is the first in a series of Biz&TaxHax articles that will outline some of the key benefits that exist in Kentucky for entrepreneurs, start-ups, small businesses, and investors. The Kentucky Small Business Tax Credit has broad application to Kentucky companies, providing the following top five benefits to Kentucky small businesses, start-ups, and entrepreneurs:

  1. Broad Eligibility: Many Companies Can Qualify for the Kentucky Small Business Tax Credit.

Assuming other requirements are met, the KSBTC is available to for-profit companies with 50 or fewer full-time employees. Additionally, this tax credit includes businesses in the retail, service, construction, manufacturing, and wholesale industries. This means that if you are a Kentucky entrepreneur, own a Kentucky start-up, or run a Kentucky small business, there’s a good chance you could qualify for the Kentucky Small Business Tax Credit.

  1. Rewards Investment in New Kentucky Jobs and New Kentucky Equipment and Technology.

Entrepreneurs and start-ups that are on their way to becoming established small businesses, and small businesses that are growing into larger ones, are continuously purchasing additional technology and equipment and hiring new team members. The good news is, the Kentucky Small Business Tax Credit rewards Kentucky entrepreneurs, start-ups, and small businesses for those very actions: hiring new employees and buying new technology and equipment.

Biz&TaxHax Tip: It is great the KSBTC focuses on rewarding expenses that Kentucky companies are already incurring, but it is important to note that there are specific requirements and thresholds for qualification relating to: (1) eligible employees hired (must be new, full-time position; certain requirements for wages paid and hours worked); (2) qualifying equipment and technology (does not include real property, consumable supplies, or inventory (generally); expenditure of at least $5,000); and (3) the timing of the new hires and equipment/technology expenses (generally, a company must have hired an employee for at least one new full-time position and invested at least $5,000 in qualifying new equipment or technology in the past 24 months), to name a few. An experienced Kentucky tax attorney or Kentucky tax consultant can help navigate these specific requirements to determine if your company is eligible for the Kentucky Small Business Tax Credit.

  1. Up to $25,000 in Credit Each Year.

The KSBTC provides a credit against tax liability for each calendar year that a Kentucky entrepreneur, start-up, or small business qualifies. Depending on the number of eligible new positions created and the amount of investment in qualifying technology or equipment, the Kentucky Small Business Tax Credit ranges from $3,500 up to $25,000 per calendar year.

Biz&TaxHax Tip: Given the timing requirements noted in the tip to #2 above, it is a good idea to discuss your hiring and investment plans with your business attorney or tax lawyer early and often. If your timing for hiring and investment is flexible from a business standpoint, your tax attorney or business lawyer can help you plan for maximizing the Kentucky Small Business Tax Credit in a particular year or over a period of years.

  1. Carryforward of Unused Credits.

A credit approved under the KSBTC program is first applied against any tax due on the return for the calendar year for which the credit was granted. But, if the credit is not fully utilized in the award year, the taxpayer may carry forward the remaining amount of credit to offset against tax due for up to the next five years. This is important for entrepreneurs, start-ups, and small businesses, as often times in the initial years they are in expenditure and growth mode, and may not have significant taxable income and tax liability. This five year carry forward enables small businesses, start-ups and entrepreneurs to recognize the benefit of the Kentucky Small Business Tax Credit in later years when they may generate more taxable income and have more tax liability.

Biz&TaxHax Tip: The KSBTC is a non-refundable credit, meaning that a taxpayer cannot obtain a cash refund for the difference between the credit and the taxpayer’s tax liability for a particular year. Rather, as noted above, the taxpayer may carry forward any unused portion of the credit for offsetting future tax liability, for up to five years.

  1. Broad Applicability to Different Tax Liabilities.

The KSBTC may be used by a taxpayer to offset tax liability on a Kentucky individual income tax return, limited liability entity tax return, or corporation income tax return. So, the KSBTC’s broad applicability benefits a wide range of taxpayers, from entrepreneurs and pass-through entity owners who may be primarily concerned with the individual income tax and limited liability entity tax, to small businesses that may be subject to the corporation income tax.

Biz&TaxHax Tip: Depending on a particular taxpayer’s structure (such as sole proprietor, partnership, limited liability company, S corporation, C corporation) and other factors, the taxpayer may be subject to one or more of the taxes noted in #5 above. So, it is best to consult an experienced Kentucky tax lawyer or Kentucky tax consultant to ensure proper tax compliance and utilization of the Kentucky Small Business Tax Credit.

As always, for entrepreneurs, start-ups, and small businesses considering eligibility for the Kentucky Small Business Tax Credit and related planning, as well as Kentucky tax reporting and payment obligations, it is best to consult an experienced Kentucky tax attorney or Kentucky tax consultant. A Kentucky tax lawyer or Kentucky tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky tax compliance and planning needs.

Should My Small Business Accept Credit Cards? What Can I Do to Offset the Credit Card Processing Fee the Network Charges?

Nick Eusanio, Esq., LL.M. Leave a comment

Generally, your small business should accept credit card payments; it just makes business sense.

Many small business owners and entrepreneurs ask the question: “Should my small business accept credit cards?” Generally, from a pure business/financial standpoint, the answer is yes, for these reasons:

  1. Don’t Lose Business – By not accepting credit card payments, a business risks losing customers. A customer who wants to pay by credit card may not want or be able to pay by any other method. Perhaps the customer doesn’t carry cash or checks, or just deems paying by credit card more convenient or secure. It simply does not make sense to turn away a would-be paying customer, just because the credit card company will charge a fee to process the transaction.
  2. Convenience = ^ Sales – Second, those same customers who value the convenience of paying by credit card are likely to buy more, and/or more often from your company.
  3. Recurring/Automatic Payments – Related to the second reason, accepting credit cards enables setting customers up for recurring/automatic payments if they use your company’s goods or services regularly.
  4. Cash Flow – From a cash flow standpoint, a credit card payment is immediate like cash, but doesn’t carry the risk of a personal check that could bounce for insufficient funds. Also, as noted above, not all customers carry cash or want to use cash, and many will buy more if they can use credit.
  5. Accounting & Record-keeping – Credit card payments can be easily integrated and synchronized with your bookkeeping software, increasing accuracy and ease of accounting and documentation while minimizing costs for additional labor to do so.

In some instances, credit card processing fees can be strategically offset or recouped.

Often, despite the above reasons, small business owners and entrepreneurs remain hesitant to accept credit card payments because of their aversion to paying the transaction fee to the credit card network. This concern has led many start-up founders and small business owners to consider what they can do to offset the credit card processing fees that the network charges. To do so, numerous small businesses have creatively tried to pass the credit card processing fees along to the customer. But, are small businesses allowed to pass credit card fees along to the customer?

Currently, there is no federal prohibition, but 10 states have laws prohibiting a merchant from charging customers a surcharge to pay by credit card (CA, CO, CT, FL, KS, ME, MA, NY, OK, and TX). In California and New York, court orders have enjoined the state from enforcing the prohibition laws, but those cases remain on appeal. In Florida, an appeals court reversed a trial court order that upheld Florida’s law limiting surcharges, but that case remains subject to further litigation. So, what can a small business owner do to offset or recoup credit card surcharge fees?

Biz&TaxHax Tip:

If you are an entrepreneur or small business owner considering charging your customers a fee for paying by credit card, following is some guidance for minimizing the effect of credit card transaction fees to your business:

  1. Review Credit Card Network Agreements – Although there is no federal prohibition, and your state may not be one that prohibits imposing a surcharge for credit card users, companies should review their agreements with the various credit card networks to determine whether a contractual prohibition or limitation exists. Agreements with the credit card networks may prohibit or otherwise limit or restrict the merchant from charging the transaction processing fee to the customer. So it is important to review all agreements with credit card networks before imposing any surcharge on credit card users to avoid potentially breaching those agreements.
  2. Review Applicable Law for Specifics – Even if your business operates in a state where there is a prohibition on imposing a “surcharge” to credit card users, these laws may be drafted such that the company can avoid the prohibition by simply offering a discounted price to cash (non-credit card) payers. In other words, the company could simply set the price for its products or services at a particular amount that would cover the credit card processing fee cost, and then advertise to customers that if they pay by cash, they get a discount from the regularly stated price. Of course, if your company operates in a state with a surcharge prohibition, you should review the particular statutory/regulatory language before using this discounted price method, to ensure that this method would not also violate the law.
    • Read Credit Card Network Agreements Again & Clearly Post Discounted Prices for Cash Payments – Note, this practice may still violate some credit card network agreements, so it’s important to read the agreements carefully. Also, be careful to clearly and conspicuously post the discounted price for customers paying by cash to avoid any possible concerns with consumer protection/deceptive trade practices laws.

As always, it’s important to consult an attorney familiar with your company’s specific facts and circumstances and the applicable law before making any decision or taking any action that may affect contractual or regulatory compliance obligations of your company. An experienced lawyer can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your business compliance and planning needs.

Tax Tips for Entrepreneurs and Business Owners – Part 4: The Business Start-Up Cost Deduction

Nick Eusanio, Esq., LL.M. Leave a comment

The fourth article in the Tax Tips for Entrepreneurs and Business Owners series focuses on the business start-up cost deduction. This article highlights the importance of the business start-up deduction for entrepreneurs. This article briefly explains the business start-up cost deduction, the general test to qualify for the deduction, and some key tips.

What is the Business Start-Up Cost Deduction and How Can My Company Qualify?

The business start-up cost deduction allows an entrepreneur to take a current tax deduction for certain expenses incurred prior to, and for the purpose of, beginning the company. The deduction is limited to $5,000, and phases out on a dollar-for-dollar basis once the total qualifying start-up and organizational costs exceed $50,000. The entrepreneur must then amortize–or deduct pro-rata over a specified period of time–the remaining eligible start-up and organizational costs.

To qualify, the entrepreneur must have incurred eligible: (1) Start-Up Costs; or (2) Organizational Costs necessary to begin an active trade or business. Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs are the expenses associated with creating a corporation or partnership.

Which Costs Qualify as Deductible Start-Up or Organizational Costs?

Qualifying Start-Up Costs include:

  1. Analyses or Surveys of potential markets, products, labor supply, transportation facilities, etc.
  2. Advertisements for the opening of the business.
  3. Salaries and Wages for employees who are being trained and their instructors.
  4. Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
  5. Salaries and Fees for executives and consultants, or for similar professional services.
  6. Investigative costs incurred as part of a general search for or initial evaluation a business to be acquired/purchased. These are the costs that help the entrepreneur decide whether to purchase the particular business.

BizAndTaxHax Tips: Start-up costs do not include deductible interest, taxes, research and experimental costs, or costs incurred as part of attempting to purchase a specific business. These expenses must be capitalized instead.

Qualifying Organizational Costs include:

  1. The cost of Temporary Directors.
  2. The cost of Organizational Meetings.
  3. State Incorporation Fees or Filing Fees.
  4. The cost of Legal Services for organization of the company, such as negotiation and preparation of the company’s organizing agreement.
  5. The cost of accounting services incident to organization of the business.

BizAndTaxHax Tips: The following expenses must be capitalized, rather than currently deducted and amortized: costs for marketing, issuing, and selling stock, securities, or company interests (such as commissions, professional fees, and printing costs); costs related to acquiring assets for the business or transferring assets to the business; costs for admitting or removing partners, shareholders, or members, other than at the time the company is first organized; costs of drafting an agreement concerning the operation of the business, including a contract between a partner, member, or shareholder and the company. These expenses must be capitalized.

Determining whether your company’s start-up or organizational costs are currently deductible and amortizable, or rather must be capitalized, is a specific factual and circumstantial analysis. So, as always, you should discuss your specific situation with a tax attorney and your accountant to obtain advice concerning deductible start-up or organizational costs for your newly formed business. An experienced tax lawyer can help you determine whether your start-up or organizational costs qualify for current deduction, and assist with electing the deduction and keeping the required documentation to support it. If you are a Columbus or Ohio entrepreneur or small business owner and need help preparing for tax return filing season and planning for the future, contact me for a free initial consultation.

Tax Tips for Entrepreneurs and Business Owners Part 3: The Home Office Expense Deduction

Nick Eusanio, Esq., LL.M. 1 Comment

The Tax Tips for Entrepreneurs and Business Owners series continues with this third article, concentrated on the home office expense deduction. This article focuses on the importance of the home office deduction for the entrepreneur or small business owner. The below discussion includes an explanation of the home office expense deduction, the test to qualify for and available methods to claim the deduction, and some key tips.

What is the Home Office Expense Deduction and How Can My Small Business Qualify?

The home office deduction allows a small business owner or entrepreneur to reduce tax liability based on expenses related to business use of a portion of his home. To qualify, the small business owner or entrepreneur must: (1) Regularly & Exclusively Use of part of his home as his (2) Principal Place of Business.

Generally, if a business owner regularly–say a few hours per day–works in a space solely dedicated as his home office, he should meet the regular and exclusive use requirements. But, this is a facts and circumstances based test, subject to many pitfalls. For instance, assume the area you utilize as a home office also contains gym equipment that you use to exercise. This could cause you to fail the exclusive use portion of the test, and lose the home office deduction.

Usually, if a business owner or entrepreneur at least uses his home office to complete administrative or management tasks without substantially using any other fixed office to do them, he can satisfy the principal place of business element. So, salespeople, tradespeople, or professional service providers (e.g., people who do most of their income-producing activity outside the home) are normally able to meet the principal place of business test by at least doing the administrative and management duties at the home office. Again, though, this determination depends heavily on facts and circumstances. So, overall, it is essential to consult with an experienced tax lawyer to review your specific situation before claiming the home office expense deduction.

Which Office Expenses Can I Deduct Related to My Small Business?

An entrepreneur or small business owner qualifying for the home office deduction may cut his tax bill by deducting the following types of expenses:

  1. Mortgage Interest;
  2. Insurance;
  3. Utilities;
  4. Repairs; and
  5. Depreciation.

These categories of expenses are important when a taxpayer uses the regular, or actual expenses method for computing the home office deduction. But, many entrepreneurs or small business owners prefer to calculate the home office deduction using the simplified method, as the record keeping requirements are less burdensome. An explanation of the home office expense deduction methods follows.

How Can I Claim the Home Office Expense Deduction?

  1. Regular/Actual Expenses Method. This option calculates the home office expense deduction based on the proportion of square feet the business owner’s home office bears to the total square footage of the home. As an example, if the home office is 200 square feet and the total square footage of the home is 1600, the deductible portion of the home is 12.5% (200/1600). Once you identify the deduction percentage, add up the items from each category of deductible expenses (see above) and multiply that amount by the deductible percentage to compute the amount of the deduction.
  2. Simplified Method. The IRS started allowing a simplified option for the 2013 tax year forward. Under this method, the business owner can simply multiply the allowable home office square footage (up to 300 square feet) by the defined rate (for 2014, $5 per square foot) to compute the home office expense deduction. So, if an entrepreneur used 200 square feet of his home for solely business purposes during 2014, his home office deduction would be $1,000 (200 x $5).

BizAndTaxHax Tips: Importantly, assuming you utilize the regular method, if you include the depreciation on your home as a deductible expense and later sell your home at a profit, you must pay capital gains tax on the total amount of depreciation deductions you claimed. Also, it is significant to note that the amount of the home office expense deduction is limited. Your deducted home office expenses may not exceed the amount of income attributable to your business–meaning you cannot use your home expenses to create a tax loss to shelter your income. Finally, the home office expense deduction varies for certain different types of businesses or industries. So, as always, you should discuss your specific situation with a tax attorney and your accountant to obtain specific advice concerning deductible expenses for your home office.

An experienced tax lawyer can help you determine whether your home office qualifies for the home office expense deduction, and assist with keeping the required documentation to support the deduction. If you are a Columbus or Ohio entrepreneur or small business owner and need help preparing for tax return filing season and planning for the future, contact me for a free initial consultation.

Tax Tips for Entrepreneurs and Business Owners – Part 2: The Section 179 Expense Deduction

Nick Eusanio, Esq., LL.M. Leave a comment

This is the second article in the Tax Tips for Entrepreneurs and Business Owners series, which highlights a few of the frequent federal tax audit issues for business owners and provides some tips for avoiding federal tax compliance problems. This article focuses on the Section 179 expense deduction and its importance for the entrepreneur or small business owner.

What is the Section 179 Expense Deduction?

Section 179 of the Internal Revenue Code provides a very helpful tool for small business owners and entrepreneurs. Section 179 allows a business to expense–meaning claim a current tax deduction rather than depreciating over a number of years–certain property purchased during the tax year. This is very important for start-ups and small businesses, because it enables the entrepreneur or small business owner to: (i) purchase a useful or necessary business asset to help generate revenue; and (ii) save cash on current tax liability. As many readers will appreciate, saving cash for reinvestment and acquiring equipment or property needed to build revenue are essential for growing a new venture or scaling a small business. So, how can you determine whether the property you bought for your business qualifies for Section 179 expensing?

What Qualifies for Section 179 Expensing?

To qualify for Section 179 deduction, your property must be:

  1. Eligible Property; and
  2. Purchased for Business Use.

Generally, eligible property includes tangible personal property (such as machinery and equipment, vehicles, computers, telephones, office furniture, etc.), certain other tangible property, off-the-shelf computer software, and some other specific property. The determination of whether a particular piece of property qualifies for Section 179 expensing can be very technical and complex, and there are numerous restricted types of property that will not be eligible for this special deduction. So, you should consult with a tax attorney and your accountant before claiming the Section 179 deduction as to your business property purchases for a given year.

As noted above, property must be purchased for business use to be eligible for Section 179 expensing. Property is considered to be for business use when more than 50% of its use will be in business operations during the year it is placed in service. If property is used for both business and nonbusiness purposes, the business owner can take a proportionate deduction under Section 179 (provided, of course, that the business use is more than 50%). To calculate the proportionate Section 179 deduction, multiply the cost of the property by the percentage of business use and use the resulting amount to determine your Section 179 deduction.

What is the Dollar Limit on Section 179 Deductions?

Usually, the purchase price of qualifying property is the amount for Section 179 expensing (subject to any business-personal use apportionment, of course). But, Section 179 also includes dollar limits and an income limits on the deduction, which vary based on the facts and circumstances. For instance, certain property (such as passenger automobiles) is subject to specific dollar limitations for Section 179 expensing. Based on recent extension by Congress, though, the 2014 general dollar limitation for Section 179 deductions is $500,000. This means that a business owner can deduct up to $500,000 of qualifying property purchases under Section 179 for this year. Finally, it is important to note that the Section 179 deduction is reduced dollar for dollar to the extent the cost of eligible property purchased for the year exceeds $2 million. So, if you purchased qualified property for a total cost of $2.5 million and placed it in business service in 2014, the Section 179 deduction would be unavailable.

BizAndTaxHax Tips: Significantly, unless Congress again acts to extend the increase ($500,000), the dollar limit on Section 179 expensing is set to fall back to $25,000 for tax year 2015. So, if you made large capital asset purchases in 2014, it is important to coordinate with a tax lawyer and your accountant to properly expense the eligible property under Section 179 at return filing time. Otherwise, you may miss out on significant current tax savings if Congress does not extend the $500,000 deduction limit for 2015.

An experienced tax lawyer can help you determine whether particular property qualifies for Section 179 expensing, and assist with keeping the required documentation to support the deduction. If you are a Columbus or Ohio entrepreneur or small business owner and need help preparing for tax return filing season and planning for the future, contact me for a free initial consultation.

Tax Tips for Entrepreneurs and Business Owners – Part 1: The Business Vehicle Expense Deduction

Nick Eusanio, Esq., LL.M. 1 Comment

As 2014 draws to a close, taxpayers should begin reviewing their annual income and expenses in preparation for filing required income tax returns and paying tax due. Importantly, entrepreneurs and small business owners should be especially diligent in this process, as there are numerous audit traps for the unwary Schedule C filer. This is the first in a series of articles that will highlight a few of the frequent federal tax audit issues for business owners, and provide some tips for avoiding federal tax compliance problems. This article focuses on the business automobile expense deduction as a potential pitfall for the unfamiliar, and offers tips for compliance.

Business Vehicle Expense Deduction 

Awareness of some typical audit traps is key to ensuring federal tax compliance, especially for entrepreneurs and start-ups who may be new to properly accounting for deductible expenses. One frequently audited area is the business automobile expense deduction. Costs associated with a business owner’s use of a vehicle for business purposes are tax-deductible, which is a very helpful savings tool. But, the federal tax rules for deducting business related automobile expenses are specific, making compliance difficult for many.

There are two methods for claiming deductible business vehicle expenses:

  1. Actual Expenses, Plus Depreciation Method. The business owner must record and document all deductible automobile-related expenses incurred for the business vehicle during the year. The following costs are deductible in proportion to the amount of business miles driven: gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments). Additionally, all business-related tolls and parking fees are deductible.
  2. Standard Mileage Rate Method. The business owner may deduct a percentage  (the standard mileage rate) of each business mile driven, plus all business-related tolls and parking fees. For 2014, the standard mileage rate is 56 cents per business mile travelled.

There are very specific rules that determine which of the above business vehicle expense deduction methods are available to a particular business owner. Certain facts and circumstances trigger different rules.

For instance, to qualify to use the standard mileage method, a business owner must utilize that method in the first year the vehicle is used in business activity. Additionally, the standard mileage deduction is not available to business owners who have used accelerated depreciation in prior years, or expensed the vehicle under Section 179 of the Internal Revenue Code. Moreover, only business-use mileage is tax-deductible, meaning proper business-to-personal mileage allocation is essential for a vehicle that is used for both purposes. Importantly, these examples are not exclusive. So, it is important to consult with your tax attorney and accountant before implementing a particular business vehicle expense deduction method for your business.

Biz&TaxHax Tips: Regardless of which deduction method a business owner uses, one thing is certain: documentation is king in surviving an audit. The best way to properly document business automobile expenses to support deduction is to maintain a detailed mileage log (listing the date, business purpose, departure location, destination, mileage, and before and after vehicle odometer reading) and records of actual expenses (invoices, receipts and proof of payment for: gasoline, oil changes, maintenance and repairs, tires, etc.) for each vehicle used in the business for the year. This way, it is less likely that you will make any mistakes in claiming deductible automobile expenses on your tax return and you will be in a much better position to show that your return was accurate, if audited.

An experienced tax lawyer can help you determine which deduction method is available and best for your business, and assist with keeping the required documentation to support the deduction. If you are a Columbus or Ohio entrepreneur or small business owner and need help preparing for tax return filing season and planning for the future, contact me for a free initial consultation.