What business expenses are deductible? What questions should you ask an attorney? What types of travel and entertainment deductions are allowable? Here are answers to these and other questions.
When should you hire an attorney?
It is necessary to hire an attorney for disputes that require a lot of time or for larger business transactions.
The following should be considered before hiring an attorney:
Some disputes can be solved without needing an attorney. For example, a living will can be prepared by organizations such as American Association of Retired Persons (AARP).
What should you do if you decide to handle the matter yourself?
The use of letters and negotiation solve many disputes without the need of an attorney.
There are many alternatives to hiring an attorney. Arbitration or mediation may also be used. Mediation consists of a third party who helps the two parties talk about the problems and hopefully reach an agreement. Arbitration is a more formal process where a third party reaches a conclusion after hearing both sides. Also, there are legal self-help manuals and conferences that can aid in resolving disputes. For smaller damages, you can also opt to sue in small claims court.
What method should be used to find a good attorney?
You can ask friends, relatives, clergymen, social workers or your doctor for recommendations, or contact your local Bar Association for their referral list.
For additional sources look at Who's Who in America Law and the Martindale-Hubbell Law Directory. Make use of referral services for particular groups (for example, people with disabilities, elders or victims of domestic violence). Ask the referral service how attorneys are selected. The court and your bank can also be excellent referral sources, as can the Yellow Pages.
What questions should you ask an attorney?
Before beginning a consultation, the following questions should be asked.
Consult with at least two of the attorneys from your list. Interview them. Make sure to have a brief summary of the case with you as well as any general questions to ask the attorney. Your goal is to see if the attorney has the talent needed to represent you and if you are comfortable with the attorney and the fee agreement.
Is one fee agreement better than another?
The rate for legal services depends on location, and the amount of work and or court time involved.
Here are a few factors that play a role in the decision:
The following are basic fee agreements used by attorneys:
Flat fee. There is a specific total that will be charged for work on your case. Ask if copies, transcribing and other expenses are included in this rate. It may be offered in simple or routine cases.
Note: Litigation is not usually a flat fee, but an attorney can give you a fair estimate beforehand.
Hourly rate. A rate will be charged for each hour or part of an hour that the attorney works on your case. For example, if the attorney's fee is $100 per hour and he/she puts in five hours of work, then the cost will be $500. Some rates vary depending on whether they are hours spent in court or doing investigation and preparation.
If you decide on an hourly rate, find out how much expertise the attorney has in your particular problem area. Someone who is less experienced may charge less per hour but need more hours to complete the work, while a more experienced attorney may charge a higher fee but do the work in far less time.
The size of the firm and its location also affects the price. Smaller firms and urban lawyers usually charge a higher hourly rate than lawyers in rural areas and large law firms charge the most. Find out what is included in the hourly rate. Will you be charged for other staff members’ time put into the case, and if so, how? Are there any other expenses that you will be billed for besides the hourly rate?
Contingency fee. The final amount owed is based on the amount awarded in the case. It is usually one-third of the total settlement. In this scenario, if you lose the case the lawyer does not receive anything besides expenses. Ask if the fee will be calculated before or after expenses are taken into account, i.e., is it pure contingency or contingency percentage plus expenses. This can make a significant difference in the total amount you pay.
Note: Litigation is not usually a set hourly fee, but an attorney can give you a fair estimate beforehand.
What can you do to save money on legal fees?
Bear in mind that attorney fees are usually negotiable even though you will not be asked to bargain over the fees.
The following are a few tips to make sure you save the most money possible:
For my business, what types of records are important to keep?
A crucial aspect of your business success depends on thorough and accurate financial record keeping.
Accurate record keeping allows you to operate your company more efficiently as well as helps you identify your assets, liabilities, income and expenses. Also, this data will help you identify your strong and weak business cycles.
Precise records allow you to more easily prepare current financial statements like income statements and cash flow projections and help maintain good relationships with your banker. Since you’ll know what you are earning and spending, you will pay the appropriate amount of taxes. Most importantly, good records are imperative during an Internal Revenue Service audit.
Accurate financial records will demonstrate how much income you are currently making as well as the overall strengths and weaknesses of the business.
The Record Keeping System
This should include basic journals to record transactions, payroll, accounts payable, accounts receivable, inventory and petty cash records.
Maintaining transaction records and preparing statements and reports to keeping customer and lead lists, creating brochures, and paying your staff are a few of the capabilities that can be accomplished by automating your workflow. A computer system with the proper accounting software can perform many operations, including restructuring payroll, accounts receivable, inventory, advertising and planning.
An accountant can develop a customized accounting system to fit your needs. He/she can also teach you how to update these records regularly. The records will become the base for your financial statements and tax returns.
Can meal expenses be deducted when visiting clients out of the office?
Normally you can only deduct the cost of a meal when entertaining a client or doing business away on a business-related trip or gone overnight. Only 50% of the cost of the meal including the tip is allowed in the deduction.
Do employer reimbursements for travel, entertainment and meals need to be reported?
If your employees return any excess reimbursements to you make sure you receive a detailed expense report. As the employer, you must report it.
Are there limits on deductible entertainment, travel and meal costs?
There is no specific dollar limit.
Although there is not dollar limit, expenses should be ordinary and necessary to your trip. Your deduction cannot exceed 50% of the cost of business entertainment and meals. There are also limitations on skyboxes, luxury water travel and country club dues.
Are living expenses while away from home on temporary assignment deductible?
Since temporary work site living expenses are separate from home travel expenses, they may be deducted.
A temporary assignment lasts for no more than a year. If the assignment is for more than one year then the new city, state, territory or country you now live in becomes your tax home and you can no longer deduct your expenses as away-from-home travel.
Which expenses are deductible when traveling away from home?
There is a broad range of expenses that you can deduct while traveling.
The most common deductible expenses are as follows:
Are there travel expenses that cannot be deducted?
Travel expenses that are not deductible include:
What can be deducted for business entertainment?
To qualify as a business deduction, there must be a business discussion before, during or after the entertainment. The deduction is limited to 50% of the cost for entertainment and meals.
Also, you can deduct your spouse’s expenses, if his/her attendance is customary at an event. Be sure to check the limitations for club dues, entertainment facilities and skyboxes.
How should entertainment and travel expenses be documented?
If your employer is reimbursing you for your expenses, submit a written accounting and return any excess amounts.
Often companies use Accountable Plans or per diem arrangements and mileage allowances instead of detailed accounting, as long as place, time and business purpose are verified. Record the expenses as close to the time of the expenditure as possible.
The IRS requires detailed documentation when expenses are not fully reimbursed by the employer, or excess reimbursements are not returned. If you are the employee, a 2% floor on miscellaneous item deductions is applied to your deductions.
Do some types of business organizations or entities limit liability to business creditors?
Yes. Limited liability companies (LLCs), limited partnerships, limited liability partnerships (LLPs) and corporations are the most common forms.
General partnerships and sole proprietorships do not restrict owners' liability, whereas limited partnerships, limit liability of some partners (such as limited partners) and not others (like general partners).
What is Corporate Double Tax and how can it be avoided?
A Corporate Double Tax occurs when a business corporation or an entity is treated as a business corporation for tax purposes and pays federal tax on its income, and then its owners pay another tax as they collect corporate profits.
The "entity level tax" is the tax on the corporation and so an entity taxed in this way is called a C corporation or C corp.
Here are ways to avoid the double tax:
What type of business entity is best for tax purposes?
Every business is different, however to save on overall taxes a "pass-through" entity is generally best.
A pass-through entity eliminates tax at the entity level. Owners of pass-through entities are taxed on the profits of the entity that they own. Owners are able to make tax deductions for startup and operating losses, against the income from other businesses or investments.
Which business entities are considered to be pass-through?
The leading pass-through forms are limited partnerships, Limited liability companies (LLCs), limited liability partnerships (LLPs,) S corps, sole proprietorships and general partnerships.
If you have a partnership of any type or a limited liability company, you can choose whether your business functions as a corporation or partnership for tax purposes. This is called the "check-the-box" system by tax and business advisors. You can qualify to have it treated as a pass-through by choosing S corporation status if your entity is incorporated or if you elect to be treated as a corporation.
This decision is binding. If you select one entity one year and a different one the next, you will have to pay the taxes as though last year's entity was sold and use those profits toward this year.
Which business entities avoid double tax and limit liability?
The following types of entities will help you avoid double tax and limit your liability.
Limited liability companies (LLCs), limited liability partnerships (LLPs) and limited partnerships (only for the limited partners). An S corporation is usually another option.
Why are limited liability companies (LLCs) a good choice for many businesses?
Limited liability and pass-through tax treatment are both combined in LLCs.
This provides you benefits that are unavailable from S corporations, including:
What, if any, special conditions exist for professional practices?
A major concern is the limitation of liability, especially malpractice liability.
Against the liability of your own malpractice, there is no entity that will protect you. To protect yourself and your business against liability for malpractice of co-owner professionals in the firm and possibly for other debts, Professional Limited Liability Companies (PLLCs), Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs), when accessible for professional practices, should be used. Depending on your state’s laws, Professionals Corporations (PCs) might not offer protection from liability for a co-owner's malpractice.
LLPs, PLLCs, and LLCs all have about the same tax rules that govern them while those for PCs are a little more liberal.
Do state business entity rules conform to federal tax rules?
There can be major differences between state tax law and state business law.
Although states normally treat the entity selected under federal check-the-box as the entity acknowledged for state tax purposes, but this is not always the case. For example, in some states if you choose corporate tax treatment for a partnership, it will not necessarily bring corporate limited liability.
The law of a state may agree to pass-through status for an entity like an S corporation or a Limited Liability Company (LLC), but still enforce some sort of tax on the entity itself.
What does EIN stand for and what is a Federal Tax Identification Number?
A Federal Tax Identification Number, also known as an Employer Identification Number (EIN), is required for each corporation.
The Federal Tax Identification Number or EIN allows the IRS to track payroll and income taxes paid by the corporation. Just as an individual’s Social Security number is used in many formal documents, an EIN is used for almost every function of the business.
What steps must be taken after incorporation?
If your director(s) have yet to be designated in the articles, you will need to hold your first shareholder meeting to select your director(s).
Once you have chosen your directors, you will need to hold the first organizational meeting of directors. At this meeting, you will hold elections for officers, approve the company's bylaws and issue stock, among other actions.
Mark S. Freedman, CPA Inc.
8949 Reseda Blvd., Suite 123
Northridge CA 91324