Business, Accounting and Taxes FAQ
People tend to ask me some questions over and over that pertain to accounting, QuickBooks, tax preparation and advice, business planning or estate planning. Here are my standard answers. Note, however, that the facts and circumstances of your situation may change my answer.
- Can I write-off my vehicle as a business tax expense?
- Should I incorporate my business (S corp vs. LLC)?
- How do I get an Employer Identification Number (EIN)?
- What should I do if I haven’t filed tax returns?
- Where is your office?
- What do you charge per hour?
- I'd like you to be my CPA--what next?
1. Can I write-off my car, truck or SUV as a business expense?
If you’re self-employed and use your vehicle in your business, you can probably deduct the business portion of your vehicle expenses on your business tax return. But this deduction is trickier than most people realize.
Here’s the big thing that goofs many people up. You need substantiation to prove your business use. Ideally, in fact, the Internal Revenue Service wants you to keep a log of your business miles, your commuting miles, and your personal miles. With this information, you can then either deduct an amount equal to the business miles times a standard per-mile rate of roughly $.60… or you can deduct the percentage of your vehicle expenses equal to the percentage that your business miles represent. For example, if your business use equals 5,000 miles, personal use equals 3000, and commuting equals 2000 miles, your total miles for the year equal 10,000. Business miles as a percentage of total miles equal 50% because 5,000 divided by 10,000 equals .5 or 50%.
In this example, you could therefore deduct 50% of your fuel, 50% of your insurance, 50% of your maintenance and repairs, 50% of the car loan interest, 50% of the depreciation, and so on, as a business deduction.
If you don’t have exact records, you can sometimes use good sampling. For example, if you keep a good appointment calendar of your business activities, one popular tax reference suggests that you can look at the total business, personal and commuting miles driven during one week each month. Then, you can average this data to get good weekly estimates of your business, personal, and commuting miles. Finally, you can multiple these weekly estimates by 52 (the number of weeks in a year) to get reasonable estimates of your business, personal and commuting miles.
Congress limits in most cases the amount of depreciation or lease rental that you can include in your vehicle expense calculations. The rules are a bit tricky, but essentially, for purposes of vehicle depreciation and lease payments, you only get to look at the first $16,000 or $17,000 (roughly) of vehicle cost. In other words, if you buy a $60,000 vehicle and your friend buys a $15,000 vehicle, you may both have the same business depreciation expense—even though your vehicle costs four times what your friend’s does.
2. Should I incorporate my business?
Probably. Here are some general rules:
- If you’re a sole proprietor making profits equal to what’s a fair salary for someone who does your job, you should usually set up a single-member limited liability company. You’ll keep your accounting and taxes very simple… and yet you’ll get a degree of liability protection (as your attorney can explain in more detail).
- If you’re a sole proprietor making profits in excess of what’s a fair salary, you should probably set up an S corporation. Your accounting and taxes will become much more complicated, but you’ll probably save thousands of dollars in self-employment taxes.
- By the way, partnerships and groups of investors will usually want to set up a limited liability company, or an S corporation, or a C corporation. And while none of these options is terribly tricky, choosing the optimal entity is tricky. You want to get able tax planning help in order to pick the best business form.
One final comment: While you can incorporate or set up a limited liability business yourself, I encourage you to consult with your attorney for an explanation of the legal reasons for either setting up a corporation or a limited liability company. One of the things you may want to ask about is difference between tort liability (which is the sort of liability you have if you accidentally drop a hammer on someone’s head) and non-tort liability (which is the liability you have to creditors if your business gets into trouble). A corporation or limited liability company will not shield the owner against liability for his or her own tort actions. It’s also very possible—again, ask your attorney about this—that a corporation or limited liability company will not shield the owner against liability for tort actions on the part of employees.
3. How do I get an Employer Identification Number?
You can get an employer identification number in a bunch of different ways. One of the easiest is to click the link shown below and then follow the on-screen instructions.
4. What should I do if I haven’t been filing tax returns?
You should file the returns you haven’t filed. You’ll pay interest and probably a penalty (unless you’ve got a really good excuse). But you’re not going to get into any truly serious trouble if you come clean.
By the way, there’s no statute of limitations on non-filed returns. The statute of limitations (typically either three or six years) starts to run only after you file a return. Therefore, if you don’t file returns, interest and penalties continue to accrue. Eventually, you’ll probably be caught because the IRS is getting smarter and smarter about finding nonfilers.
5. Where is your office located?
My office is located on the southeast corner of the intersection of 85th Street and 154th Avenue in downtown Redmond, Washington.
If you’re coming from the west or east on SR-520 near Seattle, take the W. Lake Sammamish Parkway exit. Head north on W. Lake Sammamish Parkway (which turns into 154th Avenue). Before the intersection of 85th and 154th Avenue, turn right into the parking lot. You should see my name on the building.
If you’re coming into Redmond in some other way, find 85th Street and head west. (The Redmond Library, Post Office, and City Hall are all on 85th Street.) At the intersection of 85th and 154th, take a left onto 154th and then left again into the first parking lot entrance. You should see my name on the building.
6. What do you charge per hour?
A reasonable question. But one that requires a bit of a complicated answer.
Let me start by saying that for most of the work we do, we charge a fixed price. For example, we might charge $425 for a particular individual tax return. Or we might charge $4000 for a particular corporate tax return. The current ranges of prices we charge for tax returns appear on the Tax Preparation page. But know that you can always ask Steve for a better, more precise estimate. Because the complexity and work involved varies, prices (predictably) vary.
For work that we can't practically quote a fixed price--and such a situation really should be the exception--we can bill time by the hour. The hourly rate would depend on the person performing the work. As a general rule, by-the-hour work provided by paraprofessional staff gets billed at the rate of $85 an hour. By-the-hour work provided by a CPA other than Steve gets billed at the rate of $185 an hour. By-the-hour work provided by Steve to existing tax return clients gets billed at $235 an hour. By-the-work provided by Steve to businesses or individuals are who not already tax clients gets billed at $300 an hour.
A related comment about billing rates: Accountants tend to use one of two approaches when setting their prices and differentiating themselves from their competitors. Some accountants charge low prices to attract clients. These accountants often get very good at doing lots and lots of inexpensive tax returns and bookkeeping projects in a very expeditious fashion. (This sort of accountant is often an excellent choice for a small business just starting out or someone who's very concerned about cost.)
Other accountants attract customers by providing, well, more personalized service and, frankly, a higher level of expertise and attention. These sorts of accountants charge higher prices but can (for certain types of businesses and individuals) deliver significant tax planning benefits.
The services we provide absolutely fall into the latter category. Accordingly, we may be an appropriate choice if you're looking for personalized service and a higher level of expertise--and you believe these qualities are worth paying more for.
Truly a final comment about pricing: If you're most concerned about the cost of our services--say your first question to us is, "I'm concerned about the cost--what you do charge?", we almost certainly are not the right choice. On the other hand, if you're most concerned about the quality of our work--say your first question to us is, "I need to know whether you can handle my situation--can you tell me about experience and your qualifications?", then we may just be an excellent fit.
7. I'd like you to be my CPA--what do I do?
Assuming you do want to work with me, we should do one of two things: If you're an individual, you should collect all your tax documents (including last year's tax return) and then call me early for an appointment. (A tip: It's also a really good idea to download an income tax organizer and at the very least, go through its checklists to make sure that we claim every tax deduction on your return.)
If you're a business or business owner, we should set up an appointment where we can talk about you need and what I need from you.