Get more tax mileage from your business car

Now that 2018 models are in the showrooms, you may be shopping for a new car for your business. Be aware that you can use one of two methods, the actual expense method or the standard mileage rate, to deduct business auto expenses (other special rules apply to leased car deductions).

Although the actual expense method is more work, it could provide a bigger deduction. Here’s a quick recap:

  1. Actual expense method: This encompasses all your expenses: oil, gas, repairs, insurance, tires, registration fees and licenses, as well as a generous Section 179 and/or depreciation allowance. Keep in mind that there a special rules limiting annual write-offs for cars deemed “luxury cars” by the IRS. The deduction is based on your percentage of business use.
  2. Standard mileage rate method: Alternatively, you can use the IRS-approved standard rate, which is 53.5 cents per business mile in 2017 and adjusted annually. You can also tack on the cost of business-related tolls and parking fees to the standard rate.

Both methods require detailed recordkeeping for business trips, but the standard mileage rate can be less of a hassle because you don’t have to keep track of every expense. Nevertheless, the extra work may be worthwhile. In particular, you may benefit from a Section 179 and/or depreciation allowance, including 50 percent “bonus depreciation,” in the first year of ownership if you use the actual expense method. With the standard mileage rate, the cost of depreciation is accounted for in the annual rate prescribed by the IRS.

Which mileage rate is best for you depends on your situation. Dye and Whitcomb can help you do the math to find the best tax result.

The rules of hardship withdrawals

Suppose you need to borrow money in a hurry and your only obvious option is a bank loan with sky-high interest — if you can even obtain one. Consider an unusual source: your 401(k) plan or IRA.

These accounts are meant to provide income for retirement, so they should not be “raided” without good reason. As a last resort, however, a 401(k) or IRA could provide the funds you desperately need.

With an IRA, you can take out the money without restraint, because it’s yours to do as you wish. But you can only withdraw funds from a 401(k) with your employer’s approval (if it’s even permitted). The list of reasons you can make a hardship withdrawal includes:

  • Unreimbursed medical expenses for you, your spouse or dependents
  • Acquisition of a principal residence and certain expenses for repairing damage to your principal residence
  • Payment of college tuition and related educational costs (e.g., room and board) for the next 12 months for you, your spouse, dependents or children who are no longer dependents
  • Payment to prevent eviction from your home or foreclosure on the mortgage of your principal residence
  • Funeral expenses

In any event, a distribution from a 401(k) or IRA is subject to federal income tax at ordinary income rates. In addition, a 10 percent tax penalty generally applies to most payouts prior to age 59½.

There are several exceptions to the 10 percent penalty that may or may not align with the reasons for hardship withdrawals. For instance, you might be able to avoid the penalty on early distributions from a 401(k) to pay emergency medical expenses, but not to pay your child’s college tuition for the upcoming school year.

A hardship withdrawal is typically never someone’s first choice, but sometimes it’s the last option. Consider all your other options before moving ahead with a hardship withdrawal. Contact Dye & Whitcomb today if you’d like talk about your options.

Increase your odds of getting a small business loan

As any entrepreneur will tell you, financing a business is no small undertaking. Pulling funds from personal bank accounts, liquidating assets, talking to friends and relatives about your venture — these are all actions you might take to get your business up and running. Banks and other financial institutions could also play a role.

In fact, for many small businesses, some form of debt is essential. According to a recent study by the Harvard Business School, about 48 percent of business owners reported a major bank as their primary financing relationship. Another 34 percent identified a regional or community bank as their main capital financing partner.

Understanding the following factors — fundamentals that loan officers scrutinize — could increase your chances of getting a small business loan:

  • Cash flow. Lenders want assurance that your business will pay back the loan without fail. Your job? Convincing them that your company won’t default. Calculate cash flow at least quarterly and try to optimize those numbers before applying for the loan. Understand the support for your financial statements and be able to defend any projections.
  • Collateral. This is the asset or group of assets a lender can recover to offset loan losses. In the case of a mortgage, it’s the market value of the property underlying a home loan. To bolster your case to a loan officer, consider getting independent appraisals of major assets to be used as collateral. Those assets might include inventory or company-owned real estate.
  • Credit history. Any competent loan officer will examine your credit history before approving a loan. Sometimes otherwise strong businesses face financial troubles due to problems beyond the owner’s control. But know that if your credit is less than stellar, banks may be reluctant to lend. So plan early and make every effort to fortify your credit report. Paying off old loans or renegotiating supplier contracts may lift your credit score and increase the likelihood of loan approval.
  • Expert advice. Lenders want assurance that you’re serious about the future of your business. Let the bank know that you’re seeking financial guidance from your accountant and other knowledgeable advisers.

Going back to school? What you need to know about the child care credit

A couple can claim the Child and Dependent Care Credit — commonly called the “child care credit” for short — if they pay someone to watch the kids while they’re at work. But suppose one spouse plans to go back to school this fall. Can you still claim the credit? It depends.

Generally, the credit is equal to 20 percent of the first $3,000 of qualified expenses related to caring for one child under age 13, or $6,000 for two or more children underage 13. Therefore, your maximum credit is typically $600 for one child and $1,200 for two or more children. A higher percentage is available for certain low-income taxpayers.

What expenses qualify for the child care credit? The credit can be claimed for:

  • Babysitters
  • Day care centers
  • Nursery schools
  • Summer day camps (but not overnight camps)

How do you qualify for the child care credit?
To qualify, the expenses will need to have been incurred for you and your spouse to be “gainfully employed.” A married couple is gainfully employed if one spouse works full time and the other works full time, part time or is a full-time student. A full-time student attends classes for at least five months (not necessarily consecutive) out of the year.

Say your spouse took a four-week course earlier this year and now has enrolled full time at college, beginning in September. You’ll end up with child care costs because your spouse will be at school and you work full time. That means you might claim the child care credit, subject to the usual limits.

One more thing to remember — the qualified expenses are further limited to the earned income of the lower-earning spouse. This could affect couples where one spouse attends school. During the months a spouse is a full-time student, the tax law presumes an earned income of $250 for one child and $500 for two or more children.