Listed Property - What It Is

Listed property consists of items the IRS considers having the potential for personal use. Computers, vehicles, and cell phones all fall into this category. For these items, you must keep detailed records of personal versus business use.

Just keep a notebook next to the computer, for instance. Whenever the item is in use, jot down when and for how long, and whether it was business or personal use. This may sound tedious, but during an audit, you will have to produce these records.

It is the very same concept as keeping mileage journals for your vehicle. In fact, because automobiles fall under listed property, it is why you have to keep mileage records.

If in doubt whether something is considered listed property, keep records. If you question whether or not the IRS thinks you could be abusing the tax deduction, they probably do, too. More explanation of which items are considered listed property is given in IRS Publication 946.

Note: In order to use an accelerated method of depreciation for listed property, you must use the item more than 50% for business purposes. If you use it 50% or less in the business, listed property must be depreciated using the Alternative Depreciation System (ADS).

This and other information may be found in the book listed below.
Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com

Section 179 - Do You Qualify?

What is Section 179? Section 179 is called a loophole by some. For anyone with any tax experience, however, it is as standard in the IRS world as claiming mileage. Section 179 (Form 4562) allows people claiming items (meeting the criteria listed below) to simply expense certain things instead of depreciating them. This means you get to claim all of the money paid for the item in the year you purchase it and put it to business use (assuming 100% business use). Depreciation makes you spread that benefit out over multiple years.

In order to use Section 179:

● You must have taxable income of at least the amount you expense. This taxable income can come from the business, another business claimed by you, other wages and tips, and even your spouse’s wages and tips if married filing jointly.

● You can either expense (Section 179) or depreciate, not both, on the same item in the same year. Though there are special rules enabling you to depreciate the remaining amount of an item in future years you weren’t able to fully expense this year.

● You must use the item more than 50% for business purposes. If you use it less than 100% for business, you can only claim the percentage of the purchase price based on the percentage used in business (business percentage).

● You should still use that equipment 50% or more for business purposes over the number of years you would have otherwise been allowed to depreciate it (class life─explained on page 60 in book).

Section 179 does NOT apply to:

▪ Real estate
▪ Inventory
▪ Gifts or inheritance
▪ Property purchased from a relative
▪ Items you already owned in a previous year and are converting to business
▪ Heating and air conditioner units

Basically, if you purchase equipment for your business, Section 179 gives you a way to deduct the cost in one year, instead of little by little over multiple years. There are some further limits and rules associated with Section 179 explained in more detail in the book. I simply do not have the room to go into all the detail here.

This and other information may be found in the book listed below.
Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com/

About me...and the book

I am a tax researcher, online seller, and author of Taxes for Online Sellers─A How-To Guide for Individuals on Federal Tax for Internet Sales. Taxes for Artists is due out in 2008.

My books focus on taxes for the little guy. I don’t know about you, but I don’t gross a million dollars per year. I knew some information needed to be put out there for the individual. Many books teach taxes geared toward corporations. Others leave you with the same questions the tax forms throw at you. I wanted to provide answers for the average person (sole proprietor) trying to make it in his own small business.

Are my books simply small business tax guides? Yes. I geared everything toward online sellers and artists in each of the books respectively, but they could be used as a tax guide for any small business started or run by an individual. The examples use certain professions, but the rules are generally the same.

If you have further questions or comments, please email me at: simon@taxesforonlinesellers.com. Though I will do my best to answer all questions, I am bombarded with a great deal of email. Please ask anyway. Subscribe to this blog or check back often─your answer may turn into my next post.

All blog entries, information, advice, and books mentioned are for the individual. My expertise caters to the sole proprietor. Tax rules may differ for any other tax entity. Please seek further advice from a tax professional.

Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com

Basis, Business Basis, Tax (Adjusted) Basis - Defined

Basis: Generally the cost of your item, increased by sales tax and improvements.

Business Basis: Multiply the basis of your item by the percentage you use the item for business purposes. The result is your business basis of the item.

Tax Basis (Adjusted Basis): Your basis, reduced by any Section 179 or other depreciation you have ever taken on the item for tax purposes.

Examples:

Joel has a computer. To figure his basis, he needs to know what he paid for it (plus sales tax). He paid $1000. $1000 is his basis.
(Improvement) He adds a larger hard drive to the computer for a cost of $100. His basis is now $1100 (1000 + 100).

Joel only uses the computer , with the larger hard drive, 70% for business purposes. His basis is $1100. But, his business basis is $770 (1100 - 70%).

When he is ready to sell the computer, he will need to know his tax, or adjusted, basis. Over the years, he has depreciated the computer using straight-line depreciation. The amounts he has taken thus far, add up to $440. He subtracts that from his $1100 basis. His tax basis becomes $660.

His basis is $1100. His business basis is $770. His tax basis is currently $660.

If Joel had never taken any deductions on his computer, his tax basis would be his basis, reduced by the amount he could have depreciated it using straight-line depreciation tables.

This and other information may be found in the book listed below.
Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com

Repair versus Improvement

When figuring the worth (basis) of most items claimed for expense or deduction on your taxes, the amount is generally what you paid for it­ ─ including sales tax. This amount can be increased by improvements, but it is not increased by repairs. What is the difference?

Imagine a number line. The condition of an item when you purchased it is in the center of your number line, at zero. Wear and tear, including damages, drags the condition number down into the negatives. When you repair something, you are simply getting it back to zero, the original condition, on your number line. When you improve something, you are improving the condition into the positive numbers on your number line. You are making the item better than it was when you purchased it.

This and other information may be found in the book listed below.

Permission to use or excerpt with proper attribution.

Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com

Finding Business Percentage When Expensing or Depreciating Items on Taxes

Deducting expenses on your taxes is straight-forward in many circumstances. For instance, if you pay advertising costs for your business, simply total the receipts and list the figure under advertising on your Schedule C. If, however, you are depreciating or expensing an item, which you don’t use 100% for business purposes, you will need to find your business percentage.

Business Percentage: Business Time used divided by Total Time used equals Business Percentage. Your answer will be a decimal number. Multiply that decimal by 100 to find your business percent. Total Amount Paid times Business Percent equals the amount you may deduct.

Let’s look at an example:

Kathy wants to claim actual expenses on her vehicle this year. She keeps track of her mileage. She notes she has driven her car a total of 20,000 miles this past year. Of that 20,000, only 2000 of the miles were for business purposes.

Kathy divides the 2000 business miles by the 20,000 total miles.

2000/20,000 = 0.1
0.1 x 100 = 10

Kathy used her vehicle 10% for business purposes this year. She may now deduct 10% of the total, actual costs for her vehicle.

Her receipt totals are:

Gasoline = $4000
Tires = $200
Repairs = $650
Insurance = $250
Registration = $76
Interest = $150

Total = $5326

Kathy may multiply her total expense ($5326) by 10% to arrive at the amount she may deduct in actual expenses for her vehicle ($532.60) on line 9 of her Schedule C.

Finding your business percentage works the same general way whenever you are figuring how much you may deduct for any item or service not used exclusively in business.

Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com/

Ten Ways for Online Sellers to Keep Records

Ten Ways for Online Sellers to Keep Records

1. Keep receipts—If your receipt doesn’t show all the necessary information, you may write it on the back. You need to show: the cost of each item, the date purchased, who sold you the item (store name), and how you will use the item in your business (i.e. inventory). If you have purchased equipment for the business, also jot down when you began using the item for business purposes. Keep all receipts—even ones you may not think are relevant off the top of your head. When figuring taxes, they may become useful.

2. Record your mileage—If you use your vehicle to drive to the post office or to scout for inventory, you are allowed certain deductions. Whether you take the standard mileage rate or a percentage of your actual gasoline and maintenance on the car, you will have to know how many miles your vehicle was driven. You will also need to know how many of those miles were for business purposes. Track your mileage by jotting down the odometer reading, where you are going, and for what purpose every time you get in the car.

3. Print out online statements—Periodically print out online statements. These include everything from internet postage statements to income statements from online selling venues. This information will come in handy while filling out tax forms—not to mention in the case of an audit. You never know how long these online statements will be available on the web, so print new information frequently.

4. Make spreadsheets your new friends— Spreadsheets can be invaluable. Whether you keep them on your computer screen with predefined categories, or print out blank ones to fill in along the way, spreadsheets are a great way to organize information. Use them to track how many miles you drove and when. Use a spreadsheet to tally expenses with separate columns for where, when, why, what, and how much you spent.

5. Use an accordion-style folder filing system—Where do you stuff all of those receipts and print-outs? Drawers and shoeboxes don’t cut it. Invest in an accordion-style folder. You can make your own tabs fitting the categories you use: inventory expenses, supplies, mileage records, etc. This will make sifting through it all much easier come tax time. Start a new file each year.

6. Invest in accounting software—Many of the accounting computer software programs on the market today assist in not only helping you keep track of expenses and income, but they also integrate with tax software to help you prepare tax returns based on the information you have fed into it each year. Some software programs even assist with keeping track of your inventory.

7. Keep credit card statements—Credit card statements may be used to help when figuring your taxes. You may use them as receipts for business purchases as long as they show the necessary information. You may also deduct the business percentage of any interest you pay to credit card companies.

8. Keep bank statements—Bank statements help jog your memory about what you purchased and when. They may be used as receipts as long as they show the necessary information. Are you charged service fees on your business banking account? Bank statements show those fees—which are deductible.

9. Keep previous tax returns—Keep previous tax returns much long than you ever thought necessary. Just because you no longer have a copy of it, doesn’t mean you can’t still be audited on it. For serious issues, the IRS can audit you for up to six years. If they feel something is outright fraud, there is no time limit. If you expensed an asset, then later sell that asset, you may have to pay recapture taxes for up to five years. You need to have these records to properly record that information.

10. Account for your inventory—Use your new friend, the spreadsheet, to keep track of your inventory. Write everything down as you buy it. Record what you purchased, where, the date, etc. When that item sells, go back to your spreadsheet to mark it as sold. Note the selling price. This will make your life unbelievably more organized.

Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

www.taxesforonlinesellers.com