Small business team

IRS Form 535: Business Deductions Are in Pub 535

Every business  has just one goal when it comes to the IRS.  It’s to show as little profit as possible on the annual income tax return.  That’s not to say that income should be low but rather to get as much deducted off the taxable income as possible.  To do that, you would refer to IRS Form 535, which actually has the title of Publication 535. It’s called Business Deductions and in this you can find every type of deduction for your business that’s allowable by the Internal Revenue Service.

While getting as many expenses as possible into your company’s tax return will help reduce the AGI(adjusted gross income), it may not help a company’s health report when it comes to stockholders.  For example, large expenses will make revenues smaller…if you are spending all the money you make then your business report card isn’t as strong as it would be.  If you are a publicly held company then it will make your stockholders nervous if you are making large purchases.

So, wouldn’t it be nice if your business could make those large necessary purchases, but at the same time impress the stockholders with fewer expenses and larger revenues?  Well you can.  You don’t have to deduct those large expenses for things you expect to last more than a year.  You can do what’s called capitalizing them.  When you deduct these expenses you are expensing them.

Expensing vs Capitalizing Your Expenses

IRS Pub 535 explains that if you capitalize an expense you cannot also deduct it.  Capitalizing means that you will not really show the entire expense on the current year’s tax return.  Rather, you will spread it over the next several years.  This way, you won’t kill your revenue and your bottom line will be much much nicer looking.

You cannot cheat, however, by capitalizing your regular operating expenses.  For example, your business might purchase a ton of copy paper each month.  That is a regular operating expense and must count as a deduction.  It will reduce your revenue but it’s cheating the IRS and your stockholders if you try and hide this expense by capitalizing it.  This is clearly outlined in IRS Form 535 (Publication 535).

For more info on business deductions and capitalizing versus deduction your business expenses consult the IRS Form 535 (publication) page on the IRS website.

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IRS Form 4506

Did you lose your old tax returns?  Do you need a copy of a past year’s IRS tax return?  The IRS keeps full copies of your returns on file and will send you a copy if you request it with IRS Form 4506.

Do you need a tax transcript for a loan or to submit to Financial Aid at your college?  Then you don’t need a full copy of your tax return sent out…you only need a Tax Transcript, which is a different form.  For a tax transcript use IRS Form 4506-T.

IRS Form 4506 is Not The Same as 4509-T

Don’t confuse the two types of copies of your tax returns…one is quick, easy and free and the other is definitely not free and certainly not fast.  IRS Form 4506 costs $50 and yet get a full copy of everything you submitted when you filed your income tax return with the IRS.  It can take more than three months to get your copy, however!

IRS Form 450-T is free and can be requested automatically online at the IRS website.  Just go to IRS.gov and search on “Order a Return or Account Transcript”.

Corporations can request a full copy of past years’ tax returns as well, using the same IRS Form 4506.  Same for partnerships, estates, trusts, etc.

For a look at IRS Form 4506 go to the IRS website here and you can download a copy for mailing in.  Mailing addresses for the following places:

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Alabama, Alaska,
Arizona, Arkansas,

California, Colorado,
Florida, Hawaii, Idaho,
Iowa, Kansas, Louisiana,
Minnesota, Mississippi,
Missouri, Montana,
Nebraska, Nevada,
New Mexico,
North Dakota,
Oklahoma, Oregon,
South Dakota, Texas,
Utah, Washington,
Wyoming, a foreign
country, or A.P.O. or
F.P.O. address

Internal Revenue Service

RAIVS Team
P.O. Box 9941
Mail Stop 6734
Ogden, UT 84409

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For the following states:
Connecticut, Delaware,
District of Columbia,
Georgia, Illinois, Indiana,
Kentucky, Maine,
Maryland,
Massachusetts,
Michigan, New
Hampshire, New Jersey,
New York, North
Carolina,
Ohio, Pennsylvania,
Rhode Island, South
Carolina, Tennessee,
Vermont, Virginia, West
Virginia, Wisconsin
mail your IRS Form 4506 to:
Internal Revenue Service
RAIVS Team
P.O. Box 145500
Stop 2800 F
Cincinnati, OH 45250

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Lustrous Wooden Cabinet with Retirement File Label in Dramatic LIght.

IRS Form 8606: A Form for When You Bend the Rules of Your IRA

The IRS giveth, the IRS taketh away.  You’ve heard of tax-favored accounts, right?  The IRS practices a little bit of social engineering and tries to encourage good behavior by giving tax breaks for things we taxpayers may do in life.  Contributing to tax-favored accounts usually comes with a perk that benefits you by lowering your tax liability.  For example, if you contribute to a Traditional IRA, the money you put in is not counted toward your taxable income.  The IRS is giving you a nice gift of lowering your taxes, while at the same time encouraging you to invest in your own future retirement years.

The IRS doesn’t just give things away, however.  There are strings attached…rules and limits to the how much money you can actually shelter from taxes this way.  For example let’s take the Traditional IRA again. There is a 2013 contribution limit of $5500 per year for traditional IRAs.  The amount goes up a bit each year to keep up with inflation but you get the idea.  If you just can’t help yourself and you contribute more than the limit, the IRS will “taketh away”…you will have to pay taxes on that amount.  To report an over-the-limit contribution to your Traditional IRA and other rule-breaking actions like this, you would use IRS Form 8606.  If you don’t file this form, which is called Nondeductible IRAs, there is a penalty of $50.  Yes, the IRS taketh away.

What Else Is Covered on IRS Form 8606?

Let’s make sure we remember the two main types of Individual Retirement Accounts:

  1. Traditional IRAs.  Any money (up to the IRA contribution limit) that goes into this type of account is tax-free at the time of contribution.  Then, later on when you are retired and you start taking distributions from the account, you will pay taxes on those distributions.
  2. Roth IRAs.  Any money (up to the contribution limit) that goes into this type of account is NOT tax-free at the time of contribution.  However, later on in retirement when you start taking distributions, you will not have to pay income taxes on those distributions.

Sometimes we set up one type of IRA and later on change our minds and wish we’d gone with the other type.  That’s OK!  The IRS lets you switch and pay taxes accordingly.  Switching from a traditional IRA to a Roth, you end up with what’s called a Roth Conversion IRA.  In this case, you are taking an account whose contributions were tax-free when you made them, and turning it into an account where the distributions are tax free.  You get away without paying taxes at either end, right?

Nope.  When you convert to a Roth IRA, use IRS Form 8606 to report this and pay taxes on your contributions so far.  You simply attach the form to your 1040 when you file your annual income tax return.  For a peek at the form, visit the IRS website here and go here for the instructions.

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tax

You May Owe More Income Tax Than You’d Thought: IRS Form 6251

You may have a pretty good idea of how much income tax you pay every year to the federal government.  After all, even people with the tiniest amount of financial wherewithal have some understanding of their tax rate.  It’s not uncommon to estimate how much tax you’ll owe by next April 15, or how much you’ll be getting back in an IRS refund.

What is the AMT & IRS Form 6251?

Well the IRS has thrown a wrench into all your estimates and introduced the Alternative Minimum Tax.  This is a tax that’s figured and added after you’ve figured your income tax, creating the possibility that you may owe more income tax than you’d thought.  Not everyone is subject to the AMT, however, so there’s a form you fill out to see whether you are subject to this extra tax, and how much it will be.  It’s called IRS Form 6251.

One can fill out the form or if you prefer you can use the online AMT Assistant, at the IRS website here.  There’s an AMT Assistant for each tax year beginning with 2010.  You answer the online questions to work through a series of screens, and you find out whether you have to pay the Alternative Minimum Tax after completion.  If the answer is”yes” then you must fill out Form 6251.

Who Has to Pay the AMT?

There’s a good chance you won’t have to pay the AMT if your annual income is pretty low.  There’s something called the AMT exemption amount…anything under that figure and you’re not liable for the AMT.  The exemption amount is around $50,000.

There’s a good change you will have to pay the AMT if you took certain deductions.  Most of these AMT-triggering deductions are business deductions.  Here’s a smattering…

  1. qualified electric vehicle credit
  2. deduction for a net operating loss
  3. private activity bonds that give tax exempt interest
  4. investment interest expense
  5. acceleration depreciation
  6. empowerment zone & renewal community employment credit

well you get the idea…these are not your everyday deductions.  They are deductions that wealthy business owners take and they are exactly the types that the AMT is meant to ensnare.   You see, the IRS doesn’t want rich and corporate taxpayers to deduct themselves out of paying their fair share of income taxes.  The Alternative Minimum Tax was rolled out in 1969 expressly for this purpose.  We all get deductions, but the AMT takes them away from some of us.  For a complete look at IRS form 6251 take a look at the IRS website here.

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Parental care

IRS Form 8332: Giving Up the Right To Claim Child Exemption

Having kids is expensive.  Actually, a lot of things are expensive in life, but the IRS has chosen having kids as something for which you should get a break on your federal income taxes.  So we have a tax exemption for each child any taxpayer has and believe you me, it adds up to a lot of money subtracted from your taxable income!

You may be familiar with the child exemption from filling out paperwork when you started your last job.  The W4-form has a line which asks you to write how many children you have.   The higher the count of children, the lower the withholding will be on your paycheck.  The IRS figures that if you have kids, you’re going to need all the money you can get to take care of them.  Therefore, those with more child exemptions on the W4 form will have bigger paychecks.

So, needless to say the child exemption is worth a bit of money.  What happens when parents get divorced?  Who gets to claim these nice child exemptions?  The divorce courts decide this…whoever is the custodial parent gets to claim the exemption for any child or children the couple has.

But this doesn’t mean that’s the way has has to be.  The noncustodial parent can claim the exemption for children if the couple decides that’s the way they want it to be.  All they have to do is fill out IRS Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.

What is IRS Form 8332?

Form 8332 allows divorced parents to direct the child exemption to the noncustodial parent.  Then if they change their mind again want the custodial parent to take the exemption, Form 8332 is submitted again, revoking the original directive.  In that case, it would be called Revocation of Release of Claim to Exemption… etc.

IRS Form 8332 hardly qualifies as a form.  It’s more of a signature page with a page and a half of instructions.  The custodial parent simply signs his or her name, prints child’s name, fills in his or her Social Security Number, dates it and mails it in.

For a look at Form 8332  visit the IRS website here and also get full instructions.

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