Executive Perspectives – Do I Need a Company Credit Card?

Do I Need a Company Credit Card?

You have your company up and running.  The concept is working and you actually have revenue coming in to pay some of the bills that have been piling up.  You followed your attorney’s advice and have created an S Corporation to protect yourself from personal liability.  You’ve already filed your first corporate tax return.  The “bottom line” wasn’t great, but that’s ok since you’re just getting started.  The business is going to survive!

Now that you are through the start up stage you want to get further organized.  You’re also starting to travel some for business, taking a few clients out for lunch, and need to order some office supplies through the Internet.  No problem – just put it on a credit card.  Here’s the question: do you need a corporate credit card to charge these items and deduct them for tax purposes or can you use a personal credit card?

There is no requirement that a corporation (or an LLC for that matter) needs to have a credit card issued in its name in order for business expenses to be deductible for tax purposes.  Using a personal credit card is fine and is, in fact, usually easier to obtain given that you have most likely already established a personal credit history that is much more extensive than your newly formed corporation.

That being said, here are a couple of quick “rules” that you should consider following:

• Pick one of your personal credit cards and use it ONLY for business.
• If you have more than one business, use a separate card for each business.
• DO NOT charge personal or non-business items on this card.
• Make sure it has enough of a credit limit to allow you to charge the needed items.
• Keep the monthly statement as that is your detailed record of the expenses incurred for tax purposes.
• You DO NOT need to keep the signed receipts as long as you can document the business purpose for the charges incurred (including names of people taken to lunch or other entertainment).
• Make sure the credit card bill is paid from the company checking account.
• Have your accountant analyze the monthly statement and categorize the charges into various expense categories.

Starting and running a business is hard work, especially when you are in a growth stage.  Once the business has been established and running for a number of years you can apply for and obtain a company credit card.  In the interim, save yourself some time and effort and utilize a personal credit card.

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Russ Wertz - Founder and CEO of Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

Tax Perspectives – Home Office Tax Deduction

Having a Home Office – and getting a tax deduction for it!!

A tax deduction is available for the costs of having a home office.  However, there are several requirements that must be met.  This is an area that the IRS polices regularly, so if the rules are not followed exactly, the deduction will be denied and the assessment of penalties is likely.

First, the home office must be used for a trade or business activity.  Generally, this is going to be an enterprise that is reported on Schedule C in an individual income tax return.  The activity must be a real business; you cannot have a home office deduction for managing personal investments.

The home office must be used regularly and exclusively for business.  The office must be in a separately identifiable area of the home that is used only for the business (no deduction for working at the kitchen table).  If the area is used both for business and personal purposes then the requirement is not met.  It is not necessary that an entire room be dedicated to the business.  A portion of a room – as long as it is used exclusively for the business – will satisfy the requirement.

The home office must be one of the following: (1) the principal place of business, (2) a place to meet with customers in the normal course of business, or (3) a separate structure used for the business that is not attached to the dwelling structure.

It is very difficult for an employee to take a home office deduction.  To be able to take the deduction the home office must be for the employer’s convenience.  If the employer does not require the employee to work from home and provides a space for the employee, then it is likely that the home office is at the employee’s convenience and no deduction is available.

The expenses available to be deducted include allocable portions of the costs to maintain the home.  This includes mortgage interest, property taxes, maintenance, utilities, insurance, and other costs.  It is important to remember that mortgage interest and property taxes would be deductible anyway if the home office does not meet the requirements.  Depreciation on the allocable portion of the property is also allowable; however, this will possibly lead to a portion of any gain realized on the sale of the home to be taxable.  The expenses are deductible only to the extent of the business’s income.  Any expenses not deducted can be carried over to future years.

This article only covers the basics of the deduction.  As mentioned, the IRS watches this very closely, so it is important to follow the rules outlined.  But for those who do, this deduction is something that should not be overlooked.

Any federal tax advice contained in this article is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

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Greg Tanner – is a Tax Principal at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

Tax Perspectives – 1099-K

1099-K  Don’t Let It Catch You Off-Guard

Don’t be surprised if you find a new tax form taking up space in your mailbox in the next couple weeks.  Beginning with calendar year 2011 credit card companies and electronic payment processors are required to prepare and file transaction reports with the IRS which list the total payment amounts made to businesses and individuals.  That means all transactions handled in this manner will appear on the new Form 1099-K.  It will be received along with other tax reporting forms sometime in late January and early February 2012.

The idea of this law was to “improve voluntary tax compliance by businesses and sole proprietors.”   That’s another way of saying that the IRS has found a way to force people to report income that has been previously unreported because it was never subject to reporting under the existing rules for 1099 forms.  The 1099-K is an effort to bring a halt to what the IRS believes is an underground and untaxed economy consisting of those who transact business on eBay, Etsy, and other similar online retailers.

So how does it really affect you?  If you accepted merchant cards for payments (credit cards or gift cards) or if you received payments through a third party network (PayPal) then you may be receiving a 1099-K.  The threshold for receiving a 1099-K is total payments in excess of $20,000 or more than 200 transactions.  The 1099-K will show the total amount of payments received for the year as well as a breakdown by month.

All income received is subject to reporting on your tax return, not just income reported on a 1099.  It is important to review those 1099s and be sure they are correct so the IRS is not expecting higher numbers on your tax returns.  Beginning in 2012, payments reported on a 1099-K must be identified on a separate line of your income tax return.  Although, you will be receiving a 1099-K in 2011, the separate reporting of these transactions will not take place until 2012.  We suggest that you set up new income accounts to separate payments received by way of credit card or third party service from payments received directly from customers by way of cash or check.  It will make the reconciliation to the 1099-Ks received much easier.

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Katie Sterling – is a Tax Manager at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.