Best Practices of Handling Business Expenses

Best Practices of Handling Business Expenses
0

#1

What best practices can you share with documenting business expenses? Specifically, I have confusion over when it’s possible to expense a tangible item versus depreciate versus Section 179 it.

The things that give me problems are cell phones, computers, hand tools, specialized transport cases for tools/equipment.

It seems from reading of Section 179 deductions that if the total dollar amounts are relatively low (as in less than $100k total) then you can use that for all of the items I mentioned. Most websites that discuss this are unclear. Even IRS documentation is unclear.

In past years, I’ve simply put cell phones under office expense category on my Schedule C and hope to not be audited. I think Section 179 works for them, but the paperwork to file for the Section 179 was very confusing and I couldn’t figure out how to do it the last few years, so every year I just shove my legitimate expenses into other categories.

I’m not interested in hiring an accountant for the simple reason that until I fully understand how something works, I don’t feel comfortable subcontracting it out. Anytime I go to the doctor or car mechanic, I make sure to have done as much research as possible before hiring someone to do it. Also, it’s possible the accountant I hire does it incorrectly as well. And I’m less interested in an accountant in filing papers, and more interested in one who would advise me at the start of the year to plan how I’ll create expenses as I go, rather than how to fill out the forms, when there’s no actionable changes I can make.

I get the impression that if I can figure out how the 179 documentation works that I can use it for all of the items above. Also that it might be possible for me to use depreciation method on items in a strategic way in order to push the tax credits to a future year where I’ll be in a higher tax bracket. For example, last year I bought a computer for work but made relatively little money. I may try to depreciate that so that I can get some of the tax credits in 2018 and 2019 for that purchase. But then that’s confusing too because you’re supposed to use a depreciation schedule, of which I don’t believe one exists. From my reading of documents, it seems like I have to decide on the lifespan of the computer and depreciate accordingly but maybe the IRS will decide they don’t like it if I’m audited and I’m screwed. “They know what porn is when they see it” type of rule seems to apply.

What best practices can people share? Other than hire an accountant.


#2

This is an automatically-generated Wiki post for this new topic. Any member can edit this post and use it as a summary of the topic’s highlights.


#3

What tax software do you use?

I don’t know of any commonly used software that doesn’t create the depreciation schedules or complete the sect 179 forms for you after answering a few basic questions about the asset.


#4

TurboTax handles it. Just select the category of equipment and % of business use and it does the rest. Most electronics qualifies for the immediate 100% treatment if used exclusively for business.

I’d suggest the tax code is way too complicated to ever be doing it on paper. Use a tax prep program or a pro.


#5

I’ve always just used paper - mostly because it helps me understood it, and partially because the one time I tried a tax program, was maybe 10 years ago, and it took me 10x as long because it didn’t understand what I did (Roth IRA conversion with post-tax money), and it wanted to keep charging me tax on the conversion. The automated questions it asked were stupid, confusing, and it took way longer than if I just filled it out paper.

I had been doing all my own forms by paper for years, and that one year decided to try tax software, and that’s how I knew it was messing up. If I hadn’t been experienced in paper, then I’d have possibly overpaid my taxes by $5k or more, and the IRS might not have noticed and corrected it.


#6

I too was once in a situation when tax software wanted to charge tax incorrectly on some rare transaction. The great thing about tax software is that it can display the paper forms alongside the interview questions. I eventually figured out that there was a check box on the form that determined whether the amount was taxable, yet there was no corresponding interview question, so the box could only be “checked” manually.

While knowing the paper forms and instructions is obviously a valuable skill, you couldn’t pay me enough to fill out ~25 pages (federal and state) by hand.


#7

The fact that you know how to do in on paper makes you the perfect person to switch over to doing it in a program like TurboTax or TaxAct. Do it all in the program, then print the return on paper to check your work. You’ll be happier and in a few years you’ll wonder why you waited until 2018 to start doing it that way.


#8

I wasn’t clear enough on my issue in the past with the tax program.

The problem was that it output an error, and for the life of me, after wasting hours, I couldn’t figure out how to tell the program to change the output. I knew how to fill out the Roth IRA conversion paperwork, but couldn’t figure out how to tell the dumbed-down software checkboxes to output it. It’s probably much better now, that was 10 years ago.

The reason I was even using it in the first place was so that I could file an electronic return. So even though I knew how to do the paper filing, I wasted hours trying to get the program to work so I could e-file and ultimately gave up and paper filed it.

And truthfully, the only piece that the software would help me with is the depreciation/sec 179 stuff. I already know how to do travel expenses, Roth IRA conversions, HSA deductions, etc. I don’t itemize, I take the standard deduction.

I’ve built spreadsheets that help me track my travel expenses over the year and then it gets plugged into the Schedule C by hand. I’ve also built spreadsheets that lets me plug in my income throughout the year and tracks total allowable 401k, running-total of AGI, phaseouts, tax bracket changes using complex IF/THEN statements, etc.

Using tax software would likely be a huge step backwards for me. Except for depreciation/sec 179 which I’m clueless on.


#9

[quote=“TripleB, post:8, topic:2447, full:true”]
I wasn’t clear enough on my issue in the past with the tax program.

The problem was that it output an error, and for the life of me, after wasting hours, I couldn’t figure out how to tell the program to change the output. I knew how to fill out the Roth IRA conversion paperwork, but couldn’t figure out how to tell the dumbed-down software checkboxes to output it. It’s probably much better now, that was 10 years ago.[/quote]Yes, the software is MUCH better now than 10 years ago.

[quote]The reason I was even using it in the first place was so that I could file an electronic return. So even though I knew how to do the paper filing, I wasted hours trying to get the program to work so I could e-file and ultimately gave up and paper filed it.[/quote]Filing an electronic return is one of the main reasons you should consider going back and trying the software again. Get used to it for a few years and if something happens where you are forced to file a paper return again, you will get as frustrated as you did 10 years ago.

[quote]And truthfully, the only piece that the software would help me with is the depreciation/sec 179 stuff. I already know how to do travel expenses, Roth IRA conversions, HSA deductions, etc. I don’t itemize, I take the standard deduction.[/quote]It sounds like, base on your OP, that it would be worth it just for the Section 179 help.

[quote]I’ve built spreadsheets that help me track my travel expenses over the year and then it gets plugged into the Schedule C by hand. I’ve also built spreadsheets that lets me plug in my income throughout the year and tracks total allowable 401k, running-total of AGI, phaseouts, tax bracket changes using complex IF/THEN statements, etc.[/quote]Sounds like overkill, but if it works for you, great!

[quote]Using tax software would likely be a huge step backwards for me. Except for depreciation/sec 179 which I’m clueless on.
[/quote]It’s not a step backwards. You’re looking at it completely wrong. Just because you do all that extra work doesn’t mean that tax software will muck it up. It will do exactly what you are already doing with less chance of a mathematical error. Plus it will guide you on something you need help with. And it will file them electronically. Plus it will remember everything you did for next year and allow you to save time next time you file. As long as you understand how to check your return on paper (which you do), you will catch any big errors where a box didn’t get checked. You are looking at tax software like someone that has never tried a smartphone since the first iPhone because their first phone crashed, deleted all their music and their contacts. Yes, you had a frustrating experience, but to claim it would be a backwards step to use it again 10 years later is, well frankly, backwards.


#10

My biggest concern now after reading replies is reliance on software that you don’t understand. It seems like no one actually understands how to file paper taxes and is completely reliant on tax software.

I have a fear of turning over my life to computers. Not in a Terminator Skynet way, but in a way of, if I don’t understand what the computer is doing, I’ll never be able to double check if it did it right.


#11

free file fillable forms is a good option. You enter the data on the replica of the paper forms, then e-file.

I do think you are overthinking things a bit - if you get audited, the problem is going to be with deducting non-deductible expenses, not how you deducted a valid expense. For the most part, and on your scale, they arent going to be concerned with your deducting a expense that technically shouldnt have been deducted until next year.


#12

I see you aren’t interested in using a tax program so I will just answer your main question. Yes, you can choose to depreciate your computer via a straight line method rather than doing a section 179 deduction. Assuming you’re not depreciating anything besides the computer, if you placed the computer in service in Oct-Dec, use the mid-quarter convention placed in service in the 4th quarter, otherwise, use the half-year convention. It has a useful life of 5 years.


#13

Who’s to say it won’t catch errors just as much as it misses stuff? And at the end, you still have a paper return plus all the supporting schedules to review to your heart’s content before filing.


#14

So you just want to know if you’re allowed to expense an asset under 179 and if so, how to fill out the forms? Why not just plug that one expense into some trial version of software and see what the form looks like?