How Net Operating Losses Can Save You Money

This week we are going to tell you about something that can really put some money in your pocket when it comes to taxes.  We are going to talk about Net Operating Losses.  You will often hear this term shortened to NOLs, and this is how we are going to refer to them.

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So, what is a NOL?  An NOL has to do with your Adjusted Gross Income on your tax return.  Your Adjusted Gross Income is calculated by adding up all of your income from all possible sources.  This includes things such as wages, self-employment income, rental income, Social Security income, farm income, unemployment, interest and dividends, and any other income you may have.  It also includes any losses from a business or the sale of stock.  So if you loose money in a business or sale of stock, you would subtract that amount from the total of your other sources of income.  An NOL occurs when your Adjusted Gross Income is a negative number, which means you lost more money than you made in a given year.  NOLs are most commonly caused by the day-to-day operations of a business or an investment that has lost money.  That is why it is called a net operating loss.

You may be wondering how a loss is a good thing, or how loosing money can save you money.  Well, it’s obviously not the ideal situation; but the thing you need to know is that if the loss is big enough, you can take that loss and carry it back to previous years and get some of the taxes you have paid back; or you can carry it forward to future years of income to avoid paying future tax.  So let’s say you had a profitable year in 2009 and owed $20,000 in taxes.  Then in 2010, you had a bad year and lost $100,000.  This would create a NOL.  You could then carry back the $100,000 loss to 2009 and get back some or all of the $20,000 in taxes you paid.  This is called a Carry Back.

A Carry Back can save you thousands of dollars in taxes.  If you want to learn more about NOLs and Carry Backs, check out our CD and/or MP3 “Understanding NOLs and Audits,” or contact us for a free 1-hour consultation.  If you own a business and have lost a lot of money, this could really help you save money on taxes and get back some money you have already paid.

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What will the IRS Audit You For in 2012?

Every year the IRS publishes the “Audit Technique Guides.”  This guide is used to train audit examiners in certain areas.  The guide contains, among other things, areas that the IRS will be focusing on in the coming year when they choose to audit individuals and businesses.  This guide is helpful for tax preparers and tax payers because it gives us a hint to the areas the IRS will be focusing on.

In this post, we are going to give you a list of some of the things featured in this year’s “Audit Technique Guides” that are important for you to know.  The IRS will be looking for:

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  1. A lack of internal controls. This is how you are running your business.  Do you know what is going on with your business by being in charge of where the money goes or do you have employees who are in charge of paying bills, etc?  Weak internal controls makes is easier to lose track of income, and this is a great concern to the IRS.
  2. The type of records maintained.  Do you have a valid way of keeping track of your income and expenses that would be acceptable in an audit?
  3. The use of bartering.  Bartering has always been a red flag for an audit.  The value of products and services that are traded must have detailed records of their value and must be included in income.
  4. Shifting or assigning income to a related entity.  Having multiple entities that are owned by other entities is a great tax and liability strategy.  It is an acceptable way of doing business as long as it is not used to try to evade taxes by deliberately shifting your income around.
  5. The use of the Internet.  With more and more business being done over the internet, the IRS has become increasing worried about tracking taxable income.  So, they are looking more closely at companies that do the bulk of their sales and services over the internet.
  6. The use of a fiscal year to defer income.  A fiscal year is a tax year other than January to December.  Many larger companies use a fiscal year so they can do their taxes at a time of year that is more convenient, such as when their business is slower.  As long as it is not used to alter tax liability, it is perfectly acceptable.
  7. Travel.  Many people mix business with pleasure.  It is very important if you are planning a trip that you would like to combine with business,  to plan ahead and document everything you do for business.
  8. Independent contractor vs. employee.  This is an area that the IRS has been increasingly more aggressive in.  There is certain criterion that qualifies a person as an employee rather than contract labor.  It is very important to follow the rules if you want to treat someone as contract labor.
  9. Meals and entertainment.  This is an area that is common to almost every business and is very easy to misuse and under-use.  We have seen everything from people deducting every meal they eat to people afraid to deduct any valid meals and entertainment.  Business meals must be an ordinary practice for your type of business and business must be conducted during the meal. You can’t deduct a meal just because you didn’t have time to pack a lunch.    It is very important to follow the IRS guidelines and keep good records about why you feel it is a business expense.

These are a few of the major things the IRS is looking at.  For more detail on these areas check out our resources at www.avoidbeingaudited.com

7 Medical Expenses You Should be Deducting on Your Taxes

If you want to deduct your medical expenses on your taxes, you have to know that they are limited to 7 ½% of your income.  That means the before they will start helping to relieve your tax burden, they have to add up to 7 1/2% of your income.  So if you make $50,000 you would have to spend over $3,750 on your medical expenses.  Because this percentage of things is so high, many people don’t consider even adding up their expenses.  This is foolish!  You’d be surprised how often all the little things you pay for add up to 7 ½% or more.  So to help you know what you should be adding up, here is a list of 7 medical expenses you should add up every year at tax time:

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  1. Insurance Premiums.  Any medical or dental insurance premiums you pay for are deductible.  This includes premiums for long term care. Also included is supplemental insurance such as your part of Medicare part B and D.  However, you cannot deduct premiums that were paid through your employer with pretax dollars.
  2. Prescription Medications.  This includes anything prescribed by a doctor or dentist that you pay for out of pocket.  Over the counter drugs cannot be deducted.
  3. Payments to Doctors and Dentists.  This includes anything you pay to a medical professional which includes: medical doctors, dentists, eye doctors, acupuncturists, chiropractors, occupational therapists, osteopathic doctors, physical therapists, podiatrists, psychiatrists, psychoanalysts, and psychologists.  Usually you pay these kinds of professionals for office visits and the procedures and tests you receive at those visits.  But, it can also include procedures outside of the office such as a surgery in the hospital that is billed by the doctor.
  4. Medical Examinations. This includes things such as x-rays and laboratory services.
  5. Treatments such as insulin treatments, physical therapy, and whirlpool baths your doctor orders.
  6. Travel Costs.  This includes travel by ambulance and also the cost of using your own vehicle.  Driving back and forth to any of the above medical professionals, hospitals, and medical facilities is deductible.  You can figure the percentage of gas and oil or you can deduct 16.5 cents per mile.  You can also deduct parking and tolls.
  7. Medical Aids.  These include eye glasses, contact lenses, hearing aids, braces, crutches, wheelchairs, and guide dogs. You can also deduct the cost of maintaining them.

These are only 7 of the many medical expenses that you can deduct on your taxes.  And as you can see they can really add up.  Check out our CD, “Itemized Deductions & Gambling Winnings” to learn more about other deductible medical expenses as well as tons of deductions you can take on your taxes!

Have questions or comments? Please post them! We’d love to hear from you!

How Gambling Affects Your Taxes

This week we would like to focus on gambling winnings and losses.  If you are going to participate in gambling, it is good to know how gambling winnings affect your taxes because it is different from any other kind of income.   If you are not careful, you can run up a very large tax bill.  For example, let me tell you about a client we have worked with and their experience with gambling.  James and Laura live in a small town in Nevada that has several casinos.  They enjoy going to the casinos after work and on weekends.  They win a lot of money and spend a lot of money.  In the end, they usually break even.  One year they won about $250,000 combined.  In reality, it cost them more than that to win it. Because of the way gambling is recorded on the tax return, they ended up owing about $10,000 in taxes above what had been withheld from their pay checks.

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Here is the reason why. If you go to a casino and win over $600, the casino is required to report it to the IRS.  At the end of the year you will receive a form 1099 for everything you won.  At tax time, the winnings are reported on your tax return as “Other Income.”  It is added to all the “Other Income” you have such as wages, interest, capital gains, etc.  You may ask, “What about all the money it cost to win that money?”  Whatever you put into the slot machine or other game is deductible on the Schedule A and is not subject to any limitations like some of the other deductions.  However, it is limited to what you won.  So if you won $1000 but spent $1200 you can only deduct $1000.

So why did James and Laura owe so much in taxes?  Here is what happened.  There are certain deductions that come with limitations.  If you make too much money your itemized deductions as a whole are limited as well as child tax credits, daycare expense, energy credits, education credits, just to name a few.  On a tax return, gambling winnings are calculated into your income, then your itemized deductions are taken out, then your gambling losses are taken out.  So those gambling winnings can bump your income up so high that your deductions become limited, and your losses aren’t taken into account until after you have been limited.

This is what happened to our clients.  The $250,000 in gambling winnings bumped up their adjusted gross income to $350,000.  That lowered how much they could claim for medical and employee business expense. It also lowered how much they could claim for itemized deductions in general. So they got stuck with a $10,000 bill.

You can avoid these high taxes if you know how to claim gambling winnings correctly and know how to plan for them.  Visit avoidbeingaudited.com to learn more about how to plan for your gambling winnings.  We have a ton of great resources to help you save on your taxes.