Even though the 2001 tax year has ended for most limousine and livery businesses ? and their owners ? there are still many tax strategies that can be employed and many new rules and tax rates, all of which can help both the limousine business and its owner reduce their tax bills. Remember, however, everyone should make the most of the existing tax rules ? all the while keeping an eye on the limousine operation?s potential tax bill for 2002.
While it may be too late to make more tax-deductible expenditures, it is not too late to use last year?s transactions to reduce that April 15 tax bill, perhaps even discovering a few overlooked or neglected items that can prove beneficial in achieving that lower tax bill. Most important, many limousine business owners may discover that the income received from their activities is not always taxable.
Income Under our tax rules, all income received by a limousine operation between January 1 and December 31 must be reported. In fact, all compensation for personal services, no matter what the form of payment, must be included in taxable income. But what about tip income received by a chauffeur or payments received as gifts ? such as those doled out after the September 11 terrorist attacks?
Cash tips paid directly to an employee by a customer and tips paid over to the employee for charge customers must be accounted for by the employee in a written statement furnished to the employer on or before the 10th day of the month following the month when they are received. The employee reports the tips on Form 4070, ?Employee?s Report Of Tips To Employer,? or on a similar statement.
An employer, for his or her part, must collect both income tax and employee Social Security on tips reported by an employee. Tips are usually treated as if they were supplemental wages subject to the flat 28 percent withholding rate without allowances for exemptions. This assumes, of course, that income tax has been withheld on the employee?s regular wages.
Otherwise, tips must be treated as part of the current or preceding wage payment of the same calendar year and are subject to the regular graduated withholding tables.
Keep in mind, however, tips are not gifts. The value of a gift is excludable from gross income. That means that drivers compensated by one of the September 11 funds or charities can ignore those amounts for federal income tax purposes.
Write-Off Basics There is more to taxes than merely beating the April 15 deadline and ensuring that taxes are computed on the correct amount of income. It also means making the most of your existing tax deductions and doing so in a manner that won?t adversely affect or reduce next year?s tax bill.
That means that if the limousine or livery operation?s income can be expected to be substantially higher next year, tax deductions would be worth more then than now. In other words, tax deductions, wherever possible, should be used to offset income in the highest possible tax bracket.
Every limousine business owner ? whether doing business as a corporation, a sole proprietor (individual), or a partnership ? is permitted to deduct (from gross income) all of the ordinary and necessary expenses of carrying on their trade or business that are paid or incurred in the tax year.
Expenses that kept your limousine operation?s property in ordinarily efficient operating condition and did not add to its value or appreciably prolong its useful life are generally deductible as repairs on the 2001 tax return.
However, no tax deduction is permitted for any expenditure that is a capital expense. Generally, those capital expenses must be deducted by means of depreciation, amortization or depletion.
Depreciation is defined as a deduction allowed to a taxpayer, representing a reasonable allowance for the exhaustion of property used in a trade or business. Depreciation, write-offs over a number of tax years, must generally be used for capital assets such as a new vehicle. And, don?t forget, up to $24,000 of qualified equipment acquisitions may be written off in the year of acquisition as a so-called ?Section 179? expense.
Don?t Overlook the Changing Basic Deductions Health Insurance That deduction for the health insurance expenses of self-employed limousine operators, for example, has increased incrementally from 1998?s 40 percent level to 60 percent in 2001. Self-employed operators can deduct 60 percent of the amounts paid during the year for health insurance for themselves, spouses and dependents from gross income.
In 2002, this amount increases to 70 percent of amounts paid for health insurance. This figure then increases to 100 percent in 2003 and thereafter ? all without action by our lawmakers.
Home Offices Those operators who operate their limousine businesses from home should not neglect the broadened availability of the home office tax deduction. Thanks to a ruling by the U.S. Supreme Court a couple of years ago, that deduction is now available in situations where a home office is used for administrative and management functions.
Under our tax rules, limousine business owners or operators are not permitted to deduct any of the expenses for using their homes for business purposes unless the expenses are attributable to a portion of the home (or a separate structure) used exclusively on a regular basis as either: the principal place of business, or as a place of business that is used by patients, clients or customers in meeting and dealing with the operator in the normal course of business.
Generally, a specific portion of the operator?s home must be used solely for the purpose of carrying on a trade or business in order to satisfy the exclusive-use test. This requirement is not met if the portion is used for both business and personal purposes.
On the other side of the coin, or in this case, the home office expense deduction, a limousine operator is denied a business deduction for basic local telephone service charges on the first line of his or her residence. Additional charges for long-distance calls, equipment, optional services (i.e., call waiting) or additional telephone lines may be deductible.
Tax Reform 2001 Last year?s Economic Growth and Tax Relief Reconciliation Act of 2001 offered limousine business owners an opportunity to reduce their tax bills with immediate tax reductions, new retirement planning provisions and employee benefit relief. There were also changes in estate taxes.
One of the more noticeable benefits for both limousine business owners and their employees is the lower income tax rate. The new tax law lowers ordinary income tax rates for the first time in nearly 15 years with an initial rate reduction this year and further decreases in 2004 and 2006.
The lower tax rates translate into lower withholding, meaning employees will keep more of their paycheck, and in essence, providing a raise for every employee at no additional cost to the limousine and livery operation.
Many small limousine business owners are aware that estate planning can have significant ramifications that, if not addressed early and thoroughly enough, could jeopardize the transfer of the limousine business to future generations.
Under the legislation, the amount of the deceased limousine business owner?s estate excluded from taxes will be raised and the top estate tax rate will be lowered over the next 10 years, with full repeal of the estate tax in 2010. The amount that may be excluded jumps to $1 million for 2002 (from the current $675,000); $1.5 million in 2004; $2 million in 2006; and $3.5 million in 2009.
Starting in 2004, the new bill also repeals the controversial family-owned business (QFOB) deduction that was established in 1997. The QFOB deduction was criticized as being overly complicated and not very helpful to the estates of small family business owners. The elimination of this deduction is more than made up for by the increased estate tax exclusion amounts.
When is it Deductible? Obviously, not every expenditure made by a limousine operation automatically warrants an immediate income tax deduction. Many limousine operators work to ensure that ... for more on this topic, see the April issue of LCT magazine.