Finance Tax Time

Is your business missing out on valuable tax deductions you can take for the use of your personal vehicle for business purposes?If you haven’t done so already, you should definitely beat a path to the door of your local office supply store and pick up a notebook for logging the mileage you drive to conduct businessand be sure to log the miles you drove to buy it!

Not taking the trouble to do this is like letting your pricey gasoline flow onto the pavement instead of into your tank!

Even if you work at home most of the time, miles you’ve driven to purchase office supplies, buy stamps or mail packages, and other errands for your business can translate into big tax deductions. With fuel costs soaring, you are literally throwing money down the drain if you are not keeping track of this mileage and taking the deductions for it to which you’re entitled as a business owner. And the first entry you need to make is the beginning mileage on the odometer as of January. You’ll also want to make sure that you keep track of all your automobile expenses associated with that personal vehicle that you’re using for business. (See why below…)

The dramatic surge in fuel costs has not been lost on the IRS. Of course, gasoline prices began to edge up shortly after the beginning of the war in Iraq; but the devastation wrought by Hurricane Katrina prompted the IRS to offer a valuable money-saving solution for business owners. (If you live outside the U.S.A. you should check your tax authority’s website for similar provisions.)

Last year,for 2005, the IRS increased the standard mileage rate for the use of a vehicle (car, van, or truck) by 3 cents a mile, to 40.5 cents a mile for all business miles driven. However, in the wake of Katrina, that rate was increased further to 48.5 cents a mile for the business miles driven in the months of September, October, November, and December, 2005.

This increased mileage rate ended with the end of 2005. The new mileage rate for 2006, effective January 1, is now 44.5 cents per business mile driven. You can maximize this deduction if you’re careful to consolidate business and personal errands. For example, I wait until I need to go to the post office to ship a package for my business to stop to at the drug store and supermarket right next door to pick up groceries. What would have been “dead” mileage becomes a deductible business trip, as long as you’ve logged your business purpose in your mileage logbook.

In addition, for both 2005 and 2006, the IRS also encouraged
Katrina-related charitable relief activities by granting
higher rates for miles deductible and miles reimbursable driven for such activities.

Of course, the use of these mileage allowances can be rather complicated. For example, you cannot take additional
deductions for business use of an automobile to which you
have already applied the Modified Accelerated Cost Recovery
System (MACRS), after claiming a Section 179 deduction for
that vehicle that your business purchased directly.

And if you’re using a personal vehicle for your business,
don’t forget to calculate the percentage of total miles for
the year that you travel for business purposes. At the end of 2006, you’ll note the year-end odometer reading in your mileage logbook and subtract from it the odometer reading that you recorded this month. Then you’ll add up all miles driven for your business that you have recorded and divide it by that total mileage to calculate the percentage of total miles you used for your business. If it turns out that 30% of your total mileage on that personal vehicle was for business purposes, you can deduct 30% of *all* your expenses for maintaining that vehicle: not only fuel, but all trips to the garage for routine maintenance or special repairs as part of your business expenses for the year.

The devil is in the details, as always, of course. You will want to consult your tax accountant on how best to apply the rules to your situation. If you prepare your tax returns yourself, you can get the details directly from the IRS website:

http://www.irs.gov/pub/irs-drop/rp-04-64.pdf. Examine the fine print closely: You’ll find that there are limits on what percentage of business use can be claimed for a personal vehicle, no matter what your actual numbers might be; so if your actual business mileage is greater than 75 per cent of your total mileage, you might be better off purchasing a separate vehicle dedicated to business use. If you’ve taken the care to structure your business correctly–using a corporation, limited liability company, or other stand alone entity–you and your business will benefit from even greater deductions.

(C) Copyright 2006 Azur Pacific Associates.
All formats and media, known and unknown.
All Rights Reserved.

Germaine A. Hoston, Ph.D. is a political economist, consultant and President of Azur Pacific Associates. She specializes in helping small business owners (those with fewer than 500 employees) maximize their bottom line by using business entities as alternatives to the popular but risky single proprietor/general partnership to minimize taxes and protect
personal and business assets. She is Editor of Azur
Pacific Associates’ free monthly WealthStrategies 202.com eNewsletter http://www.wealthstrategies202.comand an authorized reseller of the Secret Millionaire Asset Protection System http://www.wealthstrategies202.com/secretmillionairenopopup.html

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A corporation is a designated entity where the individuals related to it, and the company, have different legal identities. The reason most companies prefer to incorporate is asset protection - incorporation protects your personal assets from seizure during a lawsuit.

If you decide to incorporate your small business, you can choose the S corporation, C corporation or LLC model. Before choosing any kind of corporate model, you should look at the tax rules and regulations related to a corporation.

Tax Laws for Various Corporations

Tax laws vary from country to country and state to state. You need to go through them before and after incorporating. In general, all countries have mandatory tax requirements from companies. Your corporation needs to pay taxes on the profits it earns. Even if your corporation is registered abroad, you may need to pay taxes if you reside in your home country.

1) C Corporations have to go by standard corporate tax laws. They need to pay taxes on their profits, subject to certain deductions depending on their shareholding structure.

2) S Corporations are the best option if you have a startup company or a small business. S corporations do not have to pay income tax, and get to enjoy the advantages of being a standard corporation. The eligibility condition is that your small business should have less than 75 shareholders who are all citizens of the US. To get the benefits associated with the Subchapter S Corporation, you need to file an application with the tax authorities. If you want to submit taxes under LLC structure, you need to submit another application before the current financial year-ends.

3) Limited Liability Partnerships, or LLC, are preferred by businesses that need streamlined allocation of profits and losses. This facility is not available to S Corporations. LLCs need to file form 100 ES and Form 100.

S Corporation Taxes

Since this article is primarily concerned with entrepreneurs and small businesses, it would be relevant to go into the details regarding the S-corporation. If you decide to register yourself as an S-corporation to avail tax breaks, you need to keep in mind the eligibility conditions. Apart from the conditions already discussed, you need to remember that you have to use the calendar year as the financial year of the company. In addition, any shares your company sells have to be of a single kind.

Advantages of Being an S Corporation

1) The best thing about the S Corporation status is that the shareholders shoulder the responsibility for paying the tax as their personal income tax. Therefore, the corporation need not pay income tax twice over- first as a company and secondly as individual shareholders. In fact, most S corporations do not pay any tax.

2) It reduces the need for extensive paperwork when filing tax returns or declaring income.

If you wish to incorporate your small business and need more information about tax structures of various corporations, you can consult a small business advisor or tax consultant. Choose the type of incorporation carefully, as taxes will apply to your business based on that. Get yourself educated on the advantages and disadvantages of each type of incorporation vis-

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Offshore financial centers are often used to run tax shelters. They have little or no taxes, and little or no financial regulations. For example, in the British Virgin Islands, corporations can be formed without the public disclosure of the names of the directors or officers of the corporation. Favorite offshore tax havens include colonial relics such as the Cayman Islands (British), the Dutch Antilles and Curacao (Netherlands). Other places are feudal relics like Monaco, Liechentenstein and Andorra in Europe, or other nominally independent small nations from the old British, Dutch and French Empires. Other places historically in the U.S. zone of influence are Panama and the U.S. Virgin Islands.

The leading offshore center is the Cayman Islands, which is now the fifth largest banking center in the world, after New York, London, Tokyo and Hong Kong.

This is the backdrop on looking over legal papers from a court opinion on July 20th 2006. The judge in Texas District court ruled that certain technicalities of the case against the BLIPS tax shelter were wrong. This will have some effects in the case against 8 KPMG Accounting Firm former executives. KPMG itself has already pled guilty and paid a $456 million fine. One gets a feeling how these illegal tax shelter were carried out from these papers. BLIPS stands for Bond Linked Issue Premium Structure. It created a financial structure to make the capital gains tax deductions, through a capital loss. However, this “loss” had been paid at the beginning of the deal as the “premium”, hence the “BLIPS”.

The mechanism was as follows: Two companies in the Isle of Man (UK), St. Croix and another investment firm “Rogue” each borrowed $41.7 million from National Westminster Bank. The loans were for 7 years at fixed interest rates. The loans paid Interest Only, until a balloon payment at the end of the 7 years. St. Croix and Rogue agreed to pay high interest rates of 17.97%, in exchange for a $25 million payment to them from Nat West at the time the loans originated. So St. Croix and Rogue, received at the beginning of the loans a total of $66.7 million. Then the $66.7 million plus $1.5 million from each was put in an interest bearing loan at Nat West.

In addition, St. Croix and Rogue agreed to pay $25 million to NatWest, if they paid off the loan early, which is exactly what they did a couple of weeks later, May 25th, 2000.
To make it a little juicier, the two onshore companies behind the offshore companies had an interest swap deal with NatWest, where they received a floating interest rate, in exchange for the high fixed interest rate. Those under indictment argued that the $25 million that they received upfront was a liability or not. It was money they received, but it was not actually “loaned” to them. Plaintiffs argued that it was not a liability under IRS section 762, because this money was never lent to them. The tax shelters aim to create an illusion of capital losses, and also interest payments, both of which are tax deductible.

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