One of the most common tax deductions I see missed is the business use of a personal vehicle. 

When I meet with new clients and discuss this deduction, I hear all sorts of reasons as to why they haven’t taken this deduction:

– They didn’t know they could
– They don’t use their personal vehicle that much for business
– They were told that since it was a personal vehicle, it couldn’t be deducted
– They thought it was a red flag for an audit

The truth is, anytime your business uses your personal vehicle, there’s a tax deduction, whether the business use is 1% or 100%.

Have Your Business Reimburse You – Tax Free!
Your business should reimburse you for allowing it to use your car – even if you are the one using it in the business.

When your business reimburses you, your business claims the reimbursement as a deduction, reducing the amount of business income that is taxable, which in turn reduces your overall taxes.

The tax savings get even better – the reimbursement you receive from your business is not taxable to you – it is tax free income.

Here’s What You Need to Do
To make this tax reduction strategy work, you’ll want to track how many business miles versus total miles you put on your car in a year. Your business miles divided by your total miles is your percentage of business use. This is a very important percentage because it is the percentage of your vehicle expenses for which you can be reimbursed by your business.

Vehicle expenses include:

– Maintenance
– Tune-ups
– Replacement parts
– New tires
– Gas
– Oil
– Washes
– Car loan interest
– Depreciation
– Lease payments

These expenses add up, which can mean big tax savings.

Multiply your total expenses by your percentage of business use and that is the amount of reimbursement to collect from your business.

Alternatively, you can have your business reimburse you based on the standard mileage rate. The standard business mileage rate is currently 56 cents per mile. This rate changes on a regular basis and can be found on the IRS website.  Multiply the number of business miles by the standard business mileage rate and that is the amount of reimbursement due to you from your business.

The standard mileage rate is used in lieu of other expenses. This means if you use the standard mileage rate, it is in lieu of your actual vehicle expenses for that year which include the expenses listed above.

Using the standard mileage rate method usually works best when your business mileage is high. If your business mileage is low, then using the actual costs will likely result in a greater deduction.

Regardless of which method you use, submit an expense reimbursement report to your business and have your business cut you a check. This is something you can do monthly or quarterly.

The Result is Permanent Tax Savings
The vehicle deduction is one of my favorite tax deductions because it has the ability to turn expenses you already have into legal tax deductions. This creates permanent tax savings.

There are two big obstacles most people run into when forming a tax strategy.

Obstacle #1: What is a tax strategy?
Obstacle #2: Where do you start?

What is a Tax Strategy?
Let’s break this term down and start with strategy.

A strategy is a systematic plan of action intended to accomplish a specific goal or purpose.  The specific goal or purpose is to permanently reduce your taxes.So, a tax strategy is a plan of action to permanently reduce your taxes.

Of course, most people are all for permanently reducing their taxes. What is typically missing in their quest to do that is the strategy piece. And it’s the strategy piece that produces the maximum results.The strategy piece helps focus our actions and thoughts every single day on permanently reducing taxes.It doesn’t have to take hours every day to get maximum results from your tax strategy. Instead, your strategy becomes a part of your daily routine.

Every transaction you do can have an impact on your taxes. Your tax strategy helps you think about your daily transactions in a way that gets you to your goal of permanently reducing your taxes.

Where Do You Start?
Think about planning a vacation. Let’s say you are going to Hawaii. When you go to book your ticket, you need to know where you are departing from, right? This is your starting point. It is impossible for you to get to Hawaii unless you know where you are starting.

The same applies to a tax strategy. You must know where you are starting. In your tax strategy, this means you must know your current financial position.

Your current financial position includes your current balance sheet.
Your current balance sheet tells you your current net worth. It’s calculated as follows:

Your Assets (what you own) – Your Liabilities (what you owe) = Your Net Worth
When you know your current net worth, you know the exact resources available to you to use in your tax strategy. Your specific assets and liabilities help create the best path for you in your tax strategy.

Your Current Statement of Cash Flows
Your current statement of cash flows tells you your net cash flow. It’s calculated as follows:

Your Income – Your Expenses = Your Net Cash Flow
Identifying your sources of income is the starting point of identifying how to reduce the tax on that income.
Identifying your expenses is the starting point of maximizing your deductions.

Get Started
The starting point to reducing your taxes and forming a tax strategy is understanding your current financial position.If you haven’t created your tax strategy yet, start by updating your balance sheet and statement of cash flows.If you already have your tax strategy in place, review your current financial position regularly to identify new opportunities for your tax strategy.

Your Tax Strategy and Your Wealth Strategy
If you are like most, the single biggest expense draining your cash flow is your taxes.When you reduce your taxes, you immediately increase your cash flow. Increased cash flow can be used to create wealth. Your taxes are a powerful way to feed your wealth strategy!

Bookkeeping is one of the most powerful tools when it comes to maximizing tax savings. It’s where the activity gets captured and when done properly, it can capture additional tax savings.While bookkeeping is often viewed as a necessary evil, it has the ability to give your tax strategy a boost in many different ways. Here are just a couple of those ways:

#1: Bookkeeping Captures What is Often Missed
When I look at a new client’s tax return, I often find that deductions are missed or understated. The most common are:

• Home office
• Travel
• Vehicle
• Meals & entertainment

These deductions are missed or understated because there is no system in place to capture the information. Bookkeeping is this system.

Let’s use the home office as an example. Some of the expenses related to a home office include:

• Mortgage interest
• Property taxes
• Utilities, including water, gas, electric, sewer
• Pest control
• Security
• Association dues

While many people capture some of these expenses, it’s rare to see all of these expenses captured. Most people capture the big items – mortgage interest and property taxes – but usually miss the smaller items. These smaller ones can really impact the tax savings because these expenses create permanent tax savings.

The expenses listed above are all paid personally. Keeping a set of books for your personal finances can really pay off in the form of additional tax savings. Any time you pay a bill that relates to the occupancy of your home office, code it accordingly in your personal bookkeeping.

Doing bookkeeping for your personal finances can also help identify expenses you may not have thought to include as part of your home office or other tax deductions.

#2: Bookkeeping Captures the Timeline
A very powerful form of permanent tax savings comes from how you pay yourself from your business. Many times there is a delicate balance between distributions and salary and using the right amount of each is what creates permanent tax savings.

This makes distinguishing the two very important – especially given that these amounts will be scrutinized if audited.

Your bookkeeping documents two key factors related to distributions and salary:

• The amount
• The timing

Your bookkeeping is a fantastic tool to track how much you have paid yourself in distributions and how much you have paid yourself in salary. Even more important, is the timing of your distributions and salary.Think about when you pay your employees. Is it a set period or is it whenever you feel like it? Of course, it is a set period. The salary you pay yourself should also follow this pattern. Your bookkeeping captures this pay period pattern, helping to support your salary as part of the company’s normal payroll.

Now, think about how large corporations pay their shareholders. Typically, dividend distributions are quarterly or annually. Your distributions should follow a similar pattern. Your bookkeeping provides documentation of the actual timing of your distributions which is very important in your tax planning.

Good bookkeeping is a necessity if you want to maximize your tax savings. This includes bookkeeping for your business, as well as, bookkeeping for your personal finances.

#1 Most Tax Planning Assumes You Want to Retire Poor
When I speak at a seminar, I ask how many people plan on retiring poor.It may not surprise you that no one raises their hand. It surprises me because the tax planning they have done works best if they retire poor.

This is because most tax planning focuses on tax deferral. Tax deferral means you are opting not to pay tax now and will pay the tax in the future.The most common example of tax deferral is the advice to maximize the contributions to your retirement plan.

Most retirement plans work like this:

– The money you contribute is deductible.
– The money you receive as a distribution when you retire is taxable.
– The tax is deferred until a later date.

What’s the problem with this? The deduction is at your current tax rate while the distribution is taxed at your future tax rate.If you plan on retiring rich, you will be in a higher tax rate when you retire. This means you are deferring your tax into a higher tax rate.

Example: If you are currently in a 25% tax bracket, and are in a 40% tax bracket when you retire, you are deferring your taxes into a higher tax bracket.This type of tax planning works best if you plan on being in a lower tax rate when you retire.

Example: If you are currently in a 25% tax bracket, and are in a 15% tax bracket when you retire, deferring your taxes works much better.If you plan on retiring rich, deferring your taxes will ultimately increase your taxes. Instead of deferring your taxes, create a tax strategy that focuses on permanent tax savings.

You may be wondering why tax deferral is such popular advice then? Because it’s easier than creating permanent tax savings. Creating permanent tax savings requires a much better understanding of the tax law.

#2 Your Taxes Keep You from Your Dreams
Taxes steal our time. In an average lifetime, no matter where you are in the world, taxes are stealing an average of 20 years of your life. That’s a prison sentence!

The average person spends 30% to 50% of their income on taxes.What if you were able to reduce your taxes (legally, of course) by 10%? Or 20%? Or even 30% or 40%?

You would keep more money in your pocket. You could then use this money to build your wealth.The result is more time – whether it’s an early retirement or not having to work as much.

#3 Following the Tax Law Can Improve Your Business and Investing
There are thousands of incentives in the tax law, in all countries, to encourage businesses and investors.Governments need businesses and investors to succeed. Governments want people to be employed. Governments want people to have housing. Businesses and investors help the government do this.

Governments are highly motivated to help businesses and investors succeed, so the tax law is written to help businesses and investors do just that. When looked at this way, the tax law is really an instruction book for businesses and investors.

The closer you follow the tax law, the more successful your business and investing becomes and the more money you’ll make in your business and investing.

Janice S. Vanderbilt, Vanderbilt CPA Group

By Janice Vanderbilt

People get into big tax trouble with their business because they don’t treat it like a “real” business.    

Annual meetings are an important example of this.A public company holds an annual meeting with its shareholders (owners). During these meetings, many things are discussed, including:

• Informing the owners of previous and future activities
• Reviewing and approving financial statements and budgets
• Declaring dividends
• Approving vendors

A public company keeps a written record of each meeting – these are the meeting minutes.

The topics of a typical annual meeting directly relate to a tax strategy which makes the meeting minutes an extraordinary tool to protect your tax savings. This is why it is so important to treat your business like a big public company when it comes to annual meetings and minutes.

How meeting minutes can protect your tax strategy
Meeting minutes are an ideal place to document the activity in your tax strategy, such as:

• Your salary
• Your bonus
• Your distributions (dividends)
• Loans to/from your company from/to you or your other companies
• Investments purchased
• Investments sold
• Travel expenses
• Vehicle expenses
• Use of your home office

Just to name a few!

Who should have meeting minutes?
When you think of meeting minutes as being a tool to protect your tax savings, then every company should have meeting minutes. It doesn’t matter if the company is an LLC, partnership, corporation or even a sole proprietorship.It’s always a good business practice to have an annual meeting. It’s a great time to review the past year and focus on the upcoming year. This falls right in line with the company approving your salary, bonus and/or distributions. Have a discussion about why the amounts are appropriate and document that in your meeting minutes.

An annual meeting is the ideal time to document activities the company has done and intends to do. For example, if one of those activities is to purchase real estate, the discussion can address if the real estate will be held long-term and rented, or fixed up and sold, or perhaps the company has something else in mind.

Two terms that commonly come up during a tax audit are “intent” and “facts and circumstances.” A tax auditor wants to know what a taxpayer’s intent was and what the facts and circumstances were for a particular transaction. Meeting minutes are one of the most effective ways to document these items.

What if your company is just you?
You may be wondering how you conduct your meetings if your company is just you. While you may be the only owner, you may have employees who should participate or you can invite members of your team of advisors to participate.

If you haven’t been holding annual meetings in your small business, now is the time to make the change.  Annual meetings will help you manage your business and will help you stay out of tax troubles.