This week, I’ve been inundated with clients asking about Gray Area Tax Deductions. What?

It appears my local competitor has determined that certain business deductions are “gray area” and won’t risk a red flag from IRS to take the deductions. And I’m still sitting back asking myself what-the-heck?

If you need to make a purchase for your business, it’s an authentic need, you purchased the item, you are using the item, and you have a receipt - how is it a “gray area deduction“?

Some of these so called, gray area deductions were listed as:

* Calculators (because the client has a computer)
* Daytimer (because the client could use the computer)
* Coffee Grinder (ground coffee is cheaper)
* Television (used for training videos in the office - considered ‘entertainment’)
* Business Cards (because client changed addresses and needed to replace them)
* Communications Networks (because they’re ‘excessive’)
* Digital Cameras (because they can be used for personal use)

If the item on your list is used for your business, and is required for you to conduct business, it is deductible. For instance, the coffee grinder - while it probably isn’t necessary for my business to have a coffee grinder, I personally don’t drink much coffee (rarely if ever, if I don’t have clients). My clients often bring gifts of coffee beans, in small packets, as a Thank You for my services (I’m not sure where the custom came from, but it’s sweet). When they come for more services, I take a handful of coffee beans, grind them up, make a pot of coffee, and serve it while we do their business. It isn’t a big thing, and I could probably live without the deduction, but it is a business expense.

My tax client who asked about her coffee grinder, operates a very small, but lucrative Bed and Breakfast in my hometown. Of course she serves fresh ground coffee to high end visitors in her Bed and Breakfast, so of course, the coffee grinder is deductible. Ground coffee may indeed be cheaper, but since when did IRS have a bounty on high end expenditures? IF that were the case, would there not be more Executives traveling coach?

Next time you need a piece of equipment and you have good reason to purchase it for business, remember… It’s Deductible!

Income taxes are a substantial burden for business owners and real estate investors. There are few actions which can reduce your 2006 taxes after December 31, 2006. This article summarizes four options for reducing your 2006 federal income taxes during 2007. These include reducing revenue, increasing real estate depreciation, increasing expenses by conducting a fixed asset audit and increasing expenses by converting capital expenditures into operating expenses.

The basic process for calculating income taxes is simple:

Revenue - expenses = net income, or taxable income,

Taxable income x tax rate = income taxes

The formula is not quite as simple as stated above. The tax rate for most taxpayers steps up as their income increases. Hence, the calculation of income taxes is usually taken from a tax table. However, the above concept is correct.

Two options for reducing income taxes are to reduce revenues or increase expenses. It is not possible to change the tax rate except through congressional action. It may be possible to reduce revenue for taxpayers on an accrual accounting system. Taxpayers may be able to increase expenses by increasing real estate depreciation, personal property depreciation or operating expenses.

Accrual accounting recognizes revenue when it is earned. For example, revenue for a project completed in December would be recognized in December even though payment was not expected until January. Cash basis accounting recognizes revenue when payment is received. Accrual basis taxpayers can review revenue which has been booked but not yet received. In some cases, it may be appropriate to increase the allowance for bad debt. There is little cash basis taxpayers can do to reduce revenue (after the end of the year).

Most real estate owners can sharply increase depreciation by obtaining a cost segregation study. Cost segregation is a more accurate method of calculating depreciation than simply separating land and long-life property. The IRS has developed detailed guidelines for correctly prepareing a cost segregation study. Real estate depreciation schedules are typically established by simply separating land and long-life property. Long-life property is depreciated over 27.5 years for rental residential property and 39 years for commercial property. Cost segregation can usually increase depreciation by 50% to 100% during the first five to seven years of ownership by allocating a portion of the cost basis to 5, 7 and 15 year property. Short-life property includes items such as carpet, vinyl tile, some signs, sidewalks, landscaping and paving. In addition, real estate owners can "catch-up" depreciation under reported in prior years without filing amended tax returns.

Fixed asset audits can be a cost effective means to increase operating expenses by removing phantom assets, removing operating expenses mistakenly coded as capital expenditures and correcting the depreciable life for incorrectly coded items. Phantom assets can include assets which have been lost, stolen or disposed of without removing them from the accounting records. The undepreciated basis of these assets can be converted to an operating expense after the error is discovered. In some cases, substantial operating expenses are incorrectly added to the fixed asset listing as capital expenditures. This could include items such as substantial roof repair or parking lot repair. Another example is extensive repairs to a massive chilled water cooling system; are these repairs or a capital improvement? Accounting professionals could vehemently argue both points of view. The undepreciated basis of these items can be converted to an operating expense and written off when the error is discovered. The fixed asset listing is massive for many companies, sometimes exceeding 1,000 pages. With so many assets, it is difficult to ensure all are accurate. For items added with an incorrect and excessive depreciable life, it is possible to revise the asset life and "catch-up" depreciation under reported in prior years without filing an amended tax return. Instead, a form 3115 is filed with the tax return.

The difference between capital expenditures and operating expenses is often subjective. Are substantial roof repairs a capital expense or an operating expense? Reviewing disbursements which were listed as capital expenditures in 2006 may uncover items which can be converted to operating expenses.

Federal income taxes are a substantial expense for successful businesses. However, since it is difficult to profitably operate a business, it is worth reviewing legitimate options to keep more of what you have earned. Tax planning is less glamorous than purchasing a new company or developing a new division. However, a modest effort focused on reducing federal income taxes can sharply increase net income.

One of the big incentives to buying a hybrid is the Federal Tax Credit that rewards you for your 'green efforts.' The reason why the Federal government suddenly became so generous is because of the higher prices that hybrid buyers were faced with. This meant that far fewer cars would be sold.

And since the U.S. hybrid car program was started by the Federal government to begin with, they have an obligation to the American public!

Especially since our Japanese friends out-engineered us shortly after President Clinton commissioned the hybrid-electric car program back in 1993. Japan's total domination of hybrid car technology resulted in the complete withdrawal of U.S. auto manufacturers from the hybrid car program by 2001. Because by this time, the Toyota Prius was everywhere, with Honda not far behind.

Where was the U.S? Ford and a couple other Detroit automakers were quietly making deals with Toyota to license their technology. It's no secret that the U.S. has been playing "catch up" to Japan in nearly all automotive technologies for many years. And hybrid technology is definitely no exception.

Anyway, the Federal tax incentive program is a pretty good deal, and it's written to reward those good folks who elect to go for the really "good" hybrids. That is, the hybrids that substantially improve on their gasoline-only counterparts. The bigger the gas savings, the bigger the tax credit.

Here's how it works:

Every person who bought a hybrid vehicle after JAN 1st, 2006 is eligible for a tax credit up to a max of $3400, based on how the particular vehicle that he bought compares to the average car of its class and weight from 2002. Specifically, buyers will receive a $400 tax credit for every 25% improvement in efficiency.

In addition, you may be credited more money (to a max of $3400) based on how much fuel the government anticipates you will save based on the size and weight of the car.

But, there is a catch:

This credit is given to only the first 60,000 vehicles sold by each different manufacturer. Some--like Ford, for instance, don't even plan on making 60,000 hybrids through half of 2007. So each and every person who buys a Ford hybrid will get the credit.

Toyota, however, is a whole other story: They'll blow through their 60,000 quota in no time flat, leaving the remaining buyers federal tax credit-less. But then again, the Toyota Prius gets so much better gas mileage than most of Ford's larger hybrids that Ford's buyers don't stand to get anywhere near the max $3400 tax credit anyway.

The hybrid tax credit system is likely to change in the not-too-distant future, though. Hopefully, it will cover everyone until everyone is driving a hybrid!

Here are 7 More Common Tax Mistakes many taxpayers make according to Jeff Schnepper of MSN Money

1 – Bad Math

Math errors in addition and Subtraction are the number 1 Mistake taxpayers make according to the IRS. The IRS will automatically check all returns for common math errors and generate a correction notice if any are found

2 – Forgetting to Report Interest and Dividends

The IRS cross checks your returns often electronically from data it gets from banks and other financial institutions to insure all interest and dividends are reported. Of the 10 Million correction notices the IRS sends out about interest and dividends about ½ of them are wrong or unclear.

3 – Improper Reporting of Investment Gains and Losses.

When mutual funds are sold often the Gains arn losses are incorrectly reported to the IRS

4 – Getting Married

The difference in Taxes 2 single people pay versus a Married couple may make you want to consider pushing that November or December wedding to the following year, perhaps Valentines Day.

5 – Loosing Track of Receipts

Keep all receipts 3 Years if you are using them for tax deductions

6 – Failing to Bunch Deductions

Some Deductions are only allowed after they exceed a fixed amount of your income. As an example medical deductions are only allowed after they exceed 7.5% of your income. A Taxpayer who earns $50,000 a year would only be allowed medical deductions in excess of $3,750. Prepay your health insurance for January in December is one way to bunch this Deduction.

7 – Forgetting to donate

Make a happy of going through your closet in December and donate unwanted clothes and other items prior to December 31st.

One of the questions I hear most often from eBay sellers is how to value inventory for purposes of preparing their tax return, especially if it was purchased at a garage sale, or if you used the item before you sold it on eBay.

For new items that you purchase for inventory, make sure you keep all of your receipts. In addition, you might want to keep a spreadsheet with a description of the item purchased, date, and the purchase price, including shipping costs.

For items that you purchase from a garage sale or thrift store, you may not get an itemized receipt from the seller. So, I would encourage you to write up a receipt (carry a small notepad with you while garage sale shopping or thrift store shopping), while you are still at the garage sale or thrift store. Record a description of the items purchased, date, amount paid, and the location. Ask the seller to sign the receipt you wrote up.

The hardest inventory to value is inventory that you used for personal use before you sold it on eBay, such as clothes you bought for your children that they have outgrown. Before you sell these items on eBay, you should research similar items to see what they have sold for on eBay or similar auctions. For tax purposes, the value of your inventory is the average selling price on the similar items you researched. Print out your research, and be sure to enter the average selling price on your inventory spreadsheet, in case the IRS comes knocking.

If you clean out your garage and list the items on eBay for sale, you cannot claim a loss on their sale. The amount used as your cost basis in inventory converted from nonbusiness use can be no greater than its fair market value at their time of conversion. You also must be able to prove the property’s cost or you may be denied any basis (you’ll have to report the entire proceeds as gain).

The most important thing to remember is to keep good documents. If the IRS audits you and you can't provide documents showing how much you paid for an item, they may claim that your cost basis is $0, which means you will pay tax on 100% of the sale price instead of just paying tax on the profit.

To your financial success,

While many business owners recognize the importance of having a secretary and an accountant at their disposal, few realize the equally significant need of having a personal tax attorney.

A tax attorney is an attorney with specialized skills or expertise in taxation laws. Although he can also represent clients regarding other aspects of the law, a tax attorney will be especially helpful when it comes to resolving tax problems and issues. A tax attorney generally has advanced training and education in taxation law to distinguish him from other lawyers.

There are basically two ways for tax attorneys to provide aid to you or your business:

Tax Planning – Tax attorneys are like financial managers in the sense that they manage your financial affairs to ensure that you will not encounter any tax difficulties in the future. Tax attorneys will guide you in every step and steer you to the right path when your finances are beginning to wave a red flag at the IRS.

Tax Controversy – Tax attorneys can also defend your rights when you’re already embroiled in a tax controversy. If you’re already having difficulties with your taxes, a tax attorney will help you out by straightening your affairs and clearing your name. A tax attorney will be able to reduce penalties, remove liens if possible, and negotiate whatever needs negotiating with the government.

When Should You Hire a Tax Attorney?
The answer to this question depends entirely onto you. You can head off potential troubles for you and your business by paying a monthly retainer to your tax attorney. As such, he’ll be able to act in an advisory capability and warn you when you’re about to do something wrong. He can also coordinate with your accountant regularly to ensure that you will have no tax trouble in the future.

Of course, you can always opt to hire a tax attorney only and only when you are already experiencing tax difficulties and you feel helpless in the negotiation table with the IRS. While the first option is the most ideal, this second option is still better than not hiring a tax attorney at all. Only few civilians or business owners have the necessary skills and attitude to deal effectively with the IRS.

How Much Will a Tax Attorney Cost?
If you wish to employ a tax attorney by paying him a monthly retainer, the fee will range from several hundred to more than a thousand dollars every month, depending on the duties and responsibilities you wish for the attorney to take care of and the law firm you’re transacting with.

If you wish to consult with a tax attorney only when there’s a need, you may be charged by an hourly rate. Again, the rate will depend on the law firm you’re transacting with and the problem at hand.

If you are hiring a tax attorney to handle your tax case, you may not need to pay any of his fees at all if you win your case. The IRS will be responsible for it instead. Your tax attorney may also opt to have a percentage of your tax savings.

Its income tax time again. With the April 15th Deadline fast approaching you need to beware of these 9 common income tax mistakes as stated by Intuit the makers of Turbo-Tax.

1 - Not taking all of your deductions.

The 2 most common deductions missed are charitable deductions and the home office deduction. Many people underestimate the value of clothes and other items given to charity. Many taxpayers who are legally entitled to the home office deduction fail to take it for fear of being audited

2 – Not accounting for Reinvesting Mutual fund Dividends

Buying extra shares with reinvested dividends can affect your cost basis when you sell. Many taxpayers overpay the IRS because they don’t adjust the tax basis.

3 – Not claiming carryover items.

The two most common carryover many taxpayers miss are state and local income taxes paid with the prior year return and carryover capital losses.

4 – Not naming a beneficiary or naming wrong Beneficiaries to your IRA, 401k or other retirement plan.

If you fail to name a beneficiary then the money passes to your estate with unwanted tax consequences to your heirs.

5 – Not taking advantage of Matching employer contributions.

Many employees fail to invest in company sponsored retirement plans and loose out on matching contributions

6 – Failure to make estimated Quarterly Tax Payments.

Self Employed taxpayers are required to pay estimated quarterly payments to the IRS. Failure to do so may cause and underpayment penalty

7 – Poor planning in exercising stock options.

Taxpayers who exercise stock options then sell the underlying stock fail to anticipate and set aside money to pay the capital gains tax

8 – Not adjusting withholding when you change Jobs.

Taxpayers who change jobs for more money don’t always adjust their withholding to account for the higher pay and tax burden that goes with it.

9 - Contributing to a Roth IRA when your Income is too high.

Single taxpayers who earn over $110,000 or married Taxpayers who earn over $160,000 cannot contribute to a Roth IRA.

Less than 10 years old, Google has burst onto the scene like few companies in modern times. Now it is learning to throw around its weight when it comes to tax issues.

Google likes to utter the motto of “do no evil.” Of course, most people don’t believe this anymore given some of its recent predatory activity and collusion with the Chinese government on censorship. Regardless, many people in North Carolina are also starting to wonder how Google steamrolled their government to the tune of over $160,000,000!

As Google grows, it needs more facilities. More importantly, it needs some place to put them. Unlike other businesses, Google now has the clout to “massage” good deals on prospective locations. The massaging has everything to do with tax relief.

When any massive corporation starts considering a new facility, the states “come a runnin’” Why? Well, the states are looking for job creation. If they can get a large company to build a facility, jobs will be created. More jobs mean happy constituents. Happy constituents tend to re-elect politicians.

So, what do states have to offer the gigantic corporations? Nice views? Great weather? Nope. Taxes relief! The states essentially tell the corporation that they will waive certain taxes so long as the corporation agrees to build their facility within the state. It may sound sleazy, but it is an age old situation.

In the case of Google, North Carolina competed with other states to get the new facility. After all, a $600 million dollar facility is going to need a lot of employees, right? Well, Google apparently was unwilling to commit to any job creation numbers. North Carolina apparently decided it was worth the risk and took the plunge. It now appears the new facility will only result in the creation of a maximum of 200 jobs. Oops.

So, what did North Carolina give to Google to get the facility? The kitchen sink! The state has agreed to some massive tax benefits. It has waived all personal property taxes Google would have had to pay for 30 years. It also waived 80 percent of the real estate taxes the company would have to pay for 30 years. Now that is tax relief!

Should Google be blamed or condemned for running over the North Carolina politicians? No. Business is business. The next time you hear the “do no evil” slogan, just know it comes with a wink!

Society seems to change daily as time passes. The once proud institution of marriage has definitely taken a hit. With roughly half of all marriages failing, tax issues have to be addressed.

Divorce is an ugly subject no matter how you look at it. Brawling parents, stressed out kids – oh, the fun. The divorce process can take a long time and be expensive given the hourly rate of your friendly family law attorney. When the final divorce decree has been ordered by the court, the fun isn’t over. Yep, you and your ex-now have to deal with tax issues. Understanding them can avoid making a bad situation worse.

Alimony is a big issue in many divorces. Alimony can generally be described as payments made from the wage earning spouse to the other to maintain a certain lifestyle. The subject is well beyond the scope of this article, but it is a frequent issue in most divorces. Each state handles it differently. The IRS, however, has a very specific written in stone and you need to know about it.

The IRS wishes to congratulate you on your divorce by introducing tax liability to it. In this case, the agency is going to tax you on any alimony payments you receive from an ex-spouse. If you are the one paying, the news is a little better. You can deduct the alimony payments! Both of these rulings are only applicable if the final divorce decree states that one spouse must pay the other alimony. If it does not contain such wording, then any payments are neither taxable nor deductible. How exactly the IRS came around to this view is a bit of a mystery, but it apparently likes to add just a bit more tension to a tense situation.

Divorces are really ugly when there are kids involves. Nothing gets nastier than a fight over child custody. Well, maybe the next fight over child support payments! Child support is such a touchy subject that even the IRS will not touch it. The agency apparently took one look at the subject and decided to avoid it all together. In tax terms, child support is neither taxable nor deductible.

If you are considering a divorce or in the middle of one, things can be stressful to say the least. Unfortunately, the IRS doesn’t really seem to care so make sure you understand their will be tax issues to deal with as well.

If there is something people enjoy less than preparing their tax returns, it is hard to imagine. If you look to another to do the job, be very careful who you pick.

The internal revenue code is a beast of government inefficiency and confusion. I dare you to pull it up on the web and try to give it a read. I guarantee you will be suicidal by the fifth page or at least trying to pluck your eyes out. Heck, even most IRS employees don’t understand it. In a study a few years back, an independent group found IRS employees gave out the wrong tax information to taxpayers 50 percent of the time! Former President Carter even called the code a crime against humanity. Hard to argue with that.

As we close in on April, many people will think about having a go at preparing their own taxes. Some will actually go through with the process. Most, however, will throw their hands in the air and look for someone else to handle the mess. This someone else is the infamous tax preparer.

Most tax preparers are good, honest people. CPAs, in particular, are also schooled in all things tax and can get your return prepared with the minimum of fuss. Unfortunately, non-CPAs can be hit and miss when it comes to providing a quality service. In fact, you really need to know who the person is and whether they are even remotely qualified to do your return. Don’t believe me? Well, the indicted school bus driver/tax preparer may change your mind.

Yolanda White is a school bus driver in St. Louis. Well, she was. Apparently looking to make a little extra cash, she started offer tax preparer services on the side. While driving a bus full of kids around prepares you for many things, such as war, it really isn’t helpful when it comes to the old 1040 form. Ms. White is finding this out the hard way.

On February 1, 2007, the Department of Justice was successful in obtaining an injunction barring Ms. White from preparing any further returns. She apparently had problems claiming the correct deductions and amounts for the same. The IRS audited 30 of the returns she had prepared out of 337 and found all over them to fraudulently claim deductions that had no business being claimed. Where a deduction could be claimed, she also had a habit of inflating the amount of the deduction well beyond the actual amount that could be claimed by the taxpayer. The IRS is now planning to audit the remaining 307 returns she prepared.

Preparing your taxes is pretty low on the totem pole of fun. That being said, make sure you use someone who is qualified to do it should you go in that direction.