Bottom Line
Tax Tips
Managing your money

By Howard Abrams, PBS Tax & Bookkeeping

During income tax filing season many taxpayers throw their arms up and ask, “How can I owe income taxes when I don’t have any money? I didn’t make any money. How could I have made money when I don’t have any left?”

These questions can be answered by taking some time to ascertain what’s causing the problem. What most taxpayers fail to realize is how much they are spending on their personal living expenses or that perhaps deductions were left off their income tax return.

 

Q. How do I go about figuring how much I’m spending on my personal living expenses?

A. Since you just completed your 2010 income tax return, you should determine what your personal living expenses for 2010 were. Assuming you have a personal checking account, all the money you spent during 2010 should be in that checking account. For example, checks written for personal bills including your rent or mortgage, credit card payments, checks to yourself, to utilities, etc. will be listed on your check register.

You will need to include debit card expenses and all fees including from banks and ATMs. Allocate each item to categories such as mortgage payments, health insurance, telephone, insurance, heat, water, gardening, food and entertainment. Don’t forget to allocate your credit card charges and to account for ATM withdrawals.

Then add the totals of each category together to find all the money you spent personally for 2010. I bet you will be shocked. Then take the net profit from your business – which is found on form 1040 Schedule C, line 31 of your income tax return – and subtract your living expenses for the year.

If your personal expenses are higher than your net profit, perhaps you are spending too much. If your personal expenses are less than your net profit, you should have money on hand. If you don’t, you need to find out why. Maybe you are missing some deductions.

 

Q. How do I know if I am missing deductions?

A. First, you must satisfy yourself that the net profit you are paying taxes on was correct and, therefore, what you owed to the IRS was accurate. So, take the business net profit and compare it to your personal expenses. If what you spent personally is approximately what your net income was, then your net profit is probably accurate.

If your net profit is more than what you spent personally and you don’t have any money, you need to review how you arrived at your net profit. You are probably missing some deductions and therefore can lower your taxes.

The bottom line: You need to satisfy yourself that your income tax return properly shows what occurred during the year and that your net profit is correct.

If it turns out mistakes were made, you can correct them by amending your taxes by filing Form 1040X.

 

Q. Once I’m satisfied that my net profit is correct, what should I do?

A. Most important, pay your estimated taxes and do tax projections and tax planning throughout the year. Adjust your estimated tax payments accordingly. This should prevent surprises at tax time.

You should then review your business operations. Are you spending too much money in certain areas? Is your equipment in good running condition? Look at fuel efficiency and your repairs and maintenance. Could your fuel mileage be better? Are your repairs costing you too much, causing too much downtime and consequently a loss of income? Would newer equipment help and possibly pay for itself with better fuel mileage, less downtime, less spent for repairs – and therefore more income?

Also look at what you are spending personally. Your housing and food costs are already established as well as health, transportation, utilities and certain other necessities. But are you spending too much money arbitrarily? See if you can cut down or eliminate certain non-essential expenses. Try to control impulse buying.

Business and financial planning can help make the future an easier road to travel. LL


This article is written by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter-century. If you would like further information, please contact PBS at 800-697-5153 or visit their website at www.pbstax.com.

Please remember everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.

July Digital Edition