Personal usage add-backs???

Question

Just got a letter from my accountant asking what percentage she should use for "personal usage add-backs". What does this mean and how do I work out the percentage she should use?

Answer 1

She's looking for any of the expenses in your business accounts which have some personal use, eg did you record the whole cost of a vehicle but 10% of the mileage is personal. Or did you record the whole cost of a mobile phone but 20% of the use is personal etc.

This also relates to assets. If you use your 'work' computer 50% personally that will affect the tax calculation.

Its to calculate the actual profits/losses of the business without taking account of personal items.

Can affect VAT but probably more likey for your income tax calculation that she is asking (particularly as you may not be registered for VAT).

Answer 2

Now we will look for the less obvious types of addbacks. Go through the expenses shown on the front page of your tax return, as well as the detail page which shows your company's Other Deductions. As you go through each line item, try to identify any personal related amounts that might be included in these expenses. You may want to try to calculate actual dollars or just do some percentage estimating here.
Examples of personal related addbacks which we see regularly are things like: Only about half of the amount of Auto Expense charged to the business is actually business related (the rest may include the operating costs for other vehicles driven by family members); or, only about a third of the amount of Travel & Entertainment is actually business related; or, much of the amount shown for Office Supplies is actually spent on items for your personal use; or, Inventory converted to personal use; or, Telephone & Utility expenses (from your home) are charged to the business; Insurance coverage (life, health, auto) for your entire family that is paid by the business, etc.

There is one important point that needs to be stressed at this point; all of your personal addbacks should be provable. A prudent business buyer is not likely to accept all of your adjustments on faith. If your run a lot of personal expenses through your business, keep records of these expenses. If you are under-reporting your business revenues and taking cash straight out of the business, you are only diminishing the the earnings that would be used in a valuation; not to mention the fact that the IRS would probably like to discuss this with you.

Answer 3

she's asking you whether there is any personal expenditure within your business costs. sentially teh answer should be as little as possible. Also - you are not allowed to reclaim VAT on any personal usage items, so you could get stung twice. Caveat emptor.