Home Office Expenses

Are you taking all available deductions?

Having a home office may provide tax savings. To claim a deduction for the business use of your home, you must qualify under one of the following circumstances:

•     You use a portion of your home regularly and exclusively (1) as the principal place of business for a trade or business; (2) as a place to meet with clients, patients or customers in the course of the trade or business; or (3) in connection with your trade or business, if the location is in a separate structure not attached to the home.

•     Your employer requires that you maintain a home office for their convenience and you meet the regular and exclusive use requirement.

•     Your home is used for the storage of inventory or product samples used in your trade or busi­ness of selling products at retail or wholesale, and there is not a fixed location for storage. (The regular and exclusive use requirements do not need to be met.)

•     You operate a day care out of your home. (If you do not meet the regular and exclusive use requirements, you can still claim a home office deduction if you are complying with state and local laws in operating your home day care.)

Note: “Exclusive use” means a specific area of your home is used only for your trade or business. The term “principal place of business” includes a place that you use for administrative or management activities of any trade or business if there is no other fixed location where you are able to perform those activities.

Calculations

There are two ways to calculate your home office deduction. The simplified method uses a standard deduction. If you maintain a qualifying home office, you may elect to deduct annually $5 per square foot of home office space up to 300 square feet, for a maximum deduction of $1,500. If you choose this method, you cannot depreciate that portion of your home; however, you can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Alternatively, you may calculate your deduction using the actual expense method. Consider direct and indirect expenses when making home office calculations. Direct expenses are those that pertain exclusively to the home office, such as painting the walls or installing new cabinets, shelving, carpeting, etc. Indirect expenses are those that pertain to the entire residence, such as rent, mortgage interest, taxes, insurance, repairs, casualty losses and depreciation. Allocate indirect expenses between the business and non-business portions of the home. This is done based on the business use percentage of your home.

Limitations

The amount of expenses you can deduct are subject to specific limitations and ordering rules. The overall limitation is based on your net income from your trade or business. For employees, this is your wage less other business expenses listed on Form 2106. For self-employed taxpayers, this is the net income shown on your Schedule C without the home office deduction.

Home office expenses can represent a significant dollar amount in reducing your tax liability. I’ve just provided you with a basic overview of this fairly complicated area of tax law. If you think your situation meets the requirements, give me a call and we can discuss how to qualify for home office deductions. As always, I’m here to help with these calculations.

Request Form W-9 Before Payment

The info you’ll need to file Form 1099-MISC

When non-employees perform work for you in your trade or business, it’s important to obtain a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, before paying them. Taxpayers use a Form W-9 to provide their correct TIN to the person who is required to file an information return with the IRS to report income paid to the taxpayer.

If you pay someone who is not your employee $600 or more, you are required to issue a Form 1099-MISC, Miscellaneous Income. You are not required to issue this form for payments made to a corporation. To accurately complete 1099-MISC, you’ll need to collect the information contained on the taxpayer’s W-9.

It’s best to obtain a W-9 before paying the individual. If you wait until after the fact, he or she might refuse to give you one, causing you to have to file an incomplete Form 1099-MISC to the IRS, which can result in you owing back-up withholding. If you plan to pay someone who is not an employee, you may want to consult me to ensure that you are taking proper precautions.

Contributing to a Retirement Plan Can Save You Money

Reduce your taxable income while building a nest egg

Investing the maximum allowable contribution per year to a retirement account is a great way to reduce your taxable income. Below, are several types of accounts that are available to taxpayers.

Traditional 401(k) Plans

401(k) plans are a common way for businesses to help employees save for retirement. Traditional 401(k) contributions are not considered taxable income, so investing in a 401(k) is a great way to invest in your retirement while also cutting your taxable income for the year. Amounts invested in this type of account are not taxed until they are distributed.

If your employer matches your 401(k) contributions, you may want to consider investing the maximum amount allowed for 2017, which is $18,000 for those under the age of 50 and $24,000 for those 50 and over. Keep in mind, these amounts are per individual. There is no such thing as a spousal 401(k).

Roth 401(k) Plans

If your employer allows you to put some or all of your 401(k) contribution in a Roth 401(k) account, you may want to consider doing so. Although there is no tax deferral with this type of contribution, it does grow tax free. Generally, distributions from a Roth 401(k) plan are not taxed. The contribution limits for a Roth 401(k) are the same as the limits for a traditional 401(k).

Traditional IRA Plans

Contributions made to a traditional IRA may be fully or partially deductible. Generally, amounts in your traditional IRA, including earnings and gains, are not taxed until distributed. If you’d like to potentially reduce your taxable income through this type of account, the contribution limits for 2017 are $5,500 if you are under age 50 and $6,500 if you are age 50 or older.

Roth IRA Plans

A Roth IRA is an IRA that is mostly subject to the same rules that apply to a traditional IRA. The main difference is that you cannot deduct contributions to a Roth IRA. The same yearly contribution limit applies to all of your Roth and traditional IRAs, but note that your Roth IRA contribution might be limited based on your filing status and income. The contribution limits for a Roth IRA account for 2017 are the same as the limits for a traditional IRA.

If you need help determining which account is right for you, we would be happy to assist you.

Other Tax-Saving Options

There are many ways to save

Like retirement plans, there are additional education and healthcare related plans that may help you lower your taxable income.

529 Education Savings Plans

529 plans are operated by a state or educational institution and offer tax advantages and potential incentives. These plans make it easier to save for college for a designated beneficiary, such as a child or grandchild. When used for qualified education expenses, earnings are not subject to federal tax and are generally not subject to state tax. Your contributions are limited to the amount necessary to provide for the qualified education expenses of the beneficiary. This will be different based on the circumstances of your family. Be aware, though, that contributions to 529 plans are considered gifts. If you give more than $14,000 to any one beneficiary, you may have to file a gift tax return.

Health Savings Accounts (HSAs)

Is your health insurance a High Deductible Health Plan (HDHP)? If so, you are likely able to contribute to an HSA. An HSA is a tax-exempt trust or custodial account that is set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. There are several tax benefits to contributing to this type of plan. For example, you can claim a tax deduction for contributions you or someone other than your employer make to your HSA, even if you don’t itemize your deductions. Additionally, con­tributions to your HSA made by your employer may be excluded from your gross income. The account grows tax free, and distributions for qualified medical expenses are exempt from income taxes as well.

There are certain qualifications you must meet to open one of these accounts, as well as yearly contribution limits.

There Are Countless Ways to Save!

Making contributions to the accounts above are just a few ways to lower your taxable income. Other methods that may potentially lower the income that’s reported on your return include giving to a charity, paying your property tax bill early and making energy-efficient upgrades to your house. If you need help in determining the best way to reduce your income, I’m more than happy to help!

Reimbursing Employees for Business Expenses

What you need to know about accountable and nonaccountable plans

If you have employees, you can reimburse or give them an advance or allowance for business expenses, including but not limited to ordinary and necessary transportation, business entertainment, travel, meals and lodging expenses. These types of payments can either be treated under an accountable or nonaccountable plan. Below, are the requirements for both types of plans.

Accountable Plans

An accountable plan requires your employees to comply with the following requirements:

•     Pay or incur deductible expenses while performing services as your employee;

•     Adequately account to you for these expenses within a reasonable period of time; and

•     Return any excess reimbursement or allowance within a reasonable period of time.

You are allowed to deduct expense reimbursements to employees who properly comply with the terms of the plan as business expenses (limited to 50% for meals and entertainment). These reimbursements are excluded from the employee’s gross income, are not reported as wages or other compensation on the employee’s Form W-2, and are exempt from federal income tax withholding and employment taxes.

Amount Deductible for M&E is 50% of:

Expense

Lesser of per diem allowance or federal rate
 
Federal rate
 

40% of the per diem allowance    

Reimbursement or Per Diem

Reimbursement

Per diem for meal and incidental expenses only

Per diem that covers lodging, meals and incidental expenses equal to or greater than federal rate

Per diem that covers lodging, meals and incidental expenses less than federal rate

Federal per diem rates for the continental United States are available at gsa.gov.

You can deduct 80% of the cost of reimbursed meals that your employees consume while away from their tax home on business during or incident to any period subject to the Department of Transportation’s “hours of service” limits.

The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant or another location. It applies to expenses incurred at a business convention or reception, business meeting or business luncheon at a club.

The 50% limit doesn’t apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit.

Nonaccountable Plans

A nonaccountable plan is an arrangement that doesn’t meet the requirements for an accountable plan. All amounts paid or treated as paid under a nonaccountable plan are reported as wages on Form W-2. The payments are subject to income tax withholding, social security, Medicare and federal unemployment taxes. You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees’ pay.

Protect Yourself From Identity Theft

Tips for keeping yourself safe from threats

There is no shortage of scams targeting both tax professionals and taxpayers. Due to the recent rise in identity theft cases, it’s important to be proactive about protecting yourself from these threats. The information below details some steps you can take to keep your sensitive data safe from identity theft.

Quick Protection Tips

Here are some tips to protect yourself from becoming a victim:

•     Don’t carry your social security card or any documents that include your social security number (SSN) or individual taxpayer identification number (ITIN).

•     Don’t give a business your SSN or ITIN just because they ask. Give it only when required.

•     Protect your financial information.

•     Check your credit report every 12 months.

•     Annually review your Social Security Administration earnings statement.

•     Secure personal information in your home.

•     Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.

•     Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know with whom you are dealing.

Identity Theft

Steps to take if you become a victim

If your tax return is rejected because of a duplicate filing under your SSN and you haven’t filed already, you may be a victim of tax identity theft. If this occurs, you need to report this to the IRS by following these steps:

•     Download IRS Form 14039, Identity Theft Affidavit.

•     Complete the form for each taxpayer that has been rejected. Note: In Section B, you’ll be checking Box 1.

•     Print the form and attach your correct tax return and form of identification.

•     Mail or fax according to the instructions.

It may take several weeks for the IRS to process Form 14039, but once it’s been processed, you’ll receive an acknowledgment letter.

If a fraudulent return is already present on your account, the IRS will send your case to the Identity Theft Victim Assistance (IDTVA) organization where it will be handled by employees who have specialized training.

Generally, you’ll receive notification that your case has been resolved within 120 days. Complex cases may take 180 days or longer.

Most tax-related identity theft victims will be placed into the Identity Protection PIN program and annually receive a new, six-digit IP PIN that must be entered on the tax return. The IP PIN adds an extra layer of identity protection.

Also note, the Federal Trade Commission (FTC) recommends that all victims of identity theft take the following steps:

•     File a complaint with the FTC at identitytheft.gov.

•     Contact one of the three major credit bureaus to place a fraud alert on your credit records: (1) Equifax, Equifax.com, 800.766.0008; (2) Experian, Experian.com, 888.397.3742; or (3)TransUnion, TransUnion.com, 800.680.7289

•     Contact your financial institutions and close any financial or credit accounts opened without your permission or tampered with by identity thieves.