Home-Office Deduction – General Opportunities & a Simplified Method Option

If you work out of your home you’re part of a growing trend. What’s important to you, however, is that you may qualify for some valuable federal income tax deductions. You may be able to deduct part of your home’s normal operating expenses for items such as utilities and insurance, you may be able to claim write-offs for depreciation or lease payments, depending on whether you own or rent, and you may even get some extra business car deductions. The tax-saving opportunities available to you will depend not only on the type of work you do at home, but where in the home you perform it.

You won’t get any home-office-type deductions unless you regularly and exclusively use a room or specific area in your home or apartment for business. So, for example, you don’t get deductions if you work out of a room that your family also uses as a den. In addition, generally the office must either be the principal place of your business, or a place where you meet or deal with clients or customers.

If you’re a professional such as a doctor, dentist, or consultant who regularly meets with clients or patients in the home, you probably qualify for home-office deductions, but you may benefit from help on how best to allocate “shared” personal/business expenses.

If you don’t meet with clients in your home office, qualifying for home office deductions usually still is no problem if your home is your only business location. However, the rules are more complicated if some aspects of your business are performed in the home, and others are performed outside the home. In this situation, there is a question as to whether or not the office is your principal place of business. Often, there is a fine line between qualifying and not qualifying. And the rules seem to change often.

If you’re an employee who regularly comes home from the office with a loaded briefcase, catching up on paperwork at home won’t do you any tax good. Employees qualify for home-office deductions only if they work at home for the convenience of their employer. So there are no deductions if you decide on your own to do office work during evenings and weekends, or work a couple of days a week at home because you’ll get more done. And even if your employer requires you to work at home, you don’t get any extra deductions unless you also get by the home-office hurdles.

One drawback to the home office deduction is the impact it may have upon the eventual sale of your home. If you have taken depreciation deductions on the part of your home you use as an office, that amount will not qualify for the tax-exemption you otherwise get on the gain from the sale of your house, although gain from depreciation recapture can be deferred if the residence is exchanged for like-kind business property. And if 100% of your home did not qualify as your principal residence for at least two of the five years preceding the sale, you will have to pay capital gains tax on the business portion of your house. Generally, though, if a home office is physically part of the residence, the entire residence qualifies for the home-sale exclusion. An additional consideration for the many taxpayers who now find themselves within the reach of the alternative minimum tax (AMT) is the requirement that some prior depreciation may be subject to “recapture” as additional income for AMT purposes.

A Simplified option. Early in 2013, the IRS announced the introduction of a new, simplified option for claiming the home office deduction. Starting for 2013 tax year returns filed in 2014, the simplified option allows a taxpayer to calculate the amount of allowable deductible expenses for business use of a home for the tax year by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the portion of the home used in a qualified business use of the home, but not to exceed 300 feet. The prescribed rate is $5.00. Effectively, the simplified option provides a maximum deduction of $1,500 (300 square feet multiplied by $5.00). The IRS indicated that it may update the prescribed rate from time to time. Although the overall tax benefit in using the simplified option may not be as great as when all related expenses are accounted for, it may be worth exploring to reduce compliance and recordkeeping costs.

As you can see, working at home may be anything but simple from a tax standpoint. We’ll be happy to supply complete details on how the rules work in your situation, and how to make the most of them. If you need any help, don’t hesitate to call. We can help you weigh the advantages of a home office deduction against the potential for subsequent increased taxes. You should also call us if you’ve been taking a home office deduction and you’re now thinking of selling your combined home/office. With some advance tax planning, you may be able to minimize taxes on the transaction.

Items To Consider In a Lease

I was recently asked about my opinion regarding items for consideration when leasing a physical space in Summerville, SC.  Regardless of where you desire to lease, there are several general agreement terms/conditions and language to consider.  Among them, in no particular order, include:

  1. Payment: Amount, Frequency, Method, Deposit Amount, Payment Structure (this may be relevant for Financial & Tax Reporting)
  2. Provisions for Privacy/Non-Disclosure depending on the secrecy and information requirements of the business.
  3. Timing: Lease Start, Lease End, Renewal Notice, Cancellation Notice
  4. Ownership: Legal Ownership of the property, Provisions for transfer of ownership and the effect on the lease
  5. All Parties with interest to the transaction.
  6. Penalties: Penalties or interest assessed for Non Payment or Early Payment
  7. Expectations and Responsibilities: Responsibility for repairs & maintenance, landscaping, upkeep, upfit, and/or restoration at end of lease, responsibilities for tax & insurance, security
  8. Any exclusivity options for purchase, renewal or right of first refusal on additional leased properties.
  9. Future renewal requirements such as additional credit reports, financial information and background checks.
  10. Provisions/condition requirements for return of deposit at termination of lease
  11. Delinquencies and back payments due on the property (to help ensure the property does not experience foreclosure while you are under contract)
  12. Fit for purpose language to indicate intended purpose and acceptability of the use of the property.

This list of items is certainly not all inclusive. Key points will vary based on several things including location, type of business, intended use, the local market, condition of the space, and financing. Additional items should be considered when evaluating a lease for property depending on your specific circumstances. As with any business, the lease should be considered by both the CPA and the Attorney of the business owners.

If you are considering a lease and would like a CPA in or near Summerville, SC please contact Swamp Fox CPA, LLC at 843.900.6635 or sleistercpa@gmail.com.

Post Tax Season Budget

It’s the middle of the year and the pain and contempt for realizing your actual tax obligations are beginning to subside.  Now is the time to take action and help yourself avoid that same agony next year.  While it is good to take an appropriate break from the realities of family and business financial goals, now is the time to commit to leveraging the knowledge and power of today’s technology against a good old fashioned budget.

Historically accounting and bookkeeping in and of itself has been a painful process for businesses and families.  Beyond the accounting and recordkeeping, applying a budget was another layer of time and difficulty.  The results were often riddled with layers of confusing comparisons.  That is no longer the case.  Today we are able to leverage technology in way that simplifies our accounting and bookkeeping needs.  Budgets are designed and arranged for automated comparison.  With transaction recognition technology your income and expenses are semi-automatically coded in a logical and consistent manner.  The process of organizing your finances has become greatly simplified with cloud accounting software. Now more time can be spent making decisions.

When you employ semi-automated accounting information systems to your family and business finances you will finally be able to realize the value of the information rather than the burden of assembling it.  Many time people are so worn out from processing the information they forget to think critically about the result of the work.  After all, aside from preparing for the next annual tax return, the purpose of compiling all of that information is to use it for decision making.

As we all cruise into life after tax season, let’s think about how we can work smarter this year by being proactive with understanding the ins and outs of our number one resource, cash.  Leveraging technology to account for and measure our finances is the first step to taking control of our financial lives.  At Swamp Fox CPA, LLC we can assist with initial set-up, implementation, and maintenance of your family and business financial needs.  Further, we will assist with budget preparation, retirement and tax planning.

Contact us for assistance or more information.

CPA Summerville