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Tax Planning

Deduct Your Home Office!

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Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home. Note, however, that qualifying for such deductions became harder under the Tax Cuts and Jobs Act of 2017 (TCJA). If you previously claimed a home office as a miscellaneous deduction on your individual income tax return, the TCJA eliminated that deduction for tax years 2018-2025. You must now file a Schedule C on Form 1040 to be eligible for the home office deduction.

What Space Can Qualify?

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet

You May be in Danger of an IRS Audit

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The last thing you want is to receive a letter from the IRS saying that you are being audited. For many, just the thought of being audited sends them into anxiety mode. Most taxpayers who are audited are selected randomly, but there are some mistakes you do not want to make that can trigger an audit. This is why it is important to get your tax return prepared accurately and timely by a trusted tax professional rather than prepare it on your own. Some of those triggers that put you in danger of an audit include:

  •  Obvious or Almost Obvious Outliers – Refrain from being an outlier without substantiation. The IRS has software that holds data typical for a number of professions and income levels. Your return is typically run through that software. If what you have on your tax return is significantly not within those typical limits, it can be flagged. Some of those items include business expenses, charitable contributions and itemized deductions. In cases where these amounts are valid but flagged, the key is being able to substantiate the numbers. The burden of proof will be on you. If you do not have the support to substantiate those numbers you will be in danger of losing the related deduction or tax benefit AND will have to pay retroactive taxes and related penalties based on the amount of the deduction you lose.
  • Incorrect calculations – This is most common among people who do their taxes on their own. The errors may occur in deductions, taxes due qualified business income etc. just to name a few. These could trigger an audit. In fact a large portion of the examination letters the IRS sends out are related to miscalculations.
  • Incomplete or Undisclosed Information – Always keep in mind that the forms you receive each year like your W2, 1099s and other tax documentation are also provided to the IRS. If the data included on those forms are not reflected on your tax return there is an automatic trigger.

The key to breezing through an audit is to keep proper documentation in an organized manner. When you have proper documents any audit issue can be resolved speedily. When you do not, the process could be a very stressful nightmare. You must maintain documents in support of ALL the deductions you take. Documentation should include receipts, charitable donation statements; mileage tracking (that meets IRS guidelines), business meals documentation (that meets IRS guidelines), credit card statements, canceled checks to name a few. Being ready for an audit with the right records at your fingertips will significantly reduce your stress if you are ever selected. Depending on how good your record-keeping is, it may even turn out to be quite a seamless process. If you need assistance deciding what documentation you need to keep, feel free to give us a call at (540)-538-6995 to schedule a time to chat with one of our trusted tax professionals.

Natasha Dornbush, CPA

www.youraccountingrelief.com

Why Business Owners MUST Keep All Receipts!

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In today’s paperless world, whenever most people are asked if they want a receipt after a purchase, the typical answer is “No”. Business owners should be the exception. I for one hate working with paper in general so I totally get that; however, to be an astute business owner you need to know how to properly keep receipts and other proper documentation on file, if not, your tax return filings could be in jeopardy.  [Read more…] about Why Business Owners MUST Keep All Receipts!

Do-It-Yourself Tax Returns

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Choosing the right tax professional could be a challenging process, so much so, that some business owners and individuals totally forego partnering with a tax professional and settle for a Do-It-Yourself approach instead. The issue with a DIY approach is because you lack the advanced knowledge and expertise, “you will never know what you do not know”.  Most cases, after [Read more…] about Do-It-Yourself Tax Returns

If You Think You Paid Too Much in Taxes, You Probably Did!

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If you are a business owner, you probably know all the popular deductions that most are aware of, but there are some deductions that your tax-preparer may never have told you about. Additionally, without proper proactive tax planning, you will never be able to take advantage of them.

Most CPAs and tax-preparers are great at accounting and preparing an accurate and timely return. Not all of them focus on planning proactively throughout the year so that you do not miss out on the deductions that you, and sometimes even your tax-preparer do not know about. As a result, you are most likely paying more than you should legally pay in taxes without even knowing it.

If you feel like you are paying too much… you probably are.

How do you know? To help you answer that, let me ask you a few questions.

  • When you provide your tax information to your tax-preparer do they suggest ways to save through deductions either while preparing or before filing your return?
  • After your preparer prepares and files your taxes, do they discuss additional ways for you to increase your tax savings immediately for the following tax year?
  • Do you communicate with your tax preparer concerning your potential tax position more than once or twice a year… i.e. way ahead of December 31st each year?
  • Does your tax-preparer know your unique business needs, and keep up with your business growth, increases and decreases in your income and other changes in your business throughout the year?

If your answer is “NO” to any of these questions you are probably paying more in taxes than you legally should. If your tax advisor does not communicate strongly with you concerning additional ways to save throughout the year you should try to find one who does. There are actually ways you can make money or save money without a tax impact. There are legal and ethical ways to earn money throughout the year and not pay little taxes on it.  There are even ways to lower your tax burden on an early retirement plan withdrawal if you plan ahead. You may be missing out on these benefits just to name a few.

The tax code changes constantly and if you are not aware of the changes you could find yourself in trouble. For example, you should never purchase an item solely to get a deduction. For some reason, that huge deduction that your friend was eligible for may not apply to you. This could end up hurting your tax savings without you even knowing.  We can help you find ways to purchase the things you actually need and also find legal and ethical ways to deduct them. Yes!…We can show you how as a business owner there are actually legal and ethical ways to do that. Schedule an appointment HERE to start your plan now.