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Will the Sale of Your Home be Taxable? April 7, 2021

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, Section 168, Section 179, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

We all expect that no tax will be due some day when we sell our homes. At least, that is what all of our friends and family tell us. And, there is a good chance that they will be correct at least under today’s rules which are always subject to change. The below article gives us the story from the 30,000 foot view. And, as long as you have lived in your home for at least two (2) years out of the last five (5) years and your gain is below $250,000 – single / $500,000 – married filing jointly; then, you may not even need to report the transaction on your return, much less pay any taxes. 

But when the transaction involves anything out of the ordinary such as a gain in excess of $250,000 / $500,000; the property was formerly a rental; was used as your business property; used as an office in the home; you or your spouse are in the military or an involuntary conversion occurs – just to mention a few, things can get complicated very quickly and a lot of tax money may be potentially due. So do your homework BEFORE you sell your home to help avoid any unpleasant surprises.

The article below was written by Mr. Geoff Williams. It takes a deeper dive into some tax consequences of selling your home. 

– Mark Bradstreet

The IRS is often more benevolent than you would think in these matters.

If you’re thinking about selling your home, here’s what you need to know about the taxes you may owe.

YOU MAY HAVE THOUGHT about the tax benefits of buying a home, but you probably haven’t thought much about the taxes you’ll pay when you sell your home. As you can imagine, the taxes on a home sale could theoretically be a small fortune, enough to almost scare you away from selling at all.

So, if you’re looking to be proactive and prepared, here are answers to some questions you may have.

Can I Avoid Paying Taxes on a Sale of a Home?

Yes. There is a very good chance that you won’t pay taxes on your home sale. In fact, if you’ve been worrying about this, it may be for nothing.

When you make money from the sale of your home, the IRS typically lets home sellers keep the first $250,000 they earn from the sale of the house. (That’s $250,000 if you’re single; if you’re married and filing jointly, you get to keep $500,000 of capital gains.)

So, What Happens if the Capital Gains Are Higher Than the $250,000 or $500,000 Thresholds?

In that case, you may be subject to capital gains taxes.

Here’s a hypothetical scenario to give you a sense of how much you might pay if you sell a home for well over $500,000 as a married couple filing jointly.

According to David Reyes, financial advisor and CEO of Reyes Financial Architecture in San Diego, if you bought a house 10 years ago for $350,000 and sell it now for $1 million (a relatively reasonable hypothetical in California), “you would owe taxes on any amount over the $500,000 – which would be $150,000.”

As in, you would owe taxes on that $150,000 (rather than having a $150,000 tax bill).

That said, you can probably get that $150,000 number to shrink a bit. “The IRS allows you to deduct certain closing costs such as title insurance and attorney fees. You can also deduct the commission that you pay your real estate agent. You may also deduct any home improvements that you made to the property. This figure becomes your cost basis,” Reyes says.

Those home improvements, incidentally, could add up to a lot. Did you replace the roof recently? Did you add a swimming pool to your backyard, or perhaps renovate the kitchen or add a room to the house? Hopefully you saved the receipts.

Reyes says that after all these deductions, you would pay taxes on the net proceeds.

“Let’s say that your total of all eligible deductions is $50,000. You would pay capital gains taxes on the (remaining) $100,000,” Reyes says. “Depending on your tax bracket, you could pay taxes of up to 20% federal income taxes, plus state taxes. This would be a tax of $20,000, plus state income tax.”

State Income Tax?

Yes, you may have to pay state income tax with the sale of your home – but you shouldn’t when the federal taxes are exempt. Still, check with your tax preparer just to be sure. “Every state is different,” Reyes says.

How Do I Report the Sale of My Home on My Income Taxes?

You may not have to. Says Reyes: “If you have a gain on your home that is under the exclusion, you do not have to report this on your tax return. If you do have a gain that is above the exclusion, you must report it on the Schedule D of your 1040.” For most people, yes, but there may be some complications to consider. We’ll run through some of the bigger ones.

The home is a rental. Is this a house that you don’t live in? Or maybe you did 10 years ago and then you rented it out, and now you’re selling the home? Even if you are making less than $250,000 or $500,000, you will be paying taxes on the sale. But keep in mind: If you lived in the house for a minimum of two years within the last five years, and you rented it out for the remainder of that period, you will avoid paying taxes if the profits are under the $250,000 or $500,000 thresholds.

The home is a vacation home or a second home. Again, you’ll be paying taxes on the house. It needs to be your primary residence.

Within the last two years, you sold a home – and claimed the $250,000 or $500,000 exclusion. So, you sold a house and didn’t have to pay the taxes on it? Awesome. But you did that 20 months ago? You will probably have to pay taxes.

Did You Say Probably?

You might be able to get an exclusion, or at least a partial one. This is one of those cases where it wouldn’t be a bad idea to talk to a tax preparer. In fact, whenever you are selling or buying, it’s generally a good idea to talk to a tax preparer to see how the home will affect your taxes. But if you sold a house 20 months ago and bought a new house with your spouse, and now you’re divorcing and selling the home to one or the other, you might be able to get an exclusion.

You may also be able to get an exclusion if your spouse died, and now you’re forced to sell the house.

If you lost your job and are now receiving unemployment benefits, you can probably get an exclusion.

But getting a partial or full exclusion doesn’t have to involve a tragic reason. For instance, if you and your spouse are having twins, triplets or even more kids, and you have suddenly outgrown the house, you may be able to get an exclusion. If that’s the case, you’ll want to talk to a tax preparer, and along with all of the parenting and baby books you’re buying, consult the IRS’s “Publication 523 (2019), Selling Your Home.”

Credit given to: Geoff Williams, Contributor for US News published May 20, 2020.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Business Closures March 17, 2021

Posted by bradstreetblogger in : Business consulting, General, Tax Preparation, Tax Tip, Taxes , add a comment

If you can coughup $99 for the State of Ohio, you may form a business entity such as an LLC or a corporation. Granted that you must have a unique business name i.e., you may not use the same or similar name as another Ohio business. If the Secretary of State’s Office website is up and running, an official company may literally be formed online in minutes.  IRS FEINs (if needed) are free and may also be generated online. Ohio charges a nominal fee for a Vendor’s License which is used to collect Ohio sales tax. Setting-up payroll (only if you have employees) is also very inexpensive although several forms are necessary. Of course, if you have payroll you also need to register for state unemployment, worker’s compensation and city withholding if applicable. Many of these forms and applications have “trick” questions, so beware. Where am I going with all of this is – that to begin an Ohio business, it is pretty darn easy and inexpensive.

So, it would only be natural to assume that closing a business in the Buckeye State would be just as easy.  I suspicion you know where I am going with all of this.  Shutting down a business can be very difficult, cumbersome, time consuming and expensive. The state, IRS as well as any cities and payroll entities involved are all incredibly concerned that you may shutter your doors, close your bank accounts and still owe them money. So, to truly close your business, LOTS of hoops must be jumped through, forms prepared etc. Businesses are typically closed for financial difficulties which is painful enough. Adding insult to injury, you may owe taxes for many reasons such as delinquent sales taxes, past due payroll taxes and worker’s compensation, IRS taxes, Ohio taxes, city taxes and so forth and so on…  Some of these liabilities may become personal liabilities that need dealt with. 

You don’t want to run out of runway when closing down a business. It requires proper planning, finances and foresight for a proper shutdown. Professional advice is highly suggested during what may be a difficult time. 

– Mark Bradstreet     

Closing Because of the Pandemic? Beware of Potential Tax Hits.

Thousands of small businesses have shut down because of the COVID-19 pandemic. Adding insult to injury, many are facing tax hits as they wind down.

Small businesses have felt the brunt of the COVID-19 pandemic, with thousands of enterprises forced to close since the beginning of March.

As if going under because of a pandemic isn’t bad enough, some will face tax hits from their closures if they aren’t careful. Moreover, some are left wondering what to do with their COVID-19 loans and grants. As a result, instead of being able to walk away after closing up shop, they’re forced to navigate taxes and potential penalties.

“The last thing people think about when wrapping up a business is their tax obligations,” Mike Slack, senior tax research analyst at H&R Block’s The Tax Institute, told business.com. “They are running at a loss; they didn’t generate any taxable income. But there are still a lot of tax implications.”

Whether it’s filing your business’s final tax return or determining if you have to treat COVID-19 loans as income, there are several things small business owners have to consider when closing operations.

PPP loan proceeds may be taxable.

In the early days of the pandemic, the federal government released more than $2 trillion in aid under the CARES Act, with billions of dollars going to help small businesses stay afloat. Under the act’s Paycheck Protection Program, small business owners received loans that were forgivable if they used the money to keep workers on the payroll.

Despite all these efforts, thousands of small businesses couldn’t survive. Now they’re left wondering if they have to pay taxes on the money they received or, worse, pay back the loans.

“As currently written in the CARES Act, PPP proceeds are not taxable, but the IRS made a determination in notice 2020-32 that indeed it is taxable in a back-ended way,” said Mark Alaimo, who sits on the American Institute of Certified Public Accountants‘ (AICPA) Personal Financial Specialist Committee.

Under this IRS rule, PPP borrowers can’t deduct the expenses they incur to qualify for loan forgiveness. It throws murkiness into the mix and is a rule the AICPA is squarely against.

“That means if you have a $200,000 loss and if you received a $250,000 loan, you may have $50,000 worth of income,” Alaimo said. “The easiest thing people can do is assume all PPP proceeds are taxable income even if it’s been forgiven.”

According to Alaimo, most states have already indicated that they will tax any forgiven PPP loans just as they would tax any other forgiven debt. However, if your business loan wasn’t forgiven before you shut down operations, you may have to pay it back – plus taxes – unless you file for bankruptcy.

Forgiveness of debt can be a taxable event.

If you’re writing off debt as part of your business shutdown, it could trigger a taxable event. Like PPP loans, any reduction in debt you negotiate as part of your closing may be subject to tax. Let’s say you owe $100,000 to a creditor and they forgive you that debt: That $100,000 is treated as taxable income, according to John Smallwood, president of Smallwood Wealth Management.

Keep the IRS in the loop.

To avoid tax penalties, you have to make your business closure official. To do that, you must file your final tax return with the IRS. Whether you operate a partnershipC corporationS corporation or sole proprietorship, the IRS needs to know your business is closed.

“The final tax return is due within three to four months after the business date it closed,” said Slack said. “People get in trouble with that. Late filings are subject to penalties.”  

When filing your final taxes, Slack said, be mindful of how you account for proceeds from the sale of business assets. “When you sell assets, you are still supposed to report them as a disposition on your tax return. There’s a lot of nuances to it.”

“A lot of nuances” is particularly true during the COVID-19 pandemic, as business owners navigate forced closures and social distancing rules. Some run into tax trouble, despite states’ assurances.

That was the case with Heather Manto, owner and operator of Independence Barber Co. in Austin, Texas. To help businesses forced to shut down by the pandemic, Texas announced that it would extend the sales tax due dates and waive late fees. That was a relief to Manto, who had no income as her shop remained shuttered. But when she paid her sales tax a week late, she got hit with a penalty.

“Getting a human on the phone at that time was impossible, so I just paid and lived with it,” said Manto, who has since reopened her business. “It’s just a small example, but for a small business like mine, even those minor things hurt an already-pained business.”

Sweat the small stuff.

Paying sales tax late isn’t the only thing that can get you in trouble with the IRS or local tax collectors. You can face penalties for myriad reasons. The two big ones in dissolving a small business are neglecting to notify the state and failing to pay payroll taxes.

1. Notify the state.

Unless you file dissolution documents with the state where you operated, your business is not closed in the state’s eyes.

“As far as the state is concerned, they think you are still running your business and may hit you with state taxes for that year,” said Lisa Lewis, CPA and editor of the TurboTax Blog.

Make sure to cancel your employer identification number (EIN) and close your IRS business account. That requires you to send the IRS a letter that includes the business name, EIN, address and the reason you’re closing the account. The business remains open until you’ve filed all the required returns and paid all the taxes you owe.

2. Don’t forget payroll taxes.

If you have any employees, you must not only pay them their final wages, but also make good on any payroll taxes and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes could subject you to the trust fund recovery penalty.

Taxes are an unavoidable headache of starting, running and closing a business. But they shouldn’t be ignored; the last thing you want to do is simply walk away.

“You really have to be deliberate and thoughtful when winding up your business,” Smallwood said. “You have to make sure there are no personal problems and consequences that come as a result of your failed business.” 

Credit given to: Donna Fuscaldo. She is a business.com Writer. This article was published on Nov 10, 2020.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.
.

Choice of Business Entity March 10, 2021

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

Entity choice is one of my favorite topics. It reminds me of a chess game. The choice of your business entity is the cornerstone of your tax and legal foundations. Not all entities are taxed in the same fashion, others treat the taxation of a sale of its assets differently, and still others will have varying types of owner’s compensation just to mention a few of the different entity attributes. Other entity choices make switching from one entity to another very expensive. For example, switching a C corporation to an LLC may be a very expensive proposition. But, going the other direction by switching an LLC to a C corporation is usually painless. Nellie Akalp in the following article does an excellent job of discussing more of the pros and cons of entity choice.
                                                                    -Mark Bradstreet

A lot is riding on the business entity type you choose. The business structure you decide on affects your legal liability as an owner, tax obligations, growth potential, and compliance requirements you’ll need to satisfy on an ongoing basis. To make matters more complex, the entity type that’s right at the beginning of a business’s existence may not continue to be the ideal choice as the company grows and evolves.

So, what’s an entrepreneur to do? First and foremost, I encourage business owners to consult with a licensed attorney and accountant or tax advisor to get professional guidance. Every situation is unique, so it’s critical to have expert advice before making the crucial decisions of choosing a business entity and assessing when it’s time for a change.

To help you prepare for your all-important discussions with your legal and financial advisors, the following is food for thought about some of the most popular business entity types.

Business entity basics

1. Sole proprietorship and general partnership

Many small businesses start as either a sole proprietorship (one owner or a married couple) or general partnership (multiple owners). When business owners don’t formally register their companies with the state, they are, by default, considered either a sole proprietorship or general partnership. There is no legal or financial separation between the business and its owners.

Pros of sole proprietorships and general partnerships:

Cons of sole proprietorships and general partnerships:

2. Limited liability company (LLC)

The LLC business structure may be described as a bit of a cross between a sole proprietorship or partnership and a corporation. By default, an LLC is considered the same tax-paying entity as its owners (“members”). However, the LLC is regarded as a separate legal entity from its members. Articles of Organization must be filed with the state to form an LLC. 

Pros of limited liability companies

Cons of LLCs

3. C Corporation

A C Corporation is regarded as a separate taxpayer and legal entity from its owners. Business income and expenses are tied to the business, and the corporate entity reports and pays taxes. Ownership of a C Corp is through purchasing shares of stock.

Incorporating as a C Corp involves filing Articles of Incorporation (sometimes called Certificate of Incorporation) with the state. Other state requirements must also be met to start a corporation.

Pros of C Corporations

Most legal protection for owners—The C Corp structure provides the highest degree of liability protection for business owners. Under most circumstances, shareholders, directors, and employees have protection from lawsuits and debts of the corporation. 

Growth potential—C Corporations can have an unlimited number of shareholders and may issue multiple classes of stock. Typically, investors will be more interested in funding companies organized as corporations rather than those operating as other entity types.  

Tax flexibility—Eligible corporations may choose to be taxed as an S Corporation (see more about that in the next section). Often, corporations are eligible for more tax deductions than businesses operating as other business structures. 

Perpetual life—Ownership interests in a corporation may be transferred to others. Shareholders can sell, gift, or bequeath their shares of company stock, and the corporation continues to exist. Only when a C Corp is formally dissolved is its life ended. 

Cons of C Corporations

More compliance complexity and costs—In most states, it costs more to incorporate a business than to form an LLC. There are more internal and external rules to start and operate a C Corp, such as appointing a board of directors, drafting bylaws, filing an initial report, filing annual reports, etc.

Double taxation—A C Corporation’s profits get taxed at the federal corporate income tax rate. Then they are again taxed to shareholders when the corporation distributes those profits as dividends. This creates a double tax because the dividends paid do not qualify as tax deductions for the corporation. Another potential disadvantage from a shareholder’s individual tax perspective, is that they may not deduct any loss of the corporation on their personal tax returns.  

Overview of the S Corporation election for LLCs and corporations

The S Corporation is a tax election that qualifying LLCs and corporations can choose.

The benefit for LLCs is that S Corp election can reduce the amount of self-employment tax business owners must pay. An LLC taxed as an S Corp still gets pass-through tax treatment (tax obligations pass-through to the owners’ returns), but only the wages and salaries of business owners on the company’s payroll are subject to Social Security and Medicare taxes. Any profit distributions paid to owners do not have those taxes levied on them.

To request S Corporation election, an LLC must file IRS Form 8832 (to be taxed as a corporation) and IRS Form 2553 (to choose S Corporation election).

S Corp tax treatment allows corporations to avoid the sting of double taxation. As an S Corporation, a corporation’s profits and losses flow through to shareholders’ personal tax returns. The corporate entity does not pay income tax. Shareholders who are employed by the corporation pay Social Security and Medicare taxes on their wages or salaries from the company, but the dividend income paid to shareholders is not subject to those taxes.

Note that S Corporations may not exceed 100 shareholders. Therefore, corporations with more than that are not eligible for S Corp election.

Is your business entity type still the right one for you?

Business owners operating as a sole proprietor, general partnership, or LLC may find that their business is outgrowing the limitations of their entity type. A few things that might drive entrepreneurs to consider changing their business structure include:

The process to switch from one business entity type to another will vary by business structure and in which state the business is operating. An attorney and accountant can help determine whether a change may be beneficial. Also, a lawyer can advise on the correct steps to take to change business entities. Details are often available on states’ Secretary of State websites, as well. 

Ideally, when starting your business, it’s helpful to think both short-term and long-term about what structure will best serve your needs and vision. With some research, reaching out to the right resources for guidance, you will be empowered to make an informed decision. 

Credit Given to:  Nellie Akalp is a passionate entrepreneur, business expert, professional speaker, author, and mother of four. She is the Founder and CEO of CorpNet.com, a trusted resource and service provider for business incorporation, LLC filings, and corporate compliance services in all 50 states. Nellie and her team recently launched a partner program for legal, tax and business professionals to help them streamline the business incorporation and compliance process for their clients.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Energy Credit Incentives for Individuals February 24, 2021

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

The below information regarding home energy credits was taken directly from the IRS website. I was reluctant to pull the same information from a contractor’s website. Not always, but sometimes, they are a bit over-zealous in their interpretation of the tax law when it comes to business. Buyer beware!

Please remember that a tax credit typically reduces your income taxes dollar for dollar. A tax deduction reduces your taxable income. Your federal income tax is based upon your taxable income. So, all things being the same a federal credit is typically worth more than a federal tax deduction.

If you are considering some home energy improvements of some sort, please be sure to do your homework on whether they may qualify. Also, please pay particular attention to the expiration dates below for different types of home energy improvements. 

                                               -Mark Bradstreet

Q. Are there incentives for making your home energy efficient by installing alternative energy equipment?

A. Yes, the residential energy efficient property credit allows for a credit equal to the applicable percent of the cost of qualified property. Qualifying properties are solar electric property, solar water heaters, geothermal heat pumps, small wind turbines and fuel cell property. Only fuel cell property is subject to a limitation, which is $500 with respect to each half kilowatt of capacity of the qualified fuel cell property. Generally, this credit for alternative energy equipment terminates for property placed in service after December 31, 2021. The applicable percentages are:

  1. In the case of property placed in service after December 31, 2016, and before January 1, 2020, 30 percent.
  2. In the case of property placed in service after December 31, 2019, and before January 1, 2021, 26 percent.
  3. In the case of property placed in service after December 31, 2020, and before January 1, 2022, 22 percent.

Q. Is a roof eligible for the residential energy efficient property tax credit?

A. In general, traditional roofing materials and structural components do not qualify for the credit. However, some solar roofing tiles and solar roofing shingles serve as solar electric collectors while also performing the function of traditional roofing, serving both the functions of solar electric generation and structural support and such items may qualify for the credit. Components such as a roof’s decking or rafters that serve only a roofing or structural function do not qualify for the credit.

Q. Does any guidance issued for the energy credit under section 48 of the Internal Revenue Code apply to the residential energy efficient property tax credit under section 25D of the Internal Revenue Code?

A. IRS guidance issued with respect to the energy credit under section 48 in publication items such as Notice 2018-59, has no applicability to the residential energy efficient property credit under section 25D.

Q. What improvements qualify for the residential energy property credit for homeowners?

A. In 2018, 2019 and 2020, an individual may claim a credit for (1) 10 percent of the cost of qualified energy efficiency improvements and (2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during the taxable year (subject to the overall credit limit of $500).

Qualified energy efficiency improvements include the following qualifying products:

Residential energy property expenditures include the following qualifying products:

Please note that qualifying property must meet the applicable standards in the law.

The residential energy property credit, which expired at the end of December 2014, was extended for two years through December 2016 by the Protecting Americans from Tax Hikes Act of 2015. The Consolidated Appropriations Act, 2018 extended the credit through December 2017. The nonbusiness energy property credit expired on December 31, 2017 but was retroactively extended for tax years 2018, 2019 and 2020 on December 20, 2019 as part of the Further Consolidated Appropriations Act.  The credit had previously been extended by legislation several times. See Notice 2013-70 PDF for more information on this credit as well as the credit for alternative energy equipment.

Q. Who qualifies to claim a residential energy property credit? Are there limitations?

A. You may be able to take these credits if you made energy saving improvements to your principal residence during the taxable year. In 2018, 2019 and 2020, the residential energy property credit is limited to an overall lifetime credit limit of $500 ($200 lifetime limit for windows). There are also other individual credit limitations:

The residential energy property credit is nonrefundable. A nonrefundable tax credit allows taxpayers to lower their tax liability to zero, but not below zero.

Published on the IRS Website – October 2020

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Multiple Considerations of Working From Home February 10, 2021

Posted by bradstreetblogger in : Business consulting, General, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip , add a comment

Wish I had come across this article in the late spring.  Regardless, I think it is worth exploring in an effort to keep us all on the same page and avoid some of the inevitable surprises.

                                                                                                 -Mark Bradstreet

Millions of employees could be in for a rude surprise in April when they find out their home office isn’t deductible and the states can’t agree on who gets their money. Time to put a tax pro on speed dial?

It’s very likely that you’re reading this from your home—even if you’re working. As the coronavirus pandemic continues to spread across the country, many of us are finding that the new normal means not leaving the house, or at least not for work anyway.

How dramatic are the numbers? A Federal Reserve Bank of Dallas report found that of all those employed in May, 35.2% worked entirely from home, compared to just 8.2% in February. Further, a whopping 71.7% of US workers who could work from home did so in May. Some folks who are staying home do so for safety and convenience, while others are required by their employer or the state or local government to remain at home; in Pennsylvania, for example, by Order of the Governor, “Telework Must Continue Where Feasible.”

With big name companies extending work-from-home until the end of the year, next summer, or as an option for a growing number of workers, forever, ad hoc accommodations no longer seem sufficient—on either a personal, or a tax policy level.

Here’s the latest on the sometimes-confusing tax aspects of work-from-home, as well as some practical tips I’ve picked up as a tax lawyer and writer who has long worked from home.

UNDERSTAND THE LEGAL RELATIONSHIP BETWEEN YOU AND YOUR EMPLOYER

Increasingly, the lines between employees and independent contractors (or freelancers) are becoming blurred. To be clear, you are not self-employed just because you are working from home. If you are receiving a paycheck from an employer, and those wages will be reported to you and to the Internal Revenue Service on a W-2, you are an employee. Working from home is not enough, on its own, to make you an independent contractor receiving a 1099. And while you certainly may receive a Form W-2 and a Form 1099 in the same tax year, you should not receive a Form W-2 and a Form 1099 for the same type of work from the same employer.

Why does it matter? As a result of the Tax Cuts And Jobs Act (TCJA), a.k.a., the Trump tax cuts, for the tax years 2018 through 2025, you cannot deduct home office expenses if you are an employee. There is no hardship exemption or coronavirus waiver. It’s a very bright-line rule: employees who work from home can no longer claim the home office deduction. The reason you are working from home does not matter to the IRS.

However, if you are self-employed – even as a gig worker – you can continue to deduct qualifying home office expenses. (More on that later.)

ASK YOUR EMPLOYER WHAT YOU CAN TAKE FROM THE OFFICE.

Clearly, you can’t take home the snack bar. But if you’re missing out on some of your favorite things – like your office chair or your trusty stapler – ask your employer if you can take them home. That can save you (and your employer) money. The TCJA rules apply to all unreimbursed job expenses for employees, not just to your physical home office.  If you’re an employee and your employer doesn’t reimburse costs, your out-of-pocket expenses – from the cost of a new laptop or printer to copy paper to that fancy new ergonomic chair – are not deductible for federal income tax purposes. But if your employer has already spent the money to buy them for you, simply relocating them to your house means everybody wins.

FAMILIARIZE YOURSELF WITH YOUR BENEFITS

Does your employer offer you a monthly reimbursement for cell phone costs? Is there a stipend for home office expenses available? Is there a discount available for office supplies purchased through a particular vendor? If your costs are going up because you’re working from home, consider your options. Some money-saving measures may already be available through your company’s HR department. If you don’t see what you’re looking for, just ask. An enlightened employer may well find your reasonable requests a lot more economical than finding a replacement for you or finding that without the proper equipment, you’re less productive.

It’s not just the home office deduction that is creating confusion among those working from home. Employees who normally work in an office in one state, but live (and are now working from) another may be facing additional tax-filing complications.

IF YOUR OFFICE AND HOME ARE IN DIFFERENT STATE.  PUT A TAX PRO ON SPEED DIAL.

The messiness of being taxed in multiple states is at least on Congress’ radar; the HEALS Act  proposed by Senate Republicans last month would allow employees who perform employment duties in multiple states to only be subject to income tax in their state of residence and any jurisdiction where the employee is present and working for more than 30 days during the calendar year—or 90 days for frontline health-care workers. (That 90-day provision is designed to protect nurses and doctors from other states who raced to New York in the spring to help out and now worry they’ll owe New York taxes.)  The HEALS provision would only apply through 2024 and wouldn’t cover professional athletes, professional entertainers, qualified approved film, television or other commercial video production employees, or certain public figures. And even that bill, which is going nowhere, would still allow employees working from home during the pandemic to be taxed in their home state and the state where their normal office is.

Bottom line:  there is currently no national standard for the withholding, filing and payment of state income taxes for employees who work in more than one state or work in one state and live in another.  That means you may have tax requirements where you typically work as well as where you live. Usually, you can sort that out via withholding, tax agreements, and credits.

So, what if working at home in one state when your company is in another state means that you’re subject to tax in both places? If either state has a physical presence rule (most states do), figuring the split between the two can be confusing. Typically, you may have too much tax withheld from your paycheck for your nonresident state and not enough for your resident state.

For example, if you live in Connecticut but you normally work in New York, you’ll likely have to file a resident tax return in Connecticut and a nonresident tax return in New York. If you worked in New York all year, it should be relatively easy: only New York withholds taxes and then when you file your Connecticut tax return you get a credit for the taxes paid to New York. But if you worked in New York through March – and then in Connecticut through August – and then back to New York? Not so simple.

And remember the tax credit? To make it work, you have to file in the right order. You first file and report income to the state where you work and then claim the credit on your resident tax return. If you mix up the order, you may end up missing out on the credit and get stuck paying additional state tax, or miss out on a refund you’re otherwise entitled to.

Moreover, that assumes that the states agree on the rules. It gets more complicated when states have differing tax rates and residency rules.

So, you could try to figure it out yourself… but the American Institute of Certified Public Accountants (AICPA) just updated their guidance on state tax filings, and it’s 523 pages long: it’s a lot less stressful to hire a professional. 

KNOW YOUR STATE’S TAX LAWS

I know that I just advised you to hire a tax professional, but you should still be aware now of the basic rules in your state to make sure you don’t get a nasty surprise in April.  During the pandemic, the AICPA developed recommendations that would allow businesses to continue to withhold state income tax from employees based on the employer’s location instead of the employee’s work-from-home location – in other words, under these recommendations, your tax and withholding wouldn’t change at all. To date, 13 states (AL, GA, IL, IN, MA, MD, MN, MS, NE, NJ, PA, RI, and SC) have issued guidance that follows the AICPA’s suggestion on withholding. What that means is that employees in those states should be protected from paying double tax where one state uses the convenience of employer test (like CT, NY, DE, NJ or PA) and the other state uses the physical presence standard (remember, states use different tests). But if you live in a state that has signed on to this recommendation – but work in a state that hasn’t (or vice versa) – you’re out of luck.

In addition,  a slightly different list of 13 states (AL, GA, IA, IN, MA, MD, MN, MS, ND, NJ, PA, RI, and SC), as well as Washington, D.C. and Philadelphia have followed AICPA’s recommendation that an employee working remotely in a state due to Covid-19 restrictions does not create nexus and apportionment for his or her employer for tax purposes. (In other words, by allowing you to work from home, the employer will not create corporate tax problems for itself in your home state.) 

Some states also have individual reciprocity with other states. For example, Pennsylvania has agreements with IN, MD, NJ, OH, VA and WV. Remember, normally, if you earn income in one state and live in another, you file a tax return in both the state where you live and, in the state, where you work. However, if you’re lucky enough to live in a state with a reciprocity agreement with the state where you might work, you file and pay only in your home state: you don’t have to pay taxes – or even file – in the state where you work. So, if you live in Pennsylvania but work in Ohio, your employer would withhold tax for Pennsylvania, while Ohio takes a pass. Easy peasy.  

But if you live and work in states that don’t have reciprocity – and haven’t signed onto the AICPA recommendations – you may have to file tax returns (and possibly pay) in both states. You’ll need to know which rules apply to avoid a surprise—and maybe a big bill- at tax time. 

KEEP A CALENDAR OR A LOG

Sure, there may be a day when you want to look back on all of this with fondness, but there’s a more practical reason for keeping good records: you may need to keep track of your day by day working locations for tax reasons. Proving that you were where you claim to be can be handy if you (or your employer) is audited. Plus, keeping a log could keep you from falling prey to the habit of working seven days a week.

CHECK YOUR WITHHOLDING

Ask now – not later – about withholding. Find out how much is being withheld by your employer for the state where you live (and now work) and whether that will be enough to avoid a tax bill come Tax Day. If not, you may need to make estimated payments to avoid a penalty. 

Warning: If you normally work exclusively from an office in another state, work from home might increase your home state liability for 2020.  But it’s not all gloom and doom: if your home state has a lower tax rate than the rate where your office is located, working at home for much of 2020 could save you taxes. 

DON’T FORGET ABOUT SECURITY

The IRS recently issued a reminder to tax professionals who work from home to secure remote locations by using a virtual private network (VPN) to protect against cyber intruders. That’s good advice for anyone who relies on the internet. A VPN provides a secure, encrypted tunnel to transmit data via the internet between a remote user and the company network. VPNs are critical to protecting and securing internet connections. Failure to use VPNs can result in remote takeovers by cyber thieves, giving criminals access to your entire office network.

DON’T DO ANYTHING DRASTIC

The loss of the home office deduction for employees has some taxpayers wondering whether it makes sense to quit their day jobs and become self-employed. That’s an individual decision, but if you’re focusing simply on the home office piece, the numbers probably don’t support that kind of shift. For more to consider when it comes to business-related decisions in light of tax reform, check out this article.

What if you really are self-employed—meaning you get a 1099 and not a W-2.  Then you would report the home office deduction on federal form 8829, Expenses for Business Use of Your Home, which is filed along with your Schedule C, Profit or Loss From Your Business, on your 1040.

GET COMFORTABLE

My home office has undergone a transformation since March. With a full house, I found that I needed more soundproofing, so new carpeting and drapes were a must. I also needed better headphones. Don’t be afraid to spend where practical. The TCJA did not change the home office expense rules for self-employed persons and independent contractors. Those expenses are deductible so long as they otherwise meet the home office deduction criteria.

CREATE BOUNDARIES

I’m not just talking about virtual boundaries (like turning off your phone after hours) but actual, real, physical barriers. Being able to shut a door, put up a room divider, or even put on a pair of noise-canceling headphones can be an essential way to create your workspace and signal that you shouldn’t be disturbed.  Moreover, if you’re self-employed and angling for a home office deduction, it’s not only desirable, it’s mandatory: to claim a federal income tax deduction for a home office, you must use a specific area of your home exclusively for your trade or business.

It doesn’t have to be a separate room (like mine), but it must be a separately identifiable space (like my husband’s desk). You do not meet the requirements if you use the area in question for both business and personal purposes: it must be space that is used solely for business and not, say, an office or desk or computer that is also used by your children for their virtual lessons or to play Fortnite. 

I’ve always had a separate home office and I have a separate phone line for my office, which makes it deductible as a business expense. But if my husband uses our primary phone for business, he’s out of luck: the IRS has consistently taken the position that your primary phone land line is never tax deductible even if you don’t use it for anything else. 

Our internet connection is shared, so, like my utilities, I can’t deduct the whole thing as part of my home office deduction; it must be pro-rated. An upgrade in service to make it faster could also be pro-rated. Also, I can confirm that relying on a stable connection with two teleworkers and three students in virtual school can be challenging at best.  

DON’T GO IT ALONE

Even if you – like me – spend time working from home normally, you’re still likely used to seeing a friendly face or two. During the year, I attend conferences and bar functions, meet with clients, and chat with my paralegal. It is, quite frankly, weird to simply stay at home if you’re used to having people around. It helps to have opportunities to meet up – even if it’s virtually – with your colleagues. Take time to engage on social media (I highly recommend #TaxTwitter for those who work in tax) and say yes to virtual events (like a #virtualtaxpro happy hour). Socializing is healthy, and you can learn a lot from your fellow workers who are going through the same thing. We’re all learning as we go.

SET OFFICE HOURS

My hours are very nearly the same as before. I make it a point to get up at the same time every morning and sleep at roughly the same hours each night (though a few late-night drops of thousand-plus page coronavirus stimulus bills have admittedly kept me up reading). But normalcy is important to me. It also helps my kids know when it’s okay to ask questions for school or alert me to the fact that Bayern won the Bundesliga.

Credit given to: Kelly Phillips Erb. Published in Forbes on Aug 12, 2020.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Small Business Tax Deduction Checklist February 3, 2021

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

We receive a ton of questions regarding what is tax deductible. If the expense is associated with your business then it is most likely deductible. As a side note, many people are unaware that upon starting a new business, your personal assets that are now used in the new business may be deducted as an expense or as depreciation expense. Those personal assets have now been converted to from personal use to business use. They may be deducted at their fair market value at the time they were placed into service. Fair market value is typically defined as “garage sale” value. These assets may include computers, faxes, phones, copiers, printers, desks, chairs, tables, etc. The article that follows drills down further with a list of some common business tax deductions.

The not-so-good news? Every business needs to file taxes. The great news? There are many expenses you can apply to your income to help alleviate your tax burden. These deductions will reduce your profits, meaning that you will pay lower overall taxes. While the IRS does not specifically list what you can claim, they do state that if a cost you’ve incurred is “ordinary and necessary” to running your business, then you can deduct it.

We’ve created a checklist below of most of the deductions you can claim for your small business. As always, check with your accountant or tax preparer if you have any questions or need clarification. Note that some of the expenses listed below will need to be “depreciated” or expensed over several years. Speak to your tax preparer for more information.

Rent, Mortgage, and Utility Tax Deductions

These tax deductions include costs associated with renting a building for business, using part of your home as an office, utility bills, and other factors. 

Rent and Mortgage Expenses

Utility Bills Expenses

You cannot claim a telephone landline unless it is specifically dedicated to your business. You can claim a percentage of your mobile phone bill depending on how much you use your mobile phone for business.

Office Expenses and Tax Deductions

You can take additional deductions on money you spend for your business office.

Office Furniture Expenses

Office Computer Expenses

Office Software Expenses

Office Equipment Expenses

Office Supplies and Sundries Expenses

Office Maintenance and Repairs Expenses

Employee Expenses and Tax Deductions

If you pay a salary to employees, then you can deduct some of those costs from your business revenue. Employee expenses and taxes can be complex, so we recommend speaking to an accountant or tax preparer to understand what you can deduct.

Freelance, Contractor, and Professional Tax Deductions

You can claim costs for professional services like tax preparation or legal fees, and for paying freelancers or other contractors to complete work for your business.

Accountancy Expenses

Legal Expenses

Freelance and Contractor Expenses

Car and Vehicle Tax Deductions

If you use a vehicle in part or exclusively for your business, you can deduct those costs. You can either track everything individually, or use the IRS mileage rates.

Advertising and Marketing Tax Deductions

You can deduct any money you spend on promoting your business.

Travel and Accommodation Tax Deductions

If you travel or stay away from home for business, those costs are deductible.

Loan Interest and Bad Debt Tax Deductions

If you have taken out loans for your business, you can deduct the interest.

Education and Training Tax Deductions

When you provide training to yourself or your staff, those costs can be deducted.

Payment and Bank Fee Tax Deductions

Your bank is likely to charge you for business services, and you’ll also pay a fee for accepting charge, credit, or debit cards.

Insurance Tax Deductions

You can deduct insurance premiums incurred by your business:

Qualified Business Income Tax Deductions

Depending on the type of business you run, and subject to certain limits, you can claim up to 20% of your profits as a tax deduction. Speak to your accountant about this, as it can be a complex area.

Miscellaneous Tax Deductions

Depending on the type of business you run, there are potentially dozens of other areas you can expense. 

We hope you’ve found this small business tax deductions checklist useful. This list is not exhaustive, but it will give you a good starting point for your expenses. As always, talk to a professional tax preparer or accountant about your unique tax circumstances to ensure you’re claiming expenses correctly.

Credit given to Lisa Xiong and published on March 6, 2020.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

What You Need to File your Taxes January 20, 2021

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

Our job includes minimizing your income tax liability both in the short-term and long-term. Our ability to do so is closely tied to the accuracy and completeness of the information given us. Our client tax organizer and checklist are designed to help you report your income and deductions to us.  When your tax organizer and checklist are not completed, we may not know what we don’t know. Always, a good idea to call, mail, text or email any new events or questions during the year so we may either give you immediate suggestions and/or be on the alert during your tax preparation.

The following article by the Taxslayer Blog Team is written from the 30,000 feet view. Our tax organizer and checklist are more comprehensive. But the article will give you a starting point for gathering your tax information. 
                                                                                                                                                                                                -Mark Bradstreet

Tax Prep Checklist: Everything You Need to File Your Taxes

If you’d rather do something – anything – other than filing your taxes, remember that the sooner you file, the sooner you’ll get your refund. To make the e-filing process quicker, gather your forms and documents before you begin. Below is a checklist of the basic forms and records you’ll need to make slaying your taxes a cinch. 

Personal Information 

Income and Investment Information 

Self-Employment and Business Records (where applicable) 

Medical Expense Receipts and Records 

Charitable Donations 

Other Homeownership Info 

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

A Checklist of Business Deductions January 6, 2021

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, Section 168, Section 179, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes, Taxes , add a comment

Sara Sugar has created a list of small business deductions as shown below.  It is a great list to scan through and see if you have been overlooking any tax deductions.  Always fine to call us with any questions or comments you may have.

                                 -Mark Bradstreet

THE ULTIMATE LIST OF SMALL BUSINESS TAX DEDUCTIONS

Every small business owner wants to save money — and small business tax deductions are one way to do exactly that.

This list of 37 deductions will take you from “Ugh, taxes” to “Taxes? I got this.”

1. Vehicle Expenses.
Keep records during the year to prove the use of your car, truck or van, for business, especially if you also use the vehicle for personal reasons. When it’s time to pay taxes, you can choose to deduct your actual expenses (including gasoline, maintenance, parking, and tolls), or you can take the more straightforward route of using the IRS standard mileage rate — 58 cents per mile in 2019.

Whether you’re running errands in your own car or making deliveries in your bakery van, track the mileage and run some numbers to see which method gives you the higher deduction. If you drive a lot of miles each year, it makes more sense to use the standard mileage deduction when filing taxes. However, if you have an older vehicle that regularly needs maintenance, or isn’t fuel efficient, you might be able to get a larger deduction by using your actual expenses vs. the IRS mileage rate.

Either way, we all know that gas, repairs, parking, and mileage add up, so taking advantage of the standard mileage rate, or deducting your actual expenses, is a no-brainer way to put some of that money back in your pocket. Just make sure you keep records diligently to avoid mixing personal expenses with business ones.

2. Home Office.
Do you run part of your small business out of your home, maybe doing the books in the evenings after you’ve parked your food truck for the night? Or perhaps you run an entirely home-based business. For many self-employed individuals and sole proprietors, it’s pretty standard to have a space at home that’s devoted to your work. The key here is the word devoted. Sometimes doing work on at the kitchen table while your kids do their homework doesn’t count as a home office. You must have a specific room that’s dedicated to being your office in order for it to be tax deductible.

Calculating the size of your deduction is primarily related to the amount of your home that’s used as an office. For example:

Total square footage of your home / divided into square footage used as an office = the percentage of direct and indirect expenses (rent, utilities, insurance, repairs, etc.) that can be deducted.

We highly recommend that you read the IRS’ literature on this particular tax deduction, and/or speak with a tax professional before filing taxes with this deduction. It’s one of the more complicated ones available to small business owners, and there have been numerous court cases and controversies over the years. When dealing with the potential for a costly audit, it pays to be safe by consulting a professional tax preparer rather than sorry.

3. Bonus Depreciation.
If you buy new capital equipment, such as a new oven for your pizzeria, you get a depreciation tax break that lets you deduct 100 percent of your costs upon purchase. Under the Tax Cuts and Jobs Act, 100% bonus depreciation only pertains to equipment purchased and placed in use between September 27, 2017 and January 1, 2023 — something to keep in mind as you plan for new equipment purchases in the next few years.

It’s important to note that according to the IRS, the asset you purchase must meet the following three requirements:

A few things that don’t count as assets include:

4. Professional Services.
As a small business, you don’t have in-house accountants or attorneys, but that doesn’t mean you can’t deduct their services. If you hire a consultant to help you grow your gift shop’s outreach, the fees and overall expense you pay for those services are deductible. Make sure the fees you’re paying are reasonable and necessary for the deduction to count by checking with the appropriate IRS publication or a tax professional. But you’d do that anyway, wouldn’t you?

5. Salaries and Wages.
If you’re a sole proprietor or your company is an LLC, you may not be able to deduct draws and income that you take from your business. However, salaries and wages that you pay to those faithful part-time and full-time employees behind the cash register are indeed deductible.

However, this doesn’t just stop at standard salaries and wages. Other payments like bonuses, meals, lodging, per diem, allowances, and some employer-paid taxes are also deductible. You can even deduct the cost of payroll software and systems in many cases.

6. Work Opportunity Tax Credit.
Have you hired military veterans or other long-term unemployed people to work behind your counter? If so, you may be eligible to take advantage of the Work Opportunity Tax Credit of 40 percent of your first $6,000 in wages.

7. Office Supplies and Expenses.
If you’re running a frozen yogurt shop, when you hear the word “supplies,” you probably think of plastic spoons. However, even if your business doesn’t have a traditional office, you can still deduct conventional business supplies and office expenses, as long as they are used within the year they’re purchased, so set up a file for your receipts. Many times, you can also deduct the cost of postage, shipping, and delivery services so if mail-order is a part of your business, be sure to keep track of this cost.

8. Client and Employee Entertainment.
Yes, you can take small business deductions for schmoozing your clients, as long as you do indeed discuss business with them, and as long as the entertainment occurs in a business setting and for business purposes. In some cases, you can’t deduct the full amount of your entertainment expenses, but every bit helps.

Here are some tips to guide when and what you can deduct:

(Please note:  the TCJA affected Meals & Entertainment deductions beginning in 2018.)

9. Freelance/Independent Contractor Labor.
If you bring in independent contractors to keep your checkout lines moving during the holidays or to create new marketing materials for your shop, you can deduct your costs. Make sure you issue Form 1099-NEC to anyone who earned $600 or more from you during the tax year.

10. Furniture and Equipment.
Did you buy new chairs for your eat-in bakery or new juicing blenders for your juice bar this year? You have a choice regarding how you take your small business tax deduction for furniture and equipment. You can either deduct the entire cost for the tax year in which it was purchased, or you can depreciate the purchases over a seven-year period. The IRS has specific regulations that govern your choices here, so make sure you’re following the rules and make the right choice between depreciation and full deduction.

11. Employee Benefits.
The benefits that businesses like yours offer to employees do more than attract high-quality talent to your team. They also have tax benefits. Keep track of all contributions you make to your employees’ health plans, life insurance, pensions, profit-sharing, education reimbursement programs, and more. They’re all tax-deductible.

12. Computer Software.
You can now deduct the full cost of business software as a small business tax deduction, rather than depreciating it as in years past. This includes your POS software and all software you use to run your business.

13. Rent on Your Business Location.
You undoubtedly pay rent for your pet store or candy shop. Make sure you deduct it.

14. Startup Expenses.
If you’ve just opened your gift shop or convenience store, you may be able to deduct up to $5,000 in start-up costs and expenses that you incurred before you opened your doors for business. These can include marketing and advertising costs, travel, and employee pay for training.

15. Utilities.
Don’t miss the small business tax deductions for your electricity, mobile phone, and other utilities. If you use the home office deduction, your landline must be dedicated to your business to be deductible.

16. Travel Expenses.
Most industries offer some form of trade show or professional event where similar businesses can gather to discuss trends, meet with vendors, sell goods and discuss industry news. If you’re traveling to a trade show, you can take a small business deduction for all your expenses, including airfare, hotels, meals on the road, automobile expenses – whether you use the IRS standard mileage rate or actual expenses – and even tipping your cab driver.

There are also deductions for expenses that might not immediately come to mind, like:

In order for your trip to qualify for a travel deduction, it must meet the following criteria:

As with all deductions, it’s imperative that you keep receipts and records of all business travel expenses you plan to deduct in case of an audit.

17. Taxes.
Deducting taxes is a little tricky because the small business deduction depends on the type of tax. Deduct all licenses and fees, as well as taxes on any real estate your business owns. You should also deduct all sales taxes that you have collected from the customers at your deli. You can also deduct your share of the FICA, FUTA, and state unemployment taxes that you pay on behalf of your employees.

18. Commissions.
If you have salespeople working on commission, those payments are tax-deductible. You can also take a small business tax deduction for third-party commissions, such as those you might pay in an affiliate marketing set-up.

19. Machinery and Equipment Rental.
Sometimes renting equipment for your coffee shop or concession stand is beneficial to your bottom line, since you can deduct these business expenses in the year they occur with no depreciation.

20. Interest on Loans.
If you take out a business line of credit, the interest you pay is completely deductible as a small business tax deduction. If you take out a personal loan and funnel some of the proceeds into your business, however, the tax application becomes somewhat more complicated.

21. Inventory for Service-Based Businesses.
Inventory normally isn’t deductible. However, if you’re a service-based business and you use the cash method of accounting (instead of the standard accrual method typically used for businesses with inventory), you can treat some inventory as supplies and deduct them. For instance, if you’re an ice cream shop but you sell your special hot fudge sauce as a product, your inventory may be deductible. Consult a tax professional to see if you qualify.

22. Bad Debts.
Did you advance money to an employee or vendor, and then not receive repayment or the goods or services you thought you were contracting for? If so, you may be able to treat this bad business debt as a small business deduction.

23. Employee Education and Child Care Assistance.
If you go above and beyond with your employee benefits, you may be able to take small business tax deductions for education assistance and dependent care assistance. The IRS is pretty much rewarding you here for being a great employer. So, take a bow, and the deduction.

24. Mortgage Interest.
If your business owns its own building, even if it’s just a hot dog stand, you can deduct all your mortgage interest.

25. Bank Charges.
Don’t forget to deduct the fees your bank charges you for your business accounts. Even any ATM fees are deductible.

26. Disaster and Theft Losses.
If your business is unfortunate enough to suffer theft or to be the victim of a natural disaster during the year, you may be able to turn any losses that your insurance company didn’t reimburse into a small business tax deduction.

27. Carryovers From Previous Years.
Some small business tax deductions carry over from year to year. For instance, if you had a capital loss in a previous year, you may be able to take it in the current year. Specifics often change from year to year, so make sure you’re up to date on the latest IRS regulations.

28. Insurance.
The insurance premiums you pay for coverage on your business is all tax-deductible. To qualify, your insurance must provide coverage that is “ordinary and necessary.”

This could include coverage for:

There are a few insurance types that you can’t deduct, the most common being life insurance. If you’re not sure whether you can deduct a certain type of insurance, and that deduction is an important factor in your decision, please speak with a tax professional first and save yourself any unnecessary expenses.

29. Home Renovations and Insurance.
Did you take a deduction for a home office already? If so, business expenses related to any renovations to that part of your home are also deductible, and so is the percentage of your homeowner’s insurance that covers that part of your home. Remember, all small business deductions related to home offices only apply if you use part of your home exclusively for business.

30. Tools.
The IRS distinguishes between tools and equipment. While you may have to capitalize on equipment rather than deducting it in one year, you can deduct tools that aren’t expensive or that have a life of only a year or less. And for the IRS, “tools” doesn’t just refer to hammers or screwdrivers; your spatulas and cookie sheets are tools as well.

31. Unpaid Goods.
If your business produces goods rather than providing a service, you can deduct the cost of any goods that you haven’t been paid for yet.

32. Education.
Did you attend any seminars, workshops or classes in the past year that were designed to help you improve your job skills? Your work-related educational expenses may be deductible, especially if they’re required to keep up or renew a professional license. Remember, they have to be work-related. If you own a bar or cafe, you won’t be able to deduct skiing lessons.

33. Advertising and Marketing.
You already know that providing amazing goods and services isn’t enough to make your business succeed. You also need to advertise so your potential customers can find you. Advertising and marketing dollars can add up fast, but fortunately, they are all tax-deductible.

This is great news since advertising and marketing are often of the biggest business expenses that small businesses need to deal with as they get off the ground. Rest assured, you can deduct everything from flyers to billboards to business cards, and even a new website. Political advertising is the biggest exception to this rule. Those expenses are not deductible.

34. Charitable Deductions.
Yes, your small business can donate to charity and take a deduction for it. It can donate supplies, money, or property to a recognized charity, but pay attention to the rules before you go crazy giving stuff away. Donations of your time don’t count, and you can’t wipe out your business income with donations. Also, check with the IRS before you make a charitable deduction to make sure the organization you want to support qualifies for the deduction.

35. Cleaning and Janitorial Expenses.
You know all too well that the workday isn’t over when you flip the sign on the door to say “Closed.” If you hire any type of cleaning service, make sure you take your small business tax deduction.

36. Moving Expenses.
Did you need to move to start your business? If you’re a sole proprietor or self-employed worker and you had to move more than 50 miles for business, you may be able to deduct some of your moving expenses from your taxes. Specifically, you may be able to deduct packing and transportation costs, utility and service connection fees, and travel costs. However, you can’t deduct the cost of any meals or security deposits you’ve had to pay.

Lastly, to qualify for these deductions, you will need to remain a full-time employee of the business that required you to move for at least 78 weeks out of the following two years.

37. Intangibles like Licenses, Trademarks, and other Intellectual Property.
Most of the time, expenses related to the registering or protection of intellectual property are deductible. However, the process you go about it can differ depending on what you’re trying to deduct. Some costs must be depreciated over multiple years, while others can be fully deducted within the year in which they were incurred. For example, licensing fees are typically considered capital expenses that must be depreciated. However, trademarks can often be deducted in the same tax year. If you’re uncertain, we recommend working with a tax professional to ensure you’re in compliance with the regulations governing your specific situation.

No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.

Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.

To make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes, and both the employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.

Whether you’re filing your taxes quarterly or holding off for the next annual deadline, you should begin preparing for your taxes by keeping records of your expenses as of January of each year. Make sure to document each of these small business tax deductions by keeping physical receipts and writing down the business reason for the expense on your receipts as soon as you receive it.

With this comprehensive list of small business tax deductions, you’ll be well on your way to saving on your taxes this year. However, deductions can be tricky, it’s always best to consult a tax expert for any questions that might arise to ensure you are complying with all regulation and avoid any penalties.

Credit given to Sara Sugar. Published in MONEY & PROFITS on Jan 21, 2020.  

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

9 Best Practices for Small Business Taxes December 2, 2020

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip , add a comment

Not sure there are only 9 “best practices” for small businesses as the below article suggest.  But, the 9 “best practices” that follow are valid points and a decent start your tax preparation.

                                -Mark Bradstreet

Running a business is hard enough without adding the complexity of filing taxes each year. The key, experts say, is to work with your accountant throughout the year, not just when you prepare your tax return. Making financial decisions without consulting an accountant or financial adviser can put you at risk and cost you more money in the long run, says John Blake, CPA, in Hamilton, N.J.

Here are nine best practices for small business when it comes to tax preparation and small business accounting, and working with an accountant or financial professional.

1. Hire the right accountant

Your accountant should offer to do more than just prepare financial statements and do your taxes, says Chandra Bhansali, co-founder and CEO of Accountants World. If that’s all they offer to do, then they aren’t the right accountant for a small business, Bhansali says.

Your accountant should work with you throughout the year to track income and spending, to make sure you don’t have a cash flow problem, and to monitor your gross and net profits, Bhansali says. Work with your accountant from day one of opening your business, not just in March and April for tax season. “Most small businesses don’t understand the importance of accounting for the survival and growth of their businesses,” he says.

2. Claim all income that is reported to the IRS

The IRS gets a copy of the 1099-MISC forms you receive so they can match the income you’ve reported against what they know you’ve received. Make sure the income you report to the IRS matches the amount of income reported in the 1099s you received, Blake says. Not doing so is a red flag for the IRS. Even if a client doesn’t send out a 1099, you still need to report that income. The same rules apply with state taxes, he says.

3. Keep adequate records

Keeping thorough and accurate records throughout the year will ensure your tax return is correct. With inadequate record keeping, Blake says, you could be leaving deductions on the table or, worse, you could be putting yourself at risk for an audit. Blake recommends every business invest in a basic version of an accounting software because it is user friendly, inexpensive, and helps you keep track of all your income and expenses.

4. Separate business from personal expenses

If the IRS audits your business and finds personal expenses mixed with business expenses, regardless of whether you reported business expenses correctly, the IRS could start looking at your personal accounts because of commingled money, Blake says. Always get a separate bank account and credit card for your business and run only business expenses through those accounts.

5. Understand the difference between net and gross income

If your product costs more money to make than you charge for it, you will lose money regardless of how many units you sell. Small business owners often forget to take into account the difference between their net and gross income, Bhansali says. 

For instance, if it costs $100 to make your product and you sell it for $150, your gross income is $50. But, he says, after you deduct your expenses, your net income might drop to $10. “It’s important to know what your gross and net profits are so you can be more profitable and grow your business,” Bhansali says.

6. Correctly classify your business

Failing to properly classify your business could result in overpaying taxes, Blake says. Deciding whether to classify your company as either a C Corporation, S Corporation, Limited Liability Partnership, Limited Liability Company, Single Member LLC or Sole Proprietor will have a different effect on your taxes. It’s important that small businesses consult with an attorney and accountant to determine how their businesses should be classified.

7. Manage payroll

Blake recommends hiring a company to assist with payroll – but be sure that the company is reputable. To save money, some business owners will hire a lesser-known payroll service, only to find out later the service wasn’t remitting payroll taxes for the company. If that happens, Blake says, the business owners are on the hook for the payroll taxes. The IRS typically checks every quarter to see if payroll taxes have been paid.

8. Seek your accountant’s advice on your business plan

A good accountant gives you advice on how to grow your business, Bhansali says. Seek their advice to determine how much to contribute to your retirement fund and whether you should take a bonus or delay it a year. Your accountant can tell you if buying a small space for your store or business – rather than renting – could save you money.

9. Take advantage of capitalization rules

If you acquire a tangible piece of property or equipment for your business, you may be able to take a significant deduction. Make sure your accountant understands the rules around capitalization.

Credit given to: Conning, 2014; Conning Strategic Study: The Small Business Sector for Property-Casualty Insurance: Market Shift Coming.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Amended Tax Returns November 25, 2020

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Deadlines, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip , add a comment

Filing an amended tax return is far from uncommon. In 2018, 3,500,000 were filed with the IRS. Amended tax returns are often needed for a large number of wide-ranging reasons. Some of the more common ones include receiving a late Form 1099 or a late Schedule K-1 or any other relevant information after your tax return was filed. Or, the cause for amending may be as simple as a math error which was not discovered until a later date. Keep in mind, that filing an amended return with the IRS often prompts filing amended returns for other tax entities such as your state, city and school district. For the most part today, these tax entities are linked. So, if an amended return is filed with the IRS – the other tax entities are notified of that change. So, they are now expecting an amended return as well. Not filing it with them usually prompts some nasty correspondence. Refunds created from filing amended returns are often a pleasant surprise; not so much fun if they cause a tax balance due. Many tax entities limit the time for which a refund claim may be filed. The IRS says the amended return for a refund must generally be filed within three years after the date the original return was filed or within two years after the date the tax was paid whichever is later. 

An article, If You Want to File an Amended Tax Return, authored by Tom Herman as published in the WSJ on September 14, 2020 follows.


                                     -Mark Bradstreet


Much to their chagrin, millions of taxpayers each year discover significant errors, omissions and other miscues on returns they already have filed.

Mastering all the details of knowing how to handle problems such as these can be surprisingly tricky. But the Internal Revenue Service recently took an important step toward making the process of filing an amended federal income-tax return easier.

Until recently, taxpayers who wanted to amend their federal income-tax return had to file Form 1040-X the old-fashioned paper way—even if they had filed their original return electronically. Then, in August, the IRS reversed course and said taxpayers generally can file amended returns electronically for last year with tax-preparation software.

“This is a significant and a very welcome development,” says Stephen W. DeFilippis, owner of DeFilippis Financial Group, a wealth-management and tax firm in Wheaton, Ill., and an enrolled agent (a tax specialist authorized to represent taxpayers at all levels of the IRS). This will make the amending process “easier for everyone: taxpayers, practitioners and the IRS,” he says.

“E-filed returns are generally processed faster, more efficiently and contain fewer errors than paper-filed returns,” says Alison Flores, principal tax research analyst at the Tax Institute at H&R Block Inc. “Similar results are likely to extend to Form 1040-X.” She says H&R Block has already begun e-filing amended returns for customers.

The IRS received nearly 3.5 million amended income-tax returns in 2018.

The e-filing option is also a timely change. Because of the coronavirus pandemic and other issues, IRS workers have been struggling to open and process unusually large mountains of mail. But it remains to be seen how much this new e-filing option will affect how long it takes for the IRS to respond to amended returns. The waiting time can vary significantly based on the facts, circumstances and complexity of each taxpayer’s situation.

As with so many tax issues, there are important exceptions and other fine print to consider for amended returns, filed electronically or on paper. If you’re planning to make amends, here are a few points to consider:

Limited scope
At this stage, the e-filing option for amended returns applies only for Forms 1040 and 1040-SR for the 2019 tax year. “Additional improvements are planned for the future,” the IRS said. Also, only taxpayers who e-filed their original Form 1040 or 1040-SR for 2019 can e-file an amended return, notes Ms. Flores of H&R Block.

Taxpayers who want to amend returns for more than one tax year must file for each year separately, says Eric Smith, an IRS spokesman. “So, for example, if you are amending multiple years and one of them is 2019, we urge you to e-file for 2019 and then send separate 1040-X forms” in separate envelopes for each of the other years, he says. “However, you decide to send it, it’s a good idea to keep any receipt or other evidence you do have that it was sent, whether it’s through one of the mailing or shipping options offered by the U.S. Postal Service or one of the authorized private delivery services,” he adds. “Also, be sure to keep a copy of your return.”

For refunds claimed in amended returns filed electronically, as with the paper 1040-X form, “we don’t currently offer direct deposit, but that’s one of the further enhancements we hope to make in the future,” Mr. Smith says.

Time limits
Generally, to claim a refund, you must file Form 1040-X “within three years after the date you filed your original return or within two years after the date you paid the tax, whichever is later,” regardless of how you file, the IRS says. “Returns filed before the due date (without regard to extensions) are considered filed on the due date, and withholding is deemed to be tax paid on the due date.”

But there are special rules for “refund claims relating to net operating losses, foreign tax credits, bad debts, and other issues.” For example, the IRS says a Form 1040-X based on a “bad debt or worthless security” generally must be filed “within seven years after the due date of the return for the tax year in which the debt or security became worthless.”

Common flubs
Among the classic reasons for amending: You forgot to include taxable income. You didn’t realize you were eligible for various credits, deductions or other valuable breaks. You claimed breaks you now realize you weren’t entitled to take. You need to correct your tax-filing status, or perhaps you received new information from a partnership or a financial institution that differs significantly from what you originally were told.

Another possible reason is that you were affected by a natural disaster in a place later designated as a federally declared disaster area. In such cases, victims have the option of claiming unreimbursed casualty losses for the year in which the disaster occurred—or on the previous year’s return (which typically would mean amending the return for that year).

For example, those who suffered losses from Hurricane Laura or California wildfires this year could deduct those losses on their returns for 2020 or 2019, whichever works out better. The Federal Emergency Management Agency provides a list of disaster declarations.

Some people also may benefit from several tax laws enacted near the end of 2019 that could affect their returns for prior tax years.

Other considerations
Some errors don’t require an amended return. The IRS says it may correct math or clerical errors on a return and even accept returns filed “without certain required forms or schedules.”

There are other circumstances when you shouldn’t file Form 1040-X. For example, the IRS says you shouldn’t amend to ask for “a refund of penalties and interest that you have already paid.” Instead, file Form 843.

In certain other cases, such as where criminal issues might be involved, consider consulting a skilled tax pro.

Lastly, if you amend your federal return, check to see whether you also may need to amend state tax returns and how to do so.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.