May 152015
 
Please Like and Share:

Expenses for Business Use of Your Home

One of the advantages of owning one’s own business is the deductibility of expenses which would otherwise be considered personal, and therefore not deductible, for income tax purposes.  Three of the most common expenses which are generally not deductible for income tax purposes are rent, utilities and insurance.  However, if an individual engages in a business for profit and meets the following two requirements, these expenses become deductible (in part) for purposes of determining the taxable income from that business:

1.  The area (or room) must be used regularly and exclusively for administrative or management activities of the business, and

2.  There is no other fixed location where substantial administrative or management activities are conducted.

What exactly does this mean?  Assume you have a job where you’re an overworked and underpaid employee.  Every day of your work schedule you travel to the location where you conduct your work.  This is generally in a building in an office or cubicle.  Every day of your work schedule constitutes “regular” use of this area.  Whether you work four hours a day or ten hours a day is irrelevant.  The fact that you do this on a scheduled basis satisfies the regular use requirement.  So what does exclusively mean?  In your work area, do you take naps, watch television, or conduct other activities not related to your work?  Chances are, you do not.  At least not for long.  Since this area is used solely for the purpose of conducting your work activities, the requirement of exclusivity is met.  If there is no other fixed location where you conduct a substantial part of your work activity, requirement 2 is met.  Obviously, the business owner in this case gets to deduct the cost of rent and other expenses of the property.  If the business owner owns the building where this office space is located, they would be entitled to deduct the cost of the building over a period of years.  This allocation of cost is known as depreciation.  Of course there are other costs such as occupancy costs, insurance, maintenance and repairs, etc.

Consider this.  Though you are still paying rent or other housing costs, utilities and insurance on your home, those expenses are not deductible for income tax purposes.  Wouldn’t that be nice if they were?

Well, they can be.  Let’s apply the above scenario to your own business which you operate from a room in your home.  Every day, every other day, or whatever schedule you establish, you conduct business in this room.  This might include calling customers, prospects or vendors, placing orders, completing paper work, etc.  You have no other place where you can conduct these activities.  You perform these activities two to four hours on each of your scheduled days.  No other activities such as taking naps, watching television, etc. are conducted in this room.  Your expenses for rent, utilities and insurance are now deductible for income tax purposes.  By simply engaging in an activity with a profit motive and conducting the majority of that activity in this room, you now have expenses that are deductible for income tax purposes that would otherwise not be deductible.

The expenses for business use of your home are calculated under one of two methods:  actual expenses or the simplified method.  Both methods require that the square footage of the room or area be determined and the total area of the home be known.  By dividing the square footage figure by the total square footage of the home, we derive the business use percentage.  Let’s say we have a room which is 10′ by 10′, or 100 square feet.  Let’s also assume the total square footage of the home is 1,000 square feet.  Our business use percentage would be 10%, or 100 square feet divided by 1,000 square feet.  Let’s further assume we pay rent in the amount of $500.00 per month.  For each month we continue operating our business and meet the requirements discussed previously, we can deduct $50.00 of the rent as an expense for business use of your home.  Of course, you may have other expenses as well in operating your business which are also deductible such as advertising, vehicle mileage (commuting to a job is not deductible), telephone, etc.

If you’d like more information on how you can start a business and take advantage of these and other tax deductions, complete the form below.

 

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Jan 162014
 
Please Like and Share:

Clients often ask me, “Will taking the home office deduction trigger an audit of my tax return?”

The answer is No.  In the past, the home office deduction was subject to very strict rules by the IRS. However, in 1999 they loosened those rules, allowing more people to be eligible to claim the home office deduction.

There is absolutely no reason why you shouldn’t take the home office deduction if you are indeed conducting business activities out of a bona fide home office.  However, because the home office deduction is easy for people to abuse, one must be disciplined in how he/she uses a home office, and follow the rules closely.  That way, in the event of an audit (not because of taking the home office deduction, but for other reasons), the home office and the related home office deduction will stand up to IRS scrutiny.

For recent statistics regarding the home office deduction visit Small Business Trends.

For more details, see IRS Publication 587, Business Use of Your Home or contact me via R. Darren Sanford, CPA, CGMA.

Beginning with tax year 2013, there is a new simplified home office deduction method…even more reason for you to start your very own home based business.

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Aug 022013
 
Please Like and Share:

One of the advantages of owning a home-based business is the ability to deduct expenses that would otherwise be non-deductible for federal income tax purposes. However, you should and must be conducting the business in a business-like manner with the intent of making a profit. Otherwise, the IRS might disallow your home-based business deductions and your hobby may cost more than you know. You cannot conduct your business in such a way for the purpose of merely producing “write-offs” for tax purposes. Not only is that unethical, it is illegal. If you are the typical home-based business owner, you likely run your business in an ethical manner with an intent of making a profit. You might think that the phrase “intent of making a profit” is self-explanatory, but the determination as to the profit intent of one’s business is often more subjective than objective. Therefore, in the event of an audit, the IRS uses nine relevant factors to determine whether or not your business qualifies for home-based business tax deductions. Review these factors and consider whether your home-based business is in compliance. You may find areas in the conduct of your home-based business which need improvement.

According to the IRS website, whether or not an activity is presumed to be operated for profit requires an analysis of the facts and circumstances of each case. Deciding whether a taxpayer operates an activity with an actual and honest profit motive typically involves applying the nine non-exclusive factors contained in Treasury Reg. Sec. 1.183-2(b). Those factors are:

1. The manner in which the taxpayer carried on the activity – The fact that the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records may indicate that the activity is engaged in for profit. Similarly, where an activity is carried on in a manner substantially similar to other activities of the same nature which are profitable, a profit motive may be indicated. A change of operating methods, adoption of new techniques or abandonment of unprofitable methods in a manner consistent with an intent to improve profitability may also indicate a profit motive. Your hobby may cost more than you know if you’re not conducting it in a businesslike manner. [Treas. Reg. Sec. 1.183-2(b)(1)]

2. The expertise of the taxpayer or his or her advisors – Preparation for the activity by extensive study of its accepted business, economic, and scientific practices, or consultation with those who are expert therein, may indicate that the taxpayer has a profit motive where the taxpayer carries on the activity in accordance with such practices. Where a taxpayer has such preparation or procures such expert advice, but does not carry on the activity in accordance with such practices, a lack of intent to derive profit may be indicated unless it appears that the taxpayer is attempting to develop new or superior techniques which may result in profits from the activity. Attending and documenting company training would be an example. [Treas. Reg. Sec. 1.183-2(b)(2)]

3. The time and effort expended by the taxpayer in carrying on the activity – The fact that the taxpayer devotes much of his personal time and effort to carrying on an activity, particularly if the activity does not have substantial personal or recreational aspects, may indicate an intention to derive a profit. A taxpayer’s withdrawal from another occupation to devote most of his energies to the activity may also be evidence that the activity is engaged in for profit. The fact that the taxpayer devotes a limited amount of time to an activity does not necessarily indicate a lack of profit motive where the taxpayer employs competent and qualified persons to carry on such activity. The key here is to work your business on a regular and consistent basis. Working your business one hour a day, five days a week would be indicative of a regular and consistent basis. Document this by noting your activities in your calendar or day planner. [Treas. Reg. Sec. 1.183-2(b)(3)]

4. The expectation that the assets used in the activity may appreciate in value – The term “profit” encompasses appreciation in the value of assets, such as land, used in the activity. Thus, the taxpayer may intend to derive a profit from the operation of the activity, and may also intend that, even if no profit from current operations is derived, an overall profit will result when appreciation in the value of land used in the activity is realized since income from the activity together with the appreciation of land will exceed expenses of operation. [Treas. Reg. Sec. 1.183-2(b)(4)]

5. The success of the taxpayer in carrying on other similar or dissimilar activities – The fact that the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for profit, even though the activity is presently unprofitable. [Treas. Reg. Sec. 1.183-2(b)(5)]

6. The taxpayer’s history of income or loss with respect to the activity – A series of losses during the initial or start-up stage of an activity may not necessarily be an indication that the activity is not engaged in for profit. However, where losses continue to be sustained beyond the period which customarily is necessary to bring the operation to profitable status such continued losses, if not explainable, as due to customary business risks or reverses, may be indicative that the activity is not being engaged in for profit. If losses are sustained because of unforeseen or fortuitous circumstances which are beyond the control of the taxpayer, such as drought, disease, fire, theft, weather damages, other involuntary conversions, or depressed market conditions, such losses would not be an indication that the activity is not engaged in for profit. A series of years in which net income was realized would of course be strong evidence that the activity is engaged in for profit. [Treas. Reg. Sec. 1.183-2(b)(6)]

7. The amount of occasional profits, if any, which are earned – The amount of profits in relation to the amount of losses incurred, and in relation to the amount of the taxpayer’s investment and the value of the assets used in the activity, may provide useful criteria in determining the taxpayer’s intent. An occasional small profit from an activity generating large losses, or from an activity in which the taxpayer has made a large investment, would not generally be determinative that the activity is engaged in for profit. However, substantial profit, though only occasional, would generally be indicative that an activity is engaged in for profit, where the investment or losses are comparatively small. Moreover, an opportunity to earn a substantial ultimate profit in a highly speculative venture is ordinarily sufficient to indicate that the activity is engaged in for profit even though losses or only occasional small profits are actually generated. [Treas. Reg. Sec. 1.183-2(b)(7)]

8. The financial status of the taxpayer – The fact that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that an activity is engaged in for profit. Substantial income from sources other than the activity (particularly if the losses from the activity generate substantial tax benefits) may indicate that the activity is not engaged in for profit especially if there are personal or recreational elements involved. [Treas. Reg. Sec. 1.183-2(b)(8)]

9. Elements of personal pleasure or recreation – The presence of personal motives in carrying on of an activity may indicate that the activity is not engaged in for profit, especially where there are recreational or personal elements involved. On the other hand, a profit motive may be indicated where an activity lacks any appeal other than profit. Your hobby may cost more than you know if the activity involves mainly personal pleasure or recreation. [Treas. Reg. Sec. 1.183-2(b)(9)]

Additionally, no single factor controls, other factors may be considered, and the mere fact that the number of factors indicating the lack of a profit intent exceeds the number indicating the presence of a profit intent (or vice versa) is not conclusive. For example, if five factors say the activity is not for profit, but four are on the profit side, the activity still could be determined to be engaged in for profit. More weight is given by the courts to objective facts than to the taxpayer’s statement of his or her intent. (Reference: Dreicer v. Comr., 78 T.C. 642 (1982)).

As you can see, there is not a single indicator of the existence of an intent to make a profit or the lack thereof. If you need assistance with determining whether or not your deductions related to your home-based business activity might be questioned in an audit, you should consult the advice of a professional.

Request additional information regarding this topic or how you can start your own simple and profitable home based business by filling out the information below.

IRS Circular 230 Disclosure: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Jul 232013
 
Please Like and Share:

The Internal Revenue Service recently announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction).

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and record keeping burden on small businesses by an estimated 1.6 million hours annually.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.”

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. Further details on the new option can be found in Revenue Procedure 2013-13, posted on IRS.gov. Revenue Procedure 2013-13 is effective for taxable years beginning on or after January 1, 2013.  (Credit: IRS Newswire)

IRS webinar on business use of your home

I love collaborating with those who are inspired or who want to be inspired. If you are interested in starting your own home based business, leave a comment and I will get in touch with you as soon as possible.

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

Post Footer automatically generated by Add Post Footer Plugin for wordpress.