So Exactly What Counts as a Home Office?

Posted on January 26, 2012 by

This week we would like to take a look at a deduction that is confusing but valuable to tax payers.  We will be talking about what can be considered a home office.

Photo by Jeroen Sangers

A home office is a room or area used exclusively for business.   So it can be a room that you keep a computer in and work on your bookkeeping; it can be a room that you store inventory or equipment and tools; or it can be a room where you actually create or manufacture a product.  It can include a shed or shop in your backyard, an unfinished basement that you keep products in, or a part of the garage that you keep tools and work vehicle in. Ordinarily the room or space must only be used for business. Now, like everything in the tax code, there is an exception.  If you have an office or shop somewhere other than your home, your home office must be a room used exclusively for business purposes.  But, if your home is your only place of business you can use a portion of a room.  You could even use your closet, if that is where you work!  To really help you understand what options you have, here are three examples of a legitimate home office space:

  1. Natalie recently went through a divorce.  She has three small children, two of which are not in school yet.  She wanted to stay home with her children, so she started a daycare business.  She tends her own children along with four others from 6:30 am to 7:00 pm every weekday.  In her case a portion of her entire home is deductible.  We will explain more about how to take a portion of an entire house as a home office shortly.
  2. Alan was laid off from his job of 15 years, so he decided to start a business selling cleaning products.  He operates his business primarily over the internet.  He owns a small home and has a wife and 2 children.  There isn’t an extra room to work out of so he uses a corner of the living room.  Because this is his only place of business the area in his living room is considered a home office.
  3. Bobbie has a business of sewing costumes that she sells on EBay.  Her family is grown and gone out of the house so she turned her basement into a great big sewing room. She had a large family room that she turned into a product manufacturing room by tiling the floor, so it would be easier to keep the fabric scraps and thread under control, and putting her cutting table and sewing machines in it. She turned a spare bedroom into a storage room full of shelves to keep bolts of fabric and sewing supplies on.  She also has a corner that she uses to package the costumes for shipping.  Even though she sells them over the internet, she manufactures the costumes in the basement. This family room and bedroom in her home is definitely considered a home office.

We hope this helps you know whether or not your home office can be deducted this tax year. If you have any questions, check out www.avoidbeingaudited.com to learn more about this valuable deduction!

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Changes and Updates for 2011 Tax Preparation

Posted on January 14, 2012 by

The 2011 tax filing season is here, and in this blog post, we would like to update you on some of the things that have changed as well as a few things that haven’t remained the same.

  1. There are changes in 1099 reporting this year.  Investment companies are now required to report the cost of investments, such as stocks, that you sold during the year on a 1099B.  This “basis” will help you and the IRS when reporting investment sales.  There is also a new form 1099K.  If you or your business take payments from people by credit or debit card, the credit card processing company is now required to report those transactions to the IRS.  If you receive either one of these forms you should review them, and if there are any amounts that are incorrect, bring them to the attention of the one who sent the form to you so they can correct it.
  2. The Standard Deductions have gone up as usual.  For 2011 the deduction for Single and Married Filing Separate is $5800.  For Married Filing Jointly it is $11,600 and for Head of Household it is $8500.
  3. The Standard Mileage Rate for 2011 is different for the first half of the year than the last half.  This happened once before in the year of hurricane Katrina.  Business travel will be $0.51 per mile the first half and $0.555 for the second half.  Medical and Moving Mileage is $0.19 for the first half and $0.235 the second.  But Charitable Work Mileage stays the same all year at $0.14 per mile.
  4. The IRS is implementing a new efile system called MeF.  It is supposed to make efiles more accurate and process refunds better/ faster.   However, the system has not been tested with the anticipated tax return volume expected this year, so we will see how well it goes.
  5. The Child Tax Credit remains at $1000.
  6. Qualified teachers may continue to deduct up to $250 of out-of-pocket classroom expenses.
  7. You may continue to take the Sales Tax Deduction as an itemized deduction instead of deducting State Income Taxes.
  8. The College Tuition and Fees deduction also remains in place.

These are just a few of the changes this year.  Make sure to go to avoidbeingaudited.com to learn more about changes in the tax system.  Also check out our tax organizers.  They’ll help you capture all your deductions!

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Time for that End of the Year Finance Evaluation

Posted on December 21, 2011 by

As the year comes to a close, we find ourselves busier than ever trying to juggle holiday shopping, children’s holiday programs and all the other traditions we have taken on the years along with everyday life.  If you own a business, this may also be a busy time for that as well.  One of the last things you probably want to think about it evaluating your business.  However, before the end of the year is a vital time to at least take a peek at what is going on.  Certain decisions can be made at the end of the year to save on taxes.  Evaluating your business is something that should go on regularly throughout the year so let me tell you why it is important.

It is a fact that many businesses fail in the first two years. One of the reasons is that the business owner is so busy operating the business that they don’t take time to evaluate what is going on.

One thing that can really help you evaluate your business and the finances is a profit loss statement. A profit loss statement tells you how much money you have brought in, how much you have spent and what you have spent it on. This information can help you decide if you are spending money on things that will help you grow your business and keep the most money in your pocket.

We don’t mean to put more stress on anyone, but I do encourage you to talk to your accountant and spend a few minutes evaluating what has been going on in your business before the end of the year.

For more information on profit loss statements and how they can help you monitor your business, check out our CDs that can teach you everything you need to know to keep your business finances in order.

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Six Types of Deductible Continuing Education

Posted on December 14, 2011 by

This week we would like to talk about continuing your education as a business professional.  There are many things you can do to learn more about your trade, and many of them are also tax deductible, so they can save you money in the long run.  So let’s talk about six types of continuing education that are deductible on your taxes.

Seminars and Conferences

  1. College classes.  Taking college classes to improve or maintain your business is tax deductible for your business.  The cost of tuition, books, class fees, materials and supplies, and the gas or mileage to get there are all deductible.
  2. Seminars.  Throughout the year there are many seminars put on by many different organizations on many topics.  Most of them charge a fee to attend.  Some give credit if your type of professional license requires it and some do not.  But regardless of whether credit is given or not, if it is a seminar about something that can help you as a business owner, it is considered continuing education.  The fees to attend and travel expenses are all deductible.
  3. Trade shows.  A trade show is a show that has vendors with products and services that can help your business.  The most common trade shows are in the construction industry, but there are many other types of trades and businesses that have them.  Attending these shows helps you to keep updated on current products that can be helpful to your business.  Again the entrance fees and travel expenses are deductible.
  4. Vendor sponsored events.  Businesses you work with or purchase product from sometimes sponsor events.  Sometimes they are to promote their product or service and sometimes they are just helpful events to get you to like them.  Either way the goal of the event is to teach you something.  These events are often fun as well as informative, but they are still considered continuing education and the same things are deductible.
  5. Conferences.  As accountants, we attend a conference sponsored by the IRS every year in order to obtain credits to keep our license current.  This conference is never closer than 600 miles away. They have them all over the country, so we always choose the one that is the most convenient for us.  There are many types of conferences for many types of businesses.  Conferences generally have classes you can attend about various subjects pertinent to your profession.  They also often have a banquet and networking sessions to help you connect with others.  Sometimes there are even sightseeing excursions you can take advantage of.  Conferences can be both informative as well as fun and definitely fall into the continuing education category.  Many people take their families with them and do fun things in the evenings or in between conference sessions.
  6. Educational events you sponsor for your employees.  It is important to keep your employees educated and informed as well as keeping moral up.  Many companies hold events for their employees for those purposes.  Some have a weekend retreat and some go on a cruise.  The most important thing about this is to have some sort of training experience while at the event.  Anything the company pays for such as transportation, food, lodging, or educational materials is tax deductible for the business.  Anything the employee pays for is deductible to the employee.

These are only six educational expenses deductible to business owners.  Check out our CDs/MP3s at avoidbeingaudited.com to learn more about this type of expense.

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Making Your Travel Expense Tax Deductible

Posted on December 7, 2011 by

Hello, faithful readers! We’d like to apologize for the inconsistency in posts. We have had some technical troubles here. But we are up and rolling again!

Photo provided by Andrew Osterberg via Flickr.com

Let’s move forward to our topic for this post, travel expense. Travel expense is the money you spend to travel to another place for business purposes. Generally, to be considered travel expense, the destination needs to be far enough away to stay over night. Things that are considered travel expense include:

  1. Transportation to your destination such as airfare, bus, or train costs.
  2. Transportation while you are away such as a rental car, taxi, shuttle, bus, subway, etc.
  3. Lodging such as hotel or motel costs.
  4.  Meals and entertainment while away.
  5. Personal expenses such as cleaning your clothing or buying personal products.

There are many reasons people travel for business and it is a common expense. Some reasons you may travel include but are not limited to:

  1. Meeting with clients
  2. Educational seminars
  3. Purchasing equipment or materials
  4. Meeting with associates or others in your field
  5. Networking with other companies
  6. Exploring the possibility of expanding your business to other areas
  7. Office trip for partners or employees
  8. Promoting your business

Business travel is an area where you can be a little creative as well as combine business with pleasure. However, it must be structured correctly and good records must be kept so that it isn’t reclassified by the IRS as a personal vacation. Check out avoidbeingaudited.com to learn more how you can make your vacations a business tax deduction.

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Tips for Extra Christmas Cash

Posted on November 16, 2011 by

It is that time of year when we start thinking about the holiday season.  Many of us look forward to the preparation, anticipation, and all the sights, sounds, and tastes of the season.  But this time of year also comes with a lot of extra things to do, adding to our already busy lives.  More often than not it also brings financial stress.  It seems we either have the time or the money but never both.  So what do people do?  They look for extra jobs, cut back on the unnecessary things and worry.

There is a little known strategy that could possibly free up some money without taking a second job or tightening your belt.  It has to do with your taxes.  If you usually get a refund when you do your taxes at the beginning of the year you can adjust how much you are paying and put that money in your pocket.  Let me give you a few different ways where you can adjust your taxes and get a little extra holiday cash.

  1. If you and/or your spouse have a job working for someone else and receive a W-2 form at the end of the year, you can change your exemptions so that no federal or state tax is being withheld and that money will be added to your pay check.  So, let’s say you ordinarily claim married with 2 exemptions and they take out $600 per month in federal and state withholding combined.  You anticipate receiving a refund when you file your taxes next April.  By going in to the payroll office at your work and raising your exemptions or claiming exempt until the end of the year you could raise your take home pay by $600.  Of course everyone’s situation is different, but it is definitely worth looking into.  Also it is important to note that at the beginning of the year you need to change the exemptions back.
  2. If you are self-employed and pay quarterly estimated tax payments, this is a good time to evaluate what your tax liability will be when you file your taxes next year.  If you and your accountant determine you will receive a refund, you could lower what you need to save to pay in next quarter.  As long as you owe less than $1000 when you file your return, there will be no penalty.
  3. If you receive earned income credit when you file your tax return each year, you can ask your employer to give you an advance on some of it.  Earned income credit is a credit for people who earn under $40,000 per year and have children.  Some people receive over $5000 per year in earned income credit.  If you receive a large refund each year, talk to your payroll department and ask them about how much of an advance you qualify for.

These strategies are helpful and legal.  However, before you make the changes you should check with your tax advisor so he or she can determine approximately what your tax liability will be.  Remember, if you owe over $1000 when you file your tax return, you can receive a penalty.  For more helpful hints about your taxes, check out our resources at www.avoidbeingaudited.com.

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7 Employee Business Expenses You are Probably Missing

Posted on November 9, 2011 by

A commonly missed deduction is the unreimbursed employee business expense.  Anything that is required by your job that you have to pay for and don’t get reimbursed for is tax deductible.   There are more things in this category than you might think that could be deductible.  The most common are transportation, travel, and meals and entertainment. But there are many more.  Here is a list of 7 employee business expenses you are probably missing on your taxes.

  1. Vehicle Expense.  If you have to use you own vehicle for anything other than going to and from work, you can deduct the mileage.  Some examples of this are running errands for your boss, going to job sites and driving to seminars.  Also, if you have two jobs and you drive from one job to the other, those miles are tax deductible.
  2. Travel Expense.  Some jobs require the employee to travel out of town.  Most employers reimburse travel expense but if not you can deduct travel such as airfare, hotels. Taxi fare, meals, and a passport.
  3. Meals and Entertainment.  If it is ordinary for your type of business to take clients to lunch or dinner, play golf, or provide them with entertainment, then it is deductible.  This is a touchy deduction because it can be misused and the IRS looks closely at it in an audit.  But there are a lot of businesses where meals and entertainment is a common even a necessary expense.
  4. Safety Equipment.  Tools and supplies that you pay for are deductible.
  5. Uniforms. Clothing required by your employer that is not suitable for ordinary wear.  If the uniform has a logo on it or is special clothing such as scrubs in a medical office it is deductible.  But it you could wear it to the store or to a movie or somewhere like that it is not deductible.  To give you an example, I had a client who had a job selling nail polish.  She did demonstrations to large groups of business owners.  She was required to wear black clothing.  She got audited and even thought she didn’t like black and didn’t wear the clothing anywhere else, the IRS disallowed the deduction because it was normal clothing that she could have worn anywhere.
  6. Protective Clothing. This is different than uniforms.  It includes hard hats, safety glasses, gloves, coveralls, safety shoes, etc.  Any clothing that protects you from harm other than your normal clothing is considered protective clothing.
  7. Professional Licenses, Business Liability Insurance, and Malpractice Insurance.

We hope this list is helpful for you.  There are actually many more employee expenses that can be deducted on your taxes.  We cover at least 8 more on our CD titled “Itemized Deductions and Gambling Winnings.”  Check out www.avoidbeingaudited.com to learn more.  You might check out our CD/MP3s that teach you all about this deduction as well as many others.

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Deducting Taxes on Your Income Taxes?

Posted on November 3, 2011 by

Photo by DonkeyHotey

This week we would like to talk about how you can deduct the taxes you pay on your  on your Income Taxes, which is done on your itemized deductions.

What? Deducting taxes on your taxes? How does that work? Well, there are several different kinds of taxes that are deductible.  The first is state and local income taxes.  The taxes that are withheld from your paycheck or retirement check for state and city taxes are deductible.  Also, if you file your state tax return and you owe, the amount you pay is deductible.  Also any payments you make toward your state income taxes throughout the year are deductible.  Some states have funds that taxpayers are required to pay.  They also can be deductible.  But be aware that Federal income taxes are not deductible on your Schedule A or anywhere else on your Federal tax return.

Sales tax you pay is deductible.  Over the years this has come and gone as a deduction.  There has been talk of taking it away again but for now it is still a deduction.  There are two ways to figure sales tax.  One way is to take all your receipts for the year and add up the sales tax.  If you have purchased several high cost items you may want to try it.  An easier method is to use the sales tax chart provided by the IRS, which is included in the IRS instructions for Schedule A.  It considers what state or states you have lived in and how many days you lived in each state, and how much your income is for the year.  With this information, it calculates an average of what someone in your situation would pay in sales tax.  Most of us don’t save every receipt for every purchase throughout the year, but believe it or not, I have had a few people try it.  I have found that more often than not, the sales tax table is pretty close.

An important thing to note when deducting sales tax and state and local income tax on your Schedule A is it is an either/or deduction.  Meaning you either deduct state and local income tax paid or you deduct sales tax, whichever is greater.

Property taxes are another type of tax that is deductible.  The most common is real estate taxes.  This is the tax on real estate that you own that is not for business and is assessed according to the value of the property.  It is only the amount you actually pay or that is paid for you by your mortgage company.

There are a few more types of tax that you can deduct on your taxes.  Check out our CD/MP3 “Itemized Deductions and Gambling Winnings” To learn more about deductible taxes as well as other deductions you can be utilizing.  Visit avoidbeingaudited.com to learn more about other great resources we have! Also, if you have comments or questions, leave them below!

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