Posts Tagged ‘Business Use of the Home’

Are You Planning To Sell A Home?

Monday, August 8th, 2011

The goal for the information in this website is to disseminate  information, and not to provide tax advice.

You should review the appropriate Federal and state tax rules, and work with your tax return preparer, if you are planning to sell a “home”, even if it is not your “main” home.  IRS Publication 523 (“Selling Your Home”) is an excellent place to start.  http://www.irs.gov/pub/irs-pdf/p523.pdf   There is a wealth of information in this 40-page document. 

If you received or were eligible for the “First-Time Homebuyer Credit” in 2008 you should also review the instructions for Form 5405 at http://www.irs.gov/pub/irs-pdf/i5405.pdf  The provisions of this tax credit went through several changes from 2008-2010.  For example, if you received the tax credit for a home that was purchased in 2008, the “tax credit” was in fact a loan that is subject to repayment beginning in tax year 2010.   If you have sold your main home that qualified you for the credit, the entire amount of the previously received credit was an addition to your 2010 tax liability.  If you still live in that main home, your re-payment requirement commenced in 2010 and is due to be repaid in equal amounts over the next 15 years.

Additional points to consider are:

  • A “Main Home” can be a house, houseboat,  mobile home, cooperative apartment,  or condominium;
  • For the year of the sale, and if you meet the requirements, you may be able to exclude up to $250,000 of the “gain” on the sale.  Married taxpayers filing a joint tax return may exclude up to $500,000.  “Losses” on a sale are not deductible;
  • The “gain” exclusion tax benefit is applicable only for the sale of your “main” home.  Second homes do not qualify and are usually subject to capital gains tax treatment;
  • There is a requirement for you to have actually lived in your main home for two of the five years prior to the sale.  However, if you are qualified, there are special rules for a reduced exclusion amount if the reason for the sale is a) change of employment location, b) health reasons, or c) “unforseen circumstances”, all of which are defined in the publication;
  • Additional special rules and calculations are applicable if you used your main home for your business or as rental property;
  • Be sure to keep a complete (all pages), signed copy of the Housing and Urban Development form (HUD-1) from both the purchase and sale of your old home, and the the purchase of your new home; 
  • The rules will apply if your former residence is no longer your “main” home (i.e. you retired, moved from New York to Florida, and you did not sell your former residence in New York).  (more…)

Are Your Home Office Expenses A Tax Deduction?

Wednesday, March 16th, 2011

Note:  A related discussion on this topic appeared on January 12, 2011 under the topic “Are You Planning To Start A New Business?”  The contents of this article are not intended to duplicate the information which was previously provided.  There is additional, new information provided below. 

From an “Overview” perspective, If qualified, making a decision regarding whether to claim the expenses for the use of your home for your business operations is a continuing issue and a problem for both American taxpayers and the Internal Revenue Service.  As you may have already concluded, there are far too many instances of fraud and abuse by those taxpayers who are clearly not entitled to the deduction.  It is also a potential “red flag” area that could cause your tax return to be examined and audited.  In summation, if you meet the requirements and qualifications then claim the deduction.  Otherwise, you are paying too much in income taxes.  If you do not meet the requirements and qualifications, don’t even think about it! 

Prepare a letter or memorandum for your records that includes both the requirements and your rationale for meeting these requirements.  Include all of your supporting documents, i.e. a copy of your appraisal, HUD 1, etc.  Keep them in a safe place or save them on your hard drive.  These documents will be invaluable IF your tax returns are audited. Be sure to review the “Recordkeeping” requirements on page 18 of IRS Publication 587 (“Business Use of the Home”).

If you do meet the requirements, there are additional points which you should know, including:

  1. The simplest method to determine the relative percentage of your home that is devoted to your business office is to divide the total square footage of your office by the total square footage of your home, i.e. 200/2,400 = 8.3%;
  2. There will usually be both “direct” (i.e. a second telephone line, Internet connection, repairs to your office) and “indirect” (i.e. insurance, taxes, mortgage interest, utilities etc) expenses on your tax return (Form 8829).  “Indirect” expenses require the use of the percentage which was calculated in #1 above;
  3. “Depreciation” – only the cost of your home is included in the cost basis and not the land.  Read pages 10-11 (“Depreciating Your Home” ) in IRS Publication 587 for specific guidance and procedural steps;
  4. Additional information on this subject can be obtained from reading IRS Topic 509, “Business Use of the Home” which is available via this website link(more…)

Are You Planning to Start A New Business??

Wednesday, January 12th, 2011

The news media continues to report (with some variances) that our national unemployment rate is around 9.6%-9.8%.  This number is defined as those unemployed Americans who are actively seeking new employment.  By definition it excludes those persons who wish to work but have ended their search in frustration etc and those who lack the job skills demanded by the local job market.  In a nutshell, the “actual” unemployment rate is much higher than the “reported” rate.  For a myriad of reasons former employees may decide to start their own business rather than return to the work force.  If you are thinking along these lines then the information in this article may be of interest to you.

Although they are not all-inclusive (there are many more), the key points that I wish to present are:

  • Business Form – among the first decisions to make is “What business form is best for my business?”  Among the choices are 1) Sole Proprietorship, 2) General Partnership, 3) Limited Partnership, 4) Corporation, 5) Sub-Chapter S Corporation, 6) Limited Liability Company (LLC), and 7) Limited Liability Partnership (LLP).  Important considerations include:  ease of formation, liability of the owners, management structure, transferability of ownership, and taxation.  Consult with an attorney who specializes in this area.  The legal fees are probably minute compared to the benefits that you will receive;
  • Accounting Period and Methods – Is the calendar year best for your new business or is another 12-month period more appropriate?  Should you select the “Cash” basis for reporting revenue and expenses or is the “Accrual” method more appropriate?  Read through IRS Publication 538 (“Accounting Periods and Methods”) first and then consult with your CPA;
  • Accounting Software – you must record all business transactions in a timely and consistent manner.  You also want to have several key financial reports (Balance Sheet, Profit and Loss, General Ledger etc) available to you regularly to determine 1) where you were, 2) where you are now, and 3) where you are going.   You’ll need also these reports for your supplies, customers, and vendors.  Your business will always be subject to “on-demand” audits by all of the taxing authorities and you must have records to support your reports.  Many very small business owners prefer QuickBooks for simplicity, ease of use, etc. Others prefer more sophisticated software such as Sage’s Peachtree.  There are also other packages that are available.  Consult with your CPA;
  • Pricing Your Product or Service – failing to always have and know this information is almost a guarantee for your business to fail.  There are four components of every product and service: 1) direct material, 2) direct labor, 3) overhead (G&A), and 4) profit.  The value of each will be continuously changing every day that your business operates. Your accounting software will provide the information but you need to know how to extract the data.  If you use your Internet search engine, you’ll find that there is never a point in time or milestone in which a business can be assured of its longevity.  Any business can fail at any time, even if it has been in business for over 100 years.  Again, your CPA will be your best “quasi-business partner”;
  • You Wear Many “Hats” – as the business owner, even though you may hire someone as the manager,  you are ultimately in charge of 1) Sales, 2) Marketing, 3) Human Resources, 4) Accounting, 5) Product/Service Development, 6) Logistics/Supply Chain Management, 7) Technical Support, and 8 ) Customer Service.  It’s a 24X7 responsibility!
  • Continuously Increase Your Knowledge- regardless of the number of years that you have been in business you’ll never know all that you need to know.  Before you open the doors, read the following IRS publications from cover to cover: 334 – “Tax Guide for Small Businesses, 463 – “Travel, Entertainment, Gift & Car Expenses”, 535 “Business Expenses”, and if appropriate 587 “Business Use of the Home”.  Talk with other business owners who provide similar products and services.  Join a “network” of these owners or an association.  Identify colleagues who have the knowledge which you don’t have and consult with them regularly.  Find a mentor for your business.

The informaton below provides additional points to know and consider: (more…)

Home Business Use (Home Office) Deduction

Wednesday, March 17th, 2010

The real (actual) unemployment rate is as high as 15% in some areas of the United States.  Job opportunities are limited.  Many former employees have decided to start their own businesses rather than become an employee again.  They often operate their business from their home.  Anecdotally, Hewlett Packard began its operations in the founder’s garage.  If qualified, making a decision regarding whether to claim the expenses for the use of your home for your business operations is a continuing issue and problem for both American taxpayers and the Internal Revenue Service.  As you may have already concluded, there are far too many instances of fraud and abuse by those taxpayers who are clearly not entitled to the deduction.  It is also a potential “red flag” area that could cause your tax return to be examined and audited.   

There are several situations that may exist in one of three categories:  1)  Fully qualified (entitled), 2) Partially qualified (not meeting one or more of the requirements, and 3)  Not  qualified.  Then the major considerations (factors) become whether or not you are claiming the expenses on your tax return.   From a practitioner’s perspective we must ask our clients about their specific situation and assist the client in determining whether or not the deduction (expenses) should be claimed.  While the Internal Revenue Service does provide general guidelines (which are also provided in this article) these guidelines can not be expected to cover every possible situation.  IRS Publication 587 (“Business Use of Your Home”)  provides additional information and guidance and should also be carefully reviewed.

IRS Topc 509 (Business Use of The Home) is provided on the “Information Center” page of this website.  To review the information in this article now on the business use of the home, click on this link.

Recent guidance from the Internal Revenue Service is provided below from IRS Tax Tip 2010-53: (more…)