Tax Planning: Business Use of Your Home

Tax Planning – ‘Tis the Season!
Business Use of Your Home

We will continue this series of tax planning with the Business Use of the Home deduction.  A home office is an excellent idea for many businesses as it keeps the overhead low.  This is important for new businesses as they get established.  This is also a great benefit for employers who need office space for employees when space is scarce.  Home offices have helped in the green initiative by allowing commuters to remain at home reducing the amount of vehicles on the road.  What are the tax benefits of having an office in home?

Let’s take a look at the

Business Use of Your Home AKA…Office in Home.

Office space:  The area used for your office does not need to be an entire room.  The office can be an area in the home as long as it meets the requirements.  Also, it can be a separate structure. 

Requirements

o   Business use of the office must be exclusive and regular.

o   The office must be a principal place of business.

o   If the office is not a principal place of business, then it can still qualify if it is used as the ordinary place for meeting clients or for the administration of the business; (there is no other fixed location used for substantial administration)

o   If the taxpayer is an employee, then the office must be used for the convenience of the employer.    

TIP:  Keep a log of your business activities and the expenses; draw a floor plan of the home highlighting the office area(s) and take photos to record your business use – place this information in your tax folder for that year or store it in digital form in case of an IRS tax examination. 

If your business is taxed as a proprietorship, 

• use Form 8829 to claim the deduction on Schedule C. 
• Farmers claim the deduction on Form 8829 filed with the Schedule F 
• and if you are an employee claim the deduction on Schedule A as an Employee Business expense.  
• If taxed as a partnership or corporation, there is not a separate form.  

To claim the deduction, your business must show a profit.  If the business shows a loss, the deduction cannot be used in that year. Under the actual expenses method, the deduction will be carried-forward to the next year.  In the case of the simplified method, you are not allowed a carry forward. 

The deductions associated with a home office are subject to special limits.  Expenses must be allocated between the portion of the dwelling used as residence and the office.

The Simplified Method:  The IRS has implemented a simpler option for figuring deductions for the business use of your home.  IRS Revenue Procedure 2013-13, Jan. 14, 2013.

• The IRS provides a simplified method as an alternative to calculating the actual expenses.  The deduction is figured by multiplying $5 by the allowable square footage.  The maximum square footage under this method is 300 which limits the deduction to $1,500.

• You are not allowed to deduct any actual expenses related to the use of the home including depreciation.  You can switch between using the simplified method and the actual expenses method if you chose; however, you will need to use the appropriate optional depreciation table to figure depreciation.  

The Regular (Actual Expenses) Method:  You must determine actual expenses of the home office.  Typical expenses include: 

• Insurance
• Mortgage Interest
• Repairs
• Rent
• Security system
• Utilities
• Depreciation

Tip:  Keep in mind when calculating which method yields the best return that some expenses are deductible whether you use the Simplified Method or the Actual Expenses method (Mortgage interest, Casualty losses and Real estate taxes).  These expenses can be taken on the Schedule A with or without a home office...AND...they can be taken on the Schedule A if you use the Simplified Method.

Comparison between methods

Simplified Option	Regular Method
Deduction for home office use of a portion of  a residence allowed only if that portion  is exclusively used on a regular basis for  business purposes	Same
Allowable square footage of home use for  business (not to exceed 300 square feet)	Percentage of home used for business
Standard $5 per square foot used to  determine home business deduction	Actual expenses determined and records  maintained
Home-related itemized deductions claimed in  full on Schedule A	Home-related itemized deductions  apportioned between Schedule A and  business  schedule (Sch. C or Sch. F)
No depreciation deduction	Depreciation deduction for portion of home  used for business
No recapture of depreciation upon sale of  home	Recapture of depreciation on gain upon sale  of  home
Deduction cannot exceed gross income from  business use of home less business expenses	Same
Amount in excess of gross income limitation  maynot be carried over	Amount in excess of gross income limitation  may be carried over
Loss carryover from use of regular method in  prior year may not be claimed	Loss carryover from use of regular method in  prior year may be claimed if gross income test  is met in current year

(Chart taken from: IRS Small Business & Self Employed: Simplified Option for Home Office Deduction, 2014)

If the home is a personal single-family residence, depreciate the part of your home as nonresidential real property over 39 years (31.5 years if it was used for business purposes prior to May 13, 1993.)  If your residence is an apartment in a residential rental apartment building you own, depreciate over 27.5 years.  I recommend contacting your tax accountant for assistance in determining the depreciation method best for your situation. 

Whether you own or rent, the home office deduction could be a great deduction.  Now is the time to evaluate the use of your home office and determine whether or not you qualify.  Then, gather the data, keep good records and get the deductions you have earned.  There are many nuances to the business use of your home deductions.  It is important to get it right.  If taxes are too taxing for you, let the professionals jump in…it is what we do.  Don’t record unplanned history in April 2015, plan now to create a better tax outcome.

For more information, please see IRS Publication 587:  2013 Publication 587

References

Internal Revenue Service. (2013, December 11). Business Use of Your Home (Including Daycare Providers). Retrieved from Publication 587: http://www.irs.gov/pub/irs-pdf/p587.pdf

Internal Revenue Service. (2013). Expenses for Business Use of Your Home. Retrieved from Form 8829: http://www.irs.gov/pub/irs-pdf/f8829.pdf

IRS Small Business & Self Employed. (2014, February 3). Retrieved from Simplified Option for Home Office Deduction: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction

Tax Planning: Business Use of Your Vehicle

Tax Planning – ‘Tis the Season!
Business Use of Your Vehicle

Now is the time to plan for tax deductions rather than at the accountant’s desk in April.  Taxpayers miss out on many tax breaks each year due to failure to plan.  In the next few weeks, we will cover some of the most misunderstood tax planning considerations.

Let’s begin this series by taking a look at the

business use of your vehicle.

Generally, there are two methods used to calculate the vehicle expense deduction:  the standard mileage rate method or actual expense method.  Your tax accountant can figure the deduction both ways to see which one provides the larger deduction.

The Standard Mileage Method

2013:  56.5 cents per mile
2014:  56 cents per mile

The Standard Mileage Method includes parking and toll expenses incurred for business purposes. 

The Standard Mileage Method cannot be used if you use five or more vehicles at the same time, claimed a depreciation deduction for the vehicle using a method other than straight-line, claimed section 179 deduction, used the Actual Expenses Method on a car leased after 1997 or you are a rural mail carrier and received a qualified reimbursement.

• Owned vehicle Standard Mileage Method:  You must choose the Standard Mileage Method the first year you place your car in service.  After this first year, you have a choice between the Standard Mileage Method and the Actual Expense Method.  If you use the Actual Expense Method in the first year, you must use that method in all later years.
• Leased vehicle Standard Mileage Method: You must use the Standard Mileage Method for the entire lease period.

The Standard Mileage Method may appear to be simpler; however, depreciation is built into each mile.  There is a depreciation adjustment that effects the basis of the vehicle.  The basis must be reduced by the amount of the depreciation included in the standard mileage rate.

The Actual Expenses Method

• Owned vehicle Actual Expenses Method:  Depreciation, Loan Interest, Licenses, Fuel, Registration fees, Insurance, Repairs, Maintenance, Oil, Garage rent, Tires, Tolls, and Parking fees.
• Leased vehicle Actual Expenses Method:  Lease payments, Licenses, Fuel, Registration fees, Insurance, Repairs, Maintenance, Oil, Garage rent, Tires, Tolls, and Parking fees.  You can use the Actual Expenses Method to figure your deductible expense.  You can deduct the part of each lease payment that is for the use of the vehicle in your business.  Advanced payments must be spread over the entire lease period.  If the lease is greater than 30 days, you may have to reduce your lease payment deduction by an inclusion amount. 

Depreciation:  If you use actual expenses, you can claim a depreciation deduction.  This can be a complicated calculation and I recommend using a tax accountant to set up depreciation the first year you place a vehicle in service. 

If you use your car more than 50% for business purposes, you are able to use the Modified Accelerated Cost Recovery System (MACRS).  If less than 50%, you must use straight-line depreciation.

Depreciation methods: 

• ·         MACRS 200% declining balance method over a 5-year recovery period (greater deduction in earlier years tapering off each year)
• ·         MACRS 150% declining balance method over a 5-year recovery period (greater deduction in earlier years tapering off each year)
• ·         Straight-line method over a 5-year recovery period (equal deductions over the recovery period)

Whether you lease or buy, you must maintain mileage logs to track the percentage of expenses to deduct.  There are many nuances to vehicles and deductions.  It is important to get it right.  Take the time now to look at your vehicle usage and evaluate the right method that will give you a larger tax deduction.  If taxes are too taxing for you, let the professionals jump in…it is what we do.  Don’t record unplanned history in April 2015, plan now to create a better tax outcome.

For more information, please see IRS Publication 463:  2013 Publication 463