What Is The New Home Office Deduction?

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What Is The New Home Office Deduction?

Jan 3, 2014 Posted by Sanjiv No Comments

The new deduction for people that work from home could save taxpayers money and time when it is time to file tax returns. There are millions of people that work from home every day in the United States. The Internal Revenue Service has created a new option for these people so that they are able to deduct some of the expenses on their federal income tax returns.

The home office deduction is currently in effect for the 2013 tax year. Workers based out of their home will be able to claim a tax deduction of $5 sq. ft for 300 sq. ft of workspace or less. The total deduction will be up to $1,500 depending on the amount of office space they are using. The space must meet requirements set by the IRS. The space must be used exclusively and regularly for the purpose of business.

 Save Time On Record-keeping And Paperwork

The internal revenue service is estimating that this new option for home office expenses will save more than 1.6 million hours for small businesses in paperwork and record-keeping. However, taxpayers will still have the old option to use Form 8829 in order to calculate the deduction if they choose to.

 Is The New Home Office Deduction The Best Option?

The new home office tax deduction is not going to be the best option for all small businesses. It will be the best option for taxpayers who have less than $1,500 each year in home office expenses and if the home office is smaller than 300 sq. ft. The best thing to do is to calculate whether your expenses will be more than $1,500 or if you will have a lot of depreciation. If your expenses are much higher than $1,500, then using Form 8829 will be the best option for you. Your tax advisor can also assist you with determining the option that is best based on your individual situation.

This option may be easier for more workers that are based out of their home to be able to get a deduction. In the past, the home office deduction was a red flag for IRS audits. Many people were afraid to take the deduction because they were afraid that they would not have the proper records to back up the deduction. The new home office deduction is a safe harbor method taxpayers can choose to use.

If you work from home, now you can take the new home office deduction when you file your federal tax return this year. The first thing you need to do is determine if your meet all of the IRS requirements for a home office. Next, determine if the new deduction will be the best option for you. Consider speaking with a tax advisor to help you decide what makes the most financial sense for you. Remember, you do not have to use the new home office diction option. You can still use Form 8829 if it will provide a higher deduction for you.

Home Office Deduction | Video

Feb 3, 2013 Posted by Sanjiv No Comments

In this short video, Sanjiv Gupta CPA discusses the “Home Office Deduction”.

What is considered as Home Office ?

Please consider the IRS definition for Home Office.

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.  Here are six things the IRS wants you to know about the Home Office deduction

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

  • as your principal place of business, or
  • as a place to meet or deal with patients, clients or customers in the normal course of your business, or
  • in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

 

A To Z Of Home Office Tax Deductions

Jun 22, 2012 Posted by Dolly No Comments

If you have a home based business you can save money by availing home office tax deductions. The IRS allows you to save money on insurance, mortgage, repairs and other utilities, if you have an office at home. Home office deductions are applicable for all kind of homes irrespective of apartments, flats and even mobile homes. So if you are wondering how to claim a home deduction this article will provide you with all the basic information.

Requirements for home deductions

The internal revenue service or the IRS has created certain specific requirements that must be met with to claim home office deductions. They are as follows:

  1. Regular use: For you to claim home office tax deductions you have to work from your home on a period of over two years.
  2. Exclusive use: You can also be eligible for home office deductions if you use your home exclusively for work. You can either have a separate area for work or a room within your house but it must only be used for work-purpose.
  3. Principal place for your work: Your home must serve as a principal area for your work. You cannot claim for tax deductions if you use your house occasionally for the purpose of your business. But even if you have another office at some other location but use your house regularly for client meeting and other administrative and executive purposes you can easily be eligible for home office tax deductions.
  4. What percentage of the house is being used: Another requirement that will decide the deductible amount is what percentage of the house is being used for work. So before you file your house deduction claim you need to understand what percentage of the house is used for work if you are using more than one room or only a portion of a room as your home office.

Rules for employees

The IRS has specified a couple of other rules for employees claiming home office deductions. So if you are an employee in addition to the above stated rules you would also have to comply with these other criterion.

  • For an employee looking for home deductions he must show that his working from home is actually more beneficial for the employer. You can easily claim home office deductions if your office does not provide any space for you to work in their location and you have to work from home. However the IRS does not have any specific rules to judge if your work is actually beneficial for your employer. They base their decision on facts and circumstantial information.
  • You cannot be eligible for tax deductions if you rent a part of your home to the employer and use that part to work for that same company.

What can you save

Filing for a home office tax deductions can reduce your tax bills considerably. If you meet all the required compliance criterion you can easily save a lot by home tax deductions. The IRS will deduct mortgage insurance, rent, repair, real estate taxes, depreciation and any other type of utilities.

However your deductible amount will depend on the percentage of the house you are using for your work.

Also if your income is lesser than the expenditure incurred for your business your deductions will be constrained.

How to file your claim

If you are thinking of claiming your home office deductions and you are meeting all the compliance criterion you can easily reduce a considerable portion of your tax bills. Here is how you can claim your home office deductions.

 

Self employed: For those who are self employed and using their homes as office they have to fill Form 8829 to understand the amount of deduction they will be eligible for. Then this amount has to be stated in Schedule C.

Employees: Employees have a different procedure of filing home office deductions. If you are an employee you can calculate your deductible amount using the work sheets of IRS publication 587. Once you have calculated your deductions you can then claim them as itemized deductions on Schedule A.

These are the basic information that one needs to know and follow to file a home office tax deduction. Successfully filing your claim can easily reduce a considerable amount of tax burden from your shoulders.

Where is Your Tax Home?

May 25, 2017 Posted by Sanjiv 1 Comment

If your job requires you to travel from time to time, some of the expenses that you incur while traveling away from home may be entitled to tax deductions. In this sense, however, home does not necessarily refer to the place where you live but the place where you work. This is what the Internal Revenue Service (IRS) refers to as your tax home.

Determining where your tax home is is the first and most fundamental thing that you need to do if you want to determine if you are really traveling away from home.

Basically, your tax home refers to the general area of your workplace, regardless of where you actually live. So, if you work in New York, your tax home is New York.

Do not be confused if the place where you work is different from the place where you lay your head at night, because your tax home designation has nothing to do with where you live. In fact, you may travel miles from your permanent residence to your workplace every day, but your workplace will still and always be your tax home.

 Why You Need to Determine Your Tax Home

Often, when you attend a cocktail party and are asked where your home is, your answer is your current place of residence. However, that is not necessarily the case if the one asking you is from the IRS.  While their tax home is the same as their personal home for some taxpayers, the story is different for those who frequently travel for work or business. Don’t think that your tax home doesn’t deserve a thought, because it does matter especially for taxpayers like you.

According to the IRS, your travel can be considered deductible if your work or business requires you to be away from home longer than your normal work hours. Given that, it is clear that the key criterion in determining if your travel expenses are deductible is if your travel takes you away from your tax home.

Differentiating your tax home from your personal home is crucial because only those expenses incur while you are away from your tax home are considered by the law as deductible.

Your Tax Home, As Per the IRS

 IRS’ definition of tax home is plain and simple—Your tax home is your regular place of business or post of duty, regardless of where you maintain your family home.

Basically, your tax home covers the general area or the entire city where your business or workplace is located. If your office is somewhere in Cortlandt Street in New York, then your tax home is New York. If you travel to Louisville every week for your business but return to your permanent residence in Nashville on weekends, your tax home is still Louisville even if you call Nashville home.

 Why Your Workplace Must Be Your Tax Home

There is a reason the IRS requires every taxpayer to know their tax home, and there is a reason the tax home designation exists in the IRS law. The purpose of the tax home designation is for the deduction of travel expenses associated with work or business. This explains why in the eyes of the tax-collecting agency, your workplace is your home and not your apartment.

Imagine living miles outside Louisville but working in the city. If there is no tax home designation, then you must also be counting your house in Nashville out as your tax home. If that is the case, then theoretically, you can declare each and every expense you spend in Nashville as a business or work-related expense. The IRS is wise enough not to fall for such tricks.

When You Have More Than One Regular Place of Business

 Some taxpayers find it hard to determine their tax home because they have multiple places of business. Should that be your case, then your tax home must be your main place of business or the place where you conduct majority of your business. So, if you have offices in Nashville, Louisville and Franklin, then you must declare the place where you do most of your work as your tax home. In this case, the IRS expects you to consider the following in determining your tax home:

  • How much is the total time that you normally spend in each workplace?
  • How much work do you usually accomplish in each workplace?
  • How much money do you make in each workplace? Is the income you earn from conducting business there significant or insignificant?

Of the above mentioned criteria, the first one is the most important since the IRS states that the place where you conduct most of your business should be your tax home. Logically, the workplace where you spend most of your time is the same place where you conduct majority of your business.

Take this as an example. You reside in Birmingham since you have a seasonal job there for nine months each year. Annually, you earn around $50,000 from your seasonal job there. For the rest of the year which is equivalent to three months, you work in Atlanta where you earn $20,000. In that case, you may consider Birmingham as your main place of business since you spend most of your time there and you earn most of your significant income there.

When You Do Not Have a Regular or Main Place of Business

 Taxpayers who have more than one regular place of business and those who do not have a regular or main place of business usually have the same dilemma in determining their tax home. According to the IRS, for taxpayers whose nature of work causes them to not have a regular or main place of business, their tax home must be the location of their residence or where they regularly live.

Say you are a freelance web designer and do not have a regular office where you conduct business. Since your job requires you to visit offices of your clients to discuss business with them, and since you do not really have a workplace of your own, then your tax home is your house.

Freelance workers and travel bloggers are perfect examples of taxpayers who do not have a regular workplace, since they do not have a fixed place where they conduct business. In this case, you do most of the work at home so your tax home may be your actual home or your personal residence.

Take a look at these factors which the IRS considers in determining your tax home if you do not have a regular place of business:

  • You at least perform part of your business in the area of your personal residence and use it for lodging while conducting business.
  • There are living expenses in your personal residence that you are compelled to duplicate because your job or business needs you to travel away from home.
  • You do not abandon the area of both your place of lodging and personal residence are located, members of your family live with you in that residence, and you use that home for lodging most of the time.

Remember that you need to meet all the three criteria so you can consider your personal residence as your tax home. If you meet all the three factors, then any travel expense that you may incur away from your personal home can be considered deductible since they meet the “away from home” requirement for business travel deductions.

Unfortunately though, if you only meet one of the three factors, then the IRS can consider you as not having a true tax home so you can write off none of your travel expenses.

For example, your family residence is located in Indianapolis. In that city, you work 15 weeks a year. For the rest of the year, you work for the same employer in Cincinnati, where you dine in expensive restaurants and sleep in a rented apartment. For you, it doesn’t really matter whether you are in Indianapolis or in Cincinnati because your salary is the same whether you are in one city or the other. However, since you conduct most of your business in Cincinnati, that city is considered your tax home. That means that even if your expenses there are bigger than when you are in Indianapolis, you cannot deduct any of your expenses for meals and lodging while you are there. When you return to your family home in Indianapolis, you are away from your tax home so you can deduct the cost of your round trip between Indianapolis and Cincinnati, as well as part of your family’s living expenses for meals and lodging while working in your personal home.

When You Do Not Have a Fixed Workplace and a Fixed Home Address

 In determining your tax home, there is something much worse than having more than one regular workplace or not having a regular workplace at all– Not having a regular place of business or post of duty and no personal residence at the same time.

While determining your tax home is not that easy if you have more than one regular workplace, it becomes easy when you finally determine which among your workplaces is your tax home. And while determining your tax home is not that easy when you do not have a regular workplace, it becomes easy when you have a personal residence which you can call your tax home.

However, things become a bit complicated when you do not have a regular place of business and you do not have a place where you regularly live at the same time. In that case, the IRS considers you as an itinerant.

The IRS law states that the tax home of an itinerant or a transient is wherever he works. If you belong to this category, then you are not entitled to travel expense deductions because no matter where you work, you are never considered to be traveling away from home.

Since as an itinerant, everywhere you work is your tax home, you are never really away from home, which means that you cannot write off any of your travel expenses.

An outside salesman is an example of an itinerant. Say you are an outside salesman whose sales territory covers different states. The main office of your employee is in Memphis but you do not work or conduct any business there. Your work assignments are relatively temporary and you have no idea about the locations of your future assignments. Your sister is renting out a room somewhere in Saint Louis so you stay there for a couple of weekends each year, but you do not conduct any business in that area. You do not pay for your accommodation there either. Since you do not satisfy any of the previously mentioned factors that will make your regular home your tax home, then you are considered an itinerant and therefore have no deductible travel expenses.

 When Traveling is Considered Traveling Away from Your Tax Home

 Regardless of which of the abovementioned categories you fall under, all the said criteria boil down to the fact that determining your tax home is critical in determining your tax liability when traveling. Once you have already identified your tax home, it will become easier for you to know which of your travel expenses you should write off and which you should not.

It is also worth mentioning that these tax home rules are the same whether you are an employee or a self-employed individual, although there are certain instances when the degree to which you can write off your business travel expenses may differ.

For instance, employees can only deduct work-related expenses that they have not reimbursed from their employers, while self-employed individuals can deduct the full amount of their travel expenses as long as they are incurred away from their tax homes. In any case, remember to keep well-organized records like receipts, checks and other documents to support your deduction claims.

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Dec 24, 2011 Posted by deepak No Comments

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5 Ever Green Businesses You Can Start Today

How Freelancers Can Write Off their Business Travel Expenses

Mar 11, 2017 Posted by Sanjiv No Comments

While there are many risks of being a freelancer, it cannot be denied that there are plenty of benefits, too.

One advantage of being self-employed is that you can make more money than you would if you were an employee. You can also work at the comforts of your home.

Moreover, freelancers like you also get to enjoy many tax deductions like home office and business travel.

If you haven’t realized, going on a business travel can benefit your trade.

Here are three good ideas that you may want to explore if you want to maximize your tax deductions by going on a business trip anytime soon:

  1. Visiting a client

Perhaps you have a client in an area away from your tax home, or your primary place of work. You might want to visit that client and several customers to strengthen you relationship with them.

You don’t need to spend the entire them talking to them. You can schedule a meeting for a few hours.  Just make sure to keep note of the things you talked about during the meet.

  1. Meeting a Vendor

Do you know a supplier of a vendor that you can meet in Miami or another area that’s far from your home? You might want to meet him to negotiate a new deal, or how you can improve your business relationship together.

  1. Attend a conference

Are there any workshops, seminars, or conventions that you can participate in?  Attending one that’s relevant to your trade may teach you new skills or update your knowledge. The activity may also give you the perfect time to meet prospective clients or vendors.

What expenses can you write off?

 Any of the abovementioned ideas are justifiable enough to be the purpose of your next business travel. What’s more exciting is that you can deduct all your business travel-related expenses on your next tax returns.

Remember this–you can write off your business travel expenses as long as the primary purpose of your trip is ordinary and necessary for your work.

An ordinary expense is defined as common and accepted in the trade or business that you are in. If you are in the IT field, then your participation in an information security summit can be considered an ordinary expense.

On the other hand, the IRS considers travel as a necessary expense if it is appropriate for a taxpayer’s business.

You can write off the following travel expenses:

  1. Meal Expenses

You can also deduct the costs of meals that you had while you were on a business travel. However, there’s only a 50 percent limit on meal expenses.

There are two methods that you can choose from in figuring out your meal expenses.

The first is the actual cost.  This simply means claiming 50 percent of the actual cost of your meals during your business trip. If you are to use this method, you should have receipts or records of your actual expenses.

The second option is to deduct the standard meal allowance (SMA) of $51 a day, which is the rate for most of the small localities in the US. The advantage of this option is that you don’t have to keep every receipt, as you simply subtract the SMA.

However, the SMA is a bit low. Thus you may not be able to enjoy larger deductions on your tax return if you opt for this method.

Keep in mind that you can claim meal expenses even if your dinner or lunch with a prospective client didn’t lead to a deal. So even if you met potential clients, you can deduct the costs of their meals in your next tax return.

But you may also wonder—can you claim the meal expenses during a business meeting? After all, it is a common practice to discuss a deal or get to know a prospective partner while eating.

The answer is yes–you can also claim meal expenses that you incurred while entertaining customers or potential business partners.

In fact, it is not only the meals served to your clients that you can claim as tax deductible.  You can even include taxes and tips, cover charges if you brought your guests to a nightclub. The rent that you paid for a room in which you held a dinner party for your guests can also be deducted as a meal expense.

But the IRS won’t allow claiming deductible on lavish and extravagant meals. There’s no definite dollar amount for a lavish or extravagant meal, so it can really be tricky for most business owners to determine which meals to expense.

Let’s say that you treated a potential client to dinner at a five-star hotel. Would that be considered lavish or extravagant meal? Perhaps, but you can also justify that it is reasonable given the circumstances. Maybe the client that you met is the CEO of a Fortune 500 company, whom you just can’t bring to any ordinary restaurant.

  1. Lodging Expenses

Unlike in meal expenses where you are limited to a 50 percent tax claim, you can deduct 100% of your lodging expenses during a business travel.

You can even stay an extra day in your destination and claim associated stay-over costs. For example, you had your last meeting on a Friday, but you didn’t leave until Saturday afternoon because you wanted to get a reduced fare on that day. You can claim the stay-over costs on Saturday even though you had no business-related activities on that day.

But if you stayed for a couple more days just to enjoy the sights, then you can’t deduct the hotel charges for those extra days.

  1. Transportation Expenses

Whether you traveled by car, bus, train, or airplane, from your home to the business destination, you can write off your transportation expenses during a business trip.

But if you were provided tickets by a client, your cost is zero.

If you were able to fly because of a frequent flyer reward, then you won’t be able to claim the airfare.

You can also claim transportation expenses to and from the airport to your hotel, and the hotel to the offices of your clients or customers.

If you brought your own car, you can write off your gas expenses, toll fees, and parking. You can even charge the expenses you incurred for maintaining your vehicle, like car wash, replacement of tires, or oil change. However, you have to keep your receipts to prove that you indeed had paid for the said services while you were on a business travel.

Aside from the three major expenses, you can also write off the following:

  • Shipping of baggage
  • Dry cleaning and laundry
  • Business calls
  • Tips
  • Other out-of-pocket expenses such as computer rental fees

The rule of thumb is that expenses that are directly related to your business trip can be written off.  For example, you had paid for the shipping of your brochure or documents needed for a seminar or convention. You can deduct the shipping expenses.

But you can’t expense personal charges like gym or fitness fees. You can’t also deduct fees for movies or games.

Things to Remember Before Traveling for Business

 Now that you have learned the expenses that you can claim on your next tax return, you should then know the things that the IRS will look into before it accepts your tax deduction claim.

These include:

  1. Establish the Purpose of Your Travel

One, your travel should be primarily for business. You can prove this by showing that you have at least one business appointment or meeting schedule before you leave home.

This means that you can’t just depart for the Bahamas or Florida with the hopes of meeting a potential client there. Or collecting business cards of people you would present as business associates.

An invitation to a conference, emails, and other correspondences—these are enough to prove to the IRS that you went to a particular destination for a business-related activity.

But what if you don’t have any invitation or email proving that you went to a certain destination for a business activity?  Let’s say you want to spend a vacation in Miami, and also get some potential clients there.

You can mix pleasure with business, so to speak, by placing several advertisements in the area.

For example, you’re a distributor of computer software. You are hoping to expand your business by distributing more products in Miami.

What can you do to achieve that goal? You can post online ads showing to prove that indeed, you were looking for new business contacts in the area.

And when you get there in Miami, meet a couple of those who have responded to your advertisement. Document your meeting by taking photos, or keeping the business cards of your prospects.

However, you should also look at the time spent for business-related activities during your trip. It would be hard to justify travel costs for a week-long trip to Miami if you only spent 2-3 days meeting with clients.  The IRS will likely call your attention if you declared that you spent just half of your time in Florida meeting prospective customers or dealers.

What if your residence is just a few hours away from Miami? Does that mean you can’t claim your travel expenses as tax deductible?

You can, as long as you can prove that you had to sleep or rest in Miami so that you can meet the demands of your work. Let’s say that you slept in the hotel where you held a meeting to avoid possible traffic problems. The IRS will consider your overnight stay in Miami to be business-related, and allow you to make a claim.

  1. Allocate your expenses

If you traveled for a business meeting but also went to see some old friends or visited tourist destinations, you will have to allocate your expenses. You can only deduct your business-related expenses, and not the costs that you incurred for personal activities.

For example, you rented a car to take you to Miami from New Orleans. Your business travel amounted to around 2,000 miles round trip. But on your way back to NOLA, you decided to take a detour to Jacksonville to visit your old college buddy.

Because the detour to your college buddy is personal and not business-related, you cannot claim your expenses for that part of the trip.

Generally speaking, you can’t claim the expenses of your spouse if he or she accompanied you in your business trip unless the presence of your significant other was necessary.

No, your spouse taking down notes for you during your trip isn’t justifiable. Your partner should have done something more critical, like serving as your interpreter, or even helping you close a deal.

  1. Keep your receipts and related documents

Lastly, keep all your receipts during the trip. You may even write down details at the back of the receipt, like the names of the business associates you met and the purpose of the meeting.

If your total expense during the trip is $75, you don’t need to show your receipts, though.

Don’t throw away other papers such as conference or seminar program. Those papers can justify your tax deduction claim.

 

Going on a business travel is like hitting two birds with one stone. Your firm not only stands to benefit from you embarking on a business travel, but you can also reduce your tax obligations.

You can meet a potential client during a business travel, or strengthen your relationship with your current customers. You can also attend a convention or seminar to enhance your skills, or learn a new one.

Moreover, you can write off business travel expenses like lodging, transportation, and meals, although the latter has a limit of 50 percent of the total costs.

The IRS, though, has been quite strict when it comes to business travel claims. You can fend off an audit by properly allocating your expenses, keeping receipts and related documents, and establishing the purpose of your travel.

If you’ll follow the tips mentioned in this article, then you should have no problems in claiming business travel deductions.

tax audits

Dealing with IRS and other Tax Audits

Sep 7, 2016 Posted by Sanjiv No Comments

It’s one of those fears that bog the minds of rich people and even ordinary taxpayers—getting audited by the IRS. But what are the chances that you’ll be audited by the government for your tax returns?

The chances of a tax audit are very low these days. Taxpayers with moderate income levels have a 1 percent chance; while those earning $1 million and up were audited at a 7.5 percent clip.

For companies, the rates are also low. Firms with total assets of less than $10 have a 1 percent chance. Those with assets between $1 and $5 million have a 1.2 percent rate, while firms with asset size of between $5 and $10 million have a 1.9 percent chance of being audited. Even the middle-sized firms or those with assets between $10 and $50 million had a low 6.2 percent chance of being audited.

Sure, the chances of getting a visit from the IRS have shrunk to all-time lows. But that should not be enough reason for you to be complacent. It still pays to know what to do just in case someone from the IRS knocks at your door or you get a letter from the said agency.

Individual Tax Audit

You may not be a millionaire but there are conditions that can increase your risks of being visited by the IRS:

• Being self-employed. There are lots of write-offs that self-employed taxpayers can claim, unlike most employees. These range from a home office to the use of a car, and the IRS may have queries about these claims.
• You have itemized deductions that are a lot higher than those of taxpayers with comparable incomes. The tax department will likely flag your return when it notices that there’s a big difference between your write-offs and averages.

Should you get a notification that you are to be audited, don’t panic. Keep in mind that the audit will be done in a professional manner. And if you can give the IRS people the right paperwork then you will be off the hook, so to speak.

You must not also think of ignoring the IRS. Your problem won’t go away. Worse, your interest and penalties will continue to accrue. So the earlier you deal with it, the better.

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Types of Audit

There are three types of audit. The more common is correspondence audit, which is handled by a way. According to the Transactional Records Access Clearinghouse, 76 percent of individual audits were of this kind.

These computer-generated correspondences may tell you that there was a mathematical error on your return, or that your return wasn’t the same as the 1099 statements that the IRS received from your bank or broker. In these cases, you simply send the money that you owe.

The letter may also dispute a tax break that you claimed. If you can’t prove that you were correct, then you will have to pay additional taxes.

But what if you’re right? You’ll have to collate the right paperwork then send it back to the IRS through certified days within 30 days of receipt of the letter. You’ll also have to prepare a letter that includes a copy of the correspondence audit plus your reference number.

In some cases, you imply have to go back and get receipts. But there are cases when you can’t do that. Instead, you may have to get a written acknowledgment from the charity that you gave to in order to claim a charitable contribution.

This is a task that you can handle yourself, especially if the issue is simple enough to reply to. You may ask a tax pro to help you out, but you’ll obviously have to pay him or her for the service

If you feel you are deserving of the tax break but you want a stronger case or reply to the IRS, a tax professional can be of significant help. He or he can prepare your return respond to the agency, and give you a better shot at defending your case.

The second type is field audit, which is conducted in person at your home or at IRS offices. However, the chances of an IRS guy dropping by your home are very low these days. The agency is no longer conducting a lot of field audits because these often mean additional expenses.

This type of audit is conducted when the IRS has lots of questions about your return. The agency may also resort to this type of audit when there is a certain write-off that is difficult to handle by mail.

The field audit in an IRS office shouldn’t last more than four hours. However there will likely be a follow-up visit, or the agency would require you to pass additional paperwork.

The last type is the ‘random’ audit. Among the three types of audit, this is the least likely that the IRS will conduct. You have a very slim chance of being selected for this audit.

But then again, it pays to be prepared.

The random audit is perhaps the most detail-oriented and intrusive of the three types of audit. IRS agents may even ask for your birth certificate and marriage license just to check your filing status.

This is also the type of audit where a professional expert can help you. There’s a good chance that something will happen at the audit that can cause the agency to demand you to pay more. With the help of a pro, you’ll be ready just in case the proverbial can of worms is opened.

Attitude During the Audit

Whether you are going to the IRS office or accompanied by a tax pro, you need to behave professionally during the audit. Don’t become argumentative, and treat the agents with respect.

Be honest and truthful with your answers. But you should also answer straight to the point. Avoid talking too much because the more you talk, the more questions that the agency will have.

You should also come to the office prepared and organized. You don’t want to upset the agent with your messy folder and jumbled receipts.

If you are unable to provide the document the agent is looking for, politely ask if there’s any other documentation that you may provide in lieu of the document. For example, you claimed the business use of a vehicle but couldn’t show receipts for gas. Maybe a calendar of your business meetings may be accepted as a substitute.

You can go through the appeals process if you disagree with the contention of the agent. This is where a tax pro can help you as he or she would be able to handle this step.

So what happens if you have to pay the IRS more money but you don’t have cash? You have three choices—one is to pay with a credit card, although you will have to pay a convenience fee of around 2.35 percent. You can also for an installment agreement or request for a compromise.

Business IRS Audits

Again, the chances of a business getting audited by the IRS have gone down in the past few years. But this still should not give your company a false sense of security.

What are the possible issues that the IRS will look into your company’s tax returns? Here are some of the red flags that should make the IRS agents knock on your door:

1. Net loss in more than two of the past five years.
2. Excessive deductions for travel, business meals, and entertainment
3. High salaries paid to shareholders
4. Shifting income to tax-exempt organizations in a bid to avoid payment of taxes
5. Claiming 100 percent business use of a vehicle

Like in individual tax audits, it is important for a business to be prepared if it has been picked for an audit. There’s a silver lining to being audited, as if the agency’s findings show that there is no change to the tax liability then the business won’t be audited on the same issue for the next year.

Hiring a tax professional is the first step that you need to undertake if your business has been pinpointed by the IRS for auditing. Don’t be anxious in thinking that this will indicate that your business is guilty, after all, the IRS is very much used to this practice. A tax professional can help you through the audit.

You can even sign a power-of-attorney agreement to give your tax professional the legal authority to deal with the IRS directly. This is ideal if you are unsure of what to say and what not to say during the audit. This basically takes you out of the loop and puts your tax professional in.

But there are three things that you, as the business owner, should remember when your business is faced with the prospect of being audited by the IRS:

1. Review the audit letter carefully.

An IRS agent won’t just barge into your door and announce an audit. The agency will send an audit letter to your office informing you that your firm has been picked for the audit.

Be cautious with scammers who will masquerade as the IRS by sending you email messages or leaving phone messages. Those guys will attempt to hack your personal data. The real IRS doesn’t communicate through email or phone.

Once you receive the letter, open it promptly. Read and understand what the IRS needs from you.

If your company doesn’t have a financial adviser, you can hire an accountant or tax professional to help you review the review letter. He or she will also identify the issues that the agency has flagged.

Don’t ignore the letter because the IRS will not go away. Worse, the auditor may become more suspicious and even antagonistic.

2. Organize your records.

The next step is to organize your records. Gather and organize all your business records from the previous tax year even before you meet with the tax professional and IRS auditor.

These records range from receipts and invoices from income and expenses, accounting books and ledgers, bank statements, leases or titles for properties and hard copies of tax-prep data. You should also make sure that you have the specific documents requested by the IRS for review.

3. Answer the questions honestly.

During the audit, the IRS agent will ask you a lot of questions about the information reported on your business tax return. Simply answer the questions of the auditor—no more, no less. Giving any information that you are not required to give may put you in more hot water.

Similar to dealing with individual tax audits, providing unasked-for information may give the auditor more questions to ask. The last thing that you want to happen is for the auditor to uncover more issues about your tax returns. IRS auditors won’t forgive tax debt or mistakes, so any admission that you may have will be used against you.

Be straightforward in replying to the questions. However, don’t manufacture excuses. IRS agents would know if you’re making any.

Also, don’t be antagonistic with the auditor. It would only make things worse for you and your business.

In order to avoid future audits, you should track bank transfers and other financial records aside from receipts. Anything that you cannot explain on the standard IRS form must be explained on paper. Of course, double-check all your calculations before filing your returns.

Aside from keeping proper documentation, you can avoid getting picked for an audit by deducting ordinary and necessary business expenses as allowed by the IRS. So even if your company is chosen for an audit, you have nothing to be afraid of.

Indeed, getting a letter from the IRS informing that you are to be audited can be very worrisome. But if you know how to deal with tax audits, then you don’t have anything to be afraid of. It also helps to have a tax professional guiding you to be assured that you can respond to whatever audit findings the IRS guys have with you or your business.

Tax Deduction Strategies for Small Businesses

Apr 12, 2015 Posted by Sanjiv No Comments

As a small business owner, you can utilize a proactive approach and seize all opportunities available for conducting tax deductions as provided for under the law. Overlooking certain crucial write-offs leads to a bloated tax bill. Changes to the recent tax law have altered how Section 179 on deduction on bonus depreciation works. You can maximize write-offs for your home office and get deductions for business travel and automobiles, along with tax shelters for real estate property.

  1. Tapping into Major Tax Savings as per Section 179 Depreciation

A small business can benefit through huge increment in First-Year depreciation allowance as covered by Section 179. Following this law, you can deduct full cost of most used and new business personal property. The maximum amount provided for here got gradually boosted for 2009 from $25,000 to $250,000. Later on, the 2012 American Taxpayer Relief Act (ATRA) preserved the $500,000 maximum deduction adopted by the 2010 Small Business Jobs Act for two years. This provision was backdated to 1st of January 2012 and remained effective through 31st December 2013.

  1. Claiming Bonus Depreciation for All Qualified Assets

A business can lay claim to “bonus depreciation” for assets which are qualified and placed in service during the whole year. This business tax credit applies to the following:

  • Property with 20 years or below of cost recovery period
  • Qualified leasehold improvements
  • Depreciable software which is not amortized for over 15 years
  • Water utility property

 

  1. Triggering Quicker Write-Offs as per Section 179 Depreciation

It is possible to maximize Section 179 expensing deduction by undertaking some shrewd planning of your taxes through the ways below:

  • You can claim the allowance accrued through compensation payments if your company zeroes out its taxable income. The tax law limits annual deduction to amount of income taxable.
  • Boost the limit of your business income, which should include that accrued from your active businesses.
  • Maximize business percentage if claiming allowance for assets partially utilized for non-business reasons.

 

  1. Larger Deductions for ‘Heavy’ SUVs according to Section 179

If you opt to deduct annual expenditure as opposed to using standard mileage allowance, take note of an appreciably large tax advantage if owning heavy-duty vans, pickups and SUVs. These vehicles have gross vehicle weight rating or GVWR of over 6,000 pounds from the manufacturer and are viewed as “trucks” for purposes of taxation.

Such heavy-duty vehicles depreciate more rapidly than regular passenger vehicles, when used intensively for business purposes.

  1. Deductions of Fuel Tax for Business Vehicles

You may deduct automotive expenses via a standard mileage rate, set each year by the IRS. Doing this sets you free from having to account for actual expenditure incurred. For instance, business drivers got 56.5 cents for each mile in 2013.

  1. Tax-Free Family Vehicles as part of Business Deductions

Operation and maintenance costs are deductible for cars utilized in doing business, which includes depreciation. Your auto repair firm may provide cars for the whole family in this case. The business you own can deduct the entire amount of operating costs if your family members are employed by the enterprise. Car expenses which are deductable include:

  • Cost of gasoline
  • Repairs,
  • Insurance
  • Interest on car loans
  • Depreciation
  • Licenses
  • Taxes
  • Garage rents
  • Parking tolls and fees

 

  1. Writing off Home Furniture and Computer as part of Self-Employed Tax Deductions

Under Section 179, many taxpayers who are self-employed may deduct purchases for equipment, as opposed to capitalizing them. This section applies to the vast number of business assets, including furniture and computers meant for domestic use.

  1. Owning Your Business Premises

Once profits of your company start growing and business stabilizes, consider owning as opposed to renting your quarters. When evaluating the comparative costs, think of a reasonable time-period, such as of 10 years and factor into your calculations purchase price of your desired building at a prime location.

  1. Sheltering Real Estate Property of up to $25,000

Prices of real estate have recently gone down in many places, presenting great opportunities for investment. As well, business owners can enjoy tax shelters for investing in property. One has to own a 10 percent minimum portion of such investment property without involving limited partnership interests, apart from actively managing it. Business tax credit of 10 percent is available too for fixing old buildings, which changes to 20 percent if the building has historic significance.

  1. Turning Home into Rental Property

Many home owners have been adversely affected by recent devaluation in real estate property. This even gets worse due to inability of deducting loss from selling your principal residence.

Turning your home into rental property is a brilliant strategy in such situations. You only require holding it out for rent while relocating, before deducting losses once the place is sold. This is a shrewd tax move which capitalizes on an important distinction that applies to business or investment property.

tax shelter for business

Tax Shelter Ideas

Feb 23, 2015 Posted by Sanjiv No Comments

Tax Shelter Ideas for Small Business Owners

In general, a tax shelter refers to a program which allows business enterprises or individuals to either defer or reduce payment of income taxes. Such programs may not suit everyone and legitimate ones do involve some level of risk, which not all investors are comfortable to undertake. However, with the correct information, the process of taking advantage of these shelters becomes less involving.

The Internal Revenue Service (IRS) applies huge discretion when applying tax shelters as this area has traditionally been prone to abusive practices by both individuals and businesses.

How IRS Views Tax Shelters

Tax shelters are defined by the IRS as investments that normally requires making substantial contributions which oftentimes are associated with commensurate risk levels. For an individual, tax shelter implies an investment which involves liability incurred within the short-term, with hopes of making appreciable gains across the long term.

For instance, if someone invested in property situated within a low-income environment, depreciation benefits of such property would be termed as legitimate tax shelter.

The losses or tax deductions which a person can take on potential tax shelter gets limited to total worth of investment or amount at risk. The amount viewed as being “at risk” for example might get limited to:

  • Adjusted basis of property
  • Cash invested
  • Loans taken for which someone bears personal responsibility to repay

Treatment of Losses

It is vital gaining the understanding that business activity losses or credits are easily considered passive activity losses or credits. These may only be utilized for offsetting income from different passive activities. You cannot utilize them for offsetting income sources like wages, dividends or interest. Passive losses generated in excess from any tax shelter can be carried forward, or till the investor sells off the asset.

Take care of tax shelters which get marketed with promises of write-offs being more significant that the invested amount. IRS considers such as Abusive Tax Shelters. People generally make investments with hopes of generating huge amounts of profits. Legitimate shelters involve a certain level of risk, cut down fairly on taxes and generate income. If IRS takes note of someone operating an abusive scheme, the individual is then required to pay tax owed along with penalties and interest.

Legitimate Tax Shelters

It is vital knowing how to identify a questionable program. You may achieve this goal by adhering to three primary rules in order to distinguish between legal and illegal tax shelters as follows:

  • If the primary purpose of a given transaction is lowering taxes and not offering other economic gains to parties involved, consider such a business deal unethical or questionable.
  • Transactions involving exchange of goods, assets or even services at prices which lie well below the fair market value should be viewed with suspicion.
  • If the interest rate paid to a different party is unusually high or low, with the sole intention being sheltering income from taxes, such an arrangement should be seen as unethical.

Tax Accrual Work-Papers

The IRS maintains a policy of requesting tax accrual along with other financial audit work-papers that relate to tax reserves. This applies to deferred tax liabilities and footnotes which disclose contingent tax liabilities that appear in audited financial statements.

Owning a legitimate auto repair business enables you take advantage of numerous tax deductions, which are unavailable to mere employees. This includes partial deductions to expenses incurred on housing, automobile, entertainment and meals as well as cell-phone expenditure.

While some expenses get deducted within a year, others get spread out over a number of years.

You can write off full cost of new furniture and computers within this year as per IRS Code Section 179. This might not be significant to a relatively new business that may not generate a lot of income within at first. A wiser strategy therefore might be deferring some portion of deductible expenditure to years in future, which accountants call “depreciation”.

You may deduct some portion of “start-up costs” if this year is your first in business. However, beyond a certain level you will require spreading the remainder of associated costs across your tax returns for the next several years. This practice is termed “amortization” in accounting.

Remember not to overlook the expenses below when filing tax returns:

  • Legal and Accounting Fees
  • Website/ Advertising costs
  • Association Dues
  • Truck and Auto Expense
  • Computer Expense
  • Bank Charges
  • Subscriptions and Dues
  • Training and Education
  • Furniture and Equipment
  • Home Office Expense
  • Gifts
  • Insurance
  • Permits and Licenses
  • Postage and Delivery
  • Meals and Entertainment
  • Printing
  • Office Administration Fees and Rent
  • Maintenance and Repairs
  • Start Up Costs
  • Retirement Savings
  • Materials and Supplies
  • Telephone
  • Travel
  • Taxes (Payroll Tax, Property Tax etc)

Knowing the tax code is important for anyone who owns a business and IRS Publication 463 spells out on available business tax credits relating to travel, entertainment, gift as well as car expenses. Think about hiring services of a tax professional to aid in preparing tax returns for your auto repair business.

Could you get audited in 2014 ?

Mar 31, 2014 Posted by Sanjiv No Comments

The IRS is on the prowl this year and they could be coming after you. The Internal Revenue Service is able to more easily identify possible red flags that will trigger audits thanks to computerized checks and an improved detection system.

Audits are normally triggered when a tax return is filed containing something unusual such as a deduction that is above average. The taxpayer has nothing to worry about as long as they are able to properly defend the filings with documentation and logic. Unfortunately, if this happens, you will still have to deal with the added stress and the response time.

Below are 9 signs that you might get audited this year.

You Forgot To File One Of The Tax FormsAll tax forms sent out to taxpayers are also sent to the IRS. If you forget to file one of the forms you received with your taxes, the IRS might flag your tax return to be reviewed.

You Are Self-employedAlthough it does not seem fair, when a taxpayer is self-employed it can raise red flags. The best advice, if you are self-employed, is to keep track of all of your expenses and all documentation so you are able to defend all credits and deductions that you claim.

You Made A Lot More Money In 2013Major changes in this year’s income is a red flag for the IRS. It can mean that the taxpayer has under reported earnings in the prior year.

You Claimed Losses From One Of Your HobbiesIt is not legal to write hobbies off as business expenses. For example, if you make jewelry as a hobby, you cannot deduct material costs and tools. Now if you were selling the jewelry you made, it would be considered a business and you would be able to deduct those costs. Remember, a business is an endeavor you enter into and conduct with a reasonable expectation of making money.

You Were Exceedingly Charitable This YearThe IRS looks for taxpayers that have inflated donations to charitable organizations. They pay particular attention to people who have donated close to $500 because that is the limit that can be deducted without filing Form 8283.

You Have A Bank Account OverseasThis year, the IRS has additional requirements for taxpayers with banks accounts overseas. If you fail to report one of the requirements, it could be an audit trigger.

The Numbers On Your Forms Do Not Match – If you make a mistake with the numbers on your forms or the amounts do not add up, chances are the IRS will notice and will review your return carefully for any other discrepancies. Make sure you review your return carefully before filing.

Your Deductions Include Expensive Entertainment And Meal CostsThe IRS usually checks high business deductions to ensure the business expense is legitimate.

You Deducted High Home Office Expenses (Not The New Home Office Standard Deduction)When you itemize your home office expenses, the IRS will often review the tax return to make sure the expenses are really for business purposes. There is a new standard deduction for home office expenses that will not raise any red flags.

You should not worry as long as you know that you filled out your tax return properly. Just make sure that you keep good records of all the deductions and credits you take so you will be prepared if the IRS has any questions.