Roll Out of Bed and Into Your Office: Business Use of Home Deductions

If you run your own business or are an employee of a business, you may be able to deduct certain expenses associated with an office you use in your home. This includes mortgage interest, utilities, cleaning services, or a variety of other expenses associated with your home. You may qualify for the home office deduction whether or not you own the house or rent it. The home office must be associated with a trade or business; if you have a home office that you use for hobbies or other not-for-profit endeavors, then you do not qualify for the deduction. This deduction will be a line item on your Schedule C. There are two requirements that your office must meet in order to qualify for a deduction.

The two requirements are: the part of your home used as an office must be used exclusively for that business, and it must be used regularly as part of your business. Those are the two most fundamental words to remember when deciding whether or not you can take this deduction. Is it regularly used and exclusively used for business purposes. There are two exceptions to the exclusivity rule. One is if you run a daycare out of your home, you can deduct the portion of your home used for the day care, even if you use it for personal reasons as well. You must be licensed daycare or exempt from needing a license to qualify. The other exception is the storage of inventory or product samples. If you store either of these items in your house, you may be exempt from the exclusivity rule.  To qualify, you must be able to answer “yes” to all five of these questions: “You sell products at wholesale or retail as your trade or business, you keep the inventory or product samples in your home for use in your trade or business, your home is the only fixed location of your trade or business, you use the storage space on a regular basis, the space you use is a separately identifiable space suitable for storage.” (IRS Website)

If you do not run your own business, but are an employee for another business and have a home office, you may still be able to get a deduction. The exclusive and regular requirements still apply, but there are two additional rules in order to qualify. First, the home office must be for the convenience of your employer. If you have a home office because you felt you needed it, and your employer is not aware, then you do not qualify for a home office deduction. Second, you cannot rent out a portion of your home to your employer and then use that portion to perform employee services for that business.

Click here to see a helpful map by the IRS to determine whether or not your home office qualifies.

After you have decided if your home office qualifies for deductions, there are two methods you can choose for taking a deduction: actual expense method or simplified method.  The simplified method was first introduced for the 2013 tax year. This is a method you would want to use if you do not keep good records of expenses associated with your home, or if you simply do not want to keep those records. First, you determine your gross income and all your business expenses not associated with your home office for the year. You subtract the expenses from the income and if this number is $0 or less, you cannot take a home office deduction. If it is greater than $0, you take the square footage of your home office (not to exceed 300 square feet) and you multiply it by $5. You can deduct the smaller of the $5 times the square footage, or your gross income minus expenses. If you used a portion of your home for daycare and it was not exclusively used for daycare purposes, the simplified method will be slightly different. Click here, and follow links to “Instructions for the Daycare Facility Worksheet”.

You can choose the simplified method year by year. You are not stuck using it forever if you choose to use it one year. However, if you use the simplified method in a tax year, you cannot switch methods in the same year (for instance, if you must file an amended return, you cannot switch your method). Additionally, if you choose the simplified method, you cannot deduct actual expenses. You simply get the deduction as it is calculated, and that is it.

The other option is the actual expense method. For this method, there are three categories of expenses. The first is direct expenses which are expenses directly related to your business such as painting a the walls of your home office, or repairs only within your home office. These are fully deductible. Indirect expenses are things that partially apply to your home office such as property taxes, utilities, and mortgage interest. These are only partially deductible. Unrelated expenses are things that have nothing to do with your business such as lawn care in front of your house or painting a room in your house that is not your home office. These expenses are not deductible.

First, you’ll need to determine the percentage of business use for your home. You do this by dividing the square footage of your home office by the square footage of your entire home. For example, say your home is 2,000 square feet and your home office is 200 square feet. This means 10% of your home qualifies as business use of home. Then you can take all of your indirect expenses and multiply them by 10%. Once you have this total, you add it to the total amount of direct business expenses to come to your total deduction. When using the actual expense method, you can also depreciate a portion of your home as well which you cannot do using the simplified method.

As you can see, the actual method takes a bit more effort and record keeping to come to the deduction. You will have to evaluate the trade-off in order to see which method works best for your situation. Leave comments and questions below, and spread the word!



Miscellaneous Transportation Deductions and Business Auto Deductions: Standard Mileage

If you use a vehicle for business use, you can deduct certain expenses associated with that vehicle. Last week we discussed one method for deducting auto expenses, the actual expense method. The other method which we’ll discuss now is the standard mileage method. We’ll also go over different types of commuting expenses and what is and is not deductible.

The standard mileage rate for 2014 is $.056 per mile. The rate for 2015 will be $0.575 per mile. During the year, you need to keep track of the number of miles your drove for business purposes, and you multiply those miles by the standard mileage rate. In order to use the standard mileage rate, you must elect it in the first year that you record expenses for your vehicle. After the first year you can choose between the standard mileage rate or the actual expenses. However, if you lease the car for which you are claiming the deduction and you choose the standard mileage rate in the first year, you must use the standard mileage rate for the entire length of the lease. If you choose to use the standard mileage rate, you cannot expense costs for other things such as repairs, oil changes, insurance, registration fees, etc. You simply get the deduction as calculated by mileage times $0.56. However, you can still deduct parking fees and tolls paid for business purposes when using the standard mileage method. After your first year using the standard mileage rate, you should keep track of your total miles and all other expenses associated with your vehicle in order to decide which method will give you the biggest deduction at the end of the year.

There are a few instances in which you are not allowed to use the standard mileage rate. You cannot use standard mileage if any of the following apply to you and your business: you simultaneously use five or more vehicles, you claimed a 179 depreciation expense for your vehicle, you used the special depreciation allowance, you claimed depreciation using any other method besides straight line, or you used the actual expense method after 1997 for a leased vehicle.

Other costs associated with commuting for business purposes are treated differently. You are not allowed to take a deduction for any expenses incurred travelling from your home to your place of work such as taxis, buses, or gas for your personal vehicle. Even if you are working during your commute, you still cannot take a deduction. Parking fees at your place of work are also considered commuting expenses and are not deductible. However, parking fees when travelling to meet clients are a deductible expense. If you have multiple places of work, you can deduct expenses for travelling from one place directly to the other. Additionally, if you have no set place of work, but you usually work within a certain metropolitan area, you can deduct travel expenses from your home to a work site that is outside of that normal metropolitan area. If the work site is in the metropolitan area, you cannot take a deduction. If an office in your home is considered your main place of business, you can deduct transportation costs to get to other locations associated with the same business.

As you can see, transportation costs associated with your business can be a tricky subject to sift through. If you ever have a question, leave a comment so I can help you out! See you next time!

Schedule C Auto Deductions: Actual Expenses

Since we went over the basics of the income you should record and expenses you can deduct on your Schedule C, now we get to discuss an important and prevalent topic among business owners. You can expense certain costs associated with using your vehicle for business purposes and there are two methods for recording these expenses. The method we will go over now is the Actual Expense method.

The Actual Expense method means that you can deduct the actual expenses you incurred for your vehicle. If you used your vehicle solely for business and never for personal reasons, you can use 100% of expenses such as oil, registration, repairs, etc. on your Schedule C. However, it is often the case that people use their vehicle for personal and business purposes. In this situation, you should keep track of the miles you drove solely for business and the total miles you drove during the year. Then you can calculate the percentage of business use for your car. You would then multiply this percentage by those oil, registration, and other expenses to get the amount that you are allowed to expense.

You can also deduct depreciation expense on your Schedule C using a variety of methods. They consist of the following:

Section 179 deduction: When you place a vehicle in service, you can deduct a large portion of the basis of that vehicle as depreciation in the year you place it in service. You also must use the vehicle for at least 50% business use to claim the 179 deduction. You must calculate the basis of your vehicle which is usually the purchase price for most people. (If you need help calculating your basis, leave a comment below, and I can help you out!) If you have a sport or utility vehicle, your basis is limited to $25,000. This means that $90,000 sports car you just bought can’t give you as big of a deduction as you think. Additionally, if you use your vehicle for a percentage of the time for business use, say 80%, then you must multiply your basis by 80% to figure the amount of basis you can actually use for your business depreciation deduction.

Once you’ve figured your basis, then you can determine your deduction. If your vehicle is qualified property and you are taking the Special Deprecation Allowance (see below), then your limit for a depreciation deduction during 2014 is $11,160. If you don’t plan on taking the Special Depreciation Allowance, then your deduction limit drops to $3,160. Here is an example from the IRS website to simplify things:

“On September 4, 2014, Jack bought a used car for $10,000 and placed it in service. He used it 80% for his business, and he chooses to take a section 179 deduction for the car. The car is not qualified property for purposes of the special depreciation allowance.

Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. This is the cost of his qualifying property (up to the maximum $500,000 amount) multiplied by his business use ($10,000 × 80%).

Jack then figures that his section 179 deduction for 2014 is limited to $2,528 (80% of $3,160). He then figures his unadjusted basis of $5,472 (($10,000 × 80%) − $2,528) for determining his depreciation deduction. Jack has reached his maximum depreciation deduction for 2014. For 2015, Jack will use his unadjusted basis of $5,472 to figure his depreciation deduction.”

Special Depreciation Allowance: The Special Depreciation Allowance means that you can deduct an additional 50% of the vehicle’s depreciable basis. The first thing to determine is whether or not your vehicle is qualified property for the purposes of this allowance. To be qualified property, it must meet the following three criteria: be purchased on or after January 1, 2008, it must be used at least 50% for business purposes, and it must have been placed in service before January 1, 2008. You would take this allowance after claiming any Section 179 Expense, but before taking any depreciation deduction (see below). You can elect not to use this allowance by attaching a statement to your tax return stating the type of property and the fact that you are electing not to take it. However, if you do not elect out of the allowance, you still must decrease the basis of your vehicle by the amount of the deduction that you would have gotten, even if you did not use the allowance.

Depreciation Deduction: Lastly, after you’ve taken into account your Section 179 Deduction and your Special Depreciation Allowance, you can calculate your remaining depreciation expense. Remember that if you take Section 179 and Special Depreciation Allowance, your depreciation for that year is limited to $11, 160 or $3,160 if you choose not to take the Special Depreciation Allowance. There are a few options you can use to calculate your annual depreciation deduction. While you may only be able to take the other two deductions in the year the vehicle was placed in service, you can still get a depreciation deduction every year until the basis of the vehicle has been fully depreciated. Most people will use MACRS depreciation which stands for Modified Accelerated Cost Recovery System. Under this system, cars are given a useful life of 5 years. MACRS depreciation offers a variety of different ways in itself to depreciate your vehicle so click here to check out the IRS website and go more in-depth to makers. Generally, you will get larger deductions in the earlier years of your vehicles life using MACRS depreciation.

You cannot use MACRS if you were first using Standard Mileage Method, which we’ll discuss later, instead of Actual Expense Method. In this case, you would be required to use straight line depreciation which means you get an equal amount of depreciation expense over the 5 years of the vehicles useful life. Straight line is a much simpler depreciation concept, but is not as beneficial in the earlier years as MACRS is.

Depreciation can be a very confusing issue, especially when trying to apply it to your business assets. If you have any questions or comments, please leave them below, and I will do my best to help you out! Stay tuned to The Tax Bleep to learn about the alternative method, Standard Mileage Method, for expensing costs associated with your business vehicle!

So . . . You’ve Decided You Need to File a Schedule C. Now What?

Still not sure whether or not the Schedule C is for you? Take a look at my previous blog post to get some clarity. If you have decided you need to file a Schedule C for your business, continue reading to learn the basics of what information you’ll need and how to record it.

The first half of the Schedule C describes the business you are in, and asks you a variety of questions. One important question is if you are cash basis or accrual basis in your bookkeeping methods. In my experience, most people who file a Schedule C are cash basis. This means that you record income when you physically receive the money, and you record expenses when you physically pay for something. Accrual basis is the other method and this means you record income when it is earned, and you record expenses when they are incurred. If you are an accrual based business, you will have “accounts receivable” which means you have earned the money, but the person or business has not paid you yet. You would record this money as income on your return. The same thing goes for “accounts payable”.

Another important question asked at the top of the Schedule C is if you made payments that would require you to file a 1099. For example, if you subcontracted a job to a person and paid them, you could give them a 1099 showing the income they received from you. The IRS would also get a copy and that person would be liable for reporting that income on his or her tax return. If you aren’t sure whether or not you need to file 1099’s, leave your questions below, or you can check online!

Now, once you are done with the basics at the top of the form, you can begin to fill in your income and expenses. If you are in business, you should know by now that you need to keep detailed records of all income and expenses you receive through the year. There are many ways to do this. You can keep written records; however, I wouldn’t recommend this because they are difficult to keep track of and it is much easier to make and miss mistakes in your bookkeeping. There are a variety of other programs available nowadays that there is really no need to record your books by hand. A very popular one is Quickbooks which most people know about, but it seems that not many people use it to its full potential. Quickbooks is beneficial no matter what size business you have. I would recommend using the desktop version, not the online version, because the online version can be slightly more confusing and difficult to use, but it is really your preference.

You should report all income you received through your business during the year, even if you did not receive 1099’s from anyone. This will go on Line 1. You also need to keep track of any returns or discounts you gave because those can be deducted from your income. Then comes all of your expenses. You can generally deduct any expenses you incurred that were associated with the functioning of your business. This includes: advertising, car expenses (the car/truck must be used for business only or you can only deduct a percentage of expenses based on your personal to business use ratio), supplies, legal fees, etc. You can even deduct $0.56 per mile that you drive in your business vehicle. They all must be directly related to your business or you cannot deduct them. If you use a portion of your home or you use your car for work and personal use, you will need to file alternate forms in order to claim a percentage of expenses for

those items (we’ll go over that later). However there are certain expenses that cannot be deducted and must be capitalized. If you buy large assets for your business such as a building or a large piece of equipment, you could have to capitalize these. This means you do not get to take a huge expense in the current year, but instead the cost of the item is expensed over a number of years so you get to expense a small portion of the cost of that item each year. You keep track of these items on a depreciation schedule.

The IRS has new rules out that may affect how you determine which repair and maintenance costs to expense or capitalize. This regulation could affect what deductions you get to take on your Schedule C. Stayed tuned in to The Tax Bleep and we will discuss that too since it will be affecting many taxpayers!

Click the following links to view the following forms we just discussed: 2014 Schedule C and its instructions! Please leave any question or comments you may have!

Entrepreneur? Find Out If You Should File a Schedule C!

If you’re a driven, self employed individual, you will have to decide which tax form you are required to file. A Schedule C reports income from business you conduct as a sole proprietor. Income and expenses you report on a Schedule C flow to the front page of your 1040 (your individual tax return) so you do not have to file a whole other business return. You may be able to file a Schedule C, but there a certain circumstances that could alter this decision.

If you are engaged in a business alone, then you do not have much to consider. You will most likely be filing a Schedule C for all of your business activities. However if you are married and you run the business with your spouse, there are a few things to consider.

If you and your spouse own a business together and have not incorporated, you are technically considered a partnership. Partnerships must file Form 1065 which are more in depth than a Schedule C, and the income flows through to your 1040. There are ways around this filing requirement though. One way is by electing to treat the business as a Qualified Joint Venture and the other is to treat your business as Community Property.

Qualified Joint Venture: You can elect to be treated as a qualified joint venture if you meet certain requirements. You and your spouse must both materially participate in the business. If your business is your sole source of income, this shouldn’t be problem. Material participation, put simply, means that you participated in the business on a regular, continuous, and substantial basis. For many people this isn’t an issue, but if you believe it is, contact your tax professional, leave me a question in the comments below, or read the instructions for Schedule C. You and your spouse must also be the only owners of the business, and you both must be filing a joint tax return for the year. By making this election, you and your spouse “still give each of you credit for social security earnings on which retirement benefits, disability benefits, survivor benefits, and insurance (Medicare) benefits are based” (Schedule C Instructions). In order to make this election, you and your spouse must each file your own Schedule C on your jointly filed return. You may also be required to file your own Schedule SE for self employment tax as well.

Community Property: The other option you have is to treat your business as community property. Currently there are only 9 states with community property laws. Community property is property that is owned 50/50 between husband and wife no matter who acquired the property. If only one spouse participates in the business, that spouse claims all of the self-employment income for him or herself. If they both participate, the income is split between the two spouses based on their share of the business.

If you have any questions, feel free to leave me a message and I can help you out. Comments and suggestions are also welcome!