small business

Tax Tips for Entrepreneurs and Business Owners Part 3: The Home Office Expense Deduction

Nick Eusanio, Esq., LL.M. 1 Comment

The Tax Tips for Entrepreneurs and Business Owners series continues with this third article, concentrated on the home office expense deduction. This article focuses on the importance of the home office deduction for the entrepreneur or small business owner. The below discussion includes an explanation of the home office expense deduction, the test to qualify for and available methods to claim the deduction, and some key tips.

What is the Home Office Expense Deduction and How Can My Small Business Qualify?

The home office deduction allows a small business owner or entrepreneur to reduce tax liability based on expenses related to business use of a portion of his home. To qualify, the small business owner or entrepreneur must: (1) Regularly & Exclusively Use of part of his home as his (2) Principal Place of Business.

Generally, if a business owner regularly–say a few hours per day–works in a space solely dedicated as his home office, he should meet the regular and exclusive use requirements. But, this is a facts and circumstances based test, subject to many pitfalls. For instance, assume the area you utilize as a home office also contains gym equipment that you use to exercise. This could cause you to fail the exclusive use portion of the test, and lose the home office deduction.

Usually, if a business owner or entrepreneur at least uses his home office to complete administrative or management tasks without substantially using any other fixed office to do them, he can satisfy the principal place of business element. So, salespeople, tradespeople, or professional service providers (e.g., people who do most of their income-producing activity outside the home) are normally able to meet the principal place of business test by at least doing the administrative and management duties at the home office. Again, though, this determination depends heavily on facts and circumstances. So, overall, it is essential to consult with an experienced tax lawyer to review your specific situation before claiming the home office expense deduction.

Which Office Expenses Can I Deduct Related to My Small Business?

An entrepreneur or small business owner qualifying for the home office deduction may cut his tax bill by deducting the following types of expenses:

  1. Mortgage Interest;
  2. Insurance;
  3. Utilities;
  4. Repairs; and
  5. Depreciation.

These categories of expenses are important when a taxpayer uses the regular, or actual expenses method for computing the home office deduction. But, many entrepreneurs or small business owners prefer to calculate the home office deduction using the simplified method, as the record keeping requirements are less burdensome. An explanation of the home office expense deduction methods follows.

How Can I Claim the Home Office Expense Deduction?

  1. Regular/Actual Expenses Method. This option calculates the home office expense deduction based on the proportion of square feet the business owner’s home office bears to the total square footage of the home. As an example, if the home office is 200 square feet and the total square footage of the home is 1600, the deductible portion of the home is 12.5% (200/1600). Once you identify the deduction percentage, add up the items from each category of deductible expenses (see above) and multiply that amount by the deductible percentage to compute the amount of the deduction.
  2. Simplified Method. The IRS started allowing a simplified option for the 2013 tax year forward. Under this method, the business owner can simply multiply the allowable home office square footage (up to 300 square feet) by the defined rate (for 2014, $5 per square foot) to compute the home office expense deduction. So, if an entrepreneur used 200 square feet of his home for solely business purposes during 2014, his home office deduction would be $1,000 (200 x $5).

BizAndTaxHax Tips: Importantly, assuming you utilize the regular method, if you include the depreciation on your home as a deductible expense and later sell your home at a profit, you must pay capital gains tax on the total amount of depreciation deductions you claimed. Also, it is significant to note that the amount of the home office expense deduction is limited. Your deducted home office expenses may not exceed the amount of income attributable to your business–meaning you cannot use your home expenses to create a tax loss to shelter your income. Finally, the home office expense deduction varies for certain different types of businesses or industries. So, as always, you should discuss your specific situation with a tax attorney and your accountant to obtain specific advice concerning deductible expenses for your home office.

An experienced tax lawyer can help you determine whether your home office qualifies for the home office expense deduction, and assist with keeping the required documentation to support the deduction. If you are a Columbus or Ohio entrepreneur or small business owner and need help preparing for tax return filing season and planning for the future, contact me for a free initial consultation.

Tax Tips for Entrepreneurs and Business Owners – Part 2: The Section 179 Expense Deduction

Nick Eusanio, Esq., LL.M. Leave a comment

This is the second article in the Tax Tips for Entrepreneurs and Business Owners series, which highlights a few of the frequent federal tax audit issues for business owners and provides some tips for avoiding federal tax compliance problems. This article focuses on the Section 179 expense deduction and its importance for the entrepreneur or small business owner.

What is the Section 179 Expense Deduction?

Section 179 of the Internal Revenue Code provides a very helpful tool for small business owners and entrepreneurs. Section 179 allows a business to expense–meaning claim a current tax deduction rather than depreciating over a number of years–certain property purchased during the tax year. This is very important for start-ups and small businesses, because it enables the entrepreneur or small business owner to: (i) purchase a useful or necessary business asset to help generate revenue; and (ii) save cash on current tax liability. As many readers will appreciate, saving cash for reinvestment and acquiring equipment or property needed to build revenue are essential for growing a new venture or scaling a small business. So, how can you determine whether the property you bought for your business qualifies for Section 179 expensing?

What Qualifies for Section 179 Expensing?

To qualify for Section 179 deduction, your property must be:

  1. Eligible Property; and
  2. Purchased for Business Use.

Generally, eligible property includes tangible personal property (such as machinery and equipment, vehicles, computers, telephones, office furniture, etc.), certain other tangible property, off-the-shelf computer software, and some other specific property. The determination of whether a particular piece of property qualifies for Section 179 expensing can be very technical and complex, and there are numerous restricted types of property that will not be eligible for this special deduction. So, you should consult with a tax attorney and your accountant before claiming the Section 179 deduction as to your business property purchases for a given year.

As noted above, property must be purchased for business use to be eligible for Section 179 expensing. Property is considered to be for business use when more than 50% of its use will be in business operations during the year it is placed in service. If property is used for both business and nonbusiness purposes, the business owner can take a proportionate deduction under Section 179 (provided, of course, that the business use is more than 50%). To calculate the proportionate Section 179 deduction, multiply the cost of the property by the percentage of business use and use the resulting amount to determine your Section 179 deduction.

What is the Dollar Limit on Section 179 Deductions?

Usually, the purchase price of qualifying property is the amount for Section 179 expensing (subject to any business-personal use apportionment, of course). But, Section 179 also includes dollar limits and an income limits on the deduction, which vary based on the facts and circumstances. For instance, certain property (such as passenger automobiles) is subject to specific dollar limitations for Section 179 expensing. Based on recent extension by Congress, though, the 2014 general dollar limitation for Section 179 deductions is $500,000. This means that a business owner can deduct up to $500,000 of qualifying property purchases under Section 179 for this year. Finally, it is important to note that the Section 179 deduction is reduced dollar for dollar to the extent the cost of eligible property purchased for the year exceeds $2 million. So, if you purchased qualified property for a total cost of $2.5 million and placed it in business service in 2014, the Section 179 deduction would be unavailable.

BizAndTaxHax Tips: Significantly, unless Congress again acts to extend the increase ($500,000), the dollar limit on Section 179 expensing is set to fall back to $25,000 for tax year 2015. So, if you made large capital asset purchases in 2014, it is important to coordinate with a tax lawyer and your accountant to properly expense the eligible property under Section 179 at return filing time. Otherwise, you may miss out on significant current tax savings if Congress does not extend the $500,000 deduction limit for 2015.

An experienced tax lawyer can help you determine whether particular property qualifies for Section 179 expensing, and assist with keeping the required documentation to support the deduction. If you are a Columbus or Ohio entrepreneur or small business owner and need help preparing for tax return filing season and planning for the future, contact me for a free initial consultation.

Tax Tips for Entrepreneurs and Business Owners – Part 1: The Business Vehicle Expense Deduction

Nick Eusanio, Esq., LL.M. 1 Comment

As 2014 draws to a close, taxpayers should begin reviewing their annual income and expenses in preparation for filing required income tax returns and paying tax due. Importantly, entrepreneurs and small business owners should be especially diligent in this process, as there are numerous audit traps for the unwary Schedule C filer. This is the first in a series of articles that will highlight a few of the frequent federal tax audit issues for business owners, and provide some tips for avoiding federal tax compliance problems. This article focuses on the business automobile expense deduction as a potential pitfall for the unfamiliar, and offers tips for compliance.

Business Vehicle Expense Deduction 

Awareness of some typical audit traps is key to ensuring federal tax compliance, especially for entrepreneurs and start-ups who may be new to properly accounting for deductible expenses. One frequently audited area is the business automobile expense deduction. Costs associated with a business owner’s use of a vehicle for business purposes are tax-deductible, which is a very helpful savings tool. But, the federal tax rules for deducting business related automobile expenses are specific, making compliance difficult for many.

There are two methods for claiming deductible business vehicle expenses:

  1. Actual Expenses, Plus Depreciation Method. The business owner must record and document all deductible automobile-related expenses incurred for the business vehicle during the year. The following costs are deductible in proportion to the amount of business miles driven: gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments). Additionally, all business-related tolls and parking fees are deductible.
  2. Standard Mileage Rate Method. The business owner may deduct a percentage  (the standard mileage rate) of each business mile driven, plus all business-related tolls and parking fees. For 2014, the standard mileage rate is 56 cents per business mile travelled.

There are very specific rules that determine which of the above business vehicle expense deduction methods are available to a particular business owner. Certain facts and circumstances trigger different rules.

For instance, to qualify to use the standard mileage method, a business owner must utilize that method in the first year the vehicle is used in business activity. Additionally, the standard mileage deduction is not available to business owners who have used accelerated depreciation in prior years, or expensed the vehicle under Section 179 of the Internal Revenue Code. Moreover, only business-use mileage is tax-deductible, meaning proper business-to-personal mileage allocation is essential for a vehicle that is used for both purposes. Importantly, these examples are not exclusive. So, it is important to consult with your tax attorney and accountant before implementing a particular business vehicle expense deduction method for your business.

Biz&TaxHax Tips: Regardless of which deduction method a business owner uses, one thing is certain: documentation is king in surviving an audit. The best way to properly document business automobile expenses to support deduction is to maintain a detailed mileage log (listing the date, business purpose, departure location, destination, mileage, and before and after vehicle odometer reading) and records of actual expenses (invoices, receipts and proof of payment for: gasoline, oil changes, maintenance and repairs, tires, etc.) for each vehicle used in the business for the year. This way, it is less likely that you will make any mistakes in claiming deductible automobile expenses on your tax return and you will be in a much better position to show that your return was accurate, if audited.

An experienced tax lawyer can help you determine which deduction method is available and best for your business, and assist with keeping the required documentation to support the deduction. If you are a Columbus or Ohio entrepreneur or small business owner and need help preparing for tax return filing season and planning for the future, contact me for a free initial consultation.