Home sweet home: Do you qualify for office deductions?
If you’re a business owner working from home or an entrepreneur with a home-based side gig, you may qualify for valuable home office deductions.
But not everyone who works from home gets the tax break. Employees who work remotely can’t deduct home office expenses under current federal tax law.
To qualify for a deduction, you must use at least part of your home regularly and exclusively as either:
- Your principal place of business, or
- A place to meet with customers, clients or patients in the normal course of business.
In addition, you may be able to claim deductions for maintaining a separate structure — such as a garage — where you store products or tools used solely for business purposes.
Notably, “regular and exclusive” use means you must consistently use a specific identifiable area in your home for business. However, incidental or occasional personal use won’t necessarily disqualify you.
Rules for employees
What if you work remotely from home as an employee for an organization? Previously, people who itemized deductions could claim home office deductions as a miscellaneous expense, if the arrangement was for their employer’s convenience.
But the Tax Cuts and Jobs Act suspended miscellaneous expense deductions for 2018 through 2025. So, employees currently get no tax benefit if they work from home. On the other hand, self-employed individuals still may qualify if they meet the tax law requirements.
Direct and indirect expenses
If you qualify, you can write off the full amount of your direct expenses and a proportionate amount of your indirect expenses based on the percentage of business use of your home.
Indirect expenses include:
- Mortgage interest,
- Property taxes,
- Utilities (electric, gas and water),
- Insurance,
- Exterior repairs, maintenance, and
- Depreciation or rent under IRS tables.
Important: If you itemize deductions, mortgage interest and property taxes may already be deductible. If you claim a portion of these expenses as home office expenses, the remainder is deductible on your personal return. But you can’t deduct the same amount twice as a personal deduction and again as a home office expense.
Calculating your deduction
Typically, the percentage of business use is determined by the square footage of your home office. For instance, if you have a 3,000 square-foot home and use a room with 300 square feet as your office, the applicable percentage is 10%. Alternatively, you may use any other reasonable method for determining this percentage, such as a percentage based on the number of comparably sized rooms in the home.
The simplified method
Keeping track of indirect expenses is time-consuming. Some taxpayers prefer to take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square foot for the area used as an office, up to a maximum of $1,500 for the year. Although this method takes less time than tracking actual expenses, it generally results in a significantly lower deduction.
When you sell
Keep in mind that if you claim home office deductions, you may be in for a tax surprise when you sell your home.
If you eventually sell your principal residence, you may qualify for a tax exclusion of up to $250,000 of gain for single filers ($500,000 for married couples who file jointly). But you must recapture the depreciation attributable to a home office for the period after May 6, 1997.
Contact us. We can address questions related to writing off home office expenses, the best way to compute deductions and the tax implications when you sell your home.
© 2022
The Inflation Reduction Act: what’s in it for you?
You may have heard that the Inflation Reduction Act (IRA) was signed into law recently. While experts have varying opinions about whether it will reduce inflation in the near future, it contains, extends and modifies many climate and energy-related tax credits that may be of interest to individuals.
Nonbusiness energy property
Before the IRA was enacted, you were allowed a personal tax credit for certain nonbusiness energy property expenses. The credit applied only to property placed in service before January 1, 2022. The credit is now extended for energy-efficient property placed in service before January 1, 2033.
The new law also increases the credit for a tax year to an amount equal to 30% of:
- The amount paid or incurred by you for qualified energy efficiency improvements installed during the year, and
- The amount of the residential energy property expenditures paid or incurred during that year.
The credit is further increased for amounts spent for a home energy audit (up to $150).
In addition, the IRA repeals the lifetime credit limitation, and instead limits the credit to $1,200 per taxpayer, per year. There are also annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door ($500 total for all exterior doors). A $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters and biomass stoves/boilers.
The residential clean-energy credit
Prior to the IRA being enacted, you were allowed a personal tax credit, known as the Residential Energy Efficient Property (REEP) Credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump and biomass fuel property installed in homes before 2024.
The new law makes the credit available for property installed before 2035. It also makes the credit available for qualified battery storage technology expenses.
New Clean Vehicle Credit
Before the enactment of the law, you could claim a credit for each new qualified plug-in electric drive motor vehicle placed in service during the tax year.
The law renames the credit the Clean Vehicle Credit and eliminates the limitation on the number of vehicles eligible for the credit. Also, final assembly of the vehicle must now take place in North America.
Beginning in 2023, there will be income limitations. No Clean Vehicle Credit is allowed if your modified adjusted gross income (MAGI) for the year of purchase or the preceding year exceeds $300,000 for a married couple filing jointly, $225,000 for a head of household, or $150,000 for others. In addition, no credit is allowed if the manufacturer’s suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans, or SUVs).
Finally, the way the credit is calculated is changing. The rules are complicated, but they place more emphasis on where the battery components (and critical minerals used in the battery) are sourced.
The IRS provides more information about the Clean Vehicle Credit here: https://www.irs.gov/
Credit for used clean vehicles
A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 is allowed a tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price. No credit is allowed if your MAGI for the year of purchase or the preceding year exceeds $150,000 for married couples filing jointly, $112,500 for a head of household, or $75,000 for others. In addition, the maximum price per vehicle is $25,000.
We can answer your questions
Contact us if you have questions about taking advantage of these new and revised tax credits.
© 2022
Make marketing better with a brand audit
Make marketing better with a brand audit
Mention the word “audit” to a business owner and you’ll probably get an anxious look. But not all audits are of the tax, financial statement or retirement plan variety. You can audit many areas of your company to help you better manage those functions. Take your brand, for example.
Your business brand is more than just a logo. It’s a distinctive combination of identifiers that represents who you are, what you do and how you operate. As such, a brand can be audited to help you improve your marketing strategies.
Analyze info
There are many ways to conduct a brand audit. The specific steps will depend on factors such as your industry, the size of your company and the popularity of your brand. But most audits have certain things in common.
For starters, they generally rely on information you probably already have on hand or could easily generate. This includes:
Sales data. There are so many ways to track sales; it’s easy to get overwhelmed by the numbers. Nonetheless, a function of your brand audit should be to identify sales-related key performance indicators and trends that relate to branding. Essentially, if sales have slumped, is your brand partly to blame? And if so, why?
Website analytics. Determine whether site traffic is trending upward or downward. Investigate how much time visitors spend on your site and on which pages. Where are they coming from? A strong brand will draw consistent visitors who tend to stick around. A weaker one will often attract accidental visitors who leave quickly.
Social media interactions. The impact of social media on marketing and branding has been enormous. Of course, it can be tough to keep content fresh. But each social media account should provide a wealth of interaction data. Track and analyze this info, if you aren’t already. You can use it to, among other things, assess the strength of your brand.
Ask around
Most brand audits also involve gathering the thoughts and opinions of two major constituencies: customers and employees.
Customers, of course, represent the richest source of insight into brand strength. You could design a survey that posits various questions to customers and prospects about your brand. The data you receive will play a key role in your brand audit. Naturally, customer surveys are tricky. You’ve got to keep it short, clear and easy to complete. Most are now conducted online.
Employees can also tell you things about your brand that you might not know or haven’t thought about. Your sales staff, for instance, could be getting feedback — positive or negative — from customers and prospects. So, an employee survey focused on brand-related issues can be a useful part of an audit.
Two ways to go
With enough research and training, some companies’ marketing departments can devise an in-house brand audit process, execute it and present their recommended actions to leadership. However, it might be quicker and more cost-efficient to engage a marketing consultant to do the audit — if dollars are available, the price is right and you genuinely intend to act on what you learn. Let us help you weigh the costs, risks and advantages of a brand audit.
© 2022
Is your income high enough to owe two extra taxes?
High-income taxpayers face two special taxes — a 3.8% net investment income tax (NIIT) and a 0.9% additional Medicare tax on wage and self-employment income. Here’s an overview of the taxes and what they may mean for you.
3.8% NIIT
This tax applies, in addition to income tax, on your net investment income. The NIIT only affects taxpayers with adjusted gross income (AGI) exceeding $250,000 for joint filers, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately.
If your AGI is above the threshold that applies ($250,000, $200,000 or $125,000), the NIIT applies to the lesser of 1) your net investment income for the tax year or 2) the excess of your AGI for the tax year over your threshold amount.
The “net investment income” that’s subject to the NIIT consists of interest, dividends, annuities, royalties, rents and net gains from property sales. Wage income and income from an active trade or business isn’t included. However, passive business income is subject to the NIIT.
Income that’s exempt from income tax, such as tax-exempt bond interest, is likewise exempt from the NIIT. Thus, switching some taxable investments to tax-exempt bonds can reduce your exposure. Of course, this should be done after taking your income needs and investment considerations into account.
How does the NIIT apply to home sales? If you sell your principal residence, you may be able to exclude up to $250,000 of gain ($500,000 for joint filers) when figuring your income tax. This excluded gain isn’t subject to the NIIT.
However, gain that exceeds the exclusion limit is subject to the tax. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.
Distributions from qualified retirement plans, such as pension plans and IRAs, aren’t subject to the NIIT. However, those distributions may push your AGI over the threshold that would cause other types of income to be subject to the tax.
Additional 0.9% Medicare tax
Some high-wage earners pay an extra 0.9% Medicare tax on part of their wage income, in addition to the 1.45% Medicare tax that all wage earners pay. The 0.9% tax applies to wages in excess of $250,000 for joint filers, $125,000 for a married individuals filing separately and $200,000 for all others. It applies only to employees, not to employers.
Once an employee’s wages reach $200,000 for the year, the employer must begin withholding the additional 0.9% tax. However, this withholding may prove insufficient if the employee has additional wage income from another job or if the employee’s spouse also has wage income. To avoid that result, an employee may request extra income tax withholding by filing a new Form W-4 with the employer.
An extra 0.9% Medicare tax also applies to self-employment income for the tax year in excess of the same amounts for wage earners. This is in addition to the regular 2.9% Medicare tax on all self-employment income. The $250,000, $125,000, and $200,000 thresholds are reduced by the taxpayer's wage income.
Reduce the impact
As you can see, these two taxes may have a significant effect on your tax bill. Contact us to discuss these taxes and how their impact could be reduced.
© 2022
Year-end tax planning ideas for your small business
Now that Labor Day has passed, it’s a good time to think about making moves that may help lower your small business taxes for this year and next. The standard year-end approach of deferring income and accelerating deductions to minimize taxes will likely produce the best results for most businesses, as will bunching deductible expenses into this year or next to maximize their tax value.
If you expect to be in a higher tax bracket next year, opposite strategies may produce better results. For example, you could pull income into 2022 to be taxed at lower rates and defer deductible expenses until 2023, when they can be claimed to offset higher-taxed income.
Here are some other ideas that may help you save tax dollars if you act before year-end.
QBI deduction
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2022, if taxable income exceeds $340,100 for married couples filing jointly (half that amount for others), the deduction may be limited based on: whether the taxpayer is engaged in a service-type business (such as law, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.
Taxpayers may be able to salvage some or all of the QBI deduction by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout). You also may be able to increase the deduction by increasing W-2 wages before year-end. The rules are complex, so consult us before acting.
Cash vs. accrual accounting
More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2022, it’s satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $27 million. Not that long ago, it was only $5 million. Cash method taxpayers may find it easier to defer income by holding off billings until next year, paying bills early or making certain prepayments.
Section 179 deduction
Consider making expenditures that qualify for the Section 179 expensing option. For 2022, the expensing limit is $1.08 million, and the investment ceiling limit is $2.7 million. Expensing is generally available for most depreciable property (other than buildings), including equipment, off-the-shelf computer software, interior improvements to a building, HVAC, and security systems.
The high dollar ceilings mean that many small- and medium-sized businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Just place the eligible property in service by the last days of 2022, and you can claim a full deduction for the year.
Bonus depreciation
Businesses also can generally claim a 100% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. Again, the full write-off is available even if qualifying assets are in service for only a few days in 2022.
Consult with us for more ideas
These are just some year-end strategies that may help you save taxes. Contact us to tailor a plan that works for you.
© 2022
Want to see into the future? Delve deeper into forecasting
For a company to be truly successful, its ownership needs to attempt the impossible: see into the future. Forecasting key metrics — such as sales demand, receivables, payables and working capital — can help you manage overhead, offer competitive prices and keep your business on firm financial footing.
Although financial statements are often the starting point for forecasts, you’ll need to do more than just multiply last year’s numbers by a projected growth rate in today’s uncertain marketplace. Here are some tips to consider.
Pick your time frame
Forecasting is generally more accurate in the short term. The longer the period, the more likely it is that customer demand or market trends will change.
Quantitative methods, which rely on historical data, are typically the most accurate. However, they don’t work well for long-term predictions. If you’re planning to forecast over several years, try qualitative forecasting methods, which rely on expert opinions instead of company-specific data.
Define your demand
Weather, sales promotions, safety concerns and other factors can cause sales to fluctuate. For example, if you sell ski supplies and apparel, chances are good your sales tend to dip in the summer.
If demand for your products or services varies, consider forecasting with a quantitative method. One example is “time-series decomposition,” which examines historical data and allows you to adjust for market trends, seasonal trends and business cycles.
You also might want to invest in forecasting software. These solutions allow you to plug other variables into the equation, such as the short-term buying plans of key customers.
Assess your data
Quantitative forecasting techniques require varying amounts of historical information. For instance, you’ll need about three years of data to use “exponential smoothing,” a simple yet fairly accurate method that compares historical averages with current demand.
If you want to forecast for something you don’t have data for, such as a new product or service, you might use qualitative forecasting. Alternatively, you could base your forecast on historical data for a similar product or service in your lineup.
Get intensive for inventory
If you operate a business with extensive inventory, forecasting is particularly critical. As you’ve likely learned over time, you’ve got to establish accurate methods of counting inventory and adjust levels as appropriate to best manage cash flow.
For peak accuracy, take the average of multiple forecasting methods. To optimize inventory levels, consider forecasting demand by individual products as well as by geographic location.
Craft your crystal ball
The optimal forecasting approach for any business will depend on multiple factors, such as its industry and customer base. Contact us to discuss the forecasting practices that make the most sense for your company.
© 2022
Separating your business from its real estate
Does your business need real estate to conduct operations? Or does it otherwise hold property and put the title in the name of the business? You may want to rethink this approach. Any short-term benefits may be outweighed by the tax, liability and estate planning advantages of separating real estate ownership from the business.
Tax implications
Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.
However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate were transferred to a pass-through entity instead, the profit upon sale would be taxed only at the individual level.
Protecting assets
Separating your business ownership from its real estate also provides an effective way to protect it from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.
The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.
Estate planning options
Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but some members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one heir and the real estate to another family member who doesn’t work in the business.
Handling the transaction
The business simply transfers ownership of the real estate and the transferee leases it back to the company. Who should own the real estate? One option: The business owner could purchase the real estate from the business and hold title in his or her name. One concern is that it’s not only the property that’ll transfer to the owner, but also any liabilities related to it.
Moreover, any liability related to the property itself could inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner's other assets (including the interest in the business) could be in jeopardy.
An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.
An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.
Proceed cautiously
Separating the ownership of a business’s real estate isn’t always advisable. If it’s worthwhile, the right approach will depend on your individual circumstances. Contact us to help determine the best approach to minimize your transfer costs and capital gains taxes while maximizing other potential benefits.
© 2022
Seller-paid points: Can homeowners deduct them?
In its latest report, the National Association of Realtors (NAR) announced that July 2022 existing home sales were down but prices were up nationwide, compared with last year. “The ongoing sales decline reflects the impact of the mortgage rate peak of 6% in early June,” said NAR Chief Economist Lawrence Yun. However, he added that “home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers.”
If you’re buying a home, or you just bought one, you may wonder if you can deduct mortgage points paid on your behalf by the seller. The answer is “yes,” subject to some important limitations described below.
Basics of points
Points are upfront fees charged by a mortgage lender, expressed as a percentage of the loan principal. Points, which may be deductible if you itemize deductions, are normally the buyer’s obligation. But a seller will sometimes sweeten a deal by agreeing to pay the points on the buyer’s mortgage loan.
In most cases, points that a buyer pays are a deductible interest expense. And seller-paid points may also be deductible.
Suppose, for example, that you bought a home for $600,000. In connection with a $500,000 mortgage loan, your bank charged two points, or $10,000. The seller agreed to pay the points in order to close the sale.
You can deduct the $10,000 in the year of sale. The only disadvantage is that your tax basis is reduced to $590,000, which will mean more gain if — and when — you sell the home for more than that amount. But that may not happen until many years later, and the gain may not be taxable anyway. You may qualify for an exclusion for up to $250,000 ($500,000 for a married couple filing jointly) of gain on the sale of a principal residence.
Important limits
There are some important limitations on the rule allowing a deduction for seller-paid points. The rule doesn’t apply:
- To points that are allocated to the part of a mortgage above $750,000 ($375,000 for married filing separately) for tax years 2018 through 2025 (above $1 million for tax years before 2018 and after 2025);
- To points on a loan used to improve (rather than buy) a home;
- To points on a loan used to buy a vacation or second home, investment property or business property; and
- To points paid on a refinancing, home equity loan or line of credit.
Tax aspects of the transaction
We can review with you in more detail whether the points in your home purchase are deductible, as well as discuss other tax aspects of your transaction.
© 2022