Tax Planning is Key This Year

If there ever was a year for tax planning, now is the time!  Some people and businesses will be in for a big surprise this year because of all of the changes in the tax law for the 2018 year.  Many people will be underwithheld on their federal and state taxes, meaning they will owe big; others could be overwithheld, meaning the IRS is tying up money that’s theirs now!

Wouldn’t it be nice to know in advance how your situation will be impacted by the hundreds of changes in the tax laws this year?  When you know your situation, you can make decisions before the year ends to change the outcome.  You can take advantage of every strategy, deduction, and credit you are entitled to.

Planning gives you peace of mind, whether you get an affirmation that you will receive a refund from the IRS or if you owe money…if you know in advance, it will make a difference.

When working with your tax professional, they will:

  • Project your income (W-2 earnings or business earnings) through the end of December
  • Maximize your deductions
  • Make recommendations of things you can legitimately do to change the result before the year ends
  • Educate you on any changes in tax law or limitations 

Here are a few things your tax pro may require:

  1. Year to date paystub
  2. Current income/expenses, if self employed
  3. Current income/expenses of rental properties owned, if any
  4. Stock sale data, including basis information
  5. Information on any major changes from the prior year, such as a solar purchase, house sale/purchase, etc.

Tax planning can achieve the greatest benefit for your unique situation.  Don’t rely on (mis)information from your neighbor or colleague for strategies to implement!  Seek professional tax advice and get educated on the laws and consequences relating to your unique situation.  Your tax professional can warn you of something you might not have known or give you different scenarios for you to consider.  The key is knowing your options, so that you can make decisions that will provide the greatest benefit for you and your family!

Posted in Tax | Leave a comment

Your Perfect Work Day

How well do you love the way you spend your typical workday?  What would a typical workday look like if you had absolutely no constraints?  Here’s a fun exercise to get you thinking about your future and how you can make small changes in your current day to move it toward your ideal day. 

Get comfortable and begin jotting out what your ideal day looks like.  Start with what you do before you get to work.  How do you start your day?  With a workout or breakfast or something else?  What does breakfast consist of?  Where are you eating?  What do your surroundings look like?

How do you get to work? What is your commute like? List the sights, sounds, smells.  Once you get to work, what do you do first? Will you spend time on the phone?  With whom?  At the computer?  Do you go somewhere?

Do you get a nice break for lunch? Write it all down in detail, and continue until your post-workday routine.  Who are you with?  Where are you?  What do you do?

Here’s a partial sample:

“Lunch with my two friends at our favorite Mexican restaurant on the beach. We laugh a lot, share stories, and part with hugs and handshakes. After lunch, I work on my favorite work project, which challenges me to think about how to help my employees gain new skills. While I work, I listen to my favorite music CD.  In a few hours, I am ready for a stretch break and walk outside to water the plants. After break, I return calls, talking with my clients and catching up on how to best serve them.   …”

OK, now it’s your turn.  Here are some questions to consider while you do this exercise:

  • What’s important to you to spend time on?
  • What’s enjoyable that you would really like to have as part of your daily routine?
  • What activities will give you a nice balance of accomplishment, relaxation, and socialization, even during work?
  • What do you need to include in your ideal day to get your needs met?

Change One Thing

Getting to your ideal day can take time.  Don’t try to change your whole routine all at once.  What one or two things can you pull out of your ideal work day description that you could bring into your current work day to brighten it with happiness?  In the description above, this person might block out time to find employee training, go out for lunch instead of eating at her desk, make a new playlist, delegate tasks that are not part of her ideal day, or take more time when returning client calls.

Make gradual changes in your current day to improve it.  With each change, you’ll be moving toward the realization of your ideal day. And if your ideal day doesn’t include bookkeeping but your current day still does, we’re here for you.

Posted in Time Management Tips | Leave a comment

Is Your Business an SSTB? (And Why Do You Care?)

QBI, 199A, SSTB—these are just a few of the new acronyms being tossed around as part of the recent business tax reform changes (like we don’t already have enough of them to remember!). Out of all the terminology, “SSTB” (Specified Service Trade or Business) seems to be the vaguest and most misunderstood. If you have virtually any type of business entity (except for a C corporation), you need to know what this is and whether or not it applies to you. It could have huge implications come tax time!

The term “SSTB” came about as part of the new Section 199A business deduction (a tax deduction of up to 20% of business profit). SSTBs and non-SSTBs are subject to different limitations/calculations in determining the deduction. Most importantly, if your business is an SSTB and you have taxable income of:

Under $157,500 ($315,000 for joint filers): Your profit FULLY qualifies for the 20% deduction – EASY!

Between $157,500-$207,500 ($315,000-$415,000 for joint filers): Your profit PARTIALLY qualifies for the 20% business deduction (reduced – more complex calculation).

Above $207,500 ($415,000 for joint filers): NONE of your profit qualifies for the 20% business deduction (fully phased out).

So now the big question is: how do you determine if you are an SSTB? The first part is easy: if your business performs services in any of the following areas, you automatically fall into SSTB classification:

  • Health (not spas or health clubs)
  • Law
  • Accounting
  • Actuarial Science
  • Performing Arts
  • Consulting
  • Athletics
  • Financial Services
  • Brokerage Services

After this, the law becomes less clear. The IRS also says that any business “where the principal asset… is the reputation or skill of one or more of its employees or owners” is considered an SSTB.  Clearly, this is subject to a lot of varying interpretation – would a widget-maker automatically be an SSTB just because his or her widget-making skills are truly the backbone (“principal asset”) of the business?

Thankfully, IRS has limited the meaning of this “catch-all” clause in subsequent guidance, saying that it applies specifically to those engaged in the trade or business of:

1)      Receiving income for endorsing products/services

2)      Licensing or receiving income for using one’s image, likeness, name, signature, voice, trademark, or symbol associated with his/her identity

3)      Receiving fees/income for appearances

For that widget-maker, the business would likely be a non-SSTB, unless the sale of the widgets is directly associated with use of his or her identity. One way to think about it: if the success of your business depends more on you and not what you are selling, it is most likely an SSTB.

Understanding this classification and how it applies to you is important; it’s the first step in determining how to calculate QBI (Qualified Business Income) for purposes of the 20% deduction, and also a critical stepping stone in tax planning. Be sure to consult with your tax preparer for more information!

Posted in Tax | Leave a comment

Is Your Business Considered a Hobby by the IRS?

Very frequently tax preparers are asked to provide clarification on IRS rules that they heard from a friend, neighbor or colleague. Usually some part of the statement is true; however, there is always more to the story or it may not apply to that person’s specific situation. If you’ve heard the statement, “You can’t deduct a loss from business if it occurs more than three out of five years,” this is not the entire truth.

A person that conducts an activity for profit is allowed to deduct the expenses that are ordinary and necessary in that industry. If the expenses exceed the income, the amount can offset other income such as wages, interest, or dividends. However, if your activity is a hobby, you cannot reduce your other income by the losses.

When your losses exceed the three-year rule, the burden of proof now shifts to the taxpayer to prove the activity is a for-profit business. Here are some factors to consider:

• The manner that you carry on the activity
• The expertise of the taxpayer in this industry
• The time and effort spent in the activity
• The taxpayer’s history and success in this industry
• The elements of personal pleasure or recreation

Here are some ways to ensure your for-profit business is not considered as a hobby:

1. Keep thorough and professional books.

2. Use a separate business bank and credit card account(s).

3. Log any personal use on assets, such as a camera.

4. Research trends in similar businesses.

5. Obtain insurance, registrations, certifications, licenses needed for that type of industry.

6. Maintain a second phone listing for business.

7. Document evaluations of your operation to attempt to improve the business’s profitability.

8. Develop a written business plan and update it annually.

9. Keep a detailed calendar of your business activities.

Here’s an example: Joe had a business as a personal chef. This was not his primary way of earning income. He had a W-2 job with a local city. He did earn about $200 to 300 in income; however, his expenses were much more than that. Come to find out, he was hosting dinner parties at his home and wanting to write off the food, subscription to cooking magazines, and seeds for his home garden.

If you are in doubt, just imagine yourself in front of an auditor explaining your specific situation. If it “feels” like the story above, it may not fly with the auditor, but that does not mean it is not a true business. What you need to do is plan and strategize. What can you do today to prove that you are a for-profit business?

Know the rules and then step out in confidence. And, don’t get tax advice from a friend because it might not be the whole truth! Consult your tax preparer to confirm your specific situation qualifies.

Posted in Tax, Tax Topics | Leave a comment

Do You Spend Too Much Time on Email?

If you feel like you spend too much time on email, you’re not alone. Almost everyone feels the same way. That’s why it’s so important to learn how to be as productive as possible when it comes to handling email. Here are five tips to help you do just that.

1- Automate your emails.

If you’re sending a lot of the same emails to clients, you may be able to add them to email list management software like Constant Contact or MailChimp. Then you can automate a series of emails using the autoresponder function.

Another way to automate your emails is to set up inbox rules so that certain emails are automatically filed into the folders you’ve set up. For example, if you get a monthly email for a recurring bill payment, you could send it straight to your bills folder if you don’t want to read it. This will save time in the morning when you sort through the pile of email that’s sent overnight.

2- Set a timer.

Make a habit of checking your email only once or twice in the day. Plan those times on your calendar and set a timer to stop if you need to. This employs time batching, one of the most productive ideas in time management. It’s unproductive to stop and read each email exactly as it comes into your box, so setting times restructures the way you work with email for the better.

3- Create draft email answers of your ten most frequently asked questions.

Do you get a lot of the same questions over and over again in your email? Don’t start from scratch each time you craft an answer. Start with a draft of a previous answer, make it generic, and save it in your drafts folder. When you get that question again, copy and paste the draft and customize it as necessary.

Repeat this for your top ten (or twenty) most-asked questions or emails that you send. You’ll shave minutes off each email reply from now on.

4- Learn the email software you’re using.

Sure, everyone pretty much knows how to send, reply to, and forward emails. Most even know how to add attachments. But what else do you know and use on a regular basis?

If you are tech-savvy, then simply spend some time reviewing your email settings and functions. There may be some you discover that will make your day.

If you don’t feel very comfortable with all things technical, then sign up for a formal course, preferably in person, where you have a real human teacher that can answer all your questions. It will be a day well spent.

5- Set up folders.

Folders, labels, or categories in your email software are all good ways to segment email so that it can be processed in a particular order. Your folders might be by priority, client, service type, or something else. In any case, it’s easier on your brain to answer all questions from one client or topic at a time than it is to ping-pong back and forth.

Use folders when you are complete with an email but want to save it for future reference. That way, your inbox will stay cleaner and emptier.

6- Use the search function.

Using the search function liberally in your email software when you need to find an old email will help you save tons of time.

7- Get a new email address if your current email address is too spammy.

You may be losing the spam battle with email addresses that have been used for more than a few years or that have been hacked. If so, the best solution might just be to switch to a new email.

Choose a good email address in the first place by staying away from email addresses that hackers can guess, like webmaster@yourdomain.com, sales@yourdomain.com, or info@yourdomain.com. Instead use service@yourdomain.com or a version of your first and last names.

Try these email productivity tips to help you spend less time on email while still getting the job done.

Posted in Time Management Tips | Leave a comment

Separation and Divorce: When It Comes to Taxes, Breaking Up Can Be Hard to Do

Not much is harder in life than going through a separation or divorce.  Figuring outhow to handle your taxes before, during, and after a divorce is right up there with the most difficult of challenges.

So, before you make big moves to separate or divorce, know the potential tax consequences, and take steps to protect yourself from further trauma and financial pain.

Here are seven tips on some of the most questioned tax topics for people who are divorced or divorcing:

When Are You Actually Divorced?

The IRS sees things differently about your divorce than you might, including the actual date of your divorce. Even if you get divorced January 1st of this year, you will still have to file last year’s tax return as married.  This is because the IRS sees your status on December 31st of the prior tax year as the story for the whole year.  On the flip side, if your divorce became final in December, you won’t be able to file as married even if that was your status for most of the year. 

What Are Your Filing Options?

Even if you are legally still married as of the end of the year but divorce is impending, you may have some options in how to file for that year and can determine which route is most advantageous to both individuals. You could obviously file married filing jointly or married filing separately; however, in some cases, the head of household status – originally created for single taxpayers – might apply to you as well and could save you money.

To qualify as head of household, you have to be “considered unmarried” as of the end of the year (even if legally still married): you must have lived apart from your spouse for the last six months of the year, have paid over half the cost of keeping up your main residence (and it was the main home of your child(ren)), and be able to claim your child(ren) as your dependent(s) under the rules for children of divorced or separated parents. Also, you have to file a separate tax return from your spouse, even if you are still legally married.

The head of household route could significantly improve the overall tax outcome because of more favorable tax rates and higher thresholds for certain deduction items, so it’s worth checking into all of your filing options and determining what’s best for your particular situation.

Watch Out for Capital Gains Tax on the House

You don’t have to pay income taxes on assets that are transferred during a divorce. But keep in mind that if you do get the house in the settlement but want to sell, you will be subject to capital gains tax on the sale as a single person. 

Normally, a married couple doesn’t have to pay taxes on a gain of up to $500,000 on their primary residence. If you are single, you can only exempt half of that. So if your house sells for more than $250,000 over what you and your former spouse paid for it, you will owe taxes, and the rate will depend on your income bracket.  

Your Kids Aren’t Your Dependents…Unless the Court Order Says So

Custody agreements are often quite creative.  The arrangements are varied compared to the old days, when mothers typically got custody of the kids and took them as dependents.  Now, custody is often shared, and the right to claim kids as dependents must be stated in the decree. 

Generally, you can claim the kids as dependents only if you were designated to do so by your separation agreement or divorce decree. When there is no such agreement or order, or when joint custody applies, the custodial parent is considered to be the parent who has physical custody of the child for most of the year.

What happens when you share custody equally?  You will need to decide who claims the child and in what year, as you both can’t claim him or her as a dependent.  If there is more than one child, couples will often split the dependency of each child between the two parents. For example, if you have two children, the mother can take one and the father can take the other as dependents.

Child Support Is Never Deductible

While alimony is considered a taxable event, child support is always non-taxable.  This basically means that it doesn’t affect your taxes in any way.  This can be troublesome for some who are making large child support payments to understand that there is no tax break.  Likewise, the recipient of the child support payments does not have to report them as income. 

It can be tempting for some to try to classify child support as alimony in order to get a tax deduction.  This is never a good idea and can get you in a lot of financial trouble later.  Remember, no matter how much you have to pay or for how long, you can’t deduct child support!

Alimony Affects Both Your Taxes

In 2017, if you are the person paying the alimony, you will get a lower tax bill because you can deduct it even if you don’t itemize.  The recipient must report the alimony as income, thereby increasing his or her tax bill.  What’s more, you most definitely need a written separation or divorce decree stating that alimony payments are not child support.  No written order means no tax break.

Couples who are facing extended divorce proceedings due to finances, custody battles or state laws need to be sure that support during long periods of separation is clearly defined.  Even if you pay the bills for your spouse’s home while separated, you cannot deduct that amount as alimony without a written agreement in place.

The Tax Cuts and Jobs Act of 2017 changes the alimony rule.  For divorce agreements entered into after December 31, 2018 or existing agreements modified after that date that specifically include this amendment in the modification, alimony is no longer deductible by the payer and is not income to the recipient. 

Be Aware of Community Property Rules

If you live in a state subject to community property rules (nine states total) and you file separate returns while still technically married (whether as Married Filing Separately or Head of Household), you will be required to report 50 percent of all income generated by community assets during the time you were married. This includes wage income and any income earned off of community property (property that you acquired during your marriage), like rental income, investment income, and so on.

This can have multiple implications, and the most advantageous filing status (joint or separate) can vary largely depending on how long you were married, assets brought into the marriage vs. those acquired while married, income earned by one spouse vs. another, etc. Furthermore, these community property/allocation rules are handled differently in each state that has these statutes, and the interpretation can become somewhat complex.

It’s important to know what income/deduction/credit items should be split 50/50 on the return and which should not – for example, while sole proprietorship income of one spouse is community income that should be split, the self-employment tax on that income is imposed solely on the spouse carrying on the business.

Because of these complexities, it is important to understanding the rules of your state and receive the professional guidance you need in navigating these rules.

Posted in Accounting, Business Tips | Leave a comment

How to Read Your Income Statement

The income statement of any business is probably the most important report of all. It is a snapshot of the financial performance of your business over a period of time, such as a month or year. You might also hear it called the Profit and Loss Statement, or P&L.

The income statement can give you all kinds of insights as to whether you are bringing in enough sales, if your prices are generating enough profit, and how your expenses are running. Let’s take a look at the report, step by step.

Revenue

The report starts by listing the revenue for the period of time covered. Revenue includes all sources of income, including sales from operations, interest and investment income, revenue from insurance claims, sales from assets or other parts of the business, and any other source of revenue. In most small businesses, sales will be the largest part of the revenue, if not all of it. In some countries, the term used for sales is turnover.

If you sell more than one item or have more than one location, it might be a good idea to be able to view the sales detail from these categories. This may or may not be on your income statement depending on how formal it is, but you should be able to get a drill down report on your sales detail.

Look for exceptions to what you expect to see. There can be some decisions you can make and actions you can take from the insights you discover.

Cost of Goods Sold

This section of the income statement includes costs you incur directly on items you sell. If you maintain an inventory, it’s the cost you paid for the inventory items that you sold during the period. If your business is a manufacturer, cost of goods sold, or COGS, will include costs of materials and labor to produce the items.

If you own a service business, COGS will typically be zero. As a service business, you may incur direct costs when providing services, and these costs can be booked in a variety of expense accounts, including supplies.

Gross Profit

Some income statement formats will include a gross profit number which is sales minus cost of goods sold. This number is important for businesses with inventory.

Expenses

The expenses section of the income statement is the longest part. It includes all of the expenses you incurred in your business, including advertising and marketing, rent, telephone, and utilities, office supplies and meeting expenses, travel, meals, and entertainment, payroll and payroll taxes, and several more.

You might also hear the term overhead. Overhead is a subset of expenses that have to be met whether you sell zero items or millions. They include items like rent and utilities, management payroll, and office supplies.

To review your expenses, check line by line to see if anything looks out of sorts, and take the appropriate action.

Net Profit or Loss

The final number on your income statement represents whether you made or lost money in the period the report covers. The formula is simple: revenue less COGS less expenses equals net profit or loss.

Net profit/loss can go by many names, depending on the size of your business and your accountant’s vernacular. You may also see EBITDA: Earnings before interest, taxes, depreciation, and amortization. Earnings is another word for net profit.

Perspective

It’s a good idea to compare your income statement numbers to other periods in your business. Common comparisons include last period, last several periods, and same period last year.

It’s also a great idea to have a budget that sets goals for your income statement numbers. Then you can compare budget to actual numbers and take action on the variances.

If your business falls into a standard type of business, you may also be able to see how it is doing compared to others in your industry. This is called benchmarking, and the income statement is a very common format that’s used in benchmarking.

Do spend some time each period reviewing your business’s income statement. It can help you make a faster course correction in your business so you can be even more successful than you already are.

Posted in Accounting, Business Tips | Leave a comment

New Tax Brackets in 2018

The 2017 Tax Cuts and Jobs Act revised some foundational deductions, exemptions, and tax brackets for the 2018 tax year. Here’s a rundown of what’s changed in that area for individuals:

Exemption

On your 2017 1040 tax return, you likely received an exemption of $4,050 per person.  Check line 42 of your own return. In 2018, this exemption is discontinued, but you won’t really lose out because the standard deduction has increased to compensate for this elimination.

Standard Deduction

In 2017, your standard deduction was $6,350 per person in general and $9,350 for head of household.  In 2018, the standard deduction will increase to $12,000 per person and $18,000 for head of household filers.

Quite a few itemized deductions have been eliminated or capped for 2018, so more taxpayers will be using the standard deduction going forward.

Tax Brackets

There are seven tax rates or brackets, just like there were before, but the threshholds and rates have changed. The rates now range from 10 percent to 37 percent:

  1. 10 percent
  2. 12 percent
  3. 22 percent
  4. 24 percent
  5. 32 percent
  6. 35 percent
  7. 37 percent

Here are the details depending on your filing status:

The new withholding tables are posted here:

https://www.irs.gov/pub/irs-pdf/n1036.pdf

If you have questions about this or anything about the new law, please feel free to reach out any time.

Posted in Tax, Tax Topics | Leave a comment

Five Fun Customer Perks to Set You Apart in the Marketplace

It’s always fun to surprise and delight your customers. This puts a smile on your client’s face, boosts loyalty, and is fun for your employees too. Here are five ways to surprise and delight your customers with inexpensive perks.

1. Handwritten thank you note.

Email and social media have all but killed the handwritten thank you note. So when you send yours to your top customers, it will really stand out.

2. Promotional items.

Promotional items are frequently handed out at trade shows, but they can be used in other settings too. These are items where your logo is typically imprinted and you purchase them in quantity. Items that are useful and popular include coffee mugs, t-shirts, fidget spinners, screen cleaners, webcam covers, keychains, note pads, calendars, and more.

Choose an item that is similar to or a reminder of your business or product. An IT consultant might choose a screen cleaner, while an accountant might choose a piggy bank.

3. Coupon bag.

If your business is located in a strip center, shopping mall, or office building with other businesses around, go door to door and ask for coupons that you can put in a coupon bag to give to clients. Clients will be delighted to get a coupon for the dry cleaners, florist, and hair salon in your center no matter what type of business you’re in.

4. Random prize.

If your business has a stream of clients coming in a physical store or a virtual one, you can award prizes randomly to customers. If customers are grouped together as in a classroom or lecture hall, it’s easy – you can hold a drawing for a prize. Or you can select a random number and the customer assigned that number wins a prize.

Choose a prize from one of your services or products, or give something away that’s universal and “hot,” such as an Amazon Echo Dot.

5. Free samples.

The cosmetics industry has been giving away free samples and gifts with certain purchases for decades. Grocery stores often have free samples of food at a little booth staffed by a host at the end of an aisle. You might be able to apply this idea to your business with a little bit of creativity.

Think of how you can “sample” your service or product and package it up in a free gift or sample. If you offer a service, you may have to get extra creative. A consultant can offer a book that’s related to the service offered, a spa can have healthy treats while clients wait, and a divorce attorney can offer stress balls or fidget spinners.

With customer service declining in many businesses, try these five things to wow your customers and set your business apart.

Posted in Business Tips, Customer Service Tips | Leave a comment

The Home Office Deduction: Regular Method

Has your friend, neighbor or colleague told you that if you take the home office deduction, it will be a “red flag” to the IRS that will trigger an audit? Well, that is just not true! 2017 is the last tax year that you can take a home office deduction since the Tax Cuts and Jobs Act excludes it for tax years 2018-2025.

In order to claim the home office deduction, you MUST QUALIFY. To qualify, you are required to meet two tests: 1) regularly used and 2) exclusively used for business.

Regular Use: This test is clear – you use the area on a continuing basis. Occasional or incidental business use does not meet the test.

Exclusive Use: A specific part of a taxpayer’s home is used for business only. There is no requirement that the business portion of a room be physically separated by a wall or partition. But, any personal use of the space, no matter how small, means that it is not exclusive. There are two exceptions: storage space and daycare facility.

You can have several offices. The key issue is to determine your PRINCIPAL PLACE OF BUSINESS.

Your home can qualify as a principal place of business if:

  • The office is used regularly and exclusively for administrative or management activities (billing clients, keeping books, ordering supplies, setting appointments, writing reports)
  • There is no other fixed location where the taxpayer conducts these activities

A business use of the home deduction is allowed if the taxpayer meets clients in their home. For example, if an attorney works four days a week in his downtown office and 1 day at his home office, he can deduct the home office if he meets with his clients there too. It will qualify for the deduction even though it is not the principal place of business.

The best thing about qualifying your home as the principal place of business is that the miles that you drive from your home to the first business stop are now deductible. If your home is not the principal place of business, your first stop is considered commuting and not deductible.

The easiest way to determine the business percentage is to take the total square footage exclusively and regularly used for business and divide that by the total square footage of your home. Then, you can deduct the following categories on your return for the business percentage:

  • Mortgage interest
  • Rent
  • Property taxes
  • Utilities (gas, electricity, garbage)
  • House insurance
  • Security system
  • Home maintenance/repairs
  • Depreciation (straight line method over 39 years)

Note: Lawn care/landscaping expenses are not deductible according to the IRS regulations. However, the Tax Court allowed the deduction where the taxpayer’s clients regularly visited the taxpayer’s home office and where the taxpayer was a daycare provider and the children used the lawn as a play area.

If you painted the office area only, that cost would be 100 percent deductible. This is called direct expenses. However, if you paid for garbage for the home, only the business percentage used is deductible which is called indirect expenses.

If your total income is less than your total expenses, your home office deduction for certain expenses will be limited. However, these deductions can carry over the next year. Be aware of that carry over number if this happens in your situation.

If you take depreciation on your home office and you sell your home, you have to “recapture that amount.” What this means is that the amount you deducted for depreciation reduces your ordinary income – this is good. But when you sell your home, that amount will increase your capital gains. The capital gains rate is typically less than your personal income tax bracket.

Years ago, many tax preparers would never take the home office on an LLC, S-Corp or C-Corp return. If they did, it would be a Schedule A deduction as an employee, which is not a great deduction due to the two percent limitations. However, now some preparers are taking the home office for these entities. The only thing I recommend is not to take mortgage interest or real estate taxes. Only take the business portion of rent, utilities and insurance.

When you know the rules, there should be no fear around taking a deduction that you qualify for. So…do you qualify? If so, take the deduction, reduce your taxes, and don’t worry about that “red flag” because if you are audited, there will be no change on your return because you know the rules!

Feel free to reach out to us to determine if your specific situation qualifies for a deduction and/or to determine the impact of the new tax law changes for 2018.

Posted in Tax, Tax Topics | Leave a comment