Home Office Tax Deductions

Income Tax 1040For people who own their own business or simply choose to work from a home office, taxpayers are entitled to claim a few home office deductions from their yearly tax payments to the federal government. These deductions include everything from utility costs, gasoline and mileage use, mortgage payments, and miscellaneous costs toward business equipment.

These sorts of deductions are most common for those who have established a small business, such as an LLC (Limited Liability Company) or some other form of business registration, usually with their state’s office of secretary of state. Taxpayers must make sure with their CPA or tax advisor which deductions they qualify for, especially for those who qualify for home office deductions.

Those making these deductions, be warned: home office deductions are often noticed by the IRS, and those claiming too much or for things that are seemingly frivolous run the risk of being audited. At any rate, it is vitally important for all business owners who work from their home to keep copies of all purchases, receipts of sale, and any other paperwork that may need to be presented in defense in the event of an audit by the IRS.

Working Space

For renters who have an established business, up to half of the rent can be deducted as a tax write-off. For homeowners, the portion of the living space that is exclusively used as a working space must be calculated. Homeowners must measure the dimensions of the office space to be used and then divide that number by the total square feet of the entire residence.

For example, if your home is 3,000 square feet and you use a 300-square-foot room as your office, then 10 percent of each expense of the home becomes part of the home-office deduction. You can add to this any direct expenses for the office, such as painting it. It’s helpful to take a photo of your office and keep it with your tax records in case the IRS questions your setup.

Additional calculations regarding insurance premiums, home repairs and maintenance, utilities, and other costs will be factored in. These instructions are available on the 8829 tax form or via the IRS ‘Work from Home’ website.

Equipment

Office equipment like fax machines, printers, computers, furniture, and anything purchased to help people run their business can also be deducted. Nevertheless, computers are considered a “listed” deduction by the IRS, so business owners will be asked to calculate how much of the computer use is for is for business use and personal use.

Utilities

Because your rental space or owned space alike will consume an array of utilities, costs for water, gas, electric, telecommunications, and trash removal services qualify for home office tax deductions. Phone bills can be deducted completely if a business phone with a separate line is installed in the home. The costs that only affect the business end of things can be deducted at the end of the year.

Mileage and Auto Expenses

If an automobile is used to travel between two destinations, with one of those being your regular place of business, the IRS will consider this up for grabs in terms of tax deductions. Additionally, any trip made by a business owner or employee who makes a delivery to a customer or client, a trip to a vendor, travels to a store to buy a printer or fax machine, or to stop at the bank to make a deposit, all qualify as a business deduction.

Mileage rates can change from year to year, but the IRS will allow taxpayers to claim a certain amount of money per mile driven from their taxes. In addition, automotive expenses—like repairs and maintenance—can also be deducted. For mileage deductions, a detailed log of miles obtained on the car should be kept in the event of an audit.

Mortgage

A percentage of your house payment, mortgage or house insurance, property and real estate taxes are all available to be claimed for running a home office. Like other deductions, however, taxpayers may only deduct the business percentage of these figures. Portions of one’s rent and renters insurance can also be deduced. Further, any space needed for daycare to watch over children or older individuals can be deducted. Storage space for surplus and inventory can also qualify.

Deductions are very simple to make for those who own a business and operate some or all of that venture from their home. However, it is important for taxpayers to avoid stretching the truth on what they can deduct, or try to claim things that really do not affect their business. As such, it is even more so important that taxpayers keep photos and records of everything in the event of an audit. If these things are missing, a business’ defense will go out the window in the event an audit. This can cost taxpayers hefty fines, and in some very unfortunate cases, the very livelihood of their business.

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Surviving Tax Time

stress 2It’s often said that the winter holidays are the most stressful time of year, but I bet anyone who has to file an income tax return could easily argue against that contention. With mounting anxiety, Americans often procrastinate for weeks or months before rushing around to collect all the necessary paperwork they need to file. Finally they sit down to face the task – often unaware of which way their return will fall. Will they owe this year or get a tax refund?

The economic demands of our day make this season of stress even more challenging for many. With income barely meeting their needs and unexpected expenses straining an already tight budget, many people dread the thought of an additional tax bill. On the flip side is the relief felt when they find that they’ll be getting a refund check in the mail.

Knowing that the anxiety-inducing job of filing a tax return is inevitable simply means that postponing the task just adds to the stress. So no matter what you may expect, whether good or bad, the first step in easing the stress is to get down to business. Then, once you know the outcome, you’ll have time to decide how to ease the burden of a tax bill or the best use for a tax refund.

You owe the Taxman!

Taking the worst-case scenario first, finding that you owe the IRS. First off, don’t panic even if the amount is beyond your ability to pay within the 10 days allotted after the IRS has made the assessment of what you owe. You need to be proactive in finding a solution while protecting your assets. No one will come to arrest you, but you will begin to get threatening notices before you’ll be contacted by a revenue officer. Quick action will help prevent the harassment and additional penalties and interest.

The first question to ask is whether you actually owe the money. A simple mathematical error can mean the difference between a refund and a tax bill. Thoroughly review the forms you filed for discrepancies. Better yet, pay a professional tax preparer to go over your returns again. If you discover that you definitely owe the IRS, you have multiple options to repay. Some will reduce the net amount owed; others will increase your overall payout.

An installment plan is the option used by taxpayers who owe less than $25,000. Fill out IRS Form 9465, a straight forward, form used to request a monthly payment plan. Provide the total amount you owe, how much you are able to apply to the tax bill right now and the amount you can pay each month. The IRS then can adjust the agreement or offer other arrangements.

Other options for taxpayers who owe money include account receivable and bank levies, wage garnishment, penalty abatement and what’s called an ‘offer in compromise’ which lowers the amount owed. However you decide to address your obligation to the IRS, the sooner you pay it off, the less you’ll pay in interest and penalties.

Whoopee! A Refund!

While celebrating may be overkill, taxpayers who are getting a tax refund can breathe a sigh of relief for dodging a tax bill. They now have an opportunity to make wise use of a tax windfall.

  • Invest/Save: One of the most fiscally responsible uses would be to deposit it into a 401k or other investment fund that earns interest.
  • Pay off Debt: While increasing your investment accounts has obvious benefits, the decision to pay down debt is a stress reliever for anyone who carries a balance. Lower debt has the potential to move your credit score in a positive direction making future borrowing easier. 

Experiencing less stress during tax season comes when you pursue excellent financial management all year long. Avoid becoming overwhelmed by consistently burning the midnight oil and sacrificing entire weekends to work. Focus on balancing work and your private life. Set financial goals and celebrate milestones.

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