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Are You
Entitled To Home Office Deductions?
While more and
more people are now working from home, few understand the tax implications
of the business use of a home office. Often, the lines between business and
personal use are blurred.
Generally, if you conduct business from your
home, you can deduct a portion of certain expenses, such as rent,
utilities, insurance, taxes, depreciation and repairs allocated for
business use. Similarly, an employee may also deduct such expenses, but
only if one can show that the home office was required for the "convenience
of one's employer"; i.e. either required as a condition of employment,
necessary for the proper functioning of the business, or necessary to allow
the employee to properly perform his duties.
Two important tests must be met: the home
office area must be used exclusively and on a regular basis either as: (1)
the principal place of business in which you engage, or (2) a place of
business to meet or deal with patients, clients, customers in the normal
course of your business. Incidental or occasional meetings do not meet this
test. You may also treat your home office as your principal place of
business if you use it regularly and exclusively for the administrative or
management activities of your business and have no other fixed location
where this work is done. Keep in mind that a home office area that is used
for both personal and business purposes does not qualify for this tax
break--you must be able to demonstrate that the area contains no furniture
or equipment suitable for personal use. If an area of a room is used, it
would be prudent to partition the room so as to distinguish between the
business and non-business areas.
The simplest method for computing your
business-use percentage is the square-foot method. Compare the number of
square feet of space used exclusively for your business to the total square
feet of your home. Then apply this percentage to the "indirect
expenses"; e.g. mortgage interest, utilities, real estate taxes,
insurance and depreciation. Add this amount to your direct home office
expenses to arrive at the total allowable home office deduction. Because
this tax break has been the source of abuse for many years, the IRS may be
inclined to take a hard look at such deductions. However, if your home
office is legitimate and satisfies the requirements, significant tax
savings may result from proper planning and documentation.
Read more...
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Greetings!
Do not let the fast approaching tax filing deadline
cause you to overlook some important tax strategies. And if you have
already filed, then something to think about for 2004!
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· Business Owners
Should Consider a SEP
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 A relatively
simple way to reduce current taxes and provide for retirement savings is
to establish a simplified employee pension (SEP). A SEP is an arrangement
under which the employer contributes directly to an employee's SEP
individual retirement account. For this prupose, a self-employed
individual is treated as an employee.
The
maximum SEP IRA contribution is far greater than the maximum contribution
that may be made to regular IRAs. Employer contributions to a SEP are
deductible only if they are ordinary and necessary business expenses and
do not exceed 25% of the employee's compensation paid by the employer to
participating employees during the year. An employer's contributions are
deductible and are also excludable from the gross income of the employee.
A SEP arrangement does not require the employer to contribute minimum or
annual amounts and the decision of whether to make SEP contributions may
be made on a year-to-year basis at the employer's discretion. Due to the
simplified administration and lower administrative costs, SEPs offer a
substantial practical advantage over other types of qualified plans. A
SEP that is established and funded by the due date of the business return
(including Schedule C for unincorporated sole proprietors), including
extensions, may provide a significant 2003 tax savings to the business
owner or self-employed individual. One should seriously consider the
advantages of this type of retirement plan.
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· "Bonus"
Depreciation
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A taxpayer may elect to treat the cost of certain business
property (known as "Section 179" property) as an expense that
may be deducted in the taxable year in which the property is placed in
service. Property eligible for this election includes depreciable
personal property, such as machinery, equipment and furniture that is
purchased from an unrelated party for use in an active trade or business.
The total
amount that may be deducted under this election in any one taxable year
is limited to $100,000 for each of the years 2003, 2004 and 2005. The
amount that may be deducted is further limited to the taxpayer's taxable
income derived from the trade or business during that tax year without
taking into account the Section 179 deduction and certain other
deductions. Furthermore, a special 30% first year bonus depreciation
deduction is allowed for qualified property acquired after 9/10/01 and
before 1/1/05. A special 50% first year bonus depreciation deduction is
allowed for qualified property acquired after 5/5/03 and before 1/1/05. Property
qualified for either the 30% or 50% bonus depreciation allowance is
limited to tangible property with a recovery period of 20 years or less,
computer software that is depreciated over 36 months and qualified
leasehold improvement property. The tax basis used to compute the 30% or
50% depreciation deductions is reduced by any Sec. 179 depreciation
taken. Therefore, one can utilize the election under Sec 179 to its
maximum and then take advantage of these extra depreciation deductions to
significantly reduce one's taxable business income. These generous tax
breaks should be used by every business owner acquiring such qualified
property.
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· New York State's
Pension Income Exclusion
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If you have received a pension, you may be entitled to one
of the two pension income exclusions available for your 2003 NYS income
tax return. First, there is an exclusion of up to $20,000 for
"qualified" pension or annuity income received after reaching
59 1/2 years of age. Qualifying pension and annuity income includes:
periodic payments for services performed as an employee before you
retired, periodic and lump-sum payments from an IRA or Keogh plan (but
not payments derived from contributions made after you retired), and
periodic distributions from government deferred compensation plans. If
you and your spouse both qualify, each can utilize the exclusion up to
$20,000- however, you cannot claim any unused portion of your spouse's
exclusion.
Second,
there is an unlimited exclusion for pension income received from the
State of New York, local governments within the State and from the US
government. Often, these income exclusions are overlooked when filing tax
returns--you may also want to review prior year returns to make sure that
you have taken the proper exclusion. If appropriate, you can always file
an amended return to claim any overpaid taxes.
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· Can't Pay Your
Taxes?
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If you cannot pay the full amount of your taxes owed, you
may request an installment agreement by including Form 9465 with your
return. This may allow you to make installment payments for up to 60
months. However, you will be charged interest and may be charged a late
payment penalty on the tax not paid by April 15, 2004. There is also a
fee required for the installment agreement request. Before requesting
such an agreement, you should consider less costly alternatives, such as
a home equity loan or line of credit.
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· Last Minute
Questions?
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If you have any last minute questions, comments or thoughts
regarding any of the topics in this newsletter or any other tax matters
that are relevant to your tax situation, you can either call
(631-427-5158) or e-mail (jsjdcpa@aol.com or jsilver@jeffsilvercpa.com)
me and I will be happy to address your needs. Dont' panic, take a deep
breathe and make sure that you take advantage of any tax stategies
available. Remember, you can always go on extension!
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