There are few deductions taken by business owners that are more feared than home office deductions. Some business owners are convinced that claiming this deduction increases the odds of an audit, although the IRS is adamant that this just isn’t the truth. Either way, if you follow the rules, and maintain proper records, you should have no worries.
Active owners of a rental property may qualify for the home office deduction. The key to this deduction is the word active. The landlord must do more than receive and deposit rent payments each month. You need to consistently spend a substantial amount of time maintaining properties and preparing them for rent as well as seeking new tenants.
After you have met this qualifier you’ll also have to meet the basic home office deduction thresholds. To begin with, you must use the home office exclusively for your rental business on a regular basis.
Additionally, you must meet one of the following requirements:
1. This office space must be the principle location from where you manage your business as a rental property manager.
2. You must have no other location from where you run the administrative end of your property managment rental business.
3. You interact with tenants in this office space.
4. You use a separate structure on your property for conducting business.
After you’ve determined that you are eligible for home office deduction, then it’s time to look at what expenses qualify for write offs. There are two major types: indirect and direct. Indirect expenses benefit the entire home. Direct expenses benefit only the home office space. Examples of direct expenses could be cleaning or painting expenses. While examples of indirect expenses can be payments on property tax, mortgage,, and utilities, these expenses are apportioned out between the office and the rest of your residence. This percentage is normally calculated by the square-footage ratio. By way of example, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses would qualify for home office deduction expenses.
As you don’t want any trouble if you do get audited, you are going to want to maintain careful records to prove that you were actually entitled to take the deduction and that it has been accurately reported. You should document the home office space with a diagram and/or photograph that supports your calculations. It is advisable to use your home office address on company business cards and other forms of communication and to have business mail delivered to the office address. You should make an effort to meet clients at the home office and maintain a log to keep track of the client meetings and other time spent working in this space. Records you should keep to prove expenses include: property tax statements, utility bills, insurance premium notices, 1098 mortgage interest statements and receipts for any other home office expenses.
This is a basic guide to home office deductions. This is not a substitute for the expert counsel of a Seattle Accountant.
Seatac CPA +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
This portion of the Rental Property Tax Guide centers on the various types of expenses that you may deduct from your gross rental income in order to determine net rental income. As there is a variety deductible expenses, this Rental Property Tax Guide breaks the topic into four different variations. This first part will give attention to professional fee expenses, advertising, and interest incurred.
The primary type of interest you will most likely be deducting is mortgage interest. If you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. On the other hand, whenever you are renting a room in your home, or if it is a duplex and you are residing in the other unit, you need to pro rate the mortgage expense. For more on personal use, see the article entitled Personal Use of Rental Property, which is included in the Tax Guide for Landlords. Personal use mortgage interest will always go on Schedule A of your Form 1040 and not on Schedule E. Moreover, if you own only a part interest in the rental, you will need to multiply the total amount of mortgage interest paid on the property by your ownership interest. Be aware, however, that certain expenses you pay to obtain a mortgage (such as title/recording fees and commissions) are capitalized as part of your depreciable basis for the property, and are not expensed. See the article titled Depreciation Expenses for Rental Property, included in this Guide, for more on depreciation expense. Other types of interest may also be deductible, if you incurred the interest solely for the benefit of the rental property. For example, if you took out a personal loan in order to replace carpeting, or fix the roof.
Ads in a local newspaper or any paid online marketing for example are deductible expenses when promoting a rental property on the open market.
If you pay legal counsel to compose a rental contract or start legal actions for you to evict a tenant, it’s possible to deduct these expenditures. You may also deduct fees paid to a tax accountant for preparing the Schedule E of your return from the year before. Make sure to pro rate the overall fee between the rest of your return versus the Schedule E portion of you return based on time spent. Any fees unrelated to the Schedule E appear on Schedule A as personal tax preparation expenses. Also any management fees or commissions to professional realtor groups for overseeing the rental property are deductible as well.
Seatac CPA +John Huddleston has written numerous articles on accounting and other tax related matters of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
This segment concentrates on deductible startup expenses for rental properties. You could be permitted to deduct a number of expenses incurred while preparing the rental property, but prior to actually letting it.
Note: Startup expenses laid out within this segment of the Landlord’s Tax Guide, are dissimilar to the expenses which qualify as deductible (under section 195 of the Internal Revenue Code.) Under the section 195, certain startup expenses (in an active business or trade) are deductible up to $5,000 with the balance amortizable over a fifteen-year time frame. Though, under section 195 code, rental activity isn’t included because rental property is viewed as a passive activity instead of an active business or an active trade. See the article titled Tax Deductible Rental Losses, included in this Guide, for more on passive activity rules.
Note: It is not just once you have actually rented real estate that rental activity commences, but when you have made the property available for rent or you have it out on the market.
The Expenses in Obtaining a Mortgage
Abstract fees, recording fees, and mortgage fees (amongst others) are capitalized and so become part of your basis in the rental property. Instead of expensing these fees all at once, you need to depreciate the expenses. The article Depreciation Expenses for Rental Properties has more information relating to depreciation.
What are points? They are charges paid by a borrower to take out a mortgage or a loan. These charges may also be called loan origination fees, maximum loan charges, or premium charges. Points are deductible as interest, but require that you amortize the points over the life of the loan. Determining the amount of points to amortize per year, is task beyond the scope of this article. Seek the counsel of a tax professional.
Repairs versus Improvements
You must depreciate and capitalize improvements to the property in advance of putting the property on the market. Improvements are those that prolong the use of the property or materially add to the property’s market value. Repair expenses, on the other hand, you may freely deduct. A repair aims to keep your property in good working condition, not to increase the market value or prolong use. See the series of articles about deductions and depreciation, included in this Guide, for more information.
Certified public accountant +John Huddleston has written prolifically on accounting and other tax matters of concern to small business owners. He is a graduate of Washington State University and the University of Washington.
This article takes a look at the types of entities for rental property ownership. You’ll see below the different entities have their advantages and disadvantages. However, the goal is to limit your liability and protect your rental property from unsecured creditors.
When forming an entity, you’ll need to visit Washington State Entity to register.
TIP: Consult with a tax attorney or certified public accountant before establishing an entity and transferring ownership of your rental property. This Guide isn’t meant to be a comprehensive solution you should seek the care of a qualified professional.
This is the simpler and most common method of taking ownership. This is when you purchase a rental property in your own name. The leading disadvantage of this type of ownership is that your creditors may be able to force a sale of the rental property if they receive court mandate against you, or they could potentially compel you into involuntary bankruptcy. A main advantage of this form of ownership is that the process is simple, without complex forms or heavy filing fees.
Legal Entity Ownership
Legal entities include general partnerships, limited partnerships, limited liability companies, and corporations. The differences between the entities are important and outlined below. The main advantage to entity ownership is that your personal creditors cannot force a sale of the rental property, considering that you don’t own it. The only type of entity that does not require registration with the Secretary of State is the general partnership. For tax purposes, the entity type chosen doesn’t matter very much because in most cases, rental income “passes through” from the entity and is taxed on a personal tax return (but see the cautionary note under corporations). See the article titled Necessary Tax Forms for Reporting Rental Activity, which is included in this Guide, for more details on how rental income is taxed.
General partnership. The partnership is an association of two or more people to carry on as co-owners of a for-profit business. In a general partnership, each partner will have equal management rights, and are personally liable for the debts of this partnership. And regarding that liability, a general partnership is ordinarily not recommended.
Limited partnership. A limited partnership is more tricky considering the fact that this form of ownership requires one limited partner and at least one general partner. The limited partner will not be personally liable for any debts of the partnership, but then again has no management rights. Now the general partner has sole management rights, as well as personal liability for any debts which might result from the partnership. This arrangement is also typically not suggested.
Limited liability partnerships (LLPs) or limited liability company (LLCs). A limited liability partnership and a limited liability company are similar forms of entity selection. Both provide limited liability to the partners and members. Meaning that you are not personally liable for the debts of the entity, that is, unless the debts are the result of your own wrongdoing. This form of ownership is often superior as it reduces liability and allows fewer formalities than those of the corporation.
Corporations. Corporations allow for limited liability and perpetual existence. Although, they also require the observance of certain formalities in order to retain the limited liability shield. Without these formalities, a court order could very well “pierce the corporate veil” and hold you personally responsible. It is for this reason that LLPs and LLCs are generally more desirable for a rental property owner. Additionally, for tax purposes, corporations are split into s-corps and c-corps. If a corporation is taxed as a “C” corporation, it pays tax on the rental income, and then you will pay tax yet again when the corporation pays out dividends. You should avoid this “double taxation” trap.
Seatac Accountant +John Huddleston has written many articles on taxes and accounting. He is a graduate of the University of Washington’s School of Law, with a Juris Doctorate and a Masters in Tax Law.
Deciding where to buy, how to do it, and what kind of dental practice to purchase is a very important step in the career of a dentist. There are many essential decisions to make and key factors to examine as you search for the perfect dental practice that meets all of your needs.
Do Your research
Pace yourself. You are building the foundation of your future. Where do you want to live, how responsive will the community be to your new practice, how much of a rapport do you already have with the community?
Deciding on Location
Think about where you might like to live. You’ll want to be a big part of this community, so you’ll need to make sure it’s a good fit. Participating in local activities and mingling with neighbors will help your business grow. A short to medium commute is an important consideration. When you can avoid the long commute, those hours you might have spent on the road can be paid forward and spent instead with family and friends.
Establish yourself amongst people you can relate to and people you can enjoy. Your practice and your interpersonal life will reap the benefit. Suburbs? Intercity? Rural? Let the location of your competition inform your decision. Other issues are whether or not your spouse needs to find work, and the quality of the school system in the area.
Determine the Ideal Practice for You
Lay out a working business plan. What size of dental practice do you anticipate? And do be careful to leave room for growth. Do you want to practice general dentistry or do you prefer an expensive practice that focuses on cosmetic dentistry? Does working a full five-day schedule with a large list of clients appeal to you? Or do you want a smaller practice, with a slower pace, that will allow you to work fewer hours? These decisions affect your finances and stress levels–what can you reasonably make work?
Seek a Valuation
Have the business appraised by a CPA. And prefer a professional that has experience with dental practices. This way you’ll gain a better perspective. This will give you necessary information in making a purchase and could save you plenty.
Establish a Support Net
Just as your business cannot operate without the support of patrons, you’ll never realize your full-potential without the aid of experienced professionals. There are many areas where you’ll need and benefit greatly from the expertise of others. In the long-run, investing in advisors will save you a lot of trouble. Here are some people you might want to have on your side:
- A CPA with a history of advising dental care practices and other small businesses on saving tax dollars and remaining tax compliant. You will want a CPA who can help you develop tax-saving strategies. You will want a cpa that can advise you on how to structure your business (S-Corp, C-Corp, LLC, PLLC, Sole Proprietorship).
- A Bookkeeper who is versed in a bookkeeping system like Quickbooks. A certified Quickbooks Advisor is a title bestowed upon a bookkeeper which says the person is certified by the makers of Quickbooks as knowledgeable with the accounting software.
- A legal professional to review all documents related to the sale and to legally protect your interests in the future.
- A consultant for your new dental practice will prove useful in the long run, helping you avoid pitfalls.
- From the start, establish a relationship with a bank. Getting prequalified helps you keep perspective on how much you can afford when putting in an offer.
- Your insurance needs will increase ten-fold once you’re a business owner. An insurance rep will assess the value of your business and evaluate risk to see exactly how much coverage you’ll be needing.
- It is a wise idea to seek the aid of a mentor that has experienced similar circumstance to those you’ll face.
- A marketing pro that knows online marketing.
Be prepared. Be a researcher. Dumb luck isn’t a viable strategy.
Tax CPA John Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Tacoma & Everett area on various tax and accounting issues. His firm, Huddleston Tax CPAs, also provides tax preparation service, quickbooks consulting, business valuation, general accounting and bookkeeping service. Profile information on CPA John Huddleston and the CPAs employed by Huddleston Tax CPAs is available at CPA Profile, Seattle CPA
An Offer in Compromise (OIC) is a debt settlement offer provided by the IRS to taxpayers, either an individual or a business unable to manage tax debt. There are certain strict criteria that determine eligibility to request the OIC. And if you do satisfy these requirements, you’ll need to complete Form 656 and submit a number of supporting documents to be evaluated for an OIC.
There are two circumstances in which you’ll meet the requirements to file Form 656. In the first, you’re making a case that paying the full amount of owed taxes will create economic hardship. In the second, you are make the case that there is doubt as to collectiblity.
Now that you know the circumstances in which you will need to prepare Form 656, here’s what you should remember when completing the form
- Each person submitting the offer should provide social security numbers.
- You will need to supply the names of both the persons if you are pursuing a joint offer for joint liabilities. When you owe a joint liability and both your partner and you are submitting for an Offer for Compromise, then you will want to do so on Form 656, just one form. Now, you may owe a liability, such as employment taxes for yourself and hold other liabilities, such as income taxes, with another person. If you are submitting this offer solely this form, then you have to list all liabilities on one of Form 656. In case both of you want to submit this application, then you have to include all tax liabilities on your Form 656 and the other person must show only the joint tax liability on their Form 656.
- You have to include the appropriate information in every field of the form.
- You need to provide the employer identification number (EIN) of all businesses, except corporate concerns, that you own, either wholly or partly.
- If your claim to an Offer in Compromise is based on a Doubt as to Collectability, you need to also furnish a completed Form 433A if you are an individual taxpayer and Form 433B if you are a business taxpayer.
- If your claim to an Offer of compromise is based on Effective Tax Administration, then in addition to submitting a Form 433A or 433B, you also complete the details in the “Explanation of Circumstances.” You also you can include supplementary corroborating information on separate sheets together with your EIN and social security numbers.
- In supplying the total amount of your offer, you cannot include a sum that the Internal revenue service owes back to you or any of the amounts that you may have already paid in taxes.
- All persons submitting the offer should apply their signature on the form and give the date. They must also supply the titles and names of authorized corporate officers, trustees, Powers of Attorney, and executors when requested.
- Ensure that you provide the name and if it is possible, the address of the person who may have prepared the OIC on your behalf.
- You may want the IRS to get in touch with a family member, a friend, or some other acquaintance to discuss your case and understand your state of affairs more fully. In that case, you’ll need to mark the “Yes” box for the “Third Party Designee” field. And, if you’d like an enrolled agent, your cpa, or attorney to represent your case, you will have to provide the Form 2848 and submit it in addition to your offer. to increase the chances of your offer being accepted. Once you’ve gathered all the aforementioned documents for submission, be sure you make photocopies or electronic copies for your personal records. Apart from these documents, you might also submit documents that corroborate your claim for this offer.
Attention to Detail
The application process for an Offer for compromise is a complicated process. Be sure to spend enough time with Form 656 and provide the entire set of supporting documents to strengthen your chances of your offer being accepted.
Visit the Huddleston Tax Library: Self Employed Guide at:
Accountants and Tax Preparers in Auburn
Accountants and Tax Preparers in Des Moines
Accountants & Tax Preparers in Issaquah
Best Accounting Practices for Startup Business
When developing a startup business it is very important to determine the accounting procedures and practices you will set in place at the very beginning of things.
Choose a Software Package for Your Business
When beginning your company you may use a simple spreadsheet to keep track of your business income and expenses. At some point, however, you might want to give some thought to implementing a small-business accounting software package like Sage Peachtree or QuickBooks to monitor your business’s financial transactions. As a new start-up grows, the paperwork involved between collecting income from customers and paying expenses from your suppliers can prove too overwhelming without the help of a accurate and reliable financial database. A good accounting software package will also help make tax prep easier, inventory recordkeeping, and payroll records.
Anticipate your bookkeeping needs. There are accounting software packages that focus on project accounting, and there is software that caters to real estate/real property (like fixed income accounting). Specialized accounting software is usually more costly than the general software packages which are good for sales of goods, but if you know where your business is headed, you could choose the appropriate accounting software at the very beginning can save time and money as time goes on.
Choosing the Method of Financial Record Keeping
As a self employed small business owner, you’ve got a bit of freedom in how you document your financial deals. As you’re not a huge corporation, it isn’t necessary for you to provide financial books in line with Generally Accepted Accounting Principles, or GAAP. For instance, you may prefer recording your income at the time you make a deposit into your bank account and document the expenses at the time when you make out a check. This is referred to as the cash method of accounting. While this method of tracking finances doesn’t follow GAAP, it is more than adequate for a smaller start-up.
As your business grows, then, you may choose to adopt a more sophisticated financial recordkeeping method. At this point, you may wish to think about the accrual method of accounting. Under this method, you record your income when you have an invoice for services provided, rather than waiting to get paid for that service. You recognize a business expense when you receive a bill from a supplier, rather than waiting until you pay the supplies. This method of accounting is preferable because it allows you to more closely match the income your business generates to the expenses you incurred to earn it. For example, you may have received an advanced cash payment before you provided services to a customer. You may want to wait and record that amount as revenue during the year you actually provided the services, rather than the year in which you received the cash.
From an income tax perspective, the IRS is flexible in allowing you to choose an accounting method. According to its rules, you may use any method as long as it clearly reflects income and expenses and you treat all items of income and expenses in the same manner from one year to the next. Yet, when you purchase, sell, or produce product, special rules apply on when you must utilize the accrual method. If you handle inventory whatsoever, you should consult your accountants to decide when to use the accrual method and when not to.
Creating a Budget
A lot of small business bookkeeping software packages allow you to establish a budget, based either on a previous year’s records or completely from scratch. Establishing a budget is necessary because it will establish the standards of performance for your business. Then after some time, you should compare your company’s performance with the budgeted amount. And this will tell you whether or not you are on track to meet your sales goals for the year. It can also keep your business profitable.
Rating Your Performance
Most small business accounting software packages will permit you to see the parallels between your business’s current-year financial statements to those of previous years. This anaylsis will help you to see trends in your business. It also provides insight on how you can add to the success.
As an example, if your small business’ revenue increased by 30-percent for 2011 over that from 2010, but your expenses only increased by 10 percent, this suggests that your business model may be hyper-efficient. So it’s wise to ask yourself, were all expenses recorded? Perhaps, some revenue items were duplicated? And did you truly manage to increase your return on investment? It is imperative to get to the bottom of these trends so that you can have a detailed picture of your small business’ performance and to make essential decisions. On the flip side, if your revenue increased by 10-percent in 2011 over that from 2010, but, to do so, your expenses increased by 30-percent, this indicates a lack of efficiency in your business design. You might ask yourself, are you investing in assets with the greatest returns on investment? Or, did you forget to provide invoices during the year?
Visit our offers in compromise guide at:
Sammamish Accountants & CPAs
Olympia Accountants and Tax Preparers
Redmond Accountants and Tax Preparers
When attempting an offer of compromise of IRS back tax debt, you’ll want to submit the 656 form 433b, unless you are a sole proprietorship and thus you’ll complete form 1040 to account for profits and losses. The form 433-A provides the IRS with justification in determining the lowest possible offer amount you can make in seeking offers of compromise.
How to complete form 433b
Section 1: In establishing your minimum offer, the 433-B will first ask for basic data concerning your business, including its employer identification number and the frequency of tax deposits. The form queries the identity of all partners, officers, LLC members, and major shareholders associated with the business.
Section 2: Next, the form asks for business asset details. This would include the business’s banking accounts, investment accounts, and notes receivable. Then it requests details on the company’s property, vehicles, and equipment. However, in revealing their value, the internal revenue service will let you exclude your equity in any income producing assets.
Section 3: In section 3 you are to provide information regarding your business income, such as average gross monthly income (supported by documentation).
Section Four is where you’ll give the details of your business expenses. That is, your average gross monthly expenses of the more recent period 6 — 12 months (all documented). And, if you do include a profit and loss statement for the period, you can present an average amount here.
When calculating an offer
If you claim you will be able to pay off the offer amount within a period of 5 months, follow the formula below to calculate the amount.
[Business income in excess of expenses x 48] Total available assets
If you opt to pay the offer beyond a five month period, your base minimum offer increases to the following:
[Business income in excess of expenses x 60] Total available assets
Whichever method you use, you must exceed zero.
In section 6
Finally, Form 433-B asks for certain miscellaneous data this uses to consider in settling your back tax debt. By way of example, this section queries whether your company has ever filed for bankruptcy before. This question is appropriate because your business is ineligible to apply for an offer in compromise on its tax liability while in a bankruptcy proceeding. This sectionalso asks if your enterprise has any variety of other affiliations, seeks to find out if any related parties owe finances to your company, and whether your company has been party to a litigation. Also, it asks whether the business has sold any assets within the last Ten years at a discount.
Writing off Travel Expenses
It is important to plan your trips in an effort to gain the maximum write-off. Akin to other costs of doing business, it is possible to receive tax deductions for any business travel expenditures that you incur in meeting the business needs of clients.
As a self-employed business owner, you may only deduct for your business traveling costs when they can be defined as standard and needed for servicing your customers. Costs the Internal Revenue Service might typify extravagant adn lavish, won’t qualify for the write-off. While not absolutely guaranteed, these below types of travel expenses are usually tax deductible:
Fuel and other automotive costs you pay while working at the client’s location. Transportation costs incurred while travelling from your personal home to the client site. Dry cleaning and laundry expenses occurred during business travel. Meals and hotel costs.
Additionally, you cannot incur tax deductible travel expenses for reasons which are personal, but instead you’ll have to incur these travel expenses in the process of providing services to the clients. There is no concrete rule of if a travel costs are business-related. Now, as a result of this particular rule, you cannot claim deductions for the expenses of your everyday commute between your house and the business office. This travel is deemed a personal expense.
Deductible travel expenses require that you travel more than just a few miles from your worksite to service a customer. This will usually mean you’ll have to leave the city where you work or, for smaller towns, its general surrounding area. In general, travel expenses are eligible when you have travelled long or far enough that requires that you must stay at a hotel.
It is permissible to deduct for travel costs incurred while servicing clients away from your tax home. However, if you provide your services at a client’s location for an indefinite amount of time or for over a year, you cannot claim the tax write-off.Successfully claiming travel expense deductions requires recordkeeping. To verify your tax write-offs, you should keep all relevant receipts. And it is also helpful to use a log, notebook, or another type of written record to monitor your expenses.
Confer with your accountant for for any clarifications.
Another chapter in our Self-Employed Tax Guide.
Your company can demonstrate first-class characteristics and gain a tax break in one swift turn. Now let’s review charitable donations further.
Products and ServicesContributions to charitable organizations that are considerable, in that the contribution carries a $250 fair market valuie, should be eligible for tax breaks, help you make room for new, trending inventory, and allow you to make a positive impression on new and present clients that could be marketed through a press release–such as “local company _____ gives 200 winter hats to the needy.” Press releases of this kind have a large appeal.
Another example would be for services which you supply to the public. This is a way to perform community service and also acquire a tax deduction as well. The United Way and organization like this regularly have events where low-income and indigent individuals assemble to receive, en masse, services that they can’t afford or don’t have access to. Your small business’s assistance would be counted as a charitable contribution at fair market value and the organization would give you a receipt stating the value associated with these services for tax purposes. For your purposes, this receipt and any of the materials used could be regarded as tax deductions. Please note these events garner such a large gathering of individuals that through referrals and coverage your business will possibly be seen by numerous persons. Other such examples may include donating scrap material from your finished product. This could be unused vegetables, or a product that doesn’t meet up with your requirements and thus could not be sold. And again fair market value regulations apply.
In compliance with internal revenue service polices, a receipt is mandatory for any single charitable contribution in excess of $250 to be able to claim the tax deduction. This kind of contribution is popular and is easy to maintain. One employed strategy is planned giving. This can be established to regularly be recurrent. As a small business owner, this is a ideal way to plan your annual charitable deduction and maintain your cash reserves, arriving a predictable outcomes. Remember to visit your accountant for suggestions on the Schedule C form. Your business could certainly grow its marketing arm, benefit the community, and acquire a tax break in one single move. Additional info can be located in PUB 526 and the guidelines for disclosure in Publication 1771.
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