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Do You Qualify for the Home Office Deduction?

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Aside from saving on time, gas and dry cleaning, working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

Does your home office fit the bill?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction — and avoid the tax filing mistakes that can land you in hot water — that part of your home must be one of the following:

  • Your principal place of business.This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.
  • A place where you meet clients, customers or patients.Your home office may qualify if you use it exclusively and regularly to meet with clients, customers or patients in the normal course of your trade or business. Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.
  • A separate, unattached structure used in connection with your trade or business.A shed or unattached garage might qualify for the home office deduction if it’s a place that you use regularly and exclusively in connection with your trade or business.
  • A place where you store inventory or product samples.You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Keep in mind, you must now file a Schedule C on Form 1040 to be eligible for the home office deduction.

Contact the experts

If you prefer not to keep track of your home office expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet. Call Magone & Company today at (973) 301-2300 to learn how we can help ensure that you’re not overpaying your taxes for your qualified home office.

How Owning a Home Can Pay Off at Tax Time

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From building equity to growing roots in a community, home ownership has some significant benefits — including some hefty tax savings.

Uncle Sam offers homeowners several tax advantages to help ease the financial burden of your costly investment. If you’re thinking of moving into a new home or just settling into your dream home, homeownership not only provides a place to call your own. It also can offer some valuable savings along the way.

Discount points. Considering a home purchase? If you plan to stay in the home for at least 10 years, buying mortgage points — or discount points — may be worth your while.

Each mortgage point represents one percent of your underlying loan amount. While they’re an additional upfront cost at closing, they’re also a way to negotiate a lower interest rate. Plus, they’re deductible.

Mortgage interest deduction. As a homeowner, you can deduct the interest you pay on your mortgage loan from your taxable income. This deduction can result in substantial savings, especially during the early years of your mortgage when the interest portion of your monthly payment is typically higher.

For example, if you purchased a home with a mortgage loan of $300,000 and an interest rate of 4%, you would pay approximately $12,000 in interest during the first year. By deducting this amount, you could potentially lower your tax liability by thousands of dollars.

Property tax deduction. Property taxes are calculated by the local government and are typically based on the assessed value of your home. The good news is that you can deduct the amount you pay in property taxes from your taxable income, reducing your overall tax liability.

This deduction is particularly beneficial for homeowners who live in areas with high property tax rates.

Home office deduction. If you use a portion of your home exclusively for business purposes, you may be eligible for the home office deduction. This allows you to deduct all direct expenses and part of your indirect expenses involved in working from home, including utilities, insurance and repairs.

Keep in mind, this deduction is calculated based on the percentage of your home that is used for business purposes. So if your home office occupies 10% of your total square footage, you can deduct 10% of your eligible expenses.

Home equity loan interest. A home equity loan allows you to access the equity you’ve built in your home and borrow the funds as needed. You can typically borrow 80-85% of your total home equity.

Similar to regular mortgage interest, you can deduct the interest you’ve paid — as long as the funds were spent on making home improvements.

Medically necessary home improvements. And speaking of home improvements, medically necessary home improvements that help you, your spouse or dependents live safely in the home may be deductible. These include widening doorways, lowering cabinets, adding railings and more.

Time to take advantage of homeownership tax benefits

There are few times in life you can get money out of your house — rather than pouring cash into it. Tax season is a key opportunity!  At Magone & Company, we’ll help you get the most tax savings as a homeowner. For tax planning guidance, give us a call today at (973) 301-2300.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation. 

Return to the Office: Managing Employee Pushback on In-person Work

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The pandemic fueled a massive work-from-home trend that many non-essential businesses have maintained for the past 18 months or more. But despite the current surge in COVID-19 cases, more and more employers are asking employees to return — causing a fair share of anxiety and fear, especially among the unvaccinated. As employers receive pushback from their teams, what can be done to ease employee comfort and peace of mind around colleagues, customers and clients after an extended hiatus?

A heavy-handed request?

With the FDA fully approving the vaccine beyond emergency use, employers may increasingly be making vaccination a requirement for returning to the office.

As an employer, you have options up to and including termination (in some circumstances) if employees refuse to return to the office or get vaccinated. But will on-site work directly impact or negate your success?

Here are some potential reasons to reconsider a blanket return-or-quit policy.

  • Employees may be genuinely reluctant for legitimate health reasons.
  • It may cause more stress for employees whose lives have already been turned upside down by COVID-19.
  • You risk damaging morale across the workforce.
  • You may have wrongly assessed the legal risks of doing so.
  • It might be harder than expected to recruit replacements for terminated employees.

The first step in formulating a return-to-work strategy is uncovering why your employees are reluctant to stop working from home. Consider conducting a survey, but avoid giving the impression that simply preferring to work at home is a compelling enough reason to allow it.

Coaxing tips

Reassuring employees of your commitment to maintaining a safe environment may help alleviate concerns. Here are some tips to help them get on board:

  • Give a generous heads up. Set the onsite work deadline a month or two into the future to give employees time to adjust and plan head.
  • Have a conversation. If feasible, have one-on-one conversations with employees who express worry about returning to work. They’re more likely to come around if they know you respect their concerns and want to understand them. A reasonable compromise might emerge.
  • Educate, educate, educate. Inform employees about the Centers for Disease Control and Prevention (CDC) workplace safety standards and the scientific basis for those practices, as well as your compliance practices.
  • Enact a policy phase-in period. Instead of setting an all-or-nothing date of return, allow employees to slowly acclimate. You may ask them to return for one or two days a week initially, adding more days over time.
  • Be flexible and fair. Cutting deals with individual employees may create resentment from others. While doing your best to accommodate individual needs, it’s important to ensure that your practices are reasonable for everyone.

Help from Uncle Sam

If you’re considering a mandatory vaccination policy to accompany your return-to-work policy, you may consider incentivizing hesitant employees to get their jab.

One possible solution is to offer paid time off for COVID-19 vaccine appointments. Some employers take this a step further, offering a financial bonus on top of regular pay.

A little compassion goes a long way

No matter how you approach the task at hand, be aware of the many health conditions that may make people more vulnerable to contracting or having an acute case of COVID-19. The CDC’s list includes cancer, chronic kidney disease, COPD, heart conditions, obesity, pregnancy, smoking and diabetes. And some employees with these conditions might worry about COVID-19-related health risks at the workplace, even if they’ve been vaccinated.

In all cases, be sure to review how federal, state and local statutes may impact the approaches you can take.

Found Money: Common Tax Deductions You May Have Missed

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Every year, taxpayers inadvertently leave money on the table by overlooking deductions that are rightfully theirs for the taking. The tax code actually offers many legitimate deductions that are IRS-approved and yours for the taking — as long as you claim them. So when tax season rolls around, be sure you’re getting every penny you deserve.

Mortgage interest

If you own a home and have a mortgage, you can deduct the interest you pay on that loan. When you’re in the early years of your mortgage, your savings can be substantial as the majority of your payments go toward interest. And depending on where you live, you may be able to deduct state and local taxes, including property taxes, which can further reduce your tax liability.

Mortgage points

When you take out a mortgage, you may pay “points” — an upfront fee that lowers your interest rate. These points are usually tax-deductible in the year they are paid, even if you don’t itemize.

Home sale costs

Selling your home? The costs associated with the sale, such as real estate commissions, title insurance and legal fees, can be used to offset the capital gains tax on the sale. This helps reduce your overall tax burden.

Home office deduction

If you use a portion of your home regularly and exclusively for business purposes, you may be able to deduct your direct and direct expenses of running a business from your home office, including rent, utilities, insurance and other home-related expenses. Does your home fit the bill? Find out.

Continuing education and professional development costs

Are you or your dependents pursuing higher education? This deduction covers qualified education expenses for eligible students, allowing you to deduct up to $4,000 of qualified expenses, such as tuition and fees. Parents may also deduct interest payments on certain student loans from qualified lending institutions.

Ongoing training and education related to your current job may also be tax-deductible, even if your employer doesn’t reimburse you. As long as the training maintains or improves your job skills, it can qualify.

Medical and dental deductions

Medical and dental expenses that aren’t reimbursed by your insurance may be deducted to the extent your annual total exceeds 7.5% of your adjusted gross income. But to qualify for medical deductions, you must also itemize. When adding up your medical costs, be sure to include the cost of traveling to your doctor or medical facility for treatment, including your out-of-pocket expenses for gas, oil, repairs, parking and tolls.

Long-term care insurance is also a deductible medical expense. As long as your employer or spouse’s employer doesn’t subsidize the insurance, you may deduct an increasing portion of your premium as you age.

Legal and professional fees

Did you know that fees paid to lawyers, accountants, financial advisors and other professionals can sometimes be deducted? This can include the cost of tax preparation, estate planning and even consulting for starting a new business.

Don’t leave money on the table

The professionals at Magone & Company can help you navigate the deductions and tax credits your entitled to claim. Call us today at (973) 301-2300.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.

Keep More Money in Your Business: Are You Claiming All Eligible Tax Deductions?

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How should I structure my business for tax efficiency? It’s a question we hear often from business owners and entrepreneurs. And the answer? That depends…

Whether you choose to operate as a sole proprietorship, C-corporation, S-corporation, partnership or LLC, there are unique deductions that can lower your taxable income and keep more money in your business. Here’s a quick overview of each:

Sole proprietorships. As a sole proprietor, you have the freedom and flexibility to run your business as an individual. This business structure comes with its own set of tax deductions that can help save you some cash, including:

  • The home office deduction. If you use a portion of your residence exclusively for your business, you can deduct expenses like rent, mortgage interest, utilities and insurance.
  • Self-employment tax. You’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes. However, you can deduct the employer portion of these taxes when calculating your business’s net income.
  • Personal vehicle use. If you use your personal car for business purposes, you can deduct gas, maintenance and insurance or other related expenses.
  • Professional fees. Any expenses considered ordinary or necessary for your business — such as legal or accounting fees — can be written off on your tax return.

C-corporations. Unlike sole proprietorships paying individual income tax, businesses operating as a C-corporation must pay corporate taxes — which can also be beneficial when it comes to deductions:

  • Employee wages and benefits. C-corporations can deduct the full amount of employee salaries, bonuses and benefits as ordinary and necessary business expenses. This deduction not only helps reduce your taxable income but also can help to attract and retain top talent by offering competitive compensation packages.
  • Business travel and entertainment expenses. This deduction includes airfare, hotel accommodations, meals and even some client entertainment expenses.
  • Research and development (R&D) tax credit. If your business invests in R&D activities, you may be eligible for a tax credit that can significantly reduce your tax liability.

S-corporations. S-corporations, also known as “small business corporations,” offer exclusive tax advantages to minimize your liability:

  • Qualified Business Income (QBI) deduction. Under this deduction, business owners can deduct up to 20% of their qualified business income on their taxes.
  • Expenses related to employee benefits. This includes health insurance premiums, retirement plan contributions and other fringe benefits provided to employees. Additionally, S-corporations can deduct business-related expenses such as advertising, professional fees and office supplies.

Partnerships and LLCs. Partnerships and LLCs, also known as “pass-through entities,” allow profits and losses to flow through to the individual partners or members, who then report them on their personal tax returns. Deductions include:

  • Self-employment tax. This one is exclusively available to partners and LLC members. Similar to sole proprietors, these individuals can deduct the employer portion of their self-employment taxes when calculating their taxable income.
  • Expenses related to employee wages and benefits. This deduction covers salaries, bonuses and benefits provided to employees. You can also deduct ordinary and necessary business expenses such as rent, utilities, professional fees and advertising costs.

Boost your bottom line

When it comes to taxes, every dollar saved can add up to a significant amount of cash. Keep in mind, there are other tax deductions that eligible businesses can make, regardless of structure — from charitable donations to health insurance to retirement plan contributions.

We know that’s a lot to take in when you’re just starting out. Choosing (or changing) your entity type is a big decision, so be sure you’re getting professional guidance. Reach out if we can help.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.

6 Reasons the IRS Might Zoom in on Your Business’s Finances

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Did you know that something as simple as a math error or an unsigned form could invite unwanted attention from the IRS? Even if you have no intention to evade taxes or find loopholes, if there’s something on your return that makes the IRS take a second look, an audit of your business may be inevitable.

When it comes to dealing with the IRS, honesty is always the best policy. Learn some of the top audit triggers for businesses — and tips on keeping Uncle Sam at bay.

Excessive deductions. As a business owner, you’re entitled to deduct certain expenses to lower your taxable income. But don’t overdo it. If your deductions appear disproportionately high compared to your income, the IRS might suspect you’re padding your expenses. So what constitutes a legitimate business expense? The cost of goods sold, rent, salaries and business-related travel are generally deductible. The key is to keep accurate records of all your business expenses, making sure every deduction is backed by appropriate documentation like receipts, invoices or mileage logs.

Consistent business losses. It’s normal for businesses to experience losses, but reporting losses year after year can catch the IRS’s attention. They might suspect that your business is more of a hobby — and hobbies don’t qualify for business tax deductions. To avoid this trigger, you must be able to demonstrate what’s called a profit motive. For example, this could be a business plan indicating how and when you expect to become profitable, or records showing that you’re treating your business seriously by maintaining regular hours, keeping accurate financial records or investing in professional development.

Sizeable charitable donations. If you’re not generating a significant amount of income, any large charitable donations can raise eyebrows. Be sure to document every generous gift with related receipts and any supporting materials to help prove you have the best intentions. And remember, contributions must be made to qualified organizations that meet IRS guidelines for your business to claim a deduction.

Home office deductions. In the post-pandemic world of work, more people than ever are clocking in from home. But the IRS knows that even if you’re running your business from home a few days a week, that doesn’t mean you’ll necessarily qualify for the home office deduction. Do your due diligence and ensure your home office fits the bill as your principal place of business, meeting these IRS guidelines.

Large cash transactions. Dealing with wads of cash? The IRS is watching. The agency requires businesses to report cash transactions exceeding $10,000, and all businesses must comply with reporting requirements. It’s not just cash transactions that need to be reported. The rule applies to cash equivalents like cashier’s checks, money orders and bank drafts, too.

Personal use of a work vehicle. If you think you can pick up the kids at school or run errands in your business vehicle, the IRS may be on to you. You may derive tax benefits for your vehicle’s business use, but if you’re also using it for personal business, you’ll need to account for it on your taxes. Keep a detailed record of your mileage and gas costs pertaining to your vehicle’s usage. Keep a calendar to record the purpose and the mileage of each trip, every time you get behind the wheel.

As a business owner, your focus should be on growing your business — not worrying about an audit. Reach out to the CPAs at Magone & Company to ensure you’re on track for IRS compliance.

This information is provided for educational purposes and should not be construed as financial or legal advice. Please consult your accountant or attorney for advice specific to your situation.