Business Taxes

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.

Maintaining Corporation Status: To Reap the Benefits, Follow the Rules

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Businesses often choose to structure as a corporation, because it offers owners the strongest protection from personal liability by treating it as a separate legal entity. But if you’re not operating your business like a corporation, you risk losing the liability security that you count on.

Getting back to the basics
No matter how long you’ve been in business, there are some elemental rules of thumb that corporations should follow to maintain their status:

  • Include the corporation’s name on all company letterhead, checks and invoices
  • Make checks out in the corporation’s name, not yours or another individual’s
  • Avoid mixing personal affairs with corporate business
  • Maintain separate bank accounts and credit cards, and keep careful records of corporate transactions
  • File tax returns and pay any corporate taxes on time

Document everything
In addition, shareholder and director meetings should be held on a regular schedule, with official minutes on the proceedings. Corporate minutes should provide documentation of key financial and legal decisions, such as:

  • Authorization for a substantial loan to or from the corporation
  • Adoption of a retirement plan or approval to make a contribution to an existing plan (for example, a profit-sharing contribution)
  • Issuance of stock
  • Purchase of property or approval of a long-term lease

By observing these formalities, you’ll have solid records on hand if the IRS, a creditor or a company insider challenges critical decisions.

Questions?
Contact Magone & Company today at (973) 301-2300 to learn how we can help you keep your corporate operations on the right track.

PPP Update: Here We Go Again

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The more things change…Well, the more they change. 

Late last week, the House passed revisions to the Paycheck Protection Program (PPP) and if passed by the Senate (looks as though that will happen), will be signed by the President.  Once passed, it will change my prior comments on forgiveness. Barring changes by the Senate, here is the proposal by the House:

  • Increase the time period for usage from 8 weeks to 24 weeks;
  • Reduce the amount to be spent on payroll from 75% to 60%;
  • Allow recipients of PPP loans to also defer their payroll taxes;
  • Allow small businesses full loan forgiveness without regard to rehiring all full-time employees lost due to the pandemic, as long as the business can demonstrate an inability to operate at the same level it did prior to February 15, 2020;
  • Increase the time period to apply for a loan from June 30, 2020 to December 31, 2020; and
  • Increase the repayment timeframe from 2 years to 5 years

What’s forgivable?
Eligible payroll costs
Eligible payroll costs include salaries, wages, bonus, commissions, etc. as well as others previously defined in the Interim Final Rules. However, the most recent guidance states for owner-employees, self-employed individuals and general partners the amounts paid to this group are capped at the lesser of 1) $15,385 ( the equivalent of 8 weeks of $100,000 annual salary) per individual; or 2) the 8 week equivalent of their applicable 2019 compensation. For owner-employees, it includes retirement plan and medical insurance payments to arrive at the $15,385.  For self-employed and general partners these are excluded in arriving at the $15,385.

Observations:  For owner-employees (typically those employed by corporations) the total is capped at $15,385, whereas for non-owner employees the amount included for forgiveness can be greater as it includes employer retirement plan contributions and employer-paid medical insurance in addition to the salary.

There is no defined percentage at this time as to who qualifies as an owner-employee.  More importantly, how will the Small Business Association (SBA) and Treasury apply owner-employee definition for employed family members? In other words, similar to the overall limit of $15,385 for owner-employees, self-employed individuals and general partners owning multiple businesses, will SBA and Treasury limit overall compensation for a family group under attribution rules? I expect there will be further guidance on both points.

Other covered costs
Costs such as mortgage, rent and utility obligations are eligible for forgiveness so long as they were in place or incurred before 2/15/20.  What’s clearer is mortgage and rent obligations include both real and personal property. Unlike payroll, these costs must be incurred or paid during the 8 week covered period of the loan.
The proportion of other covered costs eligible for forgiveness remains at 25% of the forgivable costs.

Timing for forgiveness
The forgiveness application defines two options for calculating covered payroll costs:

  • Covered Period: “…The eight-week (56-day) Covered Period of your PPP loan. The first day of the Covered Period must be the same as the PPP Loan Disbursement Date.
  • Alternative Payroll Covered Period: “Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date.”

The application states how payroll and non-payroll costs paid and incurred during the applicable period may be forgiven. For example, amounts eligible for forgiveness may include pay earned during a pay period, but paid after, or utilities and rent incurred prior to the 8-week period.  However, be sure not to count it twice.  In other words, if the cost is counted as incurred and subsequently paid it counts as an eligible expense once.

Forgiveness is a detail-oriented process to present to your lender, and will require a business to demonstrate how the money was spent via underlying supporting source documentation, such as payroll tax returns or registers, as well as invoices.  The more logical the underlying support the easier the process will go and the more likely all of your eligible costs will be forgiven. Although there continues to be many unanswered questions, we encourage each of you to review your process and documentation.  If you require assistance, please contact us — we’re here to help.

PPP Update: Loan Forgiveness Application Released

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On May 15, 2020, the Small Business Administration (SBA) and the U.S. Treasury Department published a Loan Forgiveness Application for the CARES Act Paycheck Protection Program (PPP). As with other aspects of the PPP, it raises more questions while answering others.

Similar to the PPP loan process, we see additional guidance being released once the public has had an opportunity to digest the highlights below and communicate questions to the SBA.  When this additional guidance will be issued is uncertain, as the first forgiveness applications will not be due for another 2-3 weeks based on receipt of funds on or about April 10, 2020.

Here are some highlights of key topics arising from the text of the Loan Forgiveness Application and its related Instructions (together, the “Application”):

  • Borrowers with a biweekly or more frequent payroll schedule may use an alternative eight-week covered period (the “Alternative Payroll Covered Period”) that begins on the first day of the borrower’s first payroll period following its loan disbursement date.
  • Full time equivalent (FTE) employees are determined based on a 40-hour work week, with an option to treat all employees who work fewer than 40 hours in a week as one-half (1/2) of an FTE.
  • Prepayments of business mortgage interest during the covered period are expressly NOT forgivable. Prepayments of other qualified costs (e.g., employee bonuses) are not addressed, although it appears owner bonuses to absorb a PPP shortfall are not allowed.
  • Qualified non-payroll costs incurred during the covered period that are paid on or before the next billing date (even if paid after the covered period) are forgivable. Payments during the covered period of qualified non-payroll costs that were incurred prior to the covered period (e.g., deferred rent) may also be forgivable, but additional guidance is needed to clarify this point.
  • Reductions in headcount do not include employees who refuse a written offer to come back to work, quit or were fired for cause.
  • Reductions in salary or wages are calculated by comparing the employees’ respective average pay rates during the applicable covered period to their respective average pay rates during the applicable reference period.
  • Borrowers will be required to provide proof to support payroll and non-payroll expenses paid during the eight-week period following the disbursement of PPP funds. The documentation can take of the form of bank statements, payroll records, federal and state payroll forms, payment receipts and/or cancelled checks, lease agreements and statements and utility invoices, as well as health insurance and pension contribution statements.
  • Certification of the borrower’s authorized representative is required, attesting to the accuracy of the information included in the application.
  • The borrower also needs to separately maintain, but not include with the application, proof that no amount of the PPP was used to pay salaries in excess of $100,000 annualized cap.

We strongly recommend reviewing the forgiveness application to understand all the requirements and to ensure you can produce the information when the time arises. As always, we’re here to help, so please reach out to any member of the Magone team.

Stay tuned — it’s going to get interesting.

Traveling for Business and Pleasure: What’s Deductible?

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Business owners who travel out of town on business may choose to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities. Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, may also be deductible.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

Foreign travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

  • The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
  • Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
  • The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip. For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

With smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.

Navigating the new business normal

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No business sector has been spared the fear and uncertainty we’re all currently mired in.

As a firm, Magone & Company has been busy on several fronts — helping business clients seeking financing from the Small Business Administration (SBA) in the form of Economic Injury Disaster Loans (EIDL), applying for the Paycheck Protection Plan (PPP), and getting ahead of the continued business challenges to come.

If this is the new normal for the foreseeable future, here are some tips to help navigate it:

  • Cash is king. If you haven’t already done so, negotiate with landlords and vendors for some accommodation on your payment terms.
  • If you received a PPP loan, bring back your workforce and pay them within 8 weeks of receipt to ensure loan forgiveness. If you have not already done so, establish a separate account for these funds and transfer them into your operating account when paying payroll and related expenses. Keep in mind to reduce the payroll for the fund transfer for any employee making more than $100,000 annually, or $8,333 monthly/$4,166 semi-monthly. If the funds are used to pay payroll in excess of $100,000 they will not be forgiven.
  • If you have an existing credit facility, make certain you are diligent with loan covenants. Making certain to communicate immediately with lenders if you will not be meeting the various covenants — especially reporting covenants for annual financial statements.
  • Update your budgets and cash flow projections. If you don’t usually prepare them, prepare them now! You can’t go by the seat of your pants when negotiating vendor terms, rent and/or mortgage deferral.
  • Stay in touch with your banker. Let them know what changes you have made in your business, how business has been in the last six weeks, and your projections for the remainder of the year.
  • Make informed decisions. As difficult as it is to consider pay reductions, furloughs or terminations, be realistic when reviewing updated budget and cash flow numbers to determine if your business can support your previous headcount.
  • During this period, communicate with customers and vendors. More is better. Let your customers know you’re open for business, and your vendors know you’re still in business and paying their invoices.

The government has stated its desire to replenish the PPP in the amount of $250 billion, so if you missed out on the first round of funding be ready to submit your application for the next round of funding.

Of course, this is general information. Be sure to check with your accountant or financial advisor for guidance specific to your situation. Don’t have anyone to help? We invite you to check in with our team for assistance with any aspect of your business operation or future strategy.