In order to claim the home office deduction for 2017, you MUST QUALIFY. To qualify, you are required to meet two tests: 1) regularly used and 2) exclusively used for business.

Regular Use: This test is clear – you use the area on a continuing basis. Occasional or incidental business use does not meet the test.

Exclusive Use: A specific part of a taxpayer’s home is used for business only. There is no requirement that the business portion of a room be physically separated by a wall or partition. But, any personal use of the space, no matter how small, means that it is not exclusive. There are two exceptions: storage space and daycare facility.

You can have several offices. The key issue is to determine your PRINCIPAL PLACE OF BUSINESS.

Your home can qualify as a principal place of business if:

• The office is used regularly and exclusively for administrative or management activities (billing clients, keeping books, ordering supplies, setting appointments, writing reports)
• There is no other fixed location where the taxpayer conducts these activities

A business use of the home deduction is allowed if the taxpayer meets clients in their home. For example, if an attorney works four days a week in his downtown office and 1 day at his home office, he can deduct the home office if he meets with his clients there too. It will qualify for the deduction even though it is not the principal place of business.

The best thing about qualifying your home as the principal place of business is that the miles that you drive from your home to the first business stop are now deductible. If your home is not the principal place of business, your first stop is considered commuting and not deductible.

The easiest way to determine the business percentage is to take the total square footage exclusively and regularly used for business and divide that by the total square footage of your home. Then, you can deduct the following categories on your return for the business percentage:

• Mortgage interest
• Rent
• Property taxes
• Utilities (gas, electricity, garbage)
• House insurance
• Security system
• Home maintenance/repairs
• Depreciation (straight line method over 39 years)

Note: Lawn care/landscaping expenses are not deductible according to the IRS regulations. However, the Tax Court allowed the deduction where the taxpayer’s clients regularly visited the taxpayer’s home office and where the taxpayer was a daycare provider and the children used the lawn as a play area.

If you painted the office area only, that cost would be 100 percent deductible. This is called direct expenses. However, if you paid for garbage for the home, only the business percentage used is deductible which is called indirect expenses.

If your total income is less than your total expenses, your home office deduction for certain expenses will be limited. However, these deductions can carry over the next year. Be aware of that carry over number if this happens in your situation.

If you take depreciation on your home office and you sell your home, you have to “recapture that amount.” What this means is that the amount you deducted for depreciation reduces your ordinary income – this is good. But when you sell your home, that amount will increase your capital gains. The capital gains rate is typically less than your personal income tax bracket.

Years ago, many tax preparers would never take the home office on an LLC, S-Corp or C-Corp return. If they did, it would be a Schedule A deduction as an employee, which is not a great deduction due to the two percent limitations. However, now some preparers are taking the home office for these entities. The only thing I recommend is not to take mortgage interest or real estate taxes. Only take the business portion of rent, utilities and insurance.

When you know the rules, there should be no fear around taking a deduction that you qualify for. So…do you qualify? If so, take the deduction, reduce your taxes, and don’t worry about that “red flag” because if you are audited, there will be no change on your return because you know the rules!

Feel free to reach out to us to determine if your specific situation qualifies for a deduction and/or to determine the impact of the new tax law changes for 2018.

The post The Home Office Deduction: Regular Method appeared first on BlancoDev Bookkeeping.

First—categorize your documents. Examples include past tax returns and supporting documentation, medical information, purchase contracts for large assets, legal matters, employment information, insurance records, property deeds, etc.

Second—determine how you will store your records.  Do you want to archive everything digitally?  Do you prefer to keep paper copies?  When considering how to store your records, think about worst-case scenarios such as fire, burglary, natural disaster, or even something as simple as snooping family members.  Regardless of how you store your records, they should always be easily accessible.

Third—label documents with a “keep until” date.  Refer to the table below for suggested lengths of time to keep your important documents.  Labeling files with a “destroy” date will help ensure that your records will remain organized and current.

Fourth—destroy records that are no longer needed.  To minimize the risk of identity theft, it is very important that you permanently destroy documents.  If the items are paper, shred or incinerate them.  If you have a large amount of shredding, consider taking it to a shredding facility.  Occasionally, community organizations will offer complimentary document shredding on specific dates.  If your documents are stored on a computer, use specialized software to remove files or delete an entire hard drive’s data.  Another option is physically destroying the hard drive if you plan to stop using the computer entirely.

Having a system in place for your record retention will not only make it easier to locate important documents quickly and keep unnecessary documents to a minimum, but it will also give you something priceless—peace of mind.

The post Record Retention…When to Keep, When to Shred appeared first on BlancoDev Bookkeeping.

Jane owned a consulting business. She had two teenage sons that legitimately did work for the business. Some of the tasks they did included vacuuming the offices, emptying trash cans weekly, taking care of recycle and shredding documents, filing receipts, stuffing envelopes and doing yard work outside the office. Jane plans to pay her sons $5,000 each for the year. She was able to shift $10,000 from her higher tax rate to her son’s ZERO tax rate, which saved thousands.  She plans to use this $10,000 to teach her kids about budgeting.

Also, this income shift helped with her personal cash flow because she has the kids help pay for groceries and set aside the money for college. Another thing she plans to do is to put money aside in a Roth IRA for the kids. While the company will need to pay some payroll taxes, the savings far outweigh the cost. Another benefit is that her sons will learn basic knowledge of how she runs her business.  What a GREAT tax deduction for her business – and it was EASY!

Here are some facts and tips around income shifting:

• Your kids can be any age
• They need to keep a time card for work done – documentation is key
• The work needs to be appropriate for the age and skill level
• Depending on the situation, your child may not have to file a tax return
• Consider helping parents or grandchildren who might be in lower income brackets

Depending on your business entity, you can also reduce self-employment taxes with this strategy. For corporations, it is a great way to reduce the taxable income. If you are a sole proprietor, there are some taxes the kids don’t have to pay in their paycheck. And, the IRS allows this, but they don’t volunteer the information to you.

Don’t get this strategy confused with gifting money to your child.  When gifting, there is no work involved.  Also, don’t get this shifting of income mixed up when parents move investment income (interest, dividends and capital gains) to their children.  That is called the “kiddie tax.”

Income shifting works well under specific situations, and not everyone can meet the requirements.  Depending on your situation, you may be able to take advantage of the income shifting opportunity, so feel free to reach out to us if you want to discuss your options.

The post Income Shifting: SAVE Thousands in Taxes appeared first on BlancoDev Bookkeeping.

1. Have patience.

Practicing patience will go a long way when you’re dealing with taxes. Keep in mind that for tax professionals, the months of January through April are as crowded and hectic as a shopping mall in December. Parking is scarce, the sales clerks are doing the best they can, and customers are all trying to shop for presents, party items, and decorations in a very compressed time period.

Be patient with yourself as well. You have the skills to manage your business and do well at your career, but it may not be at organizing paperwork or dealing with numbers. That’s where we can help.

2. The tax stack.

Set aside a permanent place on your desk to be the tax stack. When you receive something in the mail that is tax-related, place it in the tax stack. You’ll save valuable time later not having to look for documents you need.

Similarly, create a folder on your computer for tax items. Under Documents, create a folder called Taxes. Within that folder, create a folder for the tax year, such as 2017 for the year just ended. Move all of your tax-related computer documents into that file.

At your leisure, scan in or take a cell phone picture of the paper documents in the tax stack and place the digital file in the Tax folder. Now you’ll have everything in one place and you’ll be so organized that your tax accountant will be surprised!

3. Catch up.

If your books or records are behind for 2017, get them caught up now to beat the rush. If you wait until the first week of April, you’ll probably need to file an extension. Keep in mind that an extension only grants a paperwork extension; it doesn’t delay any tax payments that are due. If you wait too late, you’ll have the stress of waiting until the last minute, the stress of paying estimated taxes, and the stress of waiting until your return is finally filed.

4. Early bird.

Connect with us or your tax professional early to agree on what services will be offered and to get your documents turned in as soon as you receive them. Getting your things in early will mean less waiting time for preparation and filing. Wouldn’t it be great to be able to say that you’re done with your taxes in February? Your stress will be less, and your energy can be redirected to new projects.

5. Avoid a large tax payment.

The worst thing about tax time might just be writing a big check, possibly with penalties, to the government in April. Instead, plan ahead and spread out your payments for next year by adjusting your payroll withholding or making quarterly estimated tax payments. Spreading your tax payment throughout the year will have you writing a smaller check, if any, in April.

Try these five tips for tax time, and you’ll have more energy for other, more important things in your business.

The post Five Tips to Make Tax Time Painless appeared first on BlancoDev Bookkeeping.

1. Do you have an ordinary and necessary business reason for the entertainment?
2. Did you have a quiet business discussion before, during or after the event? No discussion, no deduction! You’ll need to explain why the entertainment would benefit your business in the future.
3. The discussion must be conducted in a business setting that allows an active business discussion. This could be a restaurant, for example. If the main entertainment is done in a non-business setting such as a bar with loud music or a cocktail party, you must speak about business before or after the event in a business setting.
4. Do you have proof? Keep documentation of who, what, where, why and how much. This documentation must be written within one week of the meeting.

Reasonable, Lavish, and Extravagant: So does the entertainment need to be reasonable? Can you get in trouble if the entertainment is lavish and extravagant? Actually, no. The only rule is that it is must be an ordinary and necessary expense. There are no parameters on how much you can or cannot spend. In fact, a self-employed business person spent over $60,000 on entertainment (rock concerts). His entertainment expense was disallowed – not because of the amount – but because he did not have documentation to support the deduction.

The IRS looks at how much business was generated as a result of the entertainment. There is no rule regarding the number of times you may entertain a potential client, but a wise business person would limit the frequency within reason. But then again, what is reasonable? Taking your spouse out on a date once a month would not qualify. However, you could consider taking your mother out if she is a potential client/customer who will buy services or products from you – nothing wrong with that!

50 percent vs. 100 percent Deductible: Almost all entertainment is deductible at 50 percent, meaning that if you spend $500, you receive only a $250 deduction. Here’s the good news – any entertainment that revolves around a sporting event is fully deductible; that includes any ticket or sports event, only if:

• It is organized for the primary purpose of benefiting a 501(c)3 charity
• It donates all the net proceeds to a 501(c)3 charity
• It uses volunteers to put on the event

So a PGA tour event would be fully deductible because they donate the net proceeds to charity, but a ticket to a college or high school sports event does not qualify since that usually goes toward the coaches’ pay. Other events that may qualify for a 100 percent deduction are tennis, skeet shoots, ski tournaments and fishing tournaments, just to name a few.

Another thing to keep in mind is that generally, you will get a better deduction if you list an expense to a sporting event as a business deduction rather than a charitable donation. For the contribution to a charity, you can deduct only the amount that exceeds the benefit you received from the item (the value of the entertainment).

Additional fully deductible entertainment expenses are employee holiday parties, annual picnics or summer outings. For example, a service corporation rented a powerboat and was able to deduct 100 percent of the $41,000 expense since it did not discriminate between the owners and employees and it was deemed ordinary and necessary.

*Note: Create two accounts in your accounting system’s chart of accounts – one for 50 percent and the other for 100 percent deductible entertainment.

Be strategic: Plan a business meeting for a substantial amount of time (say two hours) and then go skiing. You cannot deduct your personal skiing with your family (unless your spouse is active in the business), but you can deduct the entertainment with people who you plan to do business with. After skiing, resume your meeting for another two hours and one minute.

The post Entertainment Deductions: Half the Fun? appeared first on BlancoDev Bookkeeping.

General Rule: If you pay someone more than $600 in a calendar year for services, not material/product, then you are required to provide a 1099 showing the amount you paid. One tip is to collect a W-9 at the time of payment so you know if the business is a sole proprietorship, LLC or corporation. If it is a corporation, then no 1099 is required. The 1099 is due January 31^st. The 1096 form is not required if you E-File. If you file by paper, it is required.

Addressing the 1099: If the person you paid uses their Social Security number as a tax ID number, then the person’s full name must be on the first line of the 1099. If you list the business name by mistake, then you will receive a letter from the IRS saying that the name and ID do not match. Then the IRS may require you to withhold money from future checks.

Reimbursed Expenses: If you pay a subcontractor for expenses incurred, do NOT include that amount in box 7. If you receive a 1099 from someone with reimbursed expenses, like travel or postage, don’t worry. Show the full amount of income on your tax return and then show the full amount of expenses and it will net out the same. If you lower the 1099 amount on your return to “correct” it, that will trigger an audit.

Strict Classification Rules: If you hire a subcontractor, be sure that the state won’t deem the person as an employee. A few indications to strengthen your case are:

• You have a contract agreement between parties.
• The subcontractor invoices the business.
• The subcontractor has a business license. The business does not tell the contractor WHEN to perform the work or HOW to do their job. The subcontractor uses their own equipment and materials.
• The subcontractor is available to be hired by other companies.

Remember, there are fines, penalties, and back taxes at the federal and state levels to pay if a worker is misclassified. Here is a link to a 20-factor test to determine if the worker is an employee or a contractor: https://www.mdc.edu/hr/Operations/AFS/IRSFactorTest.pdf

Penalties: If you miss the deadline and file within 30 days, the penalty is $50. If you file after 30 days of the missed deadline, the penalty is $100. If you file after August 1, or do not deliver, or have an incorrect name and taxpayer identification number combination, the penalty is $260. Intentional disregard results in a penalty of $530.

Extensions: Extension on E-Filing –Form 8809: you will receive an automatic 30 day extension as long as you request prior to the deadline of January 31^st. You can find the form on the IRS website and either fax or mail it in.

• Fax: 1-877-477-0572
• Mail: Internal Revenue Service, Attn: Extension of Time Coordinator, 240 Murall Drive, Mail Stop 4360, Kearneysville, WV 25430

Extension on Recipient Delivery: there is no specific form; you will need to send a letter to the IRS. It is not an automatic extension. If granted, you will be provided with an extra 30 days for delivery; however, if not granted, you will still receive a 10-15 day grace period.

1099-K Rules:  There has been a lot of confusion regarding the new 1099-K rules. All merchant companies that process credit card payments are required to issue 1099-Ks to the seller. It can be for one transaction for any amount. The main reason for this law is to capture payments going through eBay, PayPal and Amazon. However, now the common business owner will get a 1099-K as well if their clients or customers pay them with a credit card. Here is the confusing part: businesses will provide a 1099-MISC for payments made with a check or cash and the merchant company will process 1099-K’s made with a credit card. Let’s give some examples to clarify:

Example 1 – You pay a subcontractor $700 for services. If you paid them with a check, you issue them a 1099-MISC.

Example 2 – You pay a subcontractor $700 with a check and $800 with a credit card. You will issue them a 1099-MISC for $700 and the subcontractor’s merchant company will give them a 1099-K for the $800.

Example 3 – You pay a subcontractor $300 with a check and $800 with a credit card. The safe answer is to still issue a 1099-MISC for $300 because the combine total payment to the subcontractor (check and credit card) was over the $600 amount.

Oddball Clarifications: If the contractor is NOT a US citizen and lives in another country, have them fill out a W-8BEN and keep this on file. Prepare a 1099, but there will be no tax ID number on the form. If questioned by the IRS, show them a copy of the W-8BEN. There are no withholding requirements for those that work outside the United States.

If a foreign contractor performs services in the U.S., there are 3 conditions that need to be met:

1. The nonresident alien performing labor services is present in the U.S. for less than 90 days during the tax year.
2. The total pay does not exceed $3,000.
3. The pay is for labor performed for an office or place of business maintained in a foreign country.

If any of the above conditions are not satisfied, a principal has to report and withhold income of a foreign independent contractor. However, the withholding can be avoided if the country of the contractors has a tax treaty with the U.S.

If the 1099 comes back to you undelivered, keep a copy for your records to show the attempt. If the contractor has already performed their services and you cannot get the contractor to fill out the W-9, keep a log of the attempts to contact them by phone, email or letter. The IRS has penalties for not sending the 1099 and if you show intent, hopefully there will be grace in the penalties.

If you find you made a mistake on the amount or tax ID number, you can always correct the form and re-send it by checking the “Corrected” box.

Corporations do NOT get 1099s, but some people are confused if they should send a 1099 to LLCs. Send a 1099 to single-member LLCs and multi-member LLCs (partnerships). 1099s are required to ALL attorneys regardless of their entity type or amount paid!

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