FS-2006-25, September 2006
WASHINGTON — Overstated adjustments, deductions, exemptions and
credits account for up to $30 billion per year in unpaid taxes,
according to IRS estimates.
In order to educate taxpayers regarding their filing obligations,
this fact sheet, the fourth in a series, explains the rules for
deducting home office expenses.
Home Office Deduction: Basic Requirements
Generally, expenses related to the rent, purchase, maintenance
and repair of a personal residence may not be deducted as a business
expense. However, taxpayers who use a portion of their home for
business purposes may be able to take a home office deduction if
they meet certain requirements. Expenses that may be deducted
include the business portion of real estate taxes, mortgage
interest, rent, utilities, insurance, painting, repairs and
depreciation. Note: The amount of depreciation deducted, or that
could have been deducted, decreases the basis of your property.
In order to claim a deduction for that part of a home used for
business, taxpayers must use that part of the home:
-
Exclusively and regularly as their principal place of business,
as a place to meet or deal with patients, clients or customers
in the normal course of their business, or in connection with
their trade or business where there is a separate structure not
attached to the home; or
-
On a regular basis for certain storage use such as inventory or
product samples, as rental property, or as a home daycare
facility.
In addition, taxpayers working as employees can claim this
deduction only if the regular and exclusive business use of the home
is for the convenience of their employer and the portion of the home
is not rented by the employer.
“Exclusive use” means a specific area of the home is used only
for trade or business. “Regular use” means the area is used
regularly for trade or business. Incidental or occasional business
use is not regular use.
Non-business profit-seeking endeavors such as investment
activities do not qualify for a home office deduction, nor do
not-for-profit activities such as hobbies.
Example: An attorney uses the den in his home to write legal
briefs or prepare clients’ tax returns. The family also uses the den
for recreation. The den is not used exclusively in the attorney’s
profession, so a business deduction cannot be claimed for its use.
These requirements are discussed in greater detail in Publication
587, Business Use of Your Home.
Computing the Amount of Home Office Deduction
Generally, the amount of the deduction depends on the percentage
of the home that is used for business. The deduction will be limited
if gross income from the business is less than the total business
expenses.
A taxpayer can use any reasonable method to compute business
percentage, but the most common methods are to:
-
Divide the area of the home used for business by the total area
of the home, or
-
Divide the number of rooms used for business by the total number
of rooms in the home if all rooms in the home are about the same
size.
Taxpayers may not deduct expenses for any portion of the year
during which there was no business use of the home. If the gross
income from business use of the home is less than the total business
expenses, the deduction for certain expenses is limited. Publication
587 includes examples, worksheets and additional information on
computing the allowable deduction.
Personal Expenses Are Not Business Expenses
It is important for taxpayers to realize that business expenses
may be deducted only if they are ordinary and necessary for the
particular type of business. Personal, family and living expenses
are not deductible under any circumstances. A common error is to
deduct expenses for a portion of the home that is not used regularly
and exclusively for business.
Example: The basic local telephone service charge, including
taxes, for the first telephone line into a home is a nondeductible
personal expense. However, charges for business long-distance phone
calls on that line, as well as the cost of a second line into a home
used exclusively for business, are deductible business expenses.
The IRS encourages taxpayers to familiarize themselves with the
requirements before taking a home office deduction and to keep
complete and accurate records to substantiate deductions. According
to IRS research, understated business income, including
underreported receipts and overstated expenses, is an area where
compliance is a concern. In addition to increasing outreach and
education in these areas, the IRS will also be focusing enforcement
efforts, including examinations, on these issues.
Source:
www.irs.gov/newsroom
Keyboard Shortcuts in QuickBooks:
Ctrl+A
= Opens the Chart of Accounts
Ctrl+T
= Memorized Transaction List
Ctrl+M
= Memorize the current transaction
Ctrl+W
= Opens the Write Checks window
Ctrl+I
= Opens the Create Invoice window
Ctrl+J
= Opens the Customer:Job List
Ctrl+P
= Prints the selected report
Ctrl+R
= Opens the Register of the selected account, vendor or
customer
Ctrl+F
= Opens the Find Window
Ctrl+Q
= Quick Report of selected account, vendor or customer
Ctrl+Del
= Delete a line item
Ctrl+Ins
= Insert a line item
Ctrl+D
= Delete the selected transaction
(cannot be undone!)
Enter "+,–,*,/,=" in any amount field to activate the built-in
calculator
In any date field (with the date highlighted) enter the following:
+
= advances the date by one day
–
= decreases the date by one day
m
= changes the date to the first day of the month, keep entering
m
and it
will decrease by month
y
= changes the date to the first day of the year, keeping entering
y and it
will decrease by year
w
= decreases the date by one week
How frequently you do your accounting can affect your company's
survival rate:
|
FREQUENCY |
SURVIVAL RATE |
|
At Least Monthly |
79.7% |
|
Quarterly |
71.5% |
|
Half-yearly |
49.9% |
|
Annually |
36% |
How good your records are kept can also affect your company's
survival rate:
|
ACCOUNTING RECORDS |
SURVIVAL RATE |
|
Excellent/Good |
63% |
|
Average |
49.8% |
|
Inadequate |
20.1% |
|
Poor/Non-existent |
2.5% |
Source: The Small Business Book; Robert Hamilton and John English
How
to develop the saving habit
Do you save regularly? Developing a saving habit is one of the
best things you can do for your financial health. Yet studies show
that the savings rate today is lower than it’s been for
generations.
There are three good reasons to save:
Most
important, building up savings while you work can mean the
difference between a comfortable retirement and scraping by on
social security benefits.
If you’re not a regular saver, how do you start? Here are some
tips:
-
First,
remember the old adage that “what gets measured gets managed.” Set
specific goals, whether it’s to save so many dollars per month or
a set percentage of your earnings. Then track your progress
towards your goal at frequent intervals.
-
Save
automatically wherever possible. For example, sign up for payroll
deductions into your company 401(k) plan, or arrange for a portion
of every paycheck to go straight into a savings account at your
bank. Saving is much easier if you never get your hands on the
money.
-
Track
what you spend. Keep records for a month or two so you know where
your money is going. Then figure out where you can cut back to
generate some savings.
-
Start
by setting small, manageable goals. For example, give up one
espresso coffee per day, or make your own lunch two days each week
instead of eating out. Or think up one creative, low-cost way to
have fun with family or friends each week. Put aside the money you
save so you can see the results. Then gradually expand your goals
as you see your successes.
Remember, saving leads to other financial benefits. The more you
save, the less you borrow. The less you borrow, the less interest
you pay and the more money you can add to your savings. So start
your savings program now to become a well-seasoned saver by the
beginning of the new year!
Do your employees appreciate their
fringe benefits?
At
this time of year, you’re probably putting together your business
budget for 2007. As you work on the payroll numbers, it’s always
surprising how much the cost of fringe benefits adds to base
wages. And if you offer health insurance to your employees, that
number has probably been increasing even faster.
What’s
disappointing is that most employees have no idea how much the
company pays on their behalf. That’s why you should consider
preparing a personalized statement for each employee, showing the
value of their company-provided fringe benefits.
Although it may sound complicated, your accountant or bookkeeper
should be able to produce the numbers quickly and easily.
-
Begin
with premiums you pay for health, life, and disability insurance.
Include costs you pay for any other benefits, such as parking or
transit passes.
-
Add
in any dollars you contribute for the employer match in your
401(k) plan. Or if you offer a profit sharing plan, include those
contributions.
-
Include
the company’s share of Medicare and social security taxes paid for
each employee. Employees would have to pay that themselves if they
were self-employed. You can also include costs for unemployment
and workers' compensation insurance if you want to be really
precise.
-
Conclude
the statement by listing the hours of paid vacation or sick leave
that you grant.
The
end result is likely to be an impressive total for each employee.
The statement should give your employees a new appreciation for
their overall salary package. It’s also a useful tool when you
discuss salaries.
Don’t
overlook low-cost ways to boost your existing benefits. If you’re
in an urban area, consider offering free transit passes. You may
get a special deal from your local transit authority, and the
benefit will appeal especially to your lower-wage employees. Even
better, consider offering no-cost benefits such as flex-time. If
it works with your business, consider half-day Fridays in the
summer months, with slightly longer hours on other weekdays.
Employees will love arrangements that simplify their lives or give
them longer weekends.
A
tax professional gives you more than a tax return!
At this time of year, advertising for tax preparation software is
everywhere. You may be asking yourself, "Why do I need a tax
professional when sophisticated tax software is readily available?
After all, tax software contains all the latest tax changes and
automatically checks for arithmetic errors."
What tax software can do. Here's why tax software may not
maximize your tax-saving opportunities: A piece of software is only
as good as the data it has to work with. You can enter all your
numbers for this year's finances. The software will calculate your
tax bill without error. But it can't possibly understand your
complete financial situation in the way that a tax professional can.
That's especially true if the advisor has worked with you for some
years.
What a tax pro can do. A tax professional can add that
essential ingredient: long-term planning based on a knowledge of you
and your goals. Perhaps your daughter will be going to college in
seven years and you need to start planning now. Perhaps your elderly
parent is becoming infirm and you may need to provide dependent
care. A skilled professional can factor all these things into a
multi-year tax strategy that fits your specific circumstances. He or
she can provide the longer-term planning that is an essential part
of good tax management.
Record Retention Guide For Businesses:
I
n business, good recordkeeping is essential not
only for tax reporting purposes but also for the
success of the company. The guidelines below give
retention periods for the most common business
records. Call us if you'd like more information or
assistance with your record retention program.
|
Accounting Records |
Retention Period |
|
Accounts payable |
7 years |
|
Accounts receivable |
7 years |
|
Audit reports |
Permanent |
|
Chart of accounts |
Permanent |
|
Depreciation schedules |
Permanent |
|
Expense records |
7 years |
|
Financial statements (annual) |
Permanent |
|
Fixed asset purchases |
Permanent |
|
General ledger |
Permanent |
|
Inventory records |
7 years
(Permanent
for LIFO system) |
|
Loan payment schedules |
7 years |
|
Purchase orders (1 copy) |
7 years |
|
Sales records |
7 years |
|
Tax returns |
Permanent |
| |
|
|
Bank
Records |
Retention Period
|
|
Bank reconciliations |
2 years |
|
Bank statements |
7 years |
|
Cancelled or substitute checks |
7 years
(Permanent
for real estate purchases) |
|
Electronic payment records |
7 years |
| |
|
|
Corporate Records
|
Retention Period
|
|
Board minutes |
Permanent |
|
Bylaws |
Permanent |
|
Business licenses |
Permanent |
|
Contracts – major |
Permanent |
|
Contracts – minor |
Life + 4 years |
|
Insurance policies |
Life + 3 years
(Check
with your agent. Liability for prior years can
vary.) |
|
Leases/mortgages |
Permanent |
|
Patents/trademarks |
Permanent |
|
Shareholder records |
Permanent |
|
Stock registers |
Permanent |
|
Stock transactions |
Permanent |
| |
|
|
Employee
Records |
Retention Period
|
|
Benefit plans |
Permanent |
|
Employee files (ex-employees) |
7 years
(Or
statute of limitations for employee lawsuits)
|
|
Employment applications |
3 years |
|
Employment taxes |
7 years |
|
Payroll records |
7 years |
|
Pension/profit sharing plans |
Permanent |
| |
|
|
Real Property Records |
Retention Period
|
|
Construction records |
Permanent |
|
Leasehold improvements |
Permanent |
|
Lease payment records |
Life + 4 years |
|
Real estate purchases |
Permanent |
Record Retention Guide For Individuals:
Good recordkeeping can cut your taxes and make your
financial life easier.
How long to keep records is a combination of
judgment and state and federal statutes of
limitations. Since federal tax returns can generally
be audited for up to three years after filing and up
to six years if the IRS suspects underreported
income, it’s wise to keep tax records at least seven
years after a return is filed. Requirements for
records kept electronically are the same as for
paper records.
Generally, follow these recommended retention
periods for various documents:
|
Record |
Retention Period |
|
Tax returns (uncomplicated) |
7 years |
|
Tax returns (all others) |
Permanent |
|
W-2s |
7 years |
|
1099s |
7 years |
|
Cancelled or substitute checks supporting tax
deductions |
7 years |
|
Bank deposit slips |
7 years |
|
Bank statements |
7 years |
|
Charitable contribution documentation |
7 years |
|
Credit card statements |
7 years |
|
Receipts, diaries, logs pertaining to tax return
|
7 years |
|
Investment purchase and sales slips |
Ownership period + 7 years |
|
Dividend reinvestment records |
Ownership period + 7 years |
|
Year-end brokerage statements |
Ownership period + 7 years |
|
Mutual fund annual statements |
Ownership period + 7 years |
|
Investment property purchase documents |
Ownership period + 7 years |
|
Home purchase documents |
Ownership period + 7 years |
|
Home improvement receipts and cancelled checks
|
Ownership period + 7 years |
|
Home repair receipts and cancelled checks
|
Warranty period for item |
|
Retirement plan annual reports |
Permanent |
|
IRA annual reports |
Permanent |
|
IRA nondeductible contributions (Form 8606)
|
Permanent |
|
Insurance policies |
Life of policy + 3 years
(Check with your agent. Liability for
prior years can vary.) |
|
Divorce documents |
Permanent |
|
Loans |
Term of loan + 7 years |
|
Estate planning documents |
The difference between
the short and long income tax forms is simple.
If you use the short
form, the government gets your money.
If you use the long form,
the CPA gets your money.
Ever wonder why they
call it Form 1040?
For every $50 you earn, you get $10, they get $40.
.
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