Ebiz Tax Tips

Tips on Taking the Home Office Deduction

Kristine — Sun, 19 Feb 2012 20:02:55 +0000

If you have an online business, chances are you work from home. The number of people telecommuting from home and starting online businesses is growing, which means the number of people using their home for business is growing as well. Since we’re at the start of the 2012 tax season, I thought now would be a good time to review some tips on taking the home office deduction.

What is the home office deduction?

If you qualify, the home office deduction allows you to turn certain personal expenses into business expenses. According to the following video, expensese that qualify for the home office deduction include:

Rent or mortgage interest
Utilities
Insurance
Real estate taxes
Repairs & maintenance

Home Office Deduction

Find out from IRS experts what expenses are deductible, and what is not, in a home office.

Who Qualifies for the Home Office Deduction?

In order to qualify for the home office deduction, you must use the space regularly and exclusively for business. The amount you can deduct depends on the percentage of your home used for business. For example, if you use a spare bedroom that is approximately 8% of your home, then you can deduct 8% of your mortgage interest, real estate taxes, etc. The following video created by the IRS is a great introduction to the home office deduction rules.

Tax Tips: Home Office Deduction

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.

Regular and Exclusive Use Defined

Defining regular and exclusive use for purposes of the home office deduction can be confusing. Barbara Weltman of WSJ.com explains that the space must be available 24/7 for business and cannot be used by you or your family for personal reasons at any time during the day or night. Thus, if you use a TV room as an office during the day and your family watches TV there in the evening, you fail the exclusive-use test.

Tips to Help You Claim a Home-Office Deduction – Wall Street Journal

Tips to Help You Claim a Home-Office Deduction – Wall Street Journal By BARBARA WELTMAN. A portion of personal expenses for your home can be turned into a business deduction — if you meet certain rules. To claim a home-office deduction, you must use the space in your residence as a principal place of business, as a place to meet or deal with customers on a regular basis, or as a separate structure used for the business. You also must do the above regularly and exclusively for business…

Avoid these Common Mistakes when taking the Home Office Deduction

As with any tax deduction, you need to be careful that you follow the rules to avoid being audited or having the deduction taken away from you. In the following article Brett Hirsh warns of common mistakes made regarding the home office deduction:

Home office deductions can be dangerous – Martinsburg Journal

Home office deductions can be dangerous – Martinsburg Journal. Unfortunately, many who claim the home office deduction do so in error. The frequency with which this deduction is erroneously claimed makes it one of the first deductions the IRS questions. This article will help owners ensure their home office passes muster if and when it is questioned…

Home Office Tax Calculator

If you think you may qualify for the home office deduction, check out this calculator to estimate how much you can deduct. You’ll need to enter information about your home (square footage, number of rooms, etc.) as well as information about your business (income and expenses) in order to use this tool.

Resources

The IRS website is actually a great resource for researching the home office deduction and other tax topics. Here are a few great resources to check out:

Publication 587
Home Office Deduction
Working From Home? Consider the Home Office Deduction
Home Office Deduction Reminders

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Social Security Payroll Tax Cut Extended for Remainder of 2012

Kristine — Sun, 19 Feb 2012 18:56:51 +0000

You may have heard that the 2% Social Security payroll tax cut was extended through the end of February in a last minute move by Congress last year. Well, surprisingly Congress made a quick and early (for them) decision to extend the tax break through the end of 2012.

If you’re not familiar with the payroll tax cut here’s a quick overview:

In 2010, Congress passed a payroll tax holiday which reduced the amount of Social Security tax paid by employees by 2%.

As an employee, you are aware that you have taxes withheld from your paycheck. A portion of those taxes are for federal, state and local income taxes (depending on where you live, you may not have all of these), but a large portion of your tax withholding is for Social Security and Medicare, also called FICA. FICA taxes are paid by both employees and employers. In 2010, the amount was 6.2% for Social Security (on income up to $106,800) and 1.45% for Medicare, for a total of 7.65% each.

At the end of 2010, the amount of Social Security tax for 2011 was reduced by 2% to 4.2% for employees only (employers are still required to pay 6.2%). No changes were made to Medicare or to federal, state or local income taxes.

This 2% payroll tax reduction was created to help boost the economy and was intended to be for 2011 only. However, since the economy has grown slower than expected in 2011, President Obama called for an extension into 2012. After long debate and many delays Congress extended the payroll tax cut for the first two months of 2012. On February 17, 2012, they extended the tax break again, this time for the remainder of 2012.

You can read more about the 2012 payroll tax cut here:

NBC Politics – Congress passes payroll tax cut extension

nbcpolitics.msnbc.msn.com2/17/12

Updated at 2:58 pm ET – By a vote of 60 to 36, the Senate passed a bill Friday to keep the Social Security payroll tax at its lower 4.2 percent rate and to extend unemployment benefits. Republican leaders were split on the …

There has been a lot of concern that the payroll tax cut will hurt Social Security as you can see in the following articles:

Payroll Tax Cut: Tom Harkin Slams President, Democrats For …

www.huffingtonpost.com2/17/12

WASHINGTON — Sen. Tom Harkin slammed his own president and party for hatching the payroll tax cut deal that is expected to pass Congress Friday, saying he’s “embarrassed” the Democrats are pushing a measure that begins the “unravelling of Social Security.

Hoyer and Harkin Come Out Against Payroll Tax Extension Bill …

crooksandliars.com2/18/12

Tom Harkin (Iowa) have come out with strong criticism of the bill that would extend the payroll tax holiday that was started in 2011. Hoyer says he will vote against the bill because it cuts pensions for government workers: …

Woolsey, Thompson reject bill to cut payroll tax | Watch Sonoma …

www.watchsonomacounty.com2/18/12

The North Coast’s two Democratic Congress members resisted the tide of bipartisan support for renewing a Social Security payroll tax cut Friday, voting against the main legislation on President Barack Obama’s jobs agenda.

What are your thoughts on the payroll tax cut? Is it more important to keep taxes low while the economy recovers, or is it more important to keep Social Security solvent?

What if You Receive Two Form 1099s Reporting the Same Income?

Kristine — Wed, 25 Jan 2012 15:11:57 +0000

One of my concerns about the new 1099-K form is that people may receive two 1099s for the same income. For example, lets say you are a graphic-designer and you use PayPal to process payments you receive.

You could receive a 1099-K from PayPal (assuming you earn over $20,000 and you have more than 200 transactions). In addition, you could receive a 1099-MISC from one or more of your customers.

The problem is that both 1099 forms are reporting the same income. So you could earn $40,000 in any given tax year, and receive 1099 forms reporting $60,000!

How do you report your income on your tax return if this happens? There’s actually a pretty easy solution.

First, report the total income reported on 1099-K forms you received on line 1a of Schedule C (note: for 2011 only, you will use 1b instead of 1a to report 1099-K income). Second, report all income reported on 109-MISC plus all income you earned that was not reported on a 1099 on line 1b.

If you find that your income was double reported you can adjust your reportable income by entering a negative item for the amount that was double reported on line 6 – Other Income.

Using the same example above, let’s assume that your gross income for 2011 was $40,000. You received a 1099-K from PayPal for $25,000, a 1099-MISC from your largest customer for $10,000, and several more 1099-MISC forms adding up to $13,000. You also earned $5,000 that was paid to you directly (cash or check), that you did not receive either a 1099-K or 1099-MISC form for.

You will report:

Line 1a: $25,000 (from the 1099-K you received from PayPal)
Line 1b: $23,000 (from the 1099-MISC forms you received) + $5,000 (any income not reported on a 1099)

Total Gross Receipts: $53,000

As you can see your total gross receipts are too high because you had income that was double reported (on both a 1099-K and 1099-MISC). To correct this, enter a negative number on line 6 – Other Income as follows:

Line 6: Other Income ($13,000)

Your gross income (line 7) after making this adjustment will be $40,000.

By reporting your income this way your tax return will match the IRS’ records of 1099s you received, and you will not be over-reporting your income.

Popular Tax Breaks You Won’t See in 2012

Kristine — Fri, 20 Jan 2012 14:22:41 +0000

I found a great article on Kiplinger.com discussing several tax breaks that expired at the end of 2011.

The biggest surprise on this list is the lack of an AMT patch. Congress has passed a patch every year for the past few years, and I’m surprised not to see one this year. This will be an unpleasant surprise for many people this year as I expect millions of taxpayers will pay the AMT for the first time due to the lower exemption amounts.

I’m also disappointed to see the deduction for donations made directly from IRAs disappear.

You’ll face a higher tax bill next spring if Congress doesnt act to revive a series of tax breaks that expired Dec. 31, 2011. Among the breaks that Congress didnt extend in all the sturm-und-drang over the payroll tax holiday are:

Alternative minimum tax patch

The AMT is a parallel tax system created more than 40 years ago to prevent excessive use of tax breaks by the very wealthy, ensuring they pay at least some tax. Taxpayers whose income exceeds the AMT exemption in 2011, $48,450 for individuals and $74,450 for married couples filing jointly must calculate both regular tax and AMT liability and pay the larger of the two amounts. But exemption levels have, at least tentatively, dropped to $33,750 for individuals and $45,000 for married couples filing jointly in 2012, which will expose 31 million taxpayers to the higher AMT this year, according to Tax Policy Center estimates.

Deduction for direct IRA payouts to charity

Retirees who are 70 or older could direct up to $100,000 of their IRA distributions directly to charity and exclude the donated amounts from taxable income. Not anymore in 2012, unless Congress reinstates this deduction.

Write-offs for state sales taxes

This particularly significant expired break allowed you to deduct either state income tax or state sales tax from your federal taxable income.

Teachers supplies deduction

Teachers, even if they didnt itemize, were able to take an additional deduction of up to $250 for classroom supplies they paid for out of their own pockets.

Tuition and fees deduction

Taxpayers (up to certain income limits) who can’t claim the more advantageous American Opportunity or Lifetime Learning credits can still reduce taxable income by up to $4,000 for tuition and other qualifying educational expenses — if, of course, Congress reinstates this break.

Mortgage insurance premium deduction

Homeowners who dont exceed certain income limits had been able to deduct premiums they pay on mortgage insurance policies issued after 2006 on their primary residence.

Personal tax credits applied against the alternative minimum tax

Credits such as the tuition and dependent-care credits were allowed to offset your AMT liability.

We think Congress will manage to revive these breaks — eventually — with the exception of the transit subsidy, whose chances are no better than 50-50. But you may spend much, if not all, of 2012 in a state of uncertainty. The political atmosphere in Washington is so toxic that it is doubtful the parties will reach agreement before the end of 2012, when Congress will have to take up the question of extending the Bush tax cuts.

If lawmakers wait too long, in 2013, we may have a repeat of the 2006 and 2010 filing seasons, when many taxpayers had to wait for the IRS to reprogram its computers before they could file their tax returns. In both cases, the start of the filing season was delayed for many until early to mid February.

Sneak preview: New tax benefits — as well as burdens — for 2012

via kiplinger.com

Good Reads: Interesting Tax Posts This Week

Tax Carnival #95: Tax Filing Season 2012

Kristine — Wed, 18 Jan 2012 14:06:36 +0000

For filers who do their taxes the old fashioned way, the tax filing season began a couple of weeks ago — as long as they had all the necessary 2011 statements to fill out their paper forms.

Taxpayers who prefer to to e-file can hit “enter” tomorrow, Jan. 17. That’s when the IRS starts accepting electronically filed returns and also opens the door to Free File 2012.

But regardless of how you submit your return, the tax laws and rules are the same. Tax Carnival #95: Tax Filing Season 2012 looks at some of the issues taxpayers might encounter.

One of the first considerations is timing.

Tim asks the key question: When Are 2011 Taxes Due? Tax Deadline in 2012, an update on when the 2011 taxes are due. “Hint…they’re not due on April 15th,” says Tim, who posted the answer at Faith and Finance.

Continue reading Tax Carnival #95: Tax Filing Season 2012

via feedproxy.google.com

Thanks to Kay Bell for another great tax carnival. If you’re looking to get up to speed on taxes before you file your return, the tax carnival is a great resource.

Online Business Owners Prepare for IRS Form 1099-K

Kristine — Mon, 09 Jan 2012 00:04:15 +0000

I’ve mentioned the new 1099 reporting requirements a couple of times already, but now that it’s tax season and the new IRS Form 1099-K is going to finally make its debut, it’s a good time to review the new 1099 rules.

New 1099 Reporting Rules

First, some background on the new 1099 reporting rules… A few years ago the Housing Assistance Tax Act of 2008 was passed as part of the Housing and Economic Recovery Act of 2008. While the main purpose of this new tax law was to provide much needed housing reform, there were other purposes included in the bill, such as the need to improve voluntary tax compliance by small business owners, more specifically, online business owners.

The IRS realizes that there are millions of dollars in tax revenues that are lost due to unreported transactions (known as the tax gap). The majority of these unreported transactions are believed to be online transactions. The purpose of this bill is to try to reduce the tax gap by forcing credit card processors and third party settlement organizations to report certain transactions to the IRS.

Introducing the 1099-K

In plain English, the IRS wants credit card and third party payment processors such as PayPal, eBay and Amazon, to report transactions made by their customers. This means that if you accept credit card payments for goods or services that you sell, or if you use PayPal or another third party to accept credit card payments for goods or services that you sell, you could get a 1099-K this year.

Reportable Transactions for the new 1099-K Form

What is reportable? Basically, any transaction where a payment card (credit card or gift card) is accepted as payment for goods or services is reportable. In addition, any transactions that are settled through a third party payment network (such as PayPal or Google Checkout) are also reportable under the new rules. Transactions that are not reportable include ATM withdrawals, cash advances against the credit card, checks issues in connection with a payment card, or any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the credit card.

Are there any exceptions? Yes, there are two exceptions to note. First, payments made outside the U.S. do not have to be reported as long as the payment processor has no reason to know that the payee is a U.S. person. Second, there is a de-minimis exception for third party payment processors. Third party processors such as PayPal have to report on payees only if they receive $20,000 in gross payments and over 200 payments during the calendar year. That means that if you use PayPal to process your transactions and you earn less than $20,000 or have less than 200 transactions, then you probably won’t receive a 1099-K.

TurboTax® Online Federal Free Edition lets you file federal taxes online – FREE!

How will it be reported? The IRS introduced Form 1099-K to report credit card and third party network payments. This form is required to be provided to the IRS by February 28, 2012. If you expect to receive a 1099-K, it must be provided to you by January 31, 2012. 1099-K forms received in 2012 will be to report transactions that took place in 2011.

Form 1099-K vs. Form 1099-MISC

How is the 1099-K different than Form 1099-MISC? Form 1099-MISC is used to report income earned by an independent contractor who is not your employee. Generally it is for services provided, but a 1099-MISC may also be issued for other income earned (fees, commissions, royalties, etc.). Form 1099-MISC is required when you pay a non-employee $600 or more in a calendar year. In contrast, Form 1099-K will be issued by credit card processors and third party payment networks and transactions may be either service or product related. There could very well be some overlap between the two, so keeping excellent accounting records will be a must if you are a small business owner who meets the requirements of both forms.

Double Reporting and Other Concerns

As with any new tax law or form, there are a few concerns. First, the 1099-K will be used to report gross transactions. That means if you have fees, charge-backs, deductions for tips, etc., those won’t be accounted for. You’ll need to keep detailed accounting records so you can deduct those items on your tax return, otherwise you’ll pay more tax than you should. Another concern is that payment processors, especially third party networks like eBay and PayPal will increase their fees to account for the additional bookkeeping and paperwork required. This could put a serious dent in some small business owner’s net profit.

The bottom line is that if you accept credit card payments in your business, those transactions will now be reported to the IRS. Since you should have been reporting that income to the IRS to begin with, it shouldn’t cause you any issues. However, because the law and form are new there are bound to be some complications, so good accounting records are a must.

Finally, you may have heard that there has been some relief granted regarding the 1099-K for the 2011 tax year. Don’t get too excited; the law is still in effect and 1099-K forms will still be issued. However, the penalties and withholding requirements have been delayed for a year, giving payment processors more time to adapt to the new reporting requirements.

To learn more about the new 1099-K, please visit New 1099-K Reporting Requirements for Payment Settlement Entities – www.irs.gov.

Resources:

The IRS has several articles on their site to help taxpayers understand the new 1099-K. Here are a few worth checking out:

Understanding Your 1099-K
FAQs on Payment Card and Third Party Network Payments
Form 1099-K and Instructions

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April 15 Is On April 17 This Year

Kristine — Sun, 08 Jan 2012 20:08:03 +0000

The IRS announced a couple of days ago that taxpayers will have until April 17 to file their 2011 tax returns.

Generally if April 15 falls on a weekend, you are given an extra day to file. However, this year April 15 falls on a Sunday and April 16 is Emancipation Day (a holiday observed in the District of Columbia), thus the April 17 deadline.

Taxpayers who file an extension will have until October 15 to complete their tax returns. However, please remember that the extension is an extension to file, not an extension to pay. If you expect to owe taxes, it is recommended that you send in a payment with your extension form to avoid interest and penalties.

The IRS encourages people to file their returns electronically to ensure their returns are accurate and to get their refunds faster. You can start filing your free and e-filed tax returns on January 17, 2012.

Finally, the IRS has been making improvements to the website to help make tax season easier for taxpayers. You can visit the website at www.irs.gov.

Final Deadline for Filing Taxes and Receiving Rebate Check Approaching Quickly

2012: A Preview of the New Tax Year

Kristine — Sun, 01 Jan 2012 21:52:39 +0000

2012 should be an interesting year for taxes because 1) it’s an election year and 2) the tax rate is expected to go up in 2013 (when the Bush tax cuts expire).

With the economy still crawling along at a snails pace, and with presidential candidates slugging away to get your vote, I’d be suprised if we didn’t see some tax law changes to help keep taxes low, but as William Perez of About.com explains in his 2012 preview post below, don’t expect to see those changes until the last hour…

The year 2012 is likely to be a contentious year when it comes to taxation. I’ve put together a short list of what I think will be the key tax issues that we’ll be dealing with this year.

Expiration of the Bush-era tax incentives. 2012 is the last year for an astonishingly wide range of tax incentives. Collectively these are referred to as the “Bush tax cuts,” since most of the tax provisions were enacted in 2001 when G.W. Bush was president. Some of the provisions that expire at the end of 2012 include:

Our current six-tier tax rate structure (ranging from 10% to 35%) will be replaced in 2013 with a five-tiered tax rate structure (ranging from 15% to 39.6%)

Dividends will lose their preferential 15% tax rate.

Earned income credit, dependent care credit and child tax credit are reduced.

Itemized deductions and personal exemptions will be reduced for higher-income persons.

Employer-provided education assistance plans will be restricted to undergraduate studies only.

I expect this issue to dominate political news. As CNN smartly remarks, Congress likely will be “waiting to the very last minute” of 2012 before making any major tax changes. But taxpayers need not wait to the last minute to see what Congress decides. Kay Bell over at Bankrate.com has posted tax planning suggestions just in case the Bush tax cuts expire.

Expiration of the Payroll Tax Holiday. The temporary reduction in the Social Security tax rate expires at the end of February 2012. With such a short time-frame, I expect Congress to address this tax issue early in the year.

New Tax Form for Capital Gains Transactions. Taxpayers will be reporting their capital gains transactions on the new Form 8949. This new form is likely to cause confusion by taxpayers, their brokers, and tax professionals as we all get accustomed to this new reporting format. Claudia Hill says, “I’m giving this form the #1 trouble spot award for 2012″ (Forbes).

New Tax Form for Reporting Foreign Assets. If you have assets invested outside the U.S., you have a new tax form to fill out, the Form 8938. Taxpayers will use this form to let the IRS know exactly what assets, and their approximate market value, are held outside the U.S. While this form is used merely to disclose the existence of those foreign assets, there’s a hefty $10,000 fine for not filling out the form accurately. Robert Wood provides a good overview of Form 8938 (Forbes).

More scrutiny over the Earned Income Credit. The IRS is exerting greater pressure on tax professionals in an effort to reduce the amount of improper earned income tax credits. Namely, tax preparers can now be fined $500 for each return containing an improper EIC claim. Trish McIntire explains in her blog post If Your Preparer Won’t Do EITC.

via taxes.about.com

IRS Announces Mid-Year Standard Mileage Rate Increase

Kristine — Fri, 08 Jul 2011 19:53:26 +0000

[Update: The IRS recently announced the 2012 mileage rates. The new rates as of January 1, 2012 are 55.5 cents per mile for business miles, 23 cents per mile for medical miles, and 14 cents per mile for charitable mileage. This is virtually unchanged from the July 2011 rates; the only difference is that the medical mileage went down half a cent.]

In response to higher gas prices, the IRS announced that the standard mileage rate for the final six months of 2011 will be increased.

For the first half of 2011, the business rate had been 51 cents per mile. Due to rising gas prices, the rate for the remainder of the year will be 55.5 cents per mile.

The standard mileage rate is normally adjusted just once a year, but when there are large increases in gas prices, the IRS has been known to do a mid-year increase to account for the fact that it costs more to operate your vehicle. The last mid-year increase was in 2008.

People who use their personal vehicles for business use can use either the standard mileage rate or they can deduct the actual costs of operating their automobile.

The rate for medical miles has also been increased for the rest of 2011. The medical rate is going up from 19 cents to 23.5 cents per mile; the charitable rate was not adjusted and will remain the same (14 cents per mile).

While it’s always important to keep track of your miles, it’s even more important to keep accurate and timely records since the mileage rate is increasing in the middle of the year.

Will You Receive a 1099 from eBay or Paypal this year?

Kristine — Thu, 13 Jan 2011 03:31:01 +0000

Back in 2008, I reported that eBay and PayPal would have to start sending 1099s out to sellers who use those sites.

In the original bill, it was proposed that credit card processors would be required to file Form 1099 (there will be a new 1099-K just for credit card merchants) for each seller that has at least $10,000 in gross sales and 200 transactions. Since then the numbers have changed to at least $20,000 in gross sales and 200 transactions, so less people will be affected by this new rule.

This rule is not limited to just eBay and PayPal. All credit card merchants – including Amazon, eBay, PayPal, etc. – must start complying with the new rule beginning in 2011.

Given the amount of revenue and the number of transactions, this new rule won’t affect very many people. But if you do meet the income and transaction requirements, don’t panic. As long as you are reporting your income on your tax return, there’s no reason to worry about the new 1099 rules

PayPal and Ebay Must Report to the IRS

Ebiz Tax Tips

Tips on Taking the Home Office Deduction

What is the home office deduction?

Who Qualifies for the Home Office Deduction?

Regular and Exclusive Use Defined

Avoid these Common Mistakes when taking the Home Office Deduction

Home Office Tax Calculator

Resources

Related Posts:

Social Security Payroll Tax Cut Extended for Remainder of 2012

More Posts:

What if You Receive Two Form 1099s Reporting the Same Income?

More Posts:

Popular Tax Breaks You Won’t See in 2012

Alternative minimum tax patch

Deduction for direct IRA payouts to charity

Write-offs for state sales taxes

Teachers supplies deduction

Tuition and fees deduction

Mortgage insurance premium deduction

Personal tax credits applied against the alternative minimum tax

Related Posts:

Tax Carnival #95: Tax Filing Season 2012

More Posts:

Online Business Owners Prepare for IRS Form 1099-K

New 1099 Reporting Rules

Introducing the 1099-K

Reportable Transactions for the new 1099-K Form

Form 1099-K vs. Form 1099-MISC

Double Reporting and Other Concerns

Resources:

Related Posts:

April 15 Is On April 17 This Year

Related Posts:

2012: A Preview of the New Tax Year

More Posts:

IRS Announces Mid-Year Standard Mileage Rate Increase

Related Posts:

Will You Receive a 1099 from eBay or Paypal this year?

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