Generally you must meet the following two requirements to qualify for the home office deduction:
You must regularly use part of your home exclusively for a trade or business. Incidental or occasional business use is not regular use. Exclusive use means a specific area of your home is used only for trade or business activities.
The home office must be your principal place of business. This requirement can be satisfied if the home office is used for the administrative or management activities of your business and there is no other fixed location where you can conduct these activities.
If you deduct depreciation for a home office in your principle residence, your ability to fully use the taxable gain exclusion on the sale of a principle residence will be limited since the portion of the gain attributable to your home is not eligible for this exclusion Expenses that are deductible only because the home is used for business are limited to the gross income derived from the use of the home. Unused deductions are carried over to the subsequent year but are subject to the limitations calculated in that year. Expenses that other wise would have been deductible, such as real estate taxes and qualified home mortgage interest are not subject to these limitations.
For taxable years beginning on or after Jan 1, 2013 taxpayers can use a simplified option when calculating the home office deduction. The requirements to qualify for the deduction remain the same but the record keeping and calculation is simplified. Under the simplified option, the standard deduction is $5 per square foot used for business with a maximum of $300 square feet allowed. home related itemized deductions are claimed in full on Schedule A
START UP EXPENSES
The amount of capitalized business start up expenses eligible for deduction in the year the active business commences is $5,000 by the amount the start up expenses exceed $50,000. Expensing is automatic and no longer requires an election to be formally made. However, taxpayers wishing to elect out must affirmative elect to capitalize the costs on a timely federal income tax return. The election to either deduct or capitalize start up costs is irrevocable and applies to all start up costs of the taxpayer. Capitalized start up costs must be amortized over 180 months
The amount allowed as a current expense for organization costs is $5,000, reduced by the amount of costs that exceed $50,000. The excess amount must be amortized over 180 months
SELF EMPLOYED HEALTH INSURANCE DEDUCTION
As a self employed individual you can deduct 100% of the health insurance premiums you pay for yourself, your spouse, your dependents and any child of the self employed under the age of 27 as of the end of the tax year.. The deduction applies if you are a general partner in a partnership, a limited partner receiving guaranteed payments or a more than 2% shareholder who receives wages from an S Corp You can include the premiums paid for eligible long term care insurance policies as deductible self employed health insurance subject to certain limitations. Medicare premiums are included.
UTILIZE BUSINESS LOSSES OR TAKE TAX FREE DISTRIBUTIONS
If you have an interest in a partnership, LLC or S Corp, you can deduct losses from the entity only to the extent you have tax basis and are at-risk for the losses. If you have a loss from any of these entities that will be limited, you may want to make a capital contribution before year end to allow you to deduct the loss. However, losses may still be limited by the passive activity loss rules
You can take tax free distributions from a partnership, LLC or S Corp if you have tax basis in the entity and have already been taxed on the income. Since you are taxed on your share of the income of these entities, regardless of whether or not distributions were made, you may have paid tax in a prior year or will pay tax in the current year on income you have not received yet. Therefore, you can not take a distribution without paying additional tax, if funds are available and the entity permits such distributions, to the extent of your tax basis and at risk amount in the entity. However, there are special considerations for distributions from S Corps
SELF EMPLOYMENT TAX
Your net earnings from self employment are subject to Social Security and Medicare taxes As a self employed individual, your share of these taxes almost doubles since you pay both the employer's share and employee, your wages will offset the portion of your self employment earnings subject to the Social Security tax
The self employment rate is 15.3% which consists of 12.4% Social Security tax and 2.9% Medicare tax. The maximum amount of combined 2015 wages and self employment earnings subject to the 12.4% Social Security tax is $118,000. There is no limitation on self employment income subject to the 2.9% Medicare tax. An additional .9% Hospital Insurance tax will be imposed on self employment income in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separate return and $200,000 in all other cases.Because of these taxes, your federal effective tax rate on self employment income can be as high as 56% compared to about 48% for income from wages.
NET OPERATING LOSS CARRYBACKS
Net operating losses generated can be carried back two years and carried forward 20 years
FINAL REPAIR/CAPITALIZATION REGULATIONS
The IRS released the much anticipated final repair regulations in September 2013. These regulations explain when business owners must capitalize costs and when they can deduct expenses of acquiring, maintaining, repairing, and replacing tangible property. These regulations apply to tax years beginning on or after January 1,2014 The final regulations include a de minimis expensing rule that allows taxpayers to deduct certain amounts paid to acauire or produce tangible property, up to $5,000 per invoice can be deducted. A $500 expense threshold or invoice is allowed if the taxpayer does not have a written expense policy in place
AFFORDABLE CARE ACT
The Patient Protection and Affordable Care Act of 2010 along with the Health Care and Education Reconcilation Act represents the most significant regulatory overhaul of the US health care system since the passage of Medicare and Medicaid in 1965 ACA was enacted to increase the quality and affordability of health insurance through the use of mandates subsidies and insurance exchanges. The following are the major considerations of the ACA:
LARGE EMPLOYER MANDATE
The ACA that an applicable large employer pay an excise tax if
The employer fails to offer its full time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer sponsored plan and any full time employee is certified to the employer as having a premium assistance tax credit or cost sharing reduction.
The employer offers its full time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer sponsored plan, but the plan is either underfunded or too expensive. Also, one or more full time employee is certified as having a premium assistance tax credit or cost sharing reduction.
For 2015 an applicable large employer is defined as one that employs within one calendar year an average of at least 100 full time equivalent employees Full time is defined to be at least 30 hours of service per week., However there are uncertainties with the application of these rules as they relate to seasonal workers.
EMPLOYER AND INSURER REPORTING
The ACA generally requires applicable large employers to file an information return, known as a Code 6056 return, that reports the terms and conditions of the employer provided health care coverage for its full time employees. Other parties such as health insurance plans have similar reporting requirements.
SMALL EMPLOYER HEALTH INSURANCE PREMIUM CREDIT
The ACA provides a tax credit to encourage eligible small employers to provide health insurance coverage to their employees. An eligible taxpayer can claim the Code Section 45B credit for two consecutive years beginning with the first tax year on or after 2014. An eligible small employer is one with no more than 25 full time employees for the tax years whose employees have an average annual wages of less than $50,800 per employee in tax years beginning in 2014. Also the employer has a qualifying arrangement in which the employer pays a uniform percentage of not less than 50% of the premium cost of a qualified health plan offered by the employer to its employees through a SHOP market place. The percentages are 50% for small business employers and 35% for small tax-exempt.
Beginning January 1, 2014 individuals must carry minimum essential coverage for each month or make a shared responsibility payment with his or her tax return. Minimum essential coverage is that from an employer sponsored plan, coverage obtained through a state or federal marketplace. Medicare, Medicaid or other similar plans
TAX ADVANTAGE FOR BUSINESS OWNERS
If you are self-employed individual, or own an interest in an operating business through a partnership,limited liability company of an S Corp, there may be additional tax planning opportunities available to you . Unlike salaried employees, your business deductions can offset your AGI rather than be treated as itemized deductions subject to various limitations and disallowances.
TIMING OF INCOME AND DEDUCTIONS
If you are a cash basis business, you can delay billing until January of the following year for services already performed, there by deferring your tax bill until next year. Alternatively, if you expect to be in a higher bracket in the following year or if the ATM applies in the current year but is not expected to apply in the following year, you can accelerate billing and collections into the current year to take advantage of the lower tax rate.
Similarly, you can either prepay or defer paying business expenses so the deduction comes in the year you expect to be subject to the higher rate. This can be particularly significant if you are considering purchasing business equipment.. If you are concerned about your cash flow and want to accelerate your deductions, you can charge them on your credit card. This will allow you to take the deduction in the current year when the charge is made, even though you may actually pay the outstanding credit card bill in January of the current year.
Another advantage of deferring income or prepaying expenses is that you can defer the 2.9% Medicare component of your self-employment taxes. If your self employment income plus wages are below $118,000 you can also reduce your social security tax
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Significant tax benefits which had been in place have been extended to be made permanent. Section 179 expensing rules allow you to full deduct up to $500,000 of qualifying property placed in service during 2015. This dollar limit is phased out when total investments exceed$2,000,000
If you have debt traced to your business expenditures - including debt used to finance the capital requirements of a partnership. SCorp of LLC involved in a trade or business in which you materially participate - you can deduct the interest as busiess interest rather than an itemized deduction. The interest is a direct reduction of income from business. This lets you deduct all of your business interest.
HOME OFFICE DEDUCTION
When you use part of your home for business, you may be able to deduct the business portion of the costs of running your home, such as real estate taxes, mortgage interest, rent. utilities, insurance, painting, repairs and depreciation. The home office deduction is available to renters and home owners, but is subject to an overall limitation that will prevent you from deducting a net loss from your business resulting from your home office deduction.
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