Best Business Practices

If you’re one of the many people working from home this year, you may have questions about the home office tax deduction and whether you can qualify for it. Here’s a rundown of the rules.

Employees

Unfortunately, home office expenses incurred while working as an employee are not currently deductible. The reason: the Tax Cuts and Jobs Act temporarily suspended the itemized deduction for unreimbursed employee business expenses (and various other miscellaneous expenses). Unless lawmakers make a change, the deduction won’t become available again until 2026.

Self-Employed Individuals

The news is better if you are self-employed. You will be eligible for a home office deduction provided you can satisfy certain requirements. If you do, you can deduct all direct expenses and part of the indirect expenses involved in working from home. The deduction is generally limited to income from the business, and excess expenses may be carried over to the next year.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses include expenses such as rent, mortgage interest, real estate taxes, maintenance, and homeowners insurance. You can deduct only the business portion of your indirect expenses. These expenses are typically allocated between business and personal use based on square footage.

IRS Requirements

To qualify, a home office — a room or another separately identifiable space — generally has to be used regularly and exclusively for business purposes. The home office also must be (1) your principal place of business; (2) a place where you meet patients, clients, or customers; (3) a separate unattached structure that you use in connection with your business; or (4) a space within your residence that you regularly use to store inventory or product samples in connection with the business, if the residence is the only fixed location of your business (in this situation, the space doesn’t have to be used exclusively for storage).

You don’t necessarily have to spend most of your work hours in your home office for it to meet the principal place of business requirement. A home office can qualify if you use it for administrative or management activities and it is the only fixed location where you conduct those activities. Some examples of administrative or management activities include: billing customers, clients, or patients; keeping books and records; ordering supplies; setting up appointments; forwarding orders or writing reports.

Simplified Option

If you prefer not to keep track of your 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. When the simplified method is used, qualified mortgage interest and property taxes are separately deductible as itemized deductions.

Your tax professional can help you determine whether you qualify for a deduction and what you may need to do to take advantage of it.

 

Incorporating your small business the right way can bring tax benefits and protect your personal assets. Read on to learn more about what incorporation is, why you might want to incorporate, and how an accountant can help you navigate the questions that come with selecting the right business structure.

What is Incorporation?

When discussing “incorporation” in terms of a business, the term denotes how the business is organized or structured.

Regardless of the structure you choose for your business, incorporation is a legal process that brings your business into existence. The following are business structures commonly used in a small business.

Sole proprietorship

If you conduct business as an individual and do not register as any other type of business, you are a sole proprietor. With this business structure, your personal and business assets and liabilities are not separate. Sole proprietorships are relatively simple structures and a good choice for low-risk businesses or entrepreneurs testing a business idea. However, this business structure does not offer liability protection, so the owner is personally responsible for business debts and obligations. Another drawback is that it can be more challenging to get bank financing and business credit with this structure.

Partnership

When two or more individuals own a business together, the simplest structure is the partnership. There are limited partnerships (LP) and limited liability partnerships (LLP). LPs consist of a general partner with unlimited liability; the remaining partners have limited liability and limited control in the business. The partner without limited liability pays self-employment taxes. In LLPs, every owner has limited liability, protecting them from business debts and the actions of the other partners.

Partnerships can be a good choice for multiple-owned businesses and professional groups like physicians, attorneys, and veterinarians.

C-corp

Sometimes called a C-corp, a corporation is a separate legal entity from the business owner(s). The benefit of a corporation is that they offer the most robust protection for owners from personal liability; however, it costs more to form a corporation than it does to establish other business structures, and business profits are taxed at the personal and corporate level. Further, the record-keeping, operations, and reporting are more involved for a corporation. This structure is usually best for higher-risk businesses or those that raise money or plan to become publicly traded in the stock market.

S-corp

An S-corporation, or S-corp, is designed to avoid the double-taxation of a C-corp. This avoidance is possible because, in an S-corp, profits and some losses go through the owner’s personal income to avoid corporate taxes. S-corps are taxed differently in different states, so it is essential to have your accountant help you understand the guidelines and laws in your state.

LLC

A limited liability company (LLC) has the benefits of a corporation and a partnership. The owner is protected from personal liability in situations like bankruptcy or lawsuits and can avoid corporate taxes because profits and losses can pass through their personal income. However, there are self-employment taxes and Medicare and Social Security contributions since LLC members are considered self-employed.

An LLC is an option for owners with significant assets that need protection and who want the benefit of a lower tax rate than a corporation pays.

How to Incorporate

When you’re ready to incorporate your business, consult your trusted CPA or accountant so that you have a full view of what incorporating will mean for you and your business initially and for years to come.

Send us an e-mail or call us today at 727-544-1120 and ask for Debbie Jackson to discuss your business needs with an experienced Largo CPA.

You probably know of several businesses whose formal names end with the acronym LLC. And you probably also know that LLC stands for limited liability company. Here are 10 things you may not know.

1. An LLC generally protects its owners from personal liability for business obligations in much the same way a corporation does, but an LLC is not a corporate entity.¹
2. Like a corporation, an LLC can do business in multiple states, although an LLC must be organized in a specific state.
3. The owners of an LLC are called members. There is no limit on the number of members an LLC can have, and members don’t necessarily have to be individuals. Members’ management roles are typically spelled out in an operating agreement.
4. Upon formation of an LLC, the members contribute cash, property, or services to the LLC in exchange for LLC shares or units.
5. An LLC may borrow money in its own name and is responsible for repayment of the debt.
6. An LLC is usually treated as a partnership for federal income tax purposes.

   (The remaining four points assume partnership treatment.)

7. Like partners, LLC members are not considered employees of the company. However, an LLC can have non-member employees.
8. LLC members are taxed directly on company income. The LLC itself doesn’t pay federal income taxes.
9. If an LLC has a loss, its members generally can deduct their share of the loss on their own tax returns.
10. For tax purposes, an LLC’s income and losses are divided among its members according to the terms of their agreement. Tax allocations must correspond to economic allocations of profit and loss.

An LLC is but one structure you might consider using for a business venture. The input of a professional may be helpful in determining which type of arrangement will best meet your objectives.

Source/Disclaimer:

¹Each state has its own laws governing LLCs. Consult with an attorney before establishing an LLC.