If you’re self-employed and work out of an office in your home, you may be entitled to home business deductions. However, you must satisfy strict rules.
If you qualify, you can deduct the “direct expenses” of the home office. This includes the costs of painting or repairing the home office and depreciation deductions for furniture and fixtures used there.
You can also deduct the “indirect” expenses of maintaining the office. This includes the allocable share of utility costs, depreciation, and insurance for your home, as well as the allocable share of mortgage interest, real estate taxes and casualty losses.
In addition, if your home office is your “principal place of business,” the costs of traveling between your home office and other work locations are deductible transportation expenses, rather than nondeductible commuting costs.
And, generally, you can deduct the cost (reduced by the percentage of non-business use) of computers and related equipment that you use in your home office, in the year that they’re placed into service.
You can deduct your expenses if you meet any of these three tests:
You’re entitled to deductions if you use your home office, exclusively and regularly, as your principal place of business. Your home office is your principal place of business if it satisfies one of two tests.
You satisfy the “management or administrative activities test” if you use your home office for administrative or management activities of your business, and you meet certain other requirements.
You meet the “relative importance test” if your home office is the most important place where you conduct business, compared with all the other locations where you conduct that business.
You’re entitled to home office deductions if you use your home office, exclusively and regularly, to meet or deal with patients, clients, or customers.
The patients, clients or customers must physically come to the office.
You’re entitled to home office deductions for a home office, used exclusively and regularly for business, that’s located in a separate unattached structure on the same property as your home. For example, this could be in an unattached garage, artist’s studio or workshop.
You may also be able to deduct the expenses of certain storage space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use to store inventory or product samples.
The amount of your home office deductions is subject to limitations based on the income attributable to your use of the office, your residence-based deductions that aren’t dependent on use of your home for business (such as mortgage interest and real estate taxes), and your business deductions that aren’t attributable to your use of the home office.
But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.
Be aware that if you sell — at a profit — a home that contains (or contained) a home office, there may be tax implications. We can explain them to you. Pin down the best tax treatment Proper planning can be the key to claiming the maximum deduction for your home office expenses.
As a small-business owner, it always helps to have expert advice at your fingertips. A QuickBooks ProAdvisor offers that expertise.
For small and medium-sized businesses, QuickBooks is one of the most popular accounting software programs available.
Using QuickBooks, businesses can manage and pay bills, keep track of accounts payable and receivable, oversee financial reporting, organize payroll functions and track employee time.
Relying on a QuickBooks ProAdvisor ensures your business gets the most out of the accounting software.
QuickBook ProAdvisors must complete comprehensive training and pass a certification exam to earn the ProAdvisor title.
The certification ensures all ProAdvisors are experts in the latest QuickBook tools and can help customize QuickBook software to fit your business needs.
At David Mills, CPA, LLC, we have QuickBooks ProAdvisors on staff who are able to train and assist you with all your QuickBooks needs.
We provide one-on-one or small group QuickBooks training sessions, and our on-staff experts can meet in person. Our training is geared toward your business.
Our ProAdvisors will help design and set up the chart of accounts as well as set up payroll, receivables, payables, inventory and other features needed by your business.
The federal government recently extended the Work Opportunity Tax Credit through 2020. Business owners may be eligible for tax credits if they hire individuals from one or more targeted groups.
The Work Opportunity Tax Credit (WOTC) was set to expire on Dec. 31, 2019, but a new law passed late last year extends it through Dec. 31, 2020.
Generally, an employer is eligible for the credit for qualified wages paid to qualified members of these targeted groups:
For each employee, there’s a minimum requirement that the employee has completed at least 120 hours of service for the employer.
The credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (for example, a maid working in the employer’s home).
Additionally, the credit generally isn’t available for employees who’ve previously worked for the employer.
There are different rules and credit amounts for certain employees.
The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans.
Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.
For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15.
The maximum WOTC credit available for summer youth employees is $1,200 per employee.
No deduction is allowed for the portion of wages equal to the amount of the WOTC determined for the tax year.
Other employment-related credits are generally reduced with respect to an employee for whom a WOTC is allowed.
The credit is subject to the overall limits on the amount of business credits that can be taken in any tax year, but a 1-year carryback and 20-year carryforward of unused business credits is allowed.
Because of these rules, there may be circumstances when the employer might elect not to have the WOTC apply. There are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of it.
Does the idea of being your own boss and being in business for yourself appeal to you?
Many people who launch small businesses start out as sole proprietors. However, there are tax rules and considerations to consider if you’re a sole proprietor.
Here are nine things to consider if you are your own boss
To the extent your business generates qualified business income, you are eligible to claim the 20% pass-through deduction, subject to limitations.
The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income.
However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction.
The net income will be taxable to you regardless of whether you withdraw cash from the business.
Your business expenses are deductible against gross income and not as itemized deductions.
If you have losses, they will generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses, and losses in activities in which you weren’t “at risk.”
For 2020, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment of up to $137,700, and Medicare tax only at a 2.9% rate on the excess.
An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases.
Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
For 2019, these are due April 15, June 15, September 15 and January 15, 2021.
If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home.
And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.
This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.
Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled.
Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.
When you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.
The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re are withdrawn.
Because many qualified plans can be complex, you might consider a SEP plan, which requires less paperwork.
A SIMPLE plan is also available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements.
If you don’t establish a retirement plan, you may still be able to contribute to an IRA.
At David Mills CPA, LLC, we work with small businesses throughout the Central Illinois.
We can also help business owners understand the various business structures to ensure their business is structured to best meet their needs.
For more information, contact David Mills CPA, LLC today.
In 2020, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business decreased by one-half cent, to 57.5 cents per mile.
As a result, you might claim a lower deduction for vehicle-related expenses for 2020 than you can for 2019.
Businesses can generally deduct the actual expenses attributable to the business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees.
In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.
The cents-per-mile rate comes into play if you don’t want to keep track of actual vehicle-related expenses.
With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date, and the destination.
Using the mileage rate is also popular with businesses that reimburse employees for business use of their personal vehicles.
Such reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes.
Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, be aware that you must comply with various rules. If you don’t, the reimbursements could be considered taxable wages to the employees.
The rate for 2020 Beginning on January 1, 2020, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 57.5 cents per mile.
It was 58 cents for 2019 and 54.5 cents for 2018. The business cents-per-mile rate is adjusted annually.
It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation.
Occasionally, if there’s a substantial change in average gas prices, the IRS will change the mileage rate midyear.
There are some situations when you can’t use the cents-per-mile rate. In some cases, it partly depends on how you’ve claimed deductions for the same vehicle in the past.
In other cases, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the mileage rate to deduct vehicle expenses.
At David Mills CPA, LLC, our expert can help if you have questions about tracking and claiming such expenses in 2020 — or claiming them on your 2019 income tax return.
David Mills CPA, LLC has offices in Morton and East Peoria.
Does your company do business across state lines? If so, it’s a good idea to reexamine your sales tax obligations.
Today, nearly every state with a sales tax has enacted a similar law, which makes it prudent for companies doing business across state lines to review their tax obligations.
South Dakota’s economic nexus statute was upheld, but what’s nexus? A state is constitutionally prohibited from taxing business activities unless those activities have a substantial “nexus,” or connection, with the state.
Before Wayfair, simply selling to customers in a state wasn’t enough to establish nexus. The business also had to have a physical presence in the state, such as offices, retail stores, manufacturing or distribution facilities, or sales reps.
In Wayfair, the Supreme Court ruled that a business could establish nexus through economic or virtual contacts with a state, even if it didn’t have a physical presence.
The Court didn’t create a bright-line test for determining whether contacts are “substantial,” but found that the thresholds established by South Dakota’s law are sufficient.
Out-of-state businesses must collect and remit South Dakota sales taxes if, in the current or previous calendar year, they have
The vast majority of states now have economic nexus laws, although the specifics vary. Many states adopted the same sales and transaction thresholds accepted in Wayfair, but a number of states apply different thresholds.
And some chose not to impose transaction thresholds, which many view as unfair to smaller sellers (an example of a threshold might be 200 sales of $5 each would create nexus).
According to state officials, marketplace facilitators who meet state nexus thresholds are required to register to collect and remit Illinois Use Tax for sales made through their marketplace.
Marketplace sellers selling through the marketplace are not responsible for collecting and remitting Illinois Use Tax on these sales. (Read more about Illinois nexus requirements)
If your business makes online, telephone or mail-order sales in states where it lacks a physical presence, it’s critical to find out whether those states have economic nexus laws and determine whether your activities are sufficient to trigger them.
If you have nexus with a state, you’ll need to register with the state and collect state and applicable local taxes on your taxable sales there. Even if some or all of your sales are tax-exempt, you’ll need to secure exemption certifications for each jurisdiction where you do business.
Alternatively, you might decide to reduce or eliminate your activities in a state if the benefits don’t justify the compliance costs.
If you make sales through a “marketplace facilitator,” such as Amazon or Ebay, be aware that an increasing number of states have passed laws that require such providers to collect taxes on sales they facilitate for vendors using their platforms.
If you need assistance in setting up processes to collect sales tax or you have questions about your responsibilities, call David Mills, CPA, LLC. Our experts can help answer all your small business tax questions.
Keeping track of key tax-related deadlines for your business is an ongoing concern. Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2020.
Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.
Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
January 31 is the deadline to File 2019 Forms W-2 “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
Provide copies of 2019 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
File 2019 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS. File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2019.
If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it.
However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2019.
If your tax liability is less than $2,500, you can pay it in full with a timely filed return.
If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2019 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs.
If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
February 28 File 2019 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)
March 16 If a calendar-year partnership or S corporation, file or extend your 2019 tax return and pay any tax due.
If the return isn’t extended, this is also the last day to make 2019 contributions to pension and profit-sharing plans.
If you have questions about meeting applicable deadlines or to learn more about filing requirements, contact David Mills CPA, LLC. We have offices in Morton and East Peoria or can arrange a video conference with you.
Video conference options mean meeting with the professionals at David Mills CPA, LLC is as easy as looking at your phone.
We utilize the Zoom software to host video conference meetings with clients. It’s an easy-to-use program, where no account or password is created.
Because most laptops, tablets and cell phones have built-in cameras, there’s no additional hardware to purchase.
We understand individuals and business owners lead busy lives. Finding time to come to either our Morton or East Peoria location can be difficult.
With a video conference, you can have a meeting wherever you are. We will send you a link to directly connect to your tax preparer. It’s the ideal solution for those out of town or with busy schedules.
Contact David Mills CPA, LLC today to learn more about video conferencing or to set up an appointment.
Don’t let the holiday rush keep you from taking some important steps to reduce your 2019 tax liability.
You still have time to execute a few strategies, including:
Thinking about purchasing new or used heavy vehicles, heavy equipment, machinery or office equipment in the new year? Buy it and place it in service by December 31, and you can deduct 100% of the cost as bonus depreciation.
Although “qualified improvement property” (QIP) — generally, interior improvements to nonresidential real property — doesn’t qualify for bonus depreciation, it’s eligible for Sec. 179 immediate expensing. And QIP now includes roofs, HVAC, fire protection systems, alarm systems and security systems placed in service after the building was placed in service.
You can deduct as much as $1.02 million for QIP and other qualified assets placed in service before January 1, not to exceed your amount of taxable income from business activity.
Once you place in service more than $2.55 million in qualifying property, the Sec. 179 deduction begins phasing out on a dollar-for-dollar basis. Additional limitations may apply.
If you don’t already have a retirement plan, you still have time to establish a new plan, such as a SEP IRA, 401(k) or profit-sharing plans (the deadline for setting up a SIMPLE IRA to make contributions for 2019 tax purposes was October 1, unless your business started after that date).
If your circumstances, such as your number of employees, have changed significantly, you also should consider starting a new plan before January 1.
Although retirement plans generally must be started before year-end, you usually can deduct any contributions you make for yourself and your employees until the due date of your tax return. You also might qualify for a tax credit to offset the costs of starting a plan.
If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2019 and deferring income into 2020 (assuming you expect to be taxed at the same or a lower rate next year).
For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2019 even though you don’t pay the credit card bill until 2020.
In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2019.
As for income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.
Proceed with caution
Bear in mind that some of these tactics could adversely impact other factors affecting your tax liability, such as the qualified business income deduction. For more information about small business tax liability or other business advisement services, contact the experts at David Mills CPA, LLC.
While you were celebrating the holidays, you may not have noticed that Congress passed a law with a grab bag of provisions that provide tax relief to businesses and employers.
The Further Consolidated Appropriations Act, 2020 was signed into law on December 20, 2019. It makes many changes to the tax code, including an extension (generally through 2020) of more than 30 provisions that were set to expire or already expired.
Two other laws were passed as part of the law (The Taxpayer Certainty and Disaster Tax Relief Act of 2019 and the Setting Every Community Up for Retirement Enhancement Act – SECURE).
Here are five highlights:
Under current law, employers generally can exclude part-time employees (those who work less than 1,000 hours per year) when providing a 401(k) plan to their employees.
A qualified retirement plan can generally delay participation in the plan based on an employee attaining a certain age or completing a certain number of years of service but not beyond the later of completion of one year of service (that is, a 12-month period with at least 1,000 hours of service) or reaching age 21.
Qualified retirement plans are subject to various other requirements involving who can participate.
For plan years beginning after Dec. 31, 2020, the new law requires a 401(k) plan to allow an employee to make elective deferrals if the employee has worked with the employer for at least 500 hours per year for at least three consecutive years and has met the age-21 requirement by the end of the three-consecutive-year period.
There are a number of other rules involved that will determine whether a part-time employee qualifies to participate in a 401(k) plan.
Tax law provides an employer credit for paid family and medical leave. It permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave.
The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum leave amount that can be taken into account for a qualifying employee is 12 weeks per year.
The credit was set to expire on Dec. 31, 2019. The new law extends it through 2020.
Under the WOTC, an elective general business credit is provided to employers hiring individuals who are members of one or more of 10 targeted groups. The new law extends this credit through 2020.
The Affordable Care Act (ACA) contained a provision that required that the sale of a taxable medical device by the manufacturer, producer or importer is subject to a tax equal to 2.3% of the price for which it is sold.
This medical device excise tax originally applied to sales of taxable medical devices after Dec. 31, 2012.
The new law repeals the excise tax for sales occurring after December 31, 2019.
The ACA also added a nondeductible excise tax on insurers when the aggregate value of employer-sponsored health insurance coverage for an employee, former employee, surviving spouse or other primary insured individual exceeded a threshold amount.
This tax is commonly referred to as the tax on “Cadillac” plans.The new law repeals the Cadillac tax for tax years beginning after December 31, 2019.
These are only some of the provisions of the new law. We will be covering them in the coming weeks. If you have questions about your situation, don’t hesitate to contact us at David Mills CPA, LLC.