Small business owners and solo practitioners often forget the importance of a relationship with a good business accountant. If you own a small business or work from a home office you may be missing important information that could save you money.
To get the latest on tax tips for the home based business I turned to Mitch Michulka. Mitch is a Certified Public Accountant (CPA) and owner of Padgett Business Services in Lisle, IL. Padgett has been in business for over 45 years and has over 300 offices across the country supporting thousands of small businesses with Accounting, Tax and Payroll services.
Q. Mitch, what defines a home office? Are there 'rules' about the space that's used in order to claim the home office deductions?
A. To qualify for deductions as a home office, the area in the home used for business must be used regularly and exclusively:
1. as the principal place of business (including administrative use)
2. as a place to meet clients in normal course of business or
3. 'in connection with' the business if the space is a separate structure from the residence (e.g., a barn or detached garage)
Q. Supposing that I meet this criteria, what other home expenses do I need to keep track of? What is deductable in terms of my home?
A. The business use percentage of expenses are generally deductible for items such as rent, repairs, utilities, mortgage interest, real estate taxes, insurance, depreciation and any other expenses.
Q. Does my business have to be a full time operation for me to claim home office expenses?
A. To qualify, the home office must meet the 'regular use' test. Regular use means the taxpayer must use the portion of the home in the business activity on a continuing basis.
Q. Does the business have to be incorporated to take advantage of home office deductions?
A. No, the home office deduction is available to sole proprietors.
Q. Mitch, would you define what 'entertainment' and 'business meeting' expenses are legitimate for the home office business owner?
A. These expenses are defined the same whether the business owner is based out of the home or a traditional office. A deduction for expenses incurred for meals or entertainment is allowed only if the expenses are (1) directly related to the active conduct of business or (2) associated with the active conduct of business and directly precede or follow substantial business discussions. The deduction for meals and entertainment expenses is limited to 50% of the amounts that would otherwise be deductible.
Q. What are self employment taxes and how are the amounts determined?
A. Self-employed persons pay social security and Medicare taxes for themselves as part of their income tax. This self-employment tax is based on net earnings from self-employment, not on taxable income.
Q. Are any of my car expenses deductible? Would it benefit me to lease a car versus purchase one?
A. Yes, vehicle expenses are deductible using either the standard mileage method (55/mile in 2009) or the actual expense method. A taxpayer must maintain adequate records or other corroborative evidence to support the business portion of auto expense. To meet this requirement, a taxpayer should maintain an account book or log (or similar statement of expense or trip sheet) that establishes each business expense.
The complex rules that apply to purchased business autos are one reason many businesses are leasing autos instead of buying them. There are, however, a few special angles you should be aware of:
- If you trade in a car in exchange for a lower lease price on a new car, the transaction won't be a tax-free like-kind swap, so any realized gain or loss will be recognized under the rules that apply to a sale.
- If you pay an additional sum up-front, it should be amortized over the life of the lease.
- Any refundable deposit required as part of the lease deal can't be deducted at all.
All of this may sound very complicated, and it is. Before you sell or trade in your business car or lease a new one, you may want to check with your accountant regarding the impact.
Q. What receipts and other information should I save over the year?
A. Maintaining accurate accounting records is essential not only for preparing your taxes, but also for managing your business effectively. All business transactions should be captured including sales, purchases, expenses incurred, assets purchased, and loans taken to name a few. Small business owners should generally have a set of financial statements prepared monthly to be able to monitor their business performance, identify any problem areas, and plan for the future.