Commuting Expenses of Taxpayers with Home Office

Taxpayers who work from home and who have a home office enjoy many different tax benefits. 

For most people, the cost of daily travel between home and a regular work location is a nondeductible commuting expense because it is personal in nature. However, if a taxpayer  maintains home office, they may be entitled to take a special tax break for their commuting costs. Commuting costs are deductible if the taxpayer has a regular place of work outside of the home or has a home office as the principal place of business but needs to travel to temporary job locations on particular days Be aware though, that even though there special rules for this, the IRS pays close attention to home office deductions and taxpayers will need to be able to substantiate these deductions with their records.

 

Deducting Commuting Expenses with Home Office

The IRS has special rules for taxpayers who have an office at home can deduct the daily costs of travel between home and another work location in the same business, regardless of distance and regardless of whether the other location is regular or temporary. The 1997 Taxpayer Relief Act changed the requirements to qualify a residence as a “principal place of business” for purposes of the home office deduction. The IRS amended IRC section 280A to provide that a home office qualifies as a principal place of business if–

* the taxpayer uses the office to conduct administrative or management activities of a trade or business and
* there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business.

 

Commuting Expenses of Taxpayers with Home Office

As under prior law, the IRS will allow home office deductions only if the taxpayer uses the office exclusively on a regular basis as a place of business. In addition, if the taxpayer is an employee, use of the home office must be for the convenience of the employer.

 

Requirements to get Commuting Tax Deduction

The most important thing to note is that you will only get this deduction if your home is your principal place of business. If you do not meet this important requirement, taxpayers may be exposing themselves to IRS penalties and the IRS does focus heavily on the deduction of home office expenses. Also, remember this important exception, if you are an employee and your employer reimburses your travel expenses, you do not need to report the reimbursements as income if they are made under a so-called “accountable plan.”

 

What is an Accountable Plan?

An accountable plan is one that reimburses only deductible business expenses, requires you to substantiate your expenses, and requires you to return amounts in excess of your substantiated expenses. If the plan is not an accountable plan, the reimbursement must be reported as income, and your deductible expenses must be claimed as employee business expenses. Employers will have intern company policies on accountable plans and how they apply to employees business expenses deductions.

 

Records for Commuting Expense Deduction

It is absolutely essential that a taxpayer is able substantiate the auto expenses that you claim through adequate records. You can substantiate commuting expenses for the tax deduction by keeping a log (there is even a special smart phone app for tracking this for tax deductions).  The taxpayer has the  option to either use the standard mileage rate or deduct your actual expenses.

Also remember, that if your office at home isn’t your principal place of business, the costs of travel between your home and the first and last business stops of the day are nondeductible commuting expenses. However, the costs of going between home and a temporary work location are deductible, if you have a regular work location away from home. Generally speaking, employment at a work location is temporary if it is realistically expected to last (and does in fact last) for no more than a year.

What are Ordinary and Necessary Business expenses?

In order for a business expense to be deductible on a tax return, it most be considered an ordinary and necessary business expense under IRS standards. The broadest definition given by the IRS is that a business expense must be both ordinary and necessary.

What are Ordinary and Necessary Business expenses?

For most taxpayers, this means that for ordinary expense, it must be an is one that is common and generally accepted accepted in your trade or business and other businesses also would probably deduct it. By contrast, a necessary business expense is one that is helpful and appropriate for a taxpayer’s trade or business. This is a broader standard and does not mean that the expense is absolutely required or necessary for a business.

 

Tax Deductions for Ordinary and Necessary Expenses

The IRS code section § 162 explicitly says that deductions shall be allowable for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Below are some more definitions for determining what is a necessary and ordinary business expense.

Necessary means and is defined as “appropriate and helpful” in the development of the taxpayer’s business or trade. It is not that strict because a requirement that a business show the absolute necessity expenses would put the IRS in the position of reviewing every business decision to ensure that no money was spent unnecessarily. This would be tedious and impede the enforcement of tax laws.

Ordinary Expense-  Determining what is considered ordinary is more controversial when determining what is a business deduction.  “Ordinary Business Expense” means something that is “normal, usual, or customary” in the taxpayer’s business and will be actually incurred by the taxpayer.

 

It is important to separate business expenses from the following expenses:

  • The expenses used to figure the cost of goods sold,
  • Capital Expenses, and
  • Personal Expenses.

 

Other Types of Deductible Business Expenses

  • Employees’ Pay – You can deduct the salary or pay of an employee in a business
  • Retirement Plans – There are special laws regarding contributions to employee retirement plans
  • Rent Expense – You can deduct rent for a building that is used in a trade or business
  • Interest – You can deduct interest on money borrowed
  • Taxes – You can deduct various federal, state, local, and foreign taxes incurred by your business.
  • Insurance –  You can deduct any insurance costs related to your business

 

You cannot deduct personal, living, or family expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part. Therefore, it is very important to determine what is considered a deductible business expense in order to avoid any problems with the IRS.

Self Employment Tax Reporting Requirements

What are the self-employment tax reporting requirements issued by the IRS? When is a taxpayer required to pay estimated taxes?

The required reporting of self employment income begins at $400 for people that are self employed. The required issuance of 1099-MISC forms to independent contractors  begins at $600.

Generally, a taxpayer will not be penalized for not paying estimated taxes. For example, if you owe less than $1,000 in taxes, not if you earn $1,000. A taxpayer who has self-employment income should have a goal to be to owe $0 at the end of each year to avoid interest charges and unexpected tax bills from the IRS after filing a tax return.

Self Employment Tax Reporting Requirements

When figuring out your self-employment income, a taxpayer must add all of  the 1099-MISC forms received for the year, then add all non-1099-reported income, and then put it down on a single Schedule C for each separate business.

 

Deducting Business Expenses While Self-Employed

For any business deductions for expenses incurred in making the money, a taxpayer must  also report all expenses for the business on that single Schedule C. It is important to remember that when filing a tax return to not create a separate Schedule C for each 1099-MISC  received.

For estimated tax payments (not withholdings; that’s what a W-2 earner has taken automatically), a taxpayer needs to take out 13.3%, soon again 15.3%, for the self employment tax that is due to the IRS, and also the marginal tax bracket your self employed earnings are taxed at.For example,if you’re single and make $20k a year, if you earn self employment profits of another $1k, you should make an additional estimated tax payment of 15.3%+15%=30.3%=$303.

 

Making Estimated Tax Payments

Estimated payments can be done online and are fairly easy to do at eftps.gov. You can set up a wire transfer with a bank routing number to pay for estimated taxes on self-employment income to the IRS. A CPA can also set up a more complex estimated tax payment system if self-employment income continues to grow.

 

Information from IRS about Self-Employment Tax:

 

1040X Amendment, Schedule C Deductions

When filing a 1040X Amendment, what kind of deductions can you take on a Schedule C?

Generally anything you paid for the sole purpose of making money. Also, if you still are in the positive income range on Sch C after taking all the deductions you can, look into office in home if it applies to you. Think about if vehicle deductions work for your situation as well since these can add up fast. (A note, Office in home, and vehicles have very specific rules, so use these exactly right cause they are hot button issues for the IRS right now).

 

A short list of other things to consider with 1040X Amendment

  • accounting and bookkeeping
  • advertising
  • Answering Services
  • Bank Charges
  • Commissions
  • Contract Labor (be careful of 1099-misc requirements)
  • Delivery and Freight (outgoing only)
  • Dues and subscriptions (relevant only, a stock broker does not need Sports Illustrated)
  • Insurance (not health insurance, if you are self employed, health insurance for self employed is an adjustment on the 1040)
  • Interest paid
  • Janitorial
  • Legal and professional services
  • Office expenses (often abused. This is for paper and ink and pens and the like)
  • Outside Services (Buying a service from a company, like credit reports from credit reporting companies)
  • Rent paid
  • Repairs
  • Security
  • Cleaning supplies
  • Taxes paid during the year
  • Tools
  • Uniforms (Only exclusively work use, a lawyer can’t deduct a tie)
  • Licenses and License requirements (like union dues or continuing education)

 

Depreciation or Expenses

Things like computers, printers, furniture, and other assets should be depreciated and not expensed. (not sure if it’s an asset? Is it meant to be used for more than a year and costs more than $100, it’s probably an asset)

Several additional notes which might be relevant for small business owners filing a 1040X Amendment are listed below. Taxpayers should take into consideration several of these deductions when filing a Schedule C on their small business tax return.

1040X Amendment, Schedule C Deductions

A purchased vehicle should be capitalized and depreciated based on the portion (percentage) you use for your business. The same treatment applies to leases as their is a lease inclusion, that with a Schedule C, would be subject to the same apportionment based on your business use percentage. This percentage is found by taking business miles divided by the total miles of the vehicle. Meals and Entertainment are 50% deductible. Be sure that they are actually business meals. Taking a client out for golfing and drinks would be meals and entertainment subject to 50%. Grabbing Starbucks every morning before work wouldn’t fly.

Deducting Vacation with Family as Business Expense

Could a small business owner deduct some expenses associated with their vacation if  they do work while they are on vacation? Even if the work is significant? What if the vacation was near a client site?

 

Deducting Vacation on Taxes

Answer: The answer is clearly no because it wasn’t an ordinary and necessary expense related to the business. The work could have been done anywhere. Taking a vacation was not necessary to get the work done.

 

Deducting Vacation with Family as Business Expense

The purpose of the trip was obviously personal in nature and not required for business. If the business owner, happened to be near a client site, it might change things,  but probably not. The fact that it’s close to the client site may improve the odds of you convincing the IRS that the trip was taken in the course of carrying on your business or trade, but the fact that you went to a resort with just your family (rather than employees or clients or something) makes it very unlikely the IRS would go for that.

 

Claiming Business Deduction

What kind of deductions that a taxpayer claims is up to them. However, legally in this situation, there a probably not enough facts to support the deduction. If there were any expenses actually related to the work that you did while you were there (e.g. supplies, paying for internet, etc.), then you should be able to claim those as being necessary and proper to run your small business. Claiming things like airfare or lodging would be pushing the limit and the IRS would be very suspicious on audit..

If you claim the expenses, nothing will happen if you don’t get audited. If you do get audited, there’s a very high probability that the expenses will be disallowed, and you will face penalties and interest. I don’t think you would have anything else to worry about, since it’s very unlikely they would consider criminally prosecuting someone over something of such a small scale (and they would have to prove you acted willfully), but I think that you would technically be committing a crime.

 

business

7 Tips for Taxpayers Starting a New Business

Anyone starting a new business this summer should be aware of their federal tax responsibilities. Here are the top seven things the IRS wants you to know if you plan on opening a new business this year. You probably hear this from tax advisors and accountants all year long, but proper record-keeping year-round is the first step to ensuring your taxes are filed accurately and that you have the paperwork you need to back-up your deduction claims should you be audited.

Keeping your money for working capital rather than paying it out in taxes to Uncle Sam will give you an edge.

 

Below Are Some Starting Business Tax Tips

business

  1. First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.
  2. The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
  3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.
  4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
  5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.
  6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
  7. Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

 

Understand Your Business Deductions

What small business deductions can you take? Do you have the documentation and original receipts to back them up? Tax credits and deductions change each year. Both your CPA and your tax software can guide you through these deductions by asking you probing questions. These blogs also offer tips on common small business tax deductions and some deductions and credits that are specific to the 2011 tax year:

 

Additional IRS Resources on Business Taxes

Tax Tips for Online Auction Sellers

An online business comes with many tax breaks, but it also comes with some tax responsibilities. There have been recent reports about the interest of the Internal Revenue Service (IRS) in taxpayers with offshore bank accounts. The IRS’ interest, however, extends beyond offshore bank accounts. The IRS reminds you to report your worldwide income including online auctions sales to foreign customers on your U.S. tax return and lists the possible consequences of hiding income overseas.

If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S. This is true whether or not you receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or the foreign equivalents. See Publication 525, Taxable and Nontaxable Income (PDF) for more information.

 

Tax Tips for Online Auction Sellers

Online Garage Sales
If your online auction sales are the Internet equivalent of an occasional garage or yard sale, you generally do not have to report the sales. In a garage sale, you generally sell household items you purchased over the years and used personally. If you paid more for the items than you sell them for, the sales are not reportable. Losses on personal use property are not deductible, either. However, see Sales of Appreciated Assets at an Online Auction for gain reporting.

Home-Based Online Auction Seller Businesses
If your online garage sale develops into a business and/or you have recurring sales and are purchasing items for resale with the intention of making a profit; you may have started an online auction business.

Online Auction Sales Trade or Business
If you are operating a viable online auction seller business you may be entitled to deduct business expenses. Do you have an established business and you are augmenting your sales with online auction sales? Then, remember to include the online auction sales in your business income. View an IRS video on Business Income or read a transcript of the video.

Sales of Appreciated Assets at an Online Auction
Examples of appreciated assets often include art, antiques and collectibles. If you have online auction sales of property where the sales price is more than your cost or other basis, you usually will have a reportable gain. These gains may be business income or capital gains.

Sales of Depreciated Business Assets
If you sell business assets or close your business you may have capital gains, ordinary gains and depreciation recapture to report. An example is the sale of an automobile used for business.

For tax information if you sell or close your online business view the IRS video entitled Closing a Business or read the transcript online.

Don’t Be A VICTIM OF A TAX SCHEME!
Some promoters are targeting home-based businesses including online auction sellers for abusive tax schemes.

 

Sales Tax and Online Auctions

Sales tax should be collected on your eBay sales if the state you live in charges a sales tax. You need to collect sales tax only from buyers that reside in the same state. You do not have to collect sales tax from buyers that live in other states. Each state has its own set of goods that are exempt from sales tax. For example, there is no sales tax on food. Some states also exempt certain types of sales transactions such as garage sales. Be sure to check with your state’s sales tax authority for more information. When you purchase items for resale using a seller’s permit, you don’t pay sales tax on that purchase. However, when you sell the items, you need to collect sales tax. Depending on your sales volume, the collected sales tax must be paid to your state’s sales tax authority on a bi-weekly, monthly, or quarterly basis.

 

References/Related Topics for Tax Tips and Online Auction Sales

Online Auction Sellers
Publication 587, Business Use of Your Home
Publication 463, Travel, Entertainment, Gift, & Car Expenses
Publication 334, Tax Guide for Small Business
Publication 17, Your Federal Income Tax for Individuals