KBL Business Bytes

Question:

I have a home office. What types of expenses are deductible when one has a home office?

Answer :

With more and more people expected to be self-employed and working from home, here are a number of tips to help home-business-owners be sure they were properly calculating home office deductions:

Business Only

TOne of the most important things to be sure of before you try to claim the deduction is that some part of the home has to be exclusively and regularly used as the principal place of business. A mixed-use area, like a kitchen, wii not qualify.

The Simplified Option

Self-employed folks with an office in their home do not need to do a lot of calculations and add up all their home-office-related expenses. The IRS now offers a simplified option based on the size of the office. Under this simplified option you take a standard deduction of $5 per square foot of workspace, up to 300 square feet.

You can go with individual expenses or the simplified option, whichever is larger, and you can change from year to year.

Common Deductions

Some of the business owners heating, electric and utility bills can be deducted, and phone, internet and other information services may also qualify. Separate Internet connections and phone numbers can help keep track of expenses.

An office isnot an office without office supplies -- which is why computers, printers, toner, paper, paper clips, staplers, staples, staple removers and other critical equipment may also qualify. Furniture and upgrades to the home itself, if related to the office, may also be deductible.

Leaving Home

Many of those with home offices will find themselves travelling for business purposes even if its just driving across town to a client. Parking, tolls and mileage (at 54 cents a mile for business-related travel) may all be deductible, to say nothing of airfare and hotel rooms.

Recordkeeping

We recommend keeping expense records for at least three years after filing, or two years after paying taxes, whichever is later. Among the records home-business-owners should be holding onto are cancelled checks, bank statements, vendor invoices, bills, receipts and mileage logs.

More information on having a home office is available in IRS Publication 587.

KBL Business Bytes represents short answers to common questions that we receive from the owners emerging businesses. The information contained in KBL Business Bytes should not be used in any actual transaction without the advice and guidance of a professional adviser who is familiar with all the relevant facts.

Question:
We process our sales tax within QuickBooks using their sales tax platform. However, the sales tax payable liability reflected in QuickBooks does not zero out after payment and the sales tax payable liability in QuickBooks keeps increasing.

What are we doing wrong?

Answer:

We have a client that pays sales tax to several states and we set up a system where the QuickBooks sales tax payable balances are reconciled to the sales tax paid and filed monthly. Prior to that it never matched up.

Turns out the reason was that after the sales tax returns were processed there were instances where invoices were entered afterwards into the system for dates prior to the sales tax reporting date.

So for example, let's say that the sales tax due for the period ended June 30 was processed and paid. There were instances that after processing, invoices were then entered into the system that had a date of June 30 and before. Which resulted in an increase in the sales tax payable liability. But because the invoices were reflected June 30 and prior and after the sales tax for that month had been processed they ended up not being reported and not paid to the government subsequently. And the sales tax liability would keep growing for these types of amounts.

Our fix for it was that immediately after the sales tax returns were processed QuickBooks was password closed. This stopped additional processing of invoices prior to the date of closing. Then when the client checked the sales tax payable balance at the end of each period the sales tax payable liability in QuickBooks would zero out.

KBL Business Bytes represents short answers to common questions that we receive from the owners emerging businesses. The information contained in KBL Business Bytes should not be used in any actual transaction without the advice and guidance of a professional adviser who is familiar with all the relevant facts.

Question:
I have been invited to invest on a friends and family level with a start-up, and was wondering if anyone could share experience on how to evaluate such an "opportunity".

Answer:
The majority of these financing opportunities result in no return. Unless the company is mature and possibly going public I wouldn't do it. Unless you need a future tax write off and have passive income to offset any losses generated from the investment . My experience in these types of situations is summarized with three words from the movie Forest Gump: "Run Forest, Run".

KBL Business Bytes represents short answers to common questions that we receive from the owners of emerging businesses. The information contained in KBL Business Bytes should not be used in any actual transaction without the advice and guidance of a professional adviser who is familiar with all the relevant facts.

Question:
What are your thoughts/experiences about classifying S Corporation owner income as salary vs. S corporation distributions to save Medicare taxes? Is there a rule of thumb, formula or other insight on this issue about saving taxes vs. preventing IRS scrutiny?

Answer:
There is no hard and fast rule on this. It's a total judgment call with the IRS. S corporation shareholders are supposed to be compensated with salary for a reasonable amount based upon the fair market value of their services. Typically, reasonable compensation is the amount that a business owner would have to pay for someone else to do that job. Everything else is the profits generated by that business and available to be distributed to owners.

The IRS would prefer to see a higher amount allocated to salary to maximize the FICA and Medicare taxes. S corporation owners sometimes look to allocate as much of their compensation to distributions to save on FICA taxes. However, once you have exceeded the FICA maximum, which for 2015 is $118,500, there is less in it for the IRS since the only additional tax is for Medicare which is taxed at a rate of 1.45% on all wages.

Some companies choose to go with a percentage formula for salary vs. S corporation distributions. If you take this approach in my opinion the most reasonable formulas range from 50/50 to 80/20 salary to distributions. I recommend somewhere in the range of 65/35, 75/25 salary to distributions. However, S corps located in NYC have to be mindful of the impact on NYC corporate taxes as one of the formulas for calculating NYC corporate taxes includes an add back of the officer's compensation.

However, simply looking at it this way ignores the potential of the IRS down the road doing a simple desk audit and deciding, using their judgment, that, yes, you have manipulated your S compensation to lower your taxes, your compensation that is stated is not reasonable, and that there is a basis for restating your tax return. And looking at previously filed returns and returns that follow the year they are auditing. Which results in you amending a whole bunch of federal personal and business tax returns based upon the "reasonable" compensation number the "IRS came up with" and paying a whole bunch of business and personal taxes and penalties and interest.

Oh and another thing: if you are located in NYC as part of that you have to re-do your NYC tax returns for the years that the IRS has required you to amend which could make you subject to the above mentioned higher alternative NYC business tax.

I think it would be better to come up with a reasonable number for compensation, pay a reasonable amount of tax, and have a reasonable basis for an argument if you are audited as opposed to exposing yourself to the potential nightmare above. It's called "insurance".

You should remember that as you get 10 or so years close to retirement, you should up your salary to the maximum so that you get the maximum Social Security benefit when you retire.

My final comment is that you may want to consider a high end deferred compensation retirement plan as a strategy for reducing both your and the Company's taxes. These types of plans can provide significant current tax deductions while also addressing retirement, life insurance, estate planning, and financial planning issues. And also can be used to attract and retain key employees.