Tax tips all small business owners should know

Photo courtesy of Pexels.com

Photo courtesy of Pexels.com

PLEASE NOTE: The posting and reading of the article and blog does not establish an attorney-client relationship with Attorney Nancy Winter or constitute legal advice from Attorney Winter to the reader or the public. The law constantly changes and facts vary widely. Before relying on any general legal information contained herein, please consult legal counsel as to your particular situation.

Between now and April 15th business owners across the country will work diligently to get their record books in order for Uncle Sam’s annual review. In other words, it’s tax season! We spoke with Attorney Nancy Winter at the The Law Center, S.C. in Madison, Wis. to sort through common issues you, the small biz owner, may encounter this time of year.

RECORD KEEPING
Small business owners wear a lot of hats. You may play the role of Chief Executive Officer one minute, Chief Financial Officer the next, and round out your day performing Chief Technology Officer duties. That probably doesn’t leave a whole lot of time for record keeping.

As a result a fair amount of small business owners run into trouble when it comes to information reporting. In particular, Nancy says you need to pay special attention to whom and how much you spend on products or services for your organization. The IRS has been making this a point of emphasis recently.

Nancy says, “If your small business is paying for products or services and you’re putting the expense on your tax return, be sure to give the provider/contractor a 1099 if the cost exceeds $600 and the provider/contractor is not a corporation.”

HOME OFFICE
There are certain tax advantages for small business owners who operate out of their home. You may be able to write off the space used for your business activities. However, in general, there are two criteria that have to be met.

  • The portion of your home claimed has to be used exclusively for business. The space CAN’T have a dual purpose, like serving as a spare bedroom.
  • The space you claim has to be the principal work area for your business OR it has to be a place where you regularly meet with clients.

There are two methods for calculating how much you’ll receive. The first is known as the actual expense method. We’re not going to talk about this one a lot. In general, Nancy encourages business owners who do not have paid tax preparers to stay away from this method, because the deduction of depreciation allowed under the actual expense method reduces the gain exclusion available for the sale of a principal residence.

When you put your primary residence on the market, you don’t have to pay taxes on profit from the sale

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Photo courtesy of Pexels.com

if you qualify under the gain exclusion rules. For single people it’s worth up to $250,000 and $500,000 for married couples. If you were to claim the depreciation on your home office then you’d have to pay a tax on that portion of the sale which could be attributed to your home office.

Nancy instead encourages her clients to use the optional method for their home office. This approach allows you to write off $5 per square foot, up to $300. The optional method is also available to renters.

When you put your primary residence on the market, you don’t have to pay taxes on profit from the sale if you qualify under the gain exclusion rules. For single people it’s worth up to $250,000 and $500,000 for married couples. If you were to claim the depreciation on your home office then you’d have to pay a tax on that portion of the sale which could be attributed to your home office.

Nancy instead encourages her clients to use the optional method for their home office. This approach allows you to write off $5 per square foot, up to $300. The optional method is also available to renters.

EMPLOYEES
Were you kind of sick last Thursday? You know the kind of sick I’m talking about. You don’t feel terrible, but you know if you go into the office your coworkers will shun you for potentially exposing them to whatever horrible virus you contracted? Instead, you decide to work from home to make life easier for everyone. Well, that wouldn’t qualify as working from home.

However, according to Nancy in certain situations an employee can write off their home office. To qualify the employer must have a work from home policy. Also, working from home has to be for the employer’s convenience, not yours.

That said, it may not be worth the effort.

Nancy says, “An employee who works from home and incurs qualifying home office expenses has to include their home office expenses under their miscellaneous itemized deductions using Schedule A.”

Unfortunately, the amount employees who work from home can claim (as a miscellaneous itemized deduction) is reduced by two percent of their adjusted gross income which for most employees is equal to gross income (salary plus other income). Because of this reduction, Nancy says it’s not that much of an advantage. Instead, she says it’s more beneficial if the employer offers some type of reimbursement for home office expenses.

For more information you can visit irs.gov and search for form 587 or you can click here.

VEHICLE(S)

Photo courtesy of Pexels.com

Photo courtesy of Pexels.com

Do you use your vehicle to get to and from client meetings or appointments? Then you may be able to claim a deduction for your car or truck’s business use. Similar to the home office, there are two methods for determining how much you can claim.

The first is known as the actual expense method. This method includes writing off depreciation for your owned vehicle. Once again, Nancy encourages her business owners who do not have paid tax preparers to steer clear of this method. First, this approach is complicated. Second, there are limitations to how much can be deducted.

Instead, Nancy encourages her small business clients to use the mileage method. This process is straightforward and it applies to both leased and owned vehicles. However, it does require a fair amount of record keeping (we told you record keeping was important). You’ll need to keep an accurate log containing dates, miles, and purposes of travel.

Any deduction you claim for mileage has to be point-to-point.

“Point-to-point means both the beginning and the ending point of your trip must be business related. An example of point-to-point travel would be going from your home office, to a client meeting, and back to your home office,” according to Nancy.

If you went from the grocery store, to a client a meeting and then ran to the dry cleaners once the appointment wrapped up, you wouldn’t be able to claim that mileage. Mileage rates change from year-to-year. So, you’ll need to check with the IRS for the most current figure. In 2015 the rate was 57.5 cents per mile.

OFFICE SUPPLIES AND EQUIPMENT
You can write off office supplies and office equipment you own, rent, or repair. According to Nancy you can write off:

  • Depreciation on equipment you own;
  • Fees for equipment you rent;
  • Repair expenses for equipment you own (if you make the proper election, you can claim up to $500 per item of equipment repaired as a current expense).

IN CLOSING…
Your success this tax season really goes back to how much work you did last year. If you maintained precise book keeping and accurate records then this season’s taxes should be a snap! If you didn’t you may want to reach out to a professional, like those at The Law Center, for help.

About Barclay Pollak

Barclay Pollak is an award winning journalist and proud to be a member of the Corporate Communications team at TDS Telecommunications Corp. (TDS®) in Madison, Wis. Barclay joined the team in April of 2013. Before that Barclay worked as an Anchor/ Reporter for the NBC affiliate in Madison. While at NBC-15 Barclay was recognized by several organizations for his contributions to the television news industry. They include the Wisconsin Broadcasters Association, the Radio Television Digital News Association (Edward R. Murrow Regional Award) and the Chicago/Midwest National Academy of Television Arts and Sciences (2012 Emmy Nominee). When he’s not working Barclay enjoys cheering for all the sports teams in Wisconsin. Barclay’s a University of Wisconsin-Madison alumnus and a huge fan of Badger athletics. Barclay is fascinated by the ever changing world of technology and spends a fair amount of his free time reading about the latest and greatest developments online. When Barclay’s not learning about technology he’s scouring the Internet in search of freeware. Barclay has an 8-year-old daughter and lives with his girlfriend of almost five years on Madison’s southwest side. Follow on G+.

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