Getting Tax Ready in 2012, Part 3 – Get Deductions! (Home Office)

Thursday, January 26, 2012 Posted in Finance, Tax

This week we are talkin’ taxes! On Tuesday we got all the insane paperwork together and caught up on our accounting from 2011. Yesterday, I began the discussion on tax deductions, specifically mileage from driving to your business meetings. Today, let’s continue talking about deductions your business can take to lessen the amount of taxes that you send to the IRS each year.

These are some of the write-offs that you might be missing out on:

The Home Office

If you rent your home, your tax write-off is a fairly simple calculation. (The IRS provides a worksheet to do the math. Likely, your tax accountant will work out the numbers for you.) Essentially, you will calculate the percentage of your home that is used exclusively for business. From there you determine how much of your rent you can deduct from your taxes. For example, let’s say…

Your home office is equivalent to 10% of your home
You pay $2000 rent each month

= $200 rent / month is a business expense x 12 months = $2400 rent expense as a business expense for 2011

On your tax form, you will enter this amount to lessen your tax base. You can also deduct a portion of your utilities. (In this example, you could write off 10% of your utility expenses for the year.)

If you own your home, writing off the percentage on your mortgage is more complicated and you will want to consult your tax accountant. It involves interest and depreciation and fancy accounting. Furthermore, if you end up selling your house down the line, there are tax implications to the prior year tax write-offs. In a nutshell: talk to your tax accountant for the best way to work this. I know some accountants that do recommend that your business pay your family a rent check each month for the use of the home, but you’ll have to make sure you can do this in your specific situation.

Shady areas:

The IRS doesn’t like to see that you’ve written off a portion of your living room because you work on your laptop from the couch. They’ll want to make sure that the use of space in your home is completely EXCLUSIVE to the use of business. They also don’t like to see write-offs for other items that have the personal/business mix. (For example a phone that is used for personal and business unless you can itemize the calls.)Meals & Entertainment

In your accounting (Quickbooks or Excel) you will list the entire meal or entertainment with a client or colleague as a business expense. However, the IRS only allows you to deduct 50% of meals and entertainment. (Remember what I said yesterday about a write-off not always being a great business move for the sole purpose of writing an expense off.) Therefore, your accountant will make an adjustment on your tax form that ADDS BACK 50% of the amount. Essentially, you are increasing your tax base on meals and expenses. So, just be watchful of this expense type. You can easily get sucked in because of the ‘write-off’ when it’s money you can’t totally deduct from your taxes.

OtherWorking with a tax accountant can be awesome because new change are always being made to the tax code. They are up on all the latest in the world of IRS and can save you some hard earned money.

Come back next week! I want to talk about saving for taxes.