The home office is an automatic audit and other tax myths

From Yahoo Finance:



Tax myths are a lot like a bad date. They are annoying and seem to last forever. Yet people have beliefs about income taxes that have no basis in reality. Were it not for the potential financial costs, some of these might be amusing. But if you believe them and act upon them, they can cost you serious money.

1. The Home Office Deduction Is an Automatic Audit

This myth has been around for about a quarter-century and is accepted as gospel among those who are not intimately familiar with income tax preparation. In truth, as long as a home office deduction follows IRS rules, and is not excessive, this deduction is not an automatic red flag for audits.

The IRS has three basic rules when it comes to the home office deduction:

• Regular and exclusive use – This means that the home office is regularly used for business, and has no other use. As long as you have a room in your home that you are using exclusively for business on a regular basis, you meet this requirement.
• Principal place of business - The home office can't simply be a space that you occasionally use to conduct business. It must be the primary office from which you run your business. This means that you can't deduct expenses for a principal office outside of your home, in addition to your home office.
• Additional tests for employee use – As an employee, you may be able to take a home office deduction if you a) meet the two tests above, b) your business use of your home is for the convenience of your employer, and c) your employer does not pay rent for the space.

Read more by clicking on this link. 

January 15, 2015 S Corporation Newsletter

Remember the due date for your 2014 corporate return is March 15, 2015. We prefer to file both our client’s personal and corporate return at the same time.  Both forms are tied together both in terms of income and deductions.  Remember, no taxes are due with your corporate return.  And most clients file closer to April 15th and not March 15th.  Unless you specifically tell us to not file an automatic six month extension in March, we will file one on your behalf in March.

A new S Corporation tax organizer will be in the mail to you fairly quickly.  We just finished mailing out our individual 2015 Tax Guide.  Watch your mail.  We are adding additional pdf file organizers to our website as we speak.  They should be available online next week.

From our January 2, 2013 client newsletter:

My wife Cindy and I flew to Florida on Southwest Airlines last December.  On the back of our boarding pass jacket was printed “We do things differently  (aka better) at Southwest Airlines.”  I liked that slogan so much that I stole it for us to use.   

Southwest Airlines success in an industry filled with bankruptcies and failures is truly amazing.    As Warren Buffett once wrote in a letter to shareholders, “If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”  Since the late eighties, every major airline in the country has gone bankrupt—except one, Southwest. As the United States' largest (in terms of domestic originating passengers carried) low-fare, high frequency, point-to-point carrier, year end financial results for 2011 marked Southwest's 39th consecutive year of profitability.

Other airlines have been jealous of Southwest's success and its relationship with its customers and employees for years. And no one seems to be able to get to the bottom line of what they do operationally and financially that makes them a success. Maybe there is nothing more, it's all just a matter of operating efficiently and keeping employees and customers happy. In fact, many start-up airlines now use Southwest as their template for operating their airline.

What are the ingredients that have made Southwest Airlines such a consistent success story? This is an airline that has defied industry norms of either red ink on the bottom line or very low profit margins of 1-4 percent. The airline invented its own business model avoiding the usual management fads such as business process reengineering, total quality management, change management and balanced business scorecard, among others.

The one thing that Southwest has done that has made them stand out in the airline industry was not to charge a checked bag fee.  This one brilliant decision has made them stand out from their competitors. With the perception that airlines are just a commodity business, not charging for bags has made a tremendous difference in their bottom line.  In fact not paying for three check bags was the basis for our decision to fly Southwest in a completely filled airplane, on an itinerary that took us first to Baltimore and then to St. Louis instead of their competitors.  

Small business owners struggling to establish their businesses under the weight of ridiculous laws and red tape and big businesses that seek to reap monopoly or oligopoly profits will take comfort from the realization that with persistence, perseverance, determination, self-confidence, hard work and the desire to provide exceptional services to customers using dedicated and motivated workforce, they will always win in the end.

And that’s Southwest's recipe for success in a very tough business world.  When was the last time you read a tweet, facebook update or blogpost about someone being happy about paying $25 dollars for their luggage to fly with them. Being different is better.

 

Questions we get questions.

What are the disadvantages of forming a corporation?

The primary disadvantages are (1) the work involved in, and the expense of, forming a corporation and (2) after-incorporation record keeping requirements.

Other disadvantages include the possibility of double taxation if the S Corporation election is not made and if care is not taken to assure that there is no net profit after the deduction of reasonable business expenses, including salaries. In this regard, it should be noted that if a regular corporation (as opposed to an S Corporation) has a net profit after all expenses are deducted, there may be a tax at the corporate level on that net profit, and an additional tax when that net profit is paid out to the stockholders as dividends.  We call that double taxation.  That is why the S Corporation is so popular.  No corporate level taxation.

Additionally, when a corporation does sufficient business in another state (such as opening an office in that state), state laws generally require the corporation to qualify to do business in the new state.

With exception of the incorporating costs, and the additional recordkeeping requirements S Corporations continue to be a no-brainer.

Sometimes we get so busy doing it.  You know the stuff your business does.  The production part of our business and ignore the other parts of owning our business.  Our focus can result in some very bad things. Successful business owners spend the majority of their time working on their business not in the business.  Which leads me to the article below I recently found discussing cash flow and cash flow strategies. It simply lists specific things you can do to help you keep your cash flow positive. Try it.  It works.

Cash Flow Strategies for a Healthy Business

“Cash flow is important in any business. It’s especially important in young or small businesses, where cash flow is connected closely to the ability to pay employees and suppliers. Keep your business healthy by following these simple cash flow strategies.

Clarify How and When You Expect Payment

The best business is one in which you collect payment from your customers as soon as payment is due – ie, with credit card payments. If your customers will pay with credit cards or direct bank payments (“ACH” or “EFT”), consider that as a way to improve your cash flow. Although you will lose 2-4% in bank fees, you will receive payment within days instead of weeks or months.

If you sell to other businesses, then you may have to send invoices and wait for payment. This is where it’s critical to be sure your customers know when they’re expected to pay.

Be sure this is clear before you start work.

Most business customers expect 30 days to pay invoices. Many large businesses expect 60 or 90 days or even longer.

What’s worse is that some large businesses will agree to 30 days and then take 60 or 90 days, because they know you want their continuing business. They will ultimately pay, but they’ll make you wait. If you don’t have cash, cash flow, or credit to wait it out, these large customers can cause severe problems if you’re counting on their payments to pay your expenses. If you’re a small business selling to large businesses, prepare to wait for payment.

Offer Early-Pay Discounts

Offer a 2% discount if business customers pay within 10 days. A very common term is “2/10 Net 30”, which means you expect payment in 30 days, but you’ll give 2% off if you receive payment in 10 days.

You can also offer a discount if your customer pre-pays for a long period of time. For instance, if your customer usually spends $100/month, offer 6 months for $550. That’s an 8% discount. That does lower your long-term revenue, but it’s a strong incentive for customers to pay up front.

Word to the wise: if you collect long-term prepayments, spread the cash received over the number of months it represents. You have an obligation to provide the service for which your customer paid, so don’t use the money too early.

Bill Often

If you’re selling time & materials, such as with home improvements or website design, be sure to collect a deposit before you start work. Most industries have norms around this, but a rule of thumb is to collect 25-50% up front, and the rest when you reach milestones and again when you complete the work.

The same applies if you’re billing on a strictly hourly basis… collect a deposit upfront and be sure to bill your customer for hours & materials every week or two.

This is critical to keep good cash flow, and to avoid a serious problem if your customer cannot pay for your work after you’ve spent time & money on their project.

Adopt a Recurring Revenue Model

If your business naturally generates a recurring revenue stream, then you’re ahead in terms of consistent cash flow. Think of cell phone service, cable TV, HOA dues, yard care, cleaning service, and insurance – they all have consistent cash flow.

More and more businesses are adopting a recurring revenue model because of the clear cash flow advantages that result. For instance, some doctors offer a monthly fee, charged to a credit card, for periodic office visits. In another example, churches and schools are setting up recurring donations – where each donor can select an amount that’s charged to a credit card every month or every quarter.

Software is another area that’s changing quickly. You may have heard the term “Software as a Service” (or “SaaS”). Customers receive access to software via the Internet, and that access continues as long as they keep paying a monthly or yearly fee, which is usually billed to a credit card. Everyone knows about paid online dating sites (an early example), but there are many, many others today.

Find a recurring revenue model in your business – even if it’s just 20% of your total revenue, it will make a positive difference in your cash flow.

Use an Online Accounting System

An online accounting system is an absolute must for any business, even if you’re a 1-person shop. Online accounting systems can generate invoices, send them to your customers, and let you monitor your Accounts Receivable with things such as an Aging Report (a report of who owes you money and how long they’ve owed it).

Most accounting systems can also send reminders when customers are overdue, and extra charges can be automatically added when customers pay late.  We suggest you take a look at the free wave accounting software. Here is a link to their website.  

Source Cash flow strategies for a healthy business. Successful Small Business.com

Do you know someone who having tax issues?  We can help.  According to IRS one in six taxpayers will have some sort of tax liability problem at some point.  Along with my colleague, former Illinois Department of Revenue attorney Jim Chipman, we have helped dozens of clients solve their tax problems, and this is very important, honestly and affordably.  If you know someone who is having problems, please ask them to call us.

Do you know someone who would like a copy of this email newsletter?  If so pass it on or ask them to send us their email at taxpartnerfreereports@gmail.com.

Simplification of a very complicated new rule. Is it a repair or an improvement.

From my ATX blog.

IRS Delivers Relief from Form 3115 Repair Regulation Filing (Rev. Proc. 2015-20),(Feb. 16, 2015)

The IRS has issued a revenue procedure that offers significant relief to small business taxpayers from the requirements of filing a Form 3115, Application for Change in Accounting Method, to comply with the final repair regulations and certain MARS disposition regulations.

This relief is available to a taxpayer with one or more separate and distinct trades or businesses and has either:
• (1) total assets of less than $10 million as of the first day of the tax year for which a change in method of accounting under the final tangible property regulations is effective; or
• (2) average annual gross receipts of $10 million or less for the prior three tax years (as determined under Reg. §1.263(a)-3(h)(3))

The criteria for relief are applied separately to each of the taxpayer’s trades or businesses. A taxpayer’s separate and distinct trade or business that does not meet one or both criteria does not qualify for relief.

COMMENT: A taxpayer is required to comply with the final tangible property regulations in its first tax year beginning on or after January 1, 2014. The relief applies to the 2014 tax year.
The relief allows qualifying taxpayers to make changes to comply with the repair regulations and certain MACRS disposition regulations on a cutoff basis that only takes into account amounts paid or incurred, and dispositions, in tax years beginning on or after January 1, 2014. If a taxpayer chooses to make the changes on a cutoff basis, they may be made without filing Form 3115 for the taxpayer’s first tax year beginning on or after January 1, 2014. In other words, a taxpayer does not need to file Form 3115 for the 2014 tax year to comply with the covered changes if the taxpayer applies the changes on a cutoff basis and, therefore, does not have a Code Sec. 481(a)adjustment.

COMMENT: A taxpayer that applies the changes on a cutoff basis does not receive audit protection for amounts subject to the change for tax years beginning prior to January 1, 2014.
This IRS procedure states that the relief applies to all of the accounting method changes relating to the repair regulations which are described in Sec. 10.11(3)(a) of Rev. Proc. 2015-14, I.R.B. 2015-5, 450. This section provides the accounting method changes for compliance with virtually all repair regulations issued by T.D. 9636 (viz., Reg. §1.263(a)-3 (capitalization of improvements), Reg. §1.263(a)-2 (acquisitions of property), Reg. §1.162-3 (materials and supplies), and Reg. §1.162-4 (repairs).


If a taxpayer chooses to apply the repair regulations (Sec. 10.11(3)(a)) on a cutoff basis, it must also apply the MACR tangible property accounting method changes described in Secs. 6.37(3)(a)(iv), (v), (vii) or (viii) and Secs. 6.38 and 6.39 of Rev. Proc. 2015-14 on a cutoff basis without taking into account dispositions that occurred in a tax year beginning before January 1, 2014, and no Form 3115 is required to make the changes described in those sections. Audit protection is not provided for dispositions occurring prior to January 1, 2014, if these changes are applied on a cutoff basis. Conversely, if a taxpayer applies any of these disposition changes on a cutoff basis, then it must apply the repair regulations on a cut off basis.

The specified sections in Sec. 6.37 relate to permissible to permissible changes in identifying assets or portions of assets disposed of from multiple asset accounts and mass asset accounts. Sec. 6.38 and Sec. 6.39 relate to recognition of gain and loss on dispositions of buildings and structural components (Sec. 6.38) or section 1245 property (Sec. 6.39) that are considered disposed of without making a partial disposition election. Certain other changes are also described in those sections.

Significantly, a late partial disposition election to claim retirement losses on previously retired components may not be made by filing the method change described in Sec. 6.33 of Rev. Proc. 2015-14 if any accounting method change described in Sec. 10.11(3)(a) or in Secs. 6.37, 6.38, and 6.39 is applied on a cutoff basis. Thus, a taxpayer choosing not to file a Form 3115 to comply with the repair regulations may not make a late partial disposition election.

COMMENT: The late partial disposition election allows a taxpayer to claim a retirement loss on the undepreciated basis of previously retired structural components, such of the roof of a building. These losses can be significant for even small taxpayers. Consequently, many taxpayers who otherwise qualify for the relief provided in the new revenue procedure may choose not to exercise it. Similarly, taxpayers who would compute sizeable net negative (favorable) Code Sec. 481(a) adjustments for implementing the repair regulations by finding significant capitalized expenditures that are deductible under the repair regulations may decline the relief.

A transition rule allows a qualifying taxpayer that filed a return for its first tax year beginning on or after January 1, 2014, with a Form 3115 to change to a method of accounting to comply with the repair regulations under Sec. 10.11(3)(a) or the MACRS disposition regulations under the specified subsections of Sec. 6.37 or Secs. 6.38 and 6.39 to file an amended return to withdraw the Form 3115.

The IRS also requests written comments by April 21, 2015, on the issue of whether the $500 per item deduction limit under the de minimis safe harbor of Reg. §1.263(a)-1(f) should be increased.