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Archives for July 2012

Home Office Deductions for Small Business Owners

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Home Office Deductions
Whether your small business is run out of your home because there is no need to rent office space, or because you are just getting it off the ground and cannot afford a separate office yet, home office deductions can save you a substantial amount in taxes at the end of the year. Knowing what you are entitled to deduct, and keeping well organized and detailed documentation of those potential deductions, is crucial to taking advantage of the tax benefits of keeping a home office.
 
Qualifying for the Deduction — The first thing you must determine is if your home office qualifies for the home office deduction. There are two tests that must be passed to qualify your home office. First, you must regularly and exclusively use part of your home for your business. This could be an extra bedroom, a garage or a family room you have converted into an office. Second, you must use your home office as your principal place of business. This does not mean you cannot have another separate place where you conduct business, but your home must be used “substantially and regularly” for your business.
 
What Can Be Deducted–Home office deductions fall into either a direct or indirect expense. Direct expenses are expenses that most businesses incur, such as advertising, supplies, attorney fees, and wages. As a general rule, the full amount of a direct expense is deductible. Indirect expenses are things related to running or keeping up your home. Expenses such as utility bills, home owners insurance and repairs fall into the indirect expense category. These expenses are calculated by determining the percentage of your home used for your home office and then multiplying the expense by that percentage. For instance, if you use 20 percent of the total area of your home for your home office, and your utility bills for the year were $3,000, then you could deduct $600 for your home office portion of the expense ($3,000 x .20 = $600)
 
By keeping track of all your direct and indirect expenses throughout the year, you should find that your tax obligation is substantially less at the end of the year.
 
TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.
 

Filed Under: IRS

Retirement Savings options for Small Businesses

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Getting a small business up and running is its own challenge, and no matter how much you love your business you won’t be able to keep it up forever. Eventually, you’ll want to retire, and even if you only have a few employees it’s likely they will want to retire too. So, as a small business owner what can you offer your employees and yourself to move them closer to retirement?

  • 401K – While a 401K option is usually thought of in terms of something offered by large corporations, you can set up a 401K plan as part of your small business. Many people hear 401K and think that the employer has to match contributions, but that isn’t the case. If you can afford a match, great, if not it still gives employees a way to make regular contributions totalling up to $16,500 for those under 50 years, and $22,000 for those over 50. 401Ks come in both the regular and Roth varieties, letting you decide whether it is best for you to be taxed up-front with a Roth 401K or later on with a regular 401(k). 401(k)s are also good in case of an emergency, since loans are available in a pinch. Of course, there are tax implications, and plenty of paperwork to file with the IRS.
  • SEP- SEP (Simplified Employee Pensions) IRAs are a good choice for many small businesses because they are relatively easy to manage. For these plans, employees do not contribute to the plan and contribution limits are around the same amount as they are for a 401(k). Unless you are able to make large contributions, employees may want to set up a separate IRA of their own, but it’s something that gets the ball rolling in the right direction. With a SEP there is less of a safety net before that retirement day actually comes. No loans, early withdrawals, or catch up contributions are allowed, but there are also fewer IRS regulations to worry about, which can be a big relief to a lot of small business owners.
  • SIMPLE IRA – Just because the name says “simple” doesn’t mean that it is, but the SIMPLE IRA isn’t rocket science either. SIMPLE stands for Savings Insentive Match for Employees. In this plan, employers are required to match contributions, although those contributions are far less than 401(k) or SEP options, only $11,500 is allowed for a SIMPLE IRA. There are also fewer reporting requirements with the SIMPLE IRA as well.

Of course, whatever you choose to offer by way of retirement plans for your employees or for yourself will depend a lot on the state of your business, what you can afford, and how much you are willing to invest in your employees future.

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TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.
 

Filed Under: IRS