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Home Office Deductions for Small Business Owners

July 28, 2012 by mrice

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.

Retirement Savings options for Small Businesses

July 19, 2012 by mrice

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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$50,000 NC Small Business Owners Tax Deduction

June 11, 2012 by mrice

Your first $50,000 of net business income starting with the 2012 tax year may be free of state tax! That’s right; many North Carolina business owners will become eligible for up to $50,000 North Carolina income tax write-off thanks to the recent passage of North Carolina House Bill 200 and North Carolina Senate Bill 267.

The North Carolina $50,000 Tax Deduction

The new North Carolina deduction for business owners allow a single business owner to deduct up to $50,000 of net business income included on the federal return that is not considered passive. Married business owners can deduct up to $50,000 each. Business owners who report income on federal Schedule C, E, and/or F are eligible for the North Carolina $50,000 tax deduction.

North Carolina Passive vs. Non-Passive Income Defined

North Carolina defers to the Internal Revenue Code (IRC), specifically Internal Revenue Code 469, to define passive income. Generally, passive activities are business activities in which there is material participation. Per IRS guidance, “you materially participate in an activity if you are involved in the operation of the activity on a regular, continuous, and substantial basis”. However there are very specific rules, especially for real estate professionals. IRS Publication 925, Passive Activity and At-Risk Rules, provides a plain language examples of passive activities.

How to Claim the $50,000 Business Income Deduction

The 2012 North Carolina tax forms with specific instructions are expected to be released later this year. Matthew J Rice, CPA PC will provide an update as soon as it becomes available. Become a Facebook fan to get automatic updates on this deduction by clicking on this link. http://www.facebook.com/#!/matthewjricecpa

2012 Small Business Tax Law Changes:What you need to know

May 30, 2012 by mrice

Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

2012 Small Business Tax Law Changes: What You Need to Know

New year. New tax law changes. 2012 doesn’t see a ton of tax law changes, but there are several you need to be aware of. Let’s dive right in, shall we?

Write-offs. If you lease or finance used or new machinery or equipment during 2012, you won’t be able to write off as much as you could last year. In 2012, businesses can deduct $139,000 (down from $500,000 in 2011) of the full purchase price (maximum purchase price of $2 million) of leased or financed equipment under Section 179 of the Internal Revenue Tax Code. Off-the-shelf computer software used in business in 2012 is also available for the Section 179 deduction.

Bonus Depreciation. The first year bonus deduction of new equipments is cut in half: it drops to 50 percent in 2012, down from 100 percent in 2011.

Payroll taxes. The temporary payroll tax cut originally designed to stay in place until February 29, 2012 has been extended through the end of the year. This means employees will continue to see a payroll tax cut of two percentage points through the remainder of the 2012 calendar year. The reduction will continue to hold the Social Security tax withholding rate at 4.2 percent of wages, down from 6.2 percent.

Qualified retirement plans contributions. Up from its 2011 limit of $49,000, employers can contribute up to $50,000 (and receive a tax deduction) to SEPs and profit-sharing plans in 2012. The limit for pension plans (defined benefits plans) benefits is $200,000 in 2012, up from $195,000 in 2011.

Tax-free transportation for employees. For 2012, companies can pay tax-free parking expenses of $240 per month per employer. This is up from $230 in 2011. However, the limit on monthly assistance for van pooling and monthly transportation passes drops from $230 a month in 2011 to $125 in 2012.

Expired R&D credit. Intended to provide deductions for small businesses and startups for research expenses, the R&D credit has expired. However, Congress has reinstated it retroactively in the past, so there’s a possibility it may come back for 2012. Keep a look out.

Worker classification. As part of its “fresh start” initiative, the IRS unveiled a new program entitled the Voluntary Classification Settlement Program (VCSP) to allow employers to reclassify misclassified independent contractors as employees voluntarily for federal employment tax purposes. In exchange for the voluntary reclassification, the IRS will offer a reduced employment tax liability of 10 percent, no interest or penalties, and no employment tax audit.

What’s the Bottom Line?
It’s a good idea to meet with your tax advisor early in the year to review the 2012 tax law changes. This will not only help you save on 2012’s tax bill, but budget more accurately for the remainder of the year.

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Fraud:It can happen to you

May 25, 2012 by mrice

Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Fraud: It can happen to you

Do you know how to detect it or protect yourself? Most of us want to believe the best of people and therefore we are naive and believe it will never happen to us. When in reality, small and mid-size businesses are impacted at a much higher percentage than large corporations. Why? Smaller businesses tend to take fewer precautionary measures to prevent fraudulent behavior.From my experience, it is usually done by a family member, long time employee, or friend that’s been given too much freedom with too few controls. For most of us, it is an innate belief that we trust people unless they give us a reason not to. However, you must not be naive. You need to know that it is very much a reality that could happen in your business and you need to be aware of why it happens, how to identify if it is happening, and what to do if it has happened.

Why does fraud happen? Usually it is a mixture of three aspects that sets the stage:

Opportunity – an opportunity for fraudulent behavior is provided by the company unknowingly. Small businesses are more prone to these because of the lack of separation of duties.
Pressure – personal pressures can put people over the edge and cause them to be irrational in their thinking. They may have medical issues, financial issues, or a variety of other personal situations that are influencing their judgment.
Rationalization – the employee believes they can rationalize their behavior. They need the money more then the company, the company won’t ever notice, and a million other similar types of insidious thoughts.

To someone who commits fraud, they can rationalize their behavior in a variety of different ways and will go to extreme measures to cover their tracks. Small business owners believe it won’t happen to them as they often consider their employees like family. However, it is critical that you are able to keep a separation of thoughts between what happens at work and what happens outside the four walls of your business. No business is 100% safe.

What are five popular types of fraud?

Claiming additional payroll hours or falsifying an employee.
Stealing merchandise or cash.
Giving unauthorized discounts to friends and family.
Selling private business information to outsiders.
Exaggerating on expense reports

The biggest way to identify if it is happening in your business is to implement a control process that includes separation of duties. Here are a few easy to implement activities that can help identify and/or prevent fraud:

Payroll – hand deliver the paychecks. This will help identify if there are any “false” employees. A process for tracking hours will help to minimize extra hours appearing on anyone’s time card. This can be done by having a manager sign off on subordinate’s time sheets or by having a time
Theft of cash or merchandise – have controls in place that ensure separation of duties. Those who receive the money should be different than those who have done the invoicing and depositing. Same goes for inventory. There should be a checks and balances for purchase orders, receiving and invoicing.
Unauthorized discounts – have a sales system in place that tracks any time discounts are given. When you can retrieve a discount report, then you will be able to easily identify anything out of the ordinary variances.
Selling private information – this is a difficult one to protect. You should have everyone sign an agreement at the time of hire to notify them that they are going to be exposed to confidential information and what their responsibilities are and consequences should they disclose to outsiders. Computer systems and paper work should also be protected with passwords, lock and key and whatever other measures may be warranted to minimize unnecessary access.
Expense Reports – require receipts on ALL reports for reimbursement with no exceptions. Also establish guidelines so that if they fall outside those guidelines then they may risk not being reimbursed without prior approval.

Unfortunately all we can do is implement protective measures to the best of our ability. There is no 100% fool proof way to guarantee it won’t happen to us. However, you need to ensure you are assessing your risk and implementing separation of duties to try to minimize fraud in your company.

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Employee or Indepedant Contractor?

May 20, 2012 by mrice

Hire an Employee or Use an Independent Contractor?

Small business owners often need someone to help them with specific tasks. These tasks may range in scope from designing a brochure to writing product descriptions or answering telephones part-time. What is typically challenging for many small business owners is the additional burden of hiring someone on a full-time basis for part-time tasks. This is when it becomes necessary to make a decision between hring an employee and using an independent contractor.

Business hiring decisions

Small business owners often find that the cost of hiring a full-time or part-time employee is costly and often creates more paperwork than is warranted. This may be when it is time to consider an independent contractor. However, it is important to note the IRS rules that apply to independent contractors before you do so.

The IRS offers three basic rules that separate an employee from an independent contractor. They are:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?”

If the tasks that you need to have accomplished can be done by an outside worker and these questions can be answered in the negative when the tasks are accomplished, you can use the services of an independent contractor versus hiring an employee.

The impact on your taxes

When you hire an independent contractor, you deduct the expenses associated with paying them from your taxes by reporting the income to the IRS and the contractor on a Form 1099. As a small business owner, you have no obligation to withhold any type of taxes, the contractor is responsible for taxes on their own.

There are many instances where it is more beneficial for a small business owner to outsource work to an independent contractor. Overall it saves paperwork, you need not provide equipment or supplies and you do not have to withhold taxes. In many cases, the services of an independent contractor will be a more cost effective option.

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