Home office deduction: possibly a nice change to an old rule

With all of the self employed folks in the SF Bay area, we get tons of questions each year about the home office deduction.  The rules for home office have been pretty much the same for many years (although they are often misunderstood.)

There are certain conditions that need to exist to be able to take a home office deduction on your tax return.  If you are self employed, generally speaking, you must not have another fully appropriate office location away from home.  If you are an employee, then you must be using your home as an office for a documented “employer convenience”.  Facts and circumstances always rule here, so these are the kinds of questions we field all the time.

The news for 2013 is that there has been a change to the home office deduction rules.  The IRS has added a new method, called “Safe Harbor” home office rules.

Existing rules:  “Actual Expense”

The existing method requires a percentage of the square footage used as the home office divided by the entire square footage of the home.  Using that percentage, various expenses including utilities, maintenance, mortgage interest & property tax (or rent), and insurance can be deducted. Certain direct expenses such as repair expense, or depreciation on furniture used in the home office, can be deducted without percentage allocation.

New Method: “Safe Harbor”

The new simplified method is a deduction based solely on the square footage of the qualified business use of the home. It is capped at $,1500 or 300 square feet at $5 per square foot. For example, a taxpayer with a qualified home office of 250 square feet can deduct up to $1,250 regardless of the actual expenses incurred.  The taxpayer can still deduct the home mortgage interest and property tax on Schedule A without allocation between qualified business use and residential use of the home. Under this method, no depreciation deduction is allowed, including bonus depreciation and IRS section 179 deductions. Any deduction in excess of the gross business income limitation cannot be carried over to the following year.

How do you choose between the 2 methods:

The new Safe Harbor rule is a year by year decision.  So you can choose the method that benefits you most each year.   With the higher costs of homes and renting in the SF Bay area, it may be that the old method remains the one that gives the better benefit. But if you are a renter and you are lucky enough to have a lower than normal rent cost, then maybe the safe harbor will produce a better result for you.  Since your particular facts and circumstances are determinative of the better method to use, that’s where we are able to help.

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2013 taxes: what to look out for….

At the beginning of 2013, new tax laws were implemented at the federal level (we’ll address California tax issues in another blog).  There were some substantial changes.  Whether these new tax laws will impact your tax situation is completely dependent on your personal tax circumstances, so we will touch on a few key items that will be impacting our clients to give you a little food for thought.

Unearned income:  3.8% tax may be added on top of everything else you are paying.  When might that happen?  If you have unearned income (dividends, interest and other investments within which you don’t materially participate) and your adjusted gross income (AGI) exceeds $200k (if you are single) or $250k (if you file married filing joint).  I’ll refer to these AGI thresholds again, so I’ll just refer to them as AGI thresholds later.

Earned income:  0.9% on earned income when your AGI exceeds the AGI thresholds (mentioned above). What is earned income?  Income on your W2 and net income from self employment.

Why the 3.8% and the 0.9%?  Seems like odd percentages, huh?  There is some logic to these %.  This tax is being used, supposedly, to fund the Obama Care act.  So, the tax is based on the medicare tax that we all pay now.  If you have earned income, you are paying medicare tax on your current earnings.  Between you and your employer, the total medicare tax paid on your compensation is 2.9%.  So, if you add 0.9% to this medicare tax, you arrive at 3.8%.  So, the 0.9% tax “trues up” medicare tax to the higher income folks to 3.8%.   And then, because unearned income was previously not subject to medicare tax, the new law now imposes a medicare tax on income formerly not subject to this tax at the full 3.8% level.

Is your head spinning yet?  We are just getting started……we’ll be posting more blogs on other tax topics that are new or adjusted in 2013 in the days ahead.

How do you figure out if this impacts you?  That’s what we are here for.  Just send us an email or give us a call to schedule an appointment.

We are moving

We are excited to announce that our offices will be in new location as of Monday, July 30, 2012.  Our new address is 1221 Bridgeway, Suite 2, in Sausalito. We are just a few blocks south of where our offices have been since 2008.  We are just across Bridgeway from Saulitos, Bar Bocce and Wellingtons.  The cross street is Turney and the entrance to our office is off Turney.

We look forward to seeing you in our new offices soon!

Q2 Estimated taxes due Friday, June 15th

Just a quick reminder that if you are self employed and pay your income taxes quarterly, the Q2 2012 estimated payment date is coming up quick.

If business is picking up, paying in your safeharbor amount (amounts based on your 2011 income tax return total tax) is a great way to avoid penalties, but don’t forget to stash additional money away if you think business is really picking up!!!

If business in 2012 is a bit slower than 2011, you might be able to pay in a little less than your safe harbor payments based on 2011, however, best to carefully calculate what you anticipate your tax bill to be for 2012 based on what 2012 has looked like so far and what you anticipate so you don’t have to pay in penalties or interest when your return is prepared for 2012.

Of course, your specific facts and circumstances will be key to determining what is the best amount to pay in.  If we haven’t already reviewed your situation together and you would like help, just let us know.

Jazz by the Bay in Sausalito!

Typically you’ll find in our blog information nuggets relating to personal or business tax issues, accounting operational tips for small businesses or other related topics. Tonight we celebrate the start of the fun summer season in Sausalito CA.  Grab a blanket and enjoy this fog free weather (while it lasts).

We are proudly supporting the Sausalito community through our work and are also supporting the Jazz By the Bay series this summer as a series sponsor. Hope to see you there!

Cost of Employer-Sponsored Health Coverage Must Be Reported on Forms W-2

Starting in 2012, the total cost of employer-sponsored health coverage must be reported on Form W-2 issued to employees (for W-2 Forms issued in January 2013 for 2012 taxable year.)  The total reportable cost will be reported on Form W-2 in Box 12, with code DD. This does not apply to small companies that issue less than 250 W-2 Forms each year.

Coverage that must be reported includes coverage under a group health plan for employees. Coverage does not include long-term health care coverage, dental and vision coverage, on-site medical clinics, and employee assistance programs.  The aggregate cost that must be reported includes any portion of the cost of group health plans that is includible in an employee’s gross income.

Failure to include the aggregate cost on the employees’ Form W-2 could result in a penalty of $100 for each Form W-2, but the panalties are reduced if the failure is corrected prior to August 1, 2013.

If this new rule applies to your company, then its a good idea to make sure that steps are taken to cause this to be reported properly when the Forms W-2 come out in January 2013 for 2012. As many have found out the hard way, its alot easier to work to cause this to report correctly during the year rather than making amendments to W-2’s later.

We recommend that clients work with a reputable payroll company that provides ongoing training to their staff for handling changes in payroll reporting and filing rules.  Of course, if we can be of help, please give us a ring.

Corporate returns are due March 15

If you are one of many self employed business folks in Marin County, you might have incorporated your business. If so, your 2011 corporate income tax filing deadline is just around the corner, March 15, 2012.  If you aren’t ready with your 2011 information, this deadline is easy to manage and extend if you are an S Corporation. If you are a regular corporation, then things get a little more difficult.

The penalties for not filing these returns (or extending) timely are getting more expensive and more aggressively enforced. So if you fall into this category and are not sure, its a good time to check in to make sure things are in order to handle the deadline.

Also, the deadline for paying the first estimated income tax voucher for corporations is April 17, 2012.  Many will simply need to pay the minimum $800. If your S Corp has profits of more than $60k, then the estimated payments will continue for the year and possibly be more than $800 on April 17th.

Of course, if you need help in this areana, feel free to give us a ring!

Reporting HSA contributions for S Corp owner/shareholders on form W2

With all the changes with reporting on W2’s and 1099’s this year, its not a surprise that what I’m about to describe is becoming a common error that we are seeing as we prepare taxes this year.  Wanting to avoid the same issue next year, we’re bloggin in the moment……

Who does this issue impact:  Shareholder/employees of S Corporations where the corporation contributes to HSA’s for their shareholder employee. If this might apply to you, your boss, your client (if you are keeping the books)  or someone you know, then keep reading……otherwise, there are much better things to be reading about, trust me!

Background:  When an S Corp pays health insurance premiums and HSA contributions on behalf of their shareholder/employee, then we all know we need to include wages, health insurance premiums and the HSA contributions paid during the year in box 1 of the W2.  Its that annoying year end adjustment we have to make that sometimes kicks up withholdings (when it really shouldn’t).

The issue:  Many W2’s this year are coming across to us as we prepare tax returns with the HSA contribution amount reported on the Form W2, box 12 code W.  Do not use box 12 code W to report the HSA contributions made to these shareholder/employees.  Please!  That’s not what that box is for. For shareholder/employess, the amount of HSA contributions should be shown in box 14, just like the shareholder health insurance premiums, with a description along side.  Using box 12 code W really makes a mess of things on this side.

Why is this an issue:  S Corp shareholder/employees are treated like partners in a partnership when it comes to this type of benefit.  So there are unique rules that apply. Think of them as quasi employees (no, that’s not crazy employees–quasi employees.)

What about the other employees of the S Corp that the company contributes to the HSA, do we use box 12 code W?  If you read the instructions for Form W2 on the IRS website, it can be confusing.  The IRS instructions read that you should use box 12 code W if you don’t have a reasonable basis to believe at the time of payment that the HSA contribution made to the non-shareholder employee is not treatable as a tax exempt frindge benefit of employment.

When in doubt, do call a CPA or your payroll company to confirm as your specific facts and circumstances may play a vital part in determing what you should do.  This is a common Marin issue because Marin has so many small businesses, many of which are S Corporations.

Hope this helps! Call us if you want to know more.

Issuing Forms 1099 Misc–extra reasons to take this seriously for 2011

Heads up if you have a business and you haven’t dealt with this yet.  You could be behind the 8 ball, but there is still time to get out from under the problem.  

The IRS has been playing with how they can increase “compliance”–making sure everyone is filing their tax returns and paying their fair share of taxes.  A report issued a while back issued by the GAO indicated that a huge number of folks aren’t filing tax returns at all. So that has the IRS looking for ways to get everyone to file returns. And what we are communicating in this blog talks about a IRS change that could impact you as the “payor” of money that needs to show up on someone’s tax return. They think that if they put pressure on the payor, they’ll get more recepients to comply.

Long story short, if you have a business, are a sole proprietor or are otherwise self employed and you paid anyone or any other unincorporated business $600 or more for services or rents in 2011 in the course of your trade or business, then you’ll be required to affirmatively state on your 2011 return if you had any payments that met the requirements to send out Forms 1099 Misc and then if you say yes, then you’ll need to affirmatively state that you did send them out.  When we sign our returns, we are signing under perjury rules…so something to take serious.

Commonly overlooked:  home office rent.  If you are a renter and you pay a person or an LLC for your rent and if you end up deducting $600 or more of your rent for “home office expense”, then you need to send your landlord a Form 1099 Misc.

When is the deadline for filing these forms?   Technically, the deadline to send these forms out was January 31, 2012 for payments made in 2011.  However, you don’t have to send a summary of all forms to the IRS until either February 28th (or March 15th if you use an electronic filing service.)  So if you think you have a few you should have sent and haven’t sent these out to the folks you paid yet, you can jump on this now and take action.  The deadline that is enforced more regularly is the IRS deadline (Feb 28 or March 15)…..not the January 31 deadline (well, that’s the way its been over time.)

We’ve been filing these forms for our clients since 2012 began.  If you think this applies to you and need help, give us a ring.  You can find out contact info on our website www.cjspadycpa.com.

AMT is a concern again in 2012

We haven’t heard about this for a while because of the 2 year Bush era tax extensions that occurred in 2009, but AMT concerns are back. What’s AMT? Alternative Minimum Tax. Find that confusing? You are not alone! Many of us in the tax profession find it a complication that doesn’t make sense anymore.

Why is it an issue in 2012?  AMT is a “overlay” tax system.  Meaning, once you calculate your regular tax return, then you calculate Alternative Minimum Tax.  The original purpose a long time ago was to make sure the “rich” were paying their fair share of taxes.  But what happens now is families making anywhere between $100k and $250k in the bay area, end up being subject to AMT.  Unfortunately, if you have a family, that’s what you need to survive in the Bay Area–that doesn’t mean you are rich by any stretch of the imagination!  So its a real problem–the purpose of the system is not being realized and the law needs to be changed.  A typical family may find that the difference between regular tax and AMT tax could be as much as $7k (or more!)  Yes, thats $7k more in tax in 2012 even if nothing significantly changed in your life from 2011.  This is a simple shift in the law back to “old” rules.  But the unfortunate reality is that its the current law.

Historically, congress has implemented a change at the end of each year so that AMT doesn’t revert like that to “old” rules and the $7k additional tax basically disappears.  But its an election year.  And everyone knows that election years can be unpredictable.  So in the meantime, the law says that families in the Bay Area might owe this additional tax……but then history tells us that congress will move at the last minute to change it….but maybe they will, maybe they won’t.  Its a mess.

Here is why we are nervous about this:  If you aren’t prepared for the possible additional tax hit and the law isn’t changed, then come April 15th of 2013 (or before) you’ll have a nasty surprise.  Most families don’t have this extra $7k around to give to the government….so we need to be aware of this uncertainty in the tax law.

What can you do about it?  When you are having your taxes prepared, do make sure you estimate what your 2012 tax burden will be. By doing that you will be using your own facts and circumstances and you can find out if you might have this problem.  If you do find that you are in the AMT “sweet spot”, then you can plan for this uncertainty with the benefit of most of 2012 ahead of you. 

Best to be informed than surprised!  We’ll be looking at this for our clients this year for sure.  If you need help with your taxes, we are here to help.