Archive for the ‘Form 8829’ Tag

Back to Basics Part XXX – Form 8829 Expenses for Business Use of Your Home

Originally published in the Cedar Street Times

December 25, 2015

Merry Christmas!

My vision of Santa’s workshop is that it is built into his home at the North Pole.  Being that it is quite chilly there, why would you want to leave the warmth of one building to go to another?  It is also highly unlikely that he would need a separate office “in-town” at the North Pole.  Betting on the idea that it is built into his home, he would certainly seem eligible for a home office deduction.

Whether or not he would use the Form 8829 – Expenses for Business Use of Your Home would depend on his legal structure, however.  Is he Santa Claus, sole proprietor?  Is it Santa Claus, Inc. of which he is a greater than 2% shareholder employee?  Or maybe it is Santa’s Workshop, LLC?  If it is an LLC, it is possible it could be a Single Member LLC if the North Pole has community property laws.  If that is the case, Santa and Mrs. Claus would be treated as one member and the entity disregarded for federal tax purposes.  Well, I suppose that is for Santa and the IRS to worry about!  Maybe we should focus on you instead…

If you use part of your home for business purposes, you may be able to claim a home office deduction using Form 8829 – Expenses for Business Use of Your Home.  The space must be used exclusively and regularly for business purposes and it must be your principal business location – meaning that it must be the main place where managerial activities occur for your business, and you have no other space where substantial managerial activities occur.

You can claim this deduction as a sole proprietor, but also as an employee, if your employer expects you to maintain an office in your home and provides no other fixed location for you to work.  It is best if this type of arrangement is spelled out in your employment agreement.

The Form 8829 is used specifically for sole proprietors filing a Schedule C.  If  you are an employee claiming a home office deduction, or a partner, or if you are filing in conjunction with a Schedule F for a farm, you must use the “Worksheet to Figure the Deduction for Business Use of Your Home” in Publication 587 to calculate the expenses instead.  It essentially accomplishes the same purpose, except whereas the Form 8829 is filed with the returns, the worksheet is not.

The Form 8829 and the worksheet in Publication 587 focus on calculating a deduction based on actual expenses.  There is a relatively new simplified method also.  It allows you to deduct a flat $5 per square foot up to a maximum of $1,500 a year.

We will now spend some time focusing on the Form 8829 itself.  If you would like to read a more in-depth analysis on the home office deduction discussed above, I wrote a three part series on this topic on July 26, August 9, and August 23 of 2013.  You can find them on my website at:

https://blog.tlongcpa.com/2013/07/26/home-office-new-option-for-2013/

Part I of the Form 8829 determines the business percentage you will use to apply to the home office expenses you incur.  You divide the business use square footage by the total square footage to determine the percentage that will be applied to the expenses.

Home daycare providers have special rules as they are allowed to use the space for both personal use and work use.  They have an additional calculation in Part I where they divide the total hours for the year that the space was used for daycare services, by the total number of hours in the year.  This percentage is then multiplied by the square footage percentage to finally arrive at the reduced percentage to apply to the expenses.

Part II of the Form 8829 is where you will list all your expenses of maintaining your home, such as property taxes, mortgage interest, insurance, utilities, repairs, etc.  The direct column is for expenses that were 100 percent deductible and should not have the business use percentage applied.  Perhaps you repainted your home office only.  This would be an example of a direct expense.  If you had painted the entire house, then you would list it under indirect expense.  The business use percentage would then limit your deduction to the relative portion of the home used for business.

A home office deduction is generally not allowed to create a loss on your schedule C with the exception of the portion related to real property taxes and mortgage interest since they would have been deductible on Schedule A anyway.  If the other operating expenses of your home office create a loss, that loss is suspended and carried over to future years.  Part II has additional lines to handle any carried over losses from prior years as well.  The amount of deduction from the bottom of Part II carries over to your Schedule C for deduction on that form.

Part III handles the depreciation expense on your home – basically its wear and tear over time.  Depreciation is a use-it-or-lose-it concept, so you are better off taking it if eligible.  Some tax preparers incorrectly advise people not to take depreciation expense on their home in order to avoid tax recapture problems when they sell.  What they are failing to grasp is that recapture is based on depreciation that was “allowed or allowable.”  So even if you do not take the depreciation expense when you were entitled to it, you have to treat it as if you did take it when you sell, and you would still be subject to any of the same recapture taxes.  Part III is a feeder calculation back into the depreciation expense line in Part II.

Part IV is essentially the final summary of any carryovers available for the next year.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041.

Back To Basics Part VII – Schedule C

Originally published in the Cedar Street Times

January 9, 2015

In this issue, we are discussing Schedule C -Profit or Loss from Business.  Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.

Schedule C is generally used to report income and expenses for your self-employment activities for which no partnership exists or no entity has been established (such as a C or S-Corporation or LLC) – in other words, it is used for a sole proprietorship.  Of course there are exceptions and wrinkles to the rules.  Here are a few common ones.  In most states, a husband and wife which own and operate a business together would file a partnership return instead of a Schedule C.  However, since California is a community property state, a husband and wife should generally file two Schedule Cs and split the income and deductions based on their distributive shares, even if filing a joint return.

One important reason for doing this is that two Schedule SEs would also be filed reporting the Social Security and Medicare taxes separately for each spouse.  They would each be subject to the full taxable wage base for Social Security, but they would also each receive credit for their earnings which would figure into their Social Security checks in retirement.

An LLC with only one member that is operating a business would also report the business activity on a Schedule C instead of a 1065 Partnership return.  Since you can’t have a partnership between you and yourself, the formal entity structure is disregarded for federal tax purposes and reported like a sole proprietorship.  In community property states such as California, a husband and wife that both own and operate the business are actually considered one member for LLC purposes.  If they were the only two owners, the entity would be disregarded, but they would then report on two Schedule Cs as discussed above.

Now that we have discussed who uses the form, let’s move to the form itself.  The initial section of Schedule C asks for identifying information – the name of the business, the type of business, address, etc.  If you have an employer identification number you can enter that as well.  This would be required if you have employees on payroll.  You can also obtain one if you simply do not want to hand out your Social Security number whenever a formal taxpayer identification number is needed – such as for filing 1099-Misc forms for independent contractors.

There are also some other direct questions regarding your basis of accounting, level of participation, and filing compliance.  Most small businesses under $10 million in annual revenues operate by the cash method of accounting as it has many advantages.  Material participation is a tightly defined standard  by the IRS which can affect your ability to take losses in a down year.  The questions on 1099 filings are loaded questions designed to help the IRS easily identify businesses that are not filing required 1099s for payments to independent contractors, for interest received, etc.

In Part I Income, you list your gross receipts, subtract sales returns and allowances, subtract cost of goods sold (which are detailed in Part III) and then add other income such as interest income or certain credits.  Part III Cost of Goods Sold is mainly geared towards retailers, wholesalers, and manufacturers.  It provides a place to detail beginning and ending inventory and any associated labor and material costs associated with production of the goods.  Even taxpayers on a cash basis are generally required to track inventory.  Cash basis typically means you get the deduction when you spend the cash, and you record the income when you get the cash.  But with inventory, you do not get the deduction until the inventory is sold or disposed.

In Part II you detail all your expenses.  The instructions to Schedule C do a pretty good job of explaining what types of expenses they want on each line.  Some of the lines are supported by additional forms such Form 4562 Depreciation and Amortization feeding into Schedule C line 13 for Depreciation.  Line 24b for Meals and Entertainment is unique as most qualified meals and entertainment are allowed only a 50 percent deduction.  Another unique aspect is that preset per diem rate deductions are allowed for self-employed individuals (and employees) for meals, entertainment, and incidental expenses in lieu of tracking actual receipts.  Some of these per diems are quite generous depending on the location of travel, and taxpayers can sometimes get a much larger deduction than the amount they actually spend.

Line 30 for expenses for business use of your home is another example where an entirely separate form (Form 8829) is used to calculate the deduction.  There is also an alternative simplified method introduced with the 2013 returns that gives you $5 square foot for business space (up to $1,500) without having to track actual expenses on Form 8829.

Line 32 contains a few questions about whether your investment in the business is “at-risk” or not.  Basically they are asking if you are financially liable if things go south, and could you lose the money you have injected into the business in the past.  This affects your ability to take losses in down years.

Part IV details your vehicle deduction for standard mileage rate users.  For 2014, this amount is 56 cents a mile.  If you track actual expenses instead, you would not fill out this part.

Part V is for any additional expenses not discussed in Part II.

In two weeks we will continue our Back to Basics series with Schedule D – Capital Gains and Losses

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Home Office Part III – How Big is My Deduction?

Originally published in the Cedar Street Times

August 23, 2013

Four weeks ago, I discussed a new simplified option for calculating the home office deduction that is effective for 2013.  Two weeks ago I discussed the rules to qualify for a home office deduction.  In this final installment on home office deductions, we will discuss the standard method of determining your deduction, which will still yield the greatest benefit for most people – especially in high cost localities.  (If you missed the prior two articles, you can find them on my website at www.tlongcpa.com/blog.)

The standard method of calculating your home office deduction is done on a Form 8829 or on tax worksheets.  It typically starts with a square footage calculation of the livable space in your home, and a calculation of the portion used exclusively for your business activity, to determine the percentage used by the business.  You can use a calculation based on the number of rooms in the house if they are similarly sized, but in practice hardly anybody uses this method.

The next step is to gather your expenses and multiply them by the business percentage you just determined.  Add up in separate categories your utilities, water, trash/recycling service, janitorial (house cleaner), repairs and maintenance, homeowner’s or renter’s insurance, and any other recurring expenses used to maintain your house.   If you regularly meet with clients at your house, you can generally do the same for your landscape maintenance expenses as well.

If you rent your home, you add up your total rent and multiply it by the business percentage.  If you own, you apply the business percentage to your mortgage interest and real estate taxes (the balance go on Schedule A).  Some people will throw their internet access fees on the 8829, but often a better deduction is obtained by thinking about actual business use versus personal use, as square footage is not a great metric for internet use.  You could then put that directly on your schedule C if you run a business, or Form 2106 if you are an employee with a qualifying home office.  If you buy furniture or equipment exclusively for your office, that is generally put on a depreciation schedule and often linked directly to your Schedule C or Form 2106 instead of running it through your business use of home form.

The first telephone line into the house is not deductible at all.  A second line could be, however.  But in that case it is typically a dedicated business line, and you would put that on your schedule C or Form 2106 in full to get a better deduction.  Your cable or satellite service is probably off limits for most people since there is such a high degree of personal use and it is an area subject to abuse.  Based on facts and circumstances some people may be able to build a case for part of it – such as a day trader that depends on the financial channels, or if you have a waiting area which clients regularly use to watch television.

If you own the home you need to set up the home and and any improvements on a 39-year depreciation schedule (not 27.5 like a rental home – common mistake) and run depreciation deductions through your business use of home calculation (beyond the scope of this article).  Many people fail to do this thinking it is a choice.  It is not.  There is a use or lose it rule, and you are responsible for depreciation recapture taxes upon the sale of the home whether or not you claimed the deduction.  So you might as well take it!

Facts and circumstances and reasonableness will generally rule the day as an overarching principle to the application of all of these rules.  Technically, if you only painted your office, you can take 100% of the cost into consideration for your business use of home deduction.  On the flip-side, if you painted everything but your office, you shouldn’t really take any deduction.  In practice, records are generally not kept that precisely, and the dollar figures are not that large, so  you often end up applying the business percentage to everything in that category for the year for practical purposes.

Even after calculating the deduction, there is another hurdle you must pass – you cannot create an overall loss on your Schedule C from business use of home expenses with the exception of real estate taxes, mortgage interest, or casualty losses which would be deductible on Schedule A regardless.  If you have a loss, the excess business use of home expenses will get suspended and carried over to a future year when your business is profitable.

Employees have a different hurdle since their home office deduction is an employee business expense which is a miscellaneous itemized deduction subject to a two percent of adjusted gross income floor.  So if their total miscellaneous itemized deductions exceed two percent of their adjusted gross income, then the excess is an itemized deduction, and if their itemized deductions exceed the standard deduction, then they can benefit!

Of course there are many other considerations that can come into play depending on your circumstances such as separately metered properties, or separate structures, multiple offices in the same home, or different homes, a daycare home office, etc.  This article should be enough to give you the gist, but it is always best to consult with a professional to ensure you are complying with the laws as well as getting all the deductions you deserve.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.