Home Office Deduction for the Self-Employed

Expenses for business use of your home are alive and well if you are self-employed! 

Beginning in 2018 for employees of a business, the Tax Cuts and Jobs Act of 2017 eliminated the “Home Office” deductions previously deductible on Form 1040 Schedule A – Itemized Deductions. The good news is if you are self-employed and report the activity of your business on Schedule C, the Home Office deduction is still allowed. If you are an S Corporation or LLC it gets a bit more complicated, but the costs are deductible.   

There are two methods for calculating the deduction:
 

  • Form 8829

Completing Form 8829 requires allocating expenses for mortgage interest, property taxes, insurance, repair and utilities, just to name a few.  You must also calculate an amount of allocable depreciation of your home.  Then, when you sell your home, a portion of the gain may be recaptured for depreciation taken.

  • Simplified Method

The simplified method allows a deduction of $5 per square foot with a maximum deduction of $1,500 (300 square feet / the equivalent of a room 15 feet by 20 feet). While limited, requires no recapture of depreciation upon sale of the home.

 

To recap, if you are self-employed it is definitely still worth it to capture the deduction for home office expenses, however, employees who previously deducted home office expenses are no longer able to use the deduction. 

We’re here to help! If you’re self-employed and need direction, please contact us to talk about which method is best for your situation.

Tax Time: Common Business Taxes Explained

What are the most common taxes a business is responsible for?


Starting or taking over an existing business can be exciting and overwhelming at the same time. There are many things to consider and plan for like branding, marketing, hiring employees, and management. When it comes to figuring out the different business taxes that apply to your company, it can seem like the list of things to learn just gets longer and longer!

Here is a list of some common business taxes:

  • Income

At a federal and state level, most businesses are subject to a tax on the income they make. Different factors will determine a business' exact effective tax rate, but they can expect to make a payment to state and federal governments when filing a tax return for a profitable year.

Revenue (sales) increases income and expenses reduce income. The less income made after considering the expenses by the business, the less income tax will be due. This is a perfect example of why it's absolutely essential to have proper accounting in place to keep track of income and expenses. Any errors, however unintentional, puts your business at risk for audit and possible penalties by the IRS and state authorities.

  • Payroll

When a business pays a person for work as an employee, the business is responsible for sending not only what it was required to withhold from their paychecks, but also the business' own portion of payroll taxes. All businesses pay federal payroll taxes such as FICA and Medicare, and some businesses will have to pay payroll taxes to the states in which they have employees, depending on the state laws. 

To avoid penalties and risk of audit by the IRS, it's important to keep your payroll process and records accurate and up-to-date.

  • Sales / Use

Many states require businesses to pay sales and use tax, or collect and send them on behalf of their customers.

  • Sales:
    • A 'sales tax' is a tax on the transaction (or 'sale') of goods and/or services for money.
    • Laws about what is taxable and what is not vary from state to state. For example: in California, labor is not taxable, while labor is taxable in Washington state.
    • Generally, the business collects the tax from the customer and sends it with a report of all other sales and taxes collected to the department responsible for revenue collection within their state government.
    • The taxable rate varies from county to county, and in some cases such as Washington state, from city to city within a state. 
  • Use:
    • A 'use tax' is a tax paid on the use of goods or certain services when sales tax has not been paid. For instance, in Washington goods are subject to either a sales tax or use tax but not both.
    • Often used to pay tax on goods purchased from a state with no sales tax or someone who is not authorized to collect sales tax, such as a used good vendor from Craigslist.
    • As with sales tax the taxable rate varies from county to county and, sometimes, from city to city.

One can imagine why it's imperative as a business owner or manager that a company keeps very detailed records of their purchases, not only for federal tax purposes, but at a state level as well.

  • Property

A business is also responsible for paying taxes on their property; whether real property or personal/tangible property.

  • State: at a state level, businesses are most often responsible for property tax in the form of vehicle registration. This applies to all business and commercial vehicles operated and housed in any given state.
  • County/Municipal: at a county or city (municipal) level, businesses are sometimes required to pay a tax on personal or tangible property such as furniture, computers, equipment, etc. In almost all situations, if a business owns real property, it will be responsible for paying property tax on it. The real property tax will most often be assessed by and paid to the county.

Although they are assessed less frequently than sales or payroll tax, it is just as important to keep thorough records for reasons relating to property taxes as well.


Reading through the general descriptions of the taxes a business is responsible for paying in our list above, anyone can see how crucial an accurate accounting and organization system is to the health and longevity of a business, especially a SMB (small/medium sized business). In a SMB, accuracy and efficiency is key - Contact Us to learn more about our unique approach to accounting and how it minimizes costly mistakes and missteps with the federal, state, and local taxing authorities!

Tax Time: Why it Pays to Prepare - for Employees & Consultants!

How can I keep more of my paycheck?

Will I owe, or will I receive a refund this year?

Why are my estimated tax payments so high?

Knowing and understanding your federal tax liability now will save time, money, and headaches when filing time rolls around later.

Read on to learn about the benefits of preparing early.

 

Working full-time as an employee:

Typically filing Form 1040 or variant.

  • Receiving a refund means you have over-estimated your tax bill and have essentially given the federal government an interest-free loan of your payroll withholdings.
  • Owing money at tax time means you have under-estimated your tax bill and must pay the amount due in one lump sum at the time you submit your tax return.

In both of these situations a little research and planning can bring positive results at tax filing time. By properly estimating your year-end tax bill now: if you've received a refund in the past, you may now be able to keep more money each payday by adjusting withholdings (form W4, usually found with accounting or HR departments); if you've owed in the past, adjusting withholdings over the remaining year can prevent a lot of pain in a lump sum later.

2017 IRS Withholding Calculator is a great resource for estimating and planning for tax time, and always consult a tax professional before making withholding decisions.

 

Working as an Independent Contractor, Consultant, or other 1099 position:

Typically reporting business income on Schedule C with Form 1040.

As with our previous scenarios as an employee, in these scenarios a little time spent planning now will prevent surprises and headaches later at tax time:

  • Receiving a refund means you have over-estimated your tax bill and have essentially given the federal government an interest-free loan when making the required estimated tax payments throughout the year.
  • Owing money at tax time means you have under-estimated your tax bill when making the required estimated tax payments throughout the year and must pay the amount due in one lump sum at the time you submit your tax return.

When working as an Independent Contractor, Consultant, or other 1099 position, it is up to you to calculate and submit estimated payments to the Treasury throughout the year based on your expenses and income. Therefore, it is absolutely crucial to track expenses, income, and other transactions as closely as possible to allow for an accurate calculation. PNW Financial Concierge can ease the headache by doing the bookkeeping and communicating with your CPA for you; or enabling you to do your own bookkeeping by setting up a system and guiding you through the learning process, step-by-step.

 

In our next edition of the "Tax Time: Why it Pays to Prepare" series, we will discuss benefits of accurate accounting for business owners and their tax concerns. 

Record-Keeping: The Basics

What does the successful sole proprietor and the booming international corporation have in common? 

An effective and efficient record-keeping system.

A successful business depends on successful record-keeping. One of the most important responsibilities as a business owner or manager is to create and maintain a thorough record of business-related matters. 

Beyond legal requirements and regulation compliance, an efficient and effective record keeping system allows a company to:

  • Avoid costly fines, penalties, and other issues
  • Reduce processing time for orders and projects
  • Secure sensitive client and company data
  • Provide better customer service
  • Track business trends and details
  • Comply with legal regulations and other requirements

How long is a business required to keep records?

It depends.

The answer to this question varies with different factors; location, industry, type of business, number of employees, and others. Many businesses apply a year-specific rule-of-thumb (i.e. eight years) to retention of business documents, but this is inadvisable. The reality is actually more complex than a one-size-fits-all guideline, and some business documents are required to be kept permanently!

What are the common methods of Record-keeping?

  • file folder-based

    • Uses manila or other type of file folder to store and organize related documents.

    • Required equipment: fire-resistant locking filing cabinets, hanging folders, labels, office floor space

  • Paperless local

    • Uses a local computer (in-office) to store and organize documents according to an internal file structure. Should be backed up to an offsite server or service at close of business daily.

    • Required equipment: A computer (specifications dependent on use of document storage system), subscription to backup service

  • Paperless Cloud

    • Uses an offsite service to store and organize documents according to a personalized file structure. This should be supplemented with a local backup of all files at close of business daily, if only on an external storage device.
    • Required equipment: A computer to access the cloud service, local backup device, possible subscription to backup service

Where To start? 

Here at PNW Financial Concierge! Whether you've got a Mount Hood of papers just waiting to become organized and/or paperless, or if you're already organized in paper and are ready to make the switch to paperless, you're in the right place. We truly enjoy putting organization and technology to work for our clients, and are excited to bring you with us into the future of business management! 

Learn more about Going Paperless and Business Organization services.