A large number of business owners are leery of home office deductions, concerned that these deductions are more likely to spur an IRS audit. The IRS claims there is no meat to this. Whatever the case, follow the rules and you should have no concerns.
The key to this tax deduction is that rental property owners may claim this deduction if they are active, which is to say you must do more than cashing checks. If you consistently spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.
If you’ve met this qualifier you also have to meet the basic home office deduction thresholds. To start with, you have to use the home office exclusively for your rental business on a regular basis.
Additionally, you must meet one of the following requirements:
1. This office space must be the principle location from where you manage and run your business as a rental property manager.
2. You must have no other location from where you run the administrative end of your rental property business
3. You utilize the space to meet clients and potential clients.
4. You use another structure on your property to conduct business.
After you’ve determined that you are eligible for home office deduction, then it’s time to look at what expenses qualify for deductions. There are two major types: direct and indirect. Indirect expenses benefit the entire home. And direct expenses benefit only the home office space. Examples of direct expenses can be painting or cleaning expenses. While examples of indirect expenses can be payments on mortgage, property tax, and utilities, these expenses are apportioned out between the office and the rest of your residence. This percentage is usually calculated by the square-footage ratio. To demonstrate, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses would qualify for home office deduction expenses.
Since you don’t want any trouble if you do get audited, you are going to want to keep careful records to establish that you were entitled to take the deduction and that the claim has been accurately reported. You should document the home office space by a diagram and/or photograph that supports your square footage calculation. It is smart to use your home office address on your business cards and other forms of collateral and to have business mail delivered there. You should make an effort to meet clients at the home office and maintain a log to keep track of the client meetings and other time spent working in this space. Records to keep proving expenses include: 1098 mortgage interest statements, property tax statements, utility bills, insurance premium notices and receipts for other relevant home office expenses.
This topic can get quite intricate and the above is only intended to give you a basic understanding of the circumstances that would allow you to take advantage of the home office deduction.
Seattle CPA +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
There are several deductible expenses connected to owning a rental property. In this article we will expand on expenses regarding interest, advertising, and professional fees, that is expenses you may deduct from your gross rental income so as to calculate the net rental income.
If you’re renting a room in your home, or if it is a duplex and you’re occupying the other unit, you will need to pro rate the mortgage expense. (See the article titled Personal Use of Rental Property, included in this guide, for more on how to calculate personal use). Now if you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Also, if you own only a part interest in the rental, you must multiply the total amount of mortgage interest paid on the property by your ownership interest. Be aware, however, that certain expenses you pay to obtain a mortgage (such as title/recording fees and commissions) are capitalized as part of your depreciable basis for the property, and are not expensed. See the article titled Depreciation Expenses for Rental Property, included in this Guide, for more on depreciation expense. Other types of interest may also be deductible, if you incurred the interest solely for the benefit of the rental property.
Promoting a rental property on the open market, through marketing efforts such as posting newspaper ads or paying for internet marketing, is a tax deductible expense.
You can deduct professional fees incurred in connection with the rental. For example, if you paid a law firm to draw up a rental agreement, or even to initiate legal action to evict an errant tenant, you can deduct these fees. Moreover, you are able to deduct expenses paid to an accountant/CPA for preparing the Schedule E of your return from the previous year. Be sure to pro rate the total preparation fee between the Schedule E and the remainder of your return based upon the percentage of time it took. Any fees for the preparation of any section separate from Schedule E go on Schedule A as a individual tax preparation expense. Finally, whenever you pay any management fees or commissions to a professional realtor group for managing your rental, then you’ll want to deduct these expenses likewise.
Bellevue Accountant +John Huddleston has written extensively on accounting and other tax relateed matters of interest to small business owners. He is a graduate of the University of Washington School of Law, with a Masters in Tax Law and a Juris Doctorate.
This segment looks at deductible startup expenses for rental properties. You are permitted to deduct a number of expenses incurred in preparing your property for rental, but prior to renting it.
NOTE: These expenses reviewed here in this piece of writing are not the same sort of expenses that are allowable as a tax write-off under Internal Revenue Code section 195. Under section 195, certain startup expenses (in an active trade or business) are deductible up front up to $5,000 with this balance amortizable over fifteen years. But, section 195 is inapplicable to rental property this is because renting isn’t considered an active trade or business, but rather it is thought of a passive activity. See the article Tax Deductible Rental Losses, included in this Guide, for a more focused study of passive activity rules.
Note: It is not just when you’ve literally rented real estate that rental activity begins, but when you make the property available for rent or you have it out on the market.
The Expenses of Obtaining a Mortgage
Expenses such as mortgage commissions, abstract fees, and recording fees, are capitalized and grow to be part of your basis in the property. And this means that you’ll have to depreciate these particular expenses, instead of expensing them all at once. Read the article titled Depreciation Expenses for Rental Property, included in this rental property Tax Guide, for more on depreciation.
What are points? They are charges paid by a borrower to take out a mortgage or a loan. This points or charges may also be called origination fees, or premium charges, or maximum loan charges. Points are deductible as interest, but require that you amortize the points over the life of the loan. Determining the amount of points to amortize per year, is task beyond the scope of this article. Talk with a Seattle CPA.
Repairs versus Improvements
You need to depreciate and capitalize all improvements you make to the property previous to putting the property on the market. Improvements are those that prolong the use of the property or materially increase the market value of the property. On the other hand, you may freely deduct all repair expenses. A repair aims to keep your property in good working condition, not to increase the market value or prolong use. Within the Landlord’s Tax Guide there is more on deductions and depreciation, you’d like to read further.
Seattle Accountant +John Huddleston has written dozens of articles on accounting and taxes. He is a graduate of Washington State University and the University of Washington School of Law.
Let’s launch off by taking a look at the different entity selection types that are available. Each has positives and negatives. As a rule of thumb, you’ll aim to protect your property from unsecured creditors and limit liability. So let’s unroll the list and see what we’ve got here…
Also seek the counsel of an attorney or a CPA prior to establishing an entity and transferring ownership of a rental property. Make note that this isn’t a reasonable alternative for professional council.
Note: This tax guide wont serve to replace the expert council of a certified public accountant or tax attorney. You should seek qualified professional counsel when setting up an entity and shifting ownership of a rental property.
This is the simpler and more widespread method of establishing ownership. This is when you purchase a rental property in your own name. The key disadvantage of this form of ownership is that your creditors may be able to force a sale of the rental property if they receive court mandate, or they could potentially compel you into involuntary bankruptcy. A big plus to this form of ownership is that the process is simple, without complex forms or heavy filing fees.
Legal Entity Ownership
Legal entities include general partnerships, limited partnerships, limited liability companies, and corporations. The differences between these entities are important and outlined below. The major advantage to entity ownership is that your personal creditors cannot force a sale of the rental, since you don’t own it. The only type of entity that does not require registration with the Secretary of State is the general partnership. With regards to taxes, the entity type chosen doesn’t matter very much because in most cases, income from the rental property “passes through” from the entity and is taxed on a personal tax return (but do note the cautionary note under corporations). See the article titled Necessary Tax Forms for Reporting Rental Activity, included in this Guide, for more on precisely how rental income is taxed.
General partnership. A partnership is an association of two or more people who carry on as co-owners of a for-profit business. In a general partnership, each partner will have equal management rights, and are personally liable for the debts of this partnership. And as regards that liability, a general partnership is usually not ideal.
Limited partnership. This entity is more complex than a general partnership because it requires both a limited partner and a general partner. The general partner has sole management rights, together with personal liability for any resultant debts. While, the limited partner isn’t personally liable for debts of the partnership and furthermore is without management rights. This entity selection is generally not recommended.
Limited liability partnerships (LLPs) or limited liability company (LLCs). A limited liability partnership and a limited liability company are similar forms of entity selection. They both provide limited liability to the members/partners. This would mean that you are not personally liable for the entity’s debts, that is, unless the catalyst was your own wrongdoing. This form of ownership is often superior because it reduces liability and allows fewer formalities than those of the corporation.
Corporations. Corporations allow for limited liability and perpetual existence. But, they necessitate the observance of rigid formalities in order to sustain the limited liability shield. Without these formalities, a court may “pierce the corporate veil” and hold you personally responsible. It is for this reason that LLPs and LLCs are commonly more desirable for your purposes. Moreover, for taxation purposes, corporations are split into c-corporations and s-corporations. When the corporation is taxed as a “C” corporation, it pays tax on rental income, and then you will pay tax yet again when the corporation pays you dividends. And you should obviate this “double taxation” loop.
Seattle Accountant +John Huddleston is a graduate of the University of Washington, earning a juris doctorate and a masters in Tax Law. He has written extensively on all tax related matters.
Deciding where to buy, how to go about it, and what kind of dental practice to purchase is an important step in the career of a dentist. There are many essential decisions to make and key factors to examine as you search for the perfect dental practice that meets all of your needs.
Research Research Research
Dentists must not rush into a purchase, and need to manage their expectations, understanding that the process will take some time. There is no need to hurry through important steps and be impatient. Buying the right dental practice for you matters more than closing a deal quickly when the first opportunity presents itself.
Location Location Location
Decide on where you would like to live. Being a practice owner is a big commitment, and being a part of the local community is a big part of that. Establishing a connection with the locals will help your business succeed. A short to medium commute is an important consideration. When you can avoid the long commute, those hours you might have spent on the road can be paid forward and spent instead with family and friends.
Establish yourself amongst people you can relate to and people you can enjoy. Your practice and your interpersonal life will reap the benefit. Intercity or rural–what’s best for your family? These choices will dictate how many competitors will be in close proximity. Will your spouse be able to find work? Will your kids end up in a school district that will nurture them and grant you piece of mind?
Determine the Ideal Practice for You
Take special care in determining the size and type of dental practice that matches your preferences and needs. Do you want to practice general dentistry or do you prefer an expensive practice that focuses on cosmetic dentistry? Do you prefer a long client list with a five-day-a-week-schedule? Or do you want a smaller practice, with a slower pace, that will allow you to work fewer hours? Naturally, these decisions will affect your finances and may dictate your level of day-to-day stress too.
Seek a Valuation
Have the business appraised with the help of a certified public accountant or valuation specialist. A professional with experience in this industry is preferable. This way you can establish a frame of reference for what local dentists practices, similar to your own are worth.
Establish a Support Net
Just as your business cannot operate without the support of patrons, you’ll never realize your full-potential without the aid of experienced professionals. In the long-run, investing in advisors will save you a lot of trouble. Here are some people you might want to have on your side:
- A CPA or accountant who has experience guiding dental practices and other small businesses on maximizing deductions and remaining tax compliant. You will want a Certified public accountant who can help you develop tax-saving strategies. Seek an accountant that can advise you on how to structure your business entity (S corporation, C corporation, limited liability company (LLC), professional limited liability company (PLLC), sole proprietor).
- A Bookkeeper who is experienced in an accounting software system such as Quickbooks. A certified Quickbooks ProAdvisor is a title bestowed upon a bookkeeper which says the person is certified by the manufacturer of Quickbooks (Intuit Corporation) as competent with the bookkeeping platform.
- Legal counsel to protect your interests and review documents.
- A consultant also will most probably prove invaluable in the long run, helping you achieve goals.
- Right at the beginning, you should establish a relationship with a bank. Getting prequalified informs how much you can afford when putting in an offer.
- Your insurance needs will increase ten-fold once you’re a business owner. An insurance agent will assess the value of your business and evaluate risk to see just how much coverage you will have to have.
- It is intelligent to seek the help of a mentor or business confidant of some kind, perhaps a veteran dentist who once went through the same process you’re going through now.
- A marketing pro that knows online marketing.
Starting your dental practice is a big deal. Set up a team that can help you start off right.
Tax CPA John Huddleston is the author of the Self-employment Tax Guide which is a free resource for small business owners and the self employed for tax saving strategies and tax filing requirements. Mr. Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Tacoma & Everett area on various tax and accounting issues. His firm, Huddleston Tax CPAs, also provides tax preparation service, quickbooks consulting, business valuation, general accounting and bookkeeping service. Profile information on CPA John Huddleston and the CPAs employed by Huddleston Tax CPAs is available at the profile tab. Seattle CPA John Huddleston is a frequent publisher of tax saving ideas.
Preparing Form 656 and Supporting Documentation in Filing for an Offer for Compromise of Back Taxes
An Offer in Compromise (OIC) is a tax settlement offer provided by the IRS to taxpayers, both individuals and businesses, who are unable to repay in full their tax debt. There are certain strict criteria that spell out eligibility to file for the OIC. And if you do meet these criteria, you will need to fill out Form 656 and submit a number of documents to be evaluated for an offer.
Preparing Form 656 (OIC)
There are two circumstances in which you’ll meet the requirements to file Form 656. In the first, you’re making a case that paying the full amount of owed taxes will create economic hardship. In the second, you are make the case that there is doubt as to collectiblity.
Now that you know the circumstances in which you will need to prepare Form 656, here’s what you should remember when completing the form
• All persons submitting the offer should enter their social security numbers.
• You’ll need to give the names of both the persons in the case of a joint offer for joint liabilities. When you owe a joint liability and both your partner and you are submitting for an Offer in Compromise, then do so on Form 656, just one shared form. You may owe a liability, such as employment taxes for yourself and hold other liabilities, such as income taxes, with another person. If, only you are submitting this form, then you want to list all liabilities on one of Form 656. In case both of you want to submit this application, then you have to include all tax liabilities on your Form 656 and the other person must show only the joint tax liability on their Form 656.
• You have to include the relevant information In each field on the form.
• You need to give the employer identification number (EIN) of all businesses, except corporate concerns, that you own, either wholly or partly.
• If your claim to an offer is based on a Doubt as to Collectability, you need to also furnish a completed Form 433A if you are an individual taxpayer and Form 433B if you are a business taxpayer.
• If your claim to an Offer of compromise is based on Effective Tax Administration, then apart from submitting a Form 433A or 433B, you also need to fill out the information in the “Explanation of Circumstances” field. You also you can include additional relevant information in attached sheets together with your employer identification and social security numbers.
• In filling out the total amount of your offer, you won’t include a sum that the Internal revenue service owes to you or any amount that you’ve already paid in taxes.
• All persons submitting the offer should apply their signature on the Form 656 and give a date. They must also supply the titles and names of authorized corporate officers, trustees, Powers of Attorney, and executors when requested.
• You may want the IRS to get in touch with a a friend, a family member, or some other acquaintance to go over your case so that they might understand your circumstance more fully. In that case, you’ll need to tick the “Yes” box in the “Third Party Designee” field. And, if you would like an enrolled agent, your cpa, or attorney to represent your case, you need to finish the Form 2848 and submit it together with your offer.
• Be sure that you provide the name and when possible, the address of the OIC preparer. to better the chances of your offer being accepted by the IRS. After you have gathered all the documents for submission, ensure that you make copies for your personal records. In addition to these documents, you might also submit documents that corroborate your claim for this offer.
Keep Focused on Details
The application process for an Offer for compromise is complicated. You will want to spend ample time with Form 656 and submit all supporting documents to improve your chances of acceptance.
To visit the Offer in Compromise guide go to:
Seattle Business Valuation
Seattle Tax Debt Relief
Seattle Offer in Compromise
Startup Business Best Accounting Practices
Determine the bookkeeping practices that you will put into place at the very beginning. Establish an accounting plan that is forward thinking, so that you’re business growth does not have to wait while you refigure your accounting methods
Which Software Package to Choose for your Startup
Sooner or later if your startup business expands, you will need a small business accounting software package. If you keep your books with Excel Spreadsheets, you’ll find eventually the bookkeeping method can no longer engender the growth of your business.
Consider your future bookkeeping needs. There are software packages that are specialized for project accounting, and there is accounting software that works best for real property/real estate (fixed income accounting). Specialized bookkeeping software is usually more costly than the generic software packages which are great for sales of goods, but if you have an idea of where your business is headed, you might choose the most appropriate accounting software at the very beginning can save time and money in time.
Choosing your Method of Accounting
As a small business owner, you’ve got some leeway in how you keep your financial deals. Since you’re no vast corporation, it is not necessary for you to produce financial statements according to Generally Accepted Accounting Principles (GAAP). For instance, you may prefer recording your income whenever you deposit payment for a job into your banking account and report an expense whenever you write a check to cover an expense. This is referred to as the cash method of accounting. While this method of tracking finances doesn’t fall in line with GAAP, it is more than adequate for a small start-up.
As your business grows, however, you might want to adopt a more advanced financial recordkeeping method. At this point, you may want to think about the accrual method of accounting. With this method, you record income when you have the invoice, rather than waiting to get paid for that service. You recognize a business expense when you receive a bill from a supplier, rather than waiting until you pay the supplies. This method of accounting is preferable because it allows you to more closely match the income your business generates to the expenses you incurred to earn it. For example, you may have received an advanced cash payment before you provided services to a customer. You may want to wait and record that amount as revenue during the year you actually provided the services, rather than the year in which you received the cash.
As for income taxes, the IRS is very flexible in allowing you to choose an accounting method. According to its rules, you may use any method as long as it clearly reflects income and expenses and you treat all items of income and expenses in the same manner from year to year. Yet, if you produce, purchase, or sell product, special rules apply on when to use the accrual method. If your business handles inventory whatsoever, you should consult our accountants to figure out when to use the accrual method.
How to Create a Budget that Works for You
Flourishing freelancers, while remaining focused on meeting client needs, but are also fastidious with bookkeeping. However, your financial situation can quickly spiral out of control despite this diligence if you aren’t carefully watching your funds.
You’ll also want to make certain that the accounting software you select enables you to establish a budget.
Compare your performance
Finally, most small business accounting software packages also allow you to make comparisons between your small business’s current-year financial statements to those of the earlier years. This anaylsis will permit you to see trends in your business. It also provides insight on how you can add to its success.
As an example, if your revenue increased by 30-percent for 2011 over that from 2010, while your expenses only increased by 10 percent, this indicates that your business model might be hyper-efficient. So it’s wise to ask yourself, were all expenses recorded? Were some revenue items duplicated? And did you definitely manage to increase your return on investment? It is immensely important to get to the bottom of these trends so as to form a precise picture of your business’s performance and to make very important financial decisions. On the flip side, if your revenue increased by 10-percent in 2011 over that from 2010, but, to do so, your expenses increased by 30-percent, this could indicate some inefficiency in your business plan. Are you investing in the assets with the greatest return on investment? Or maybe you forgot to supply invoices during the year?
You might also find our Self Employed Tax Guide helpful Self Employed Tax Guide
Booklet 656 form 433b is necessary for those business owners that have businesses that are any other entity than sole proprietorships. This form is used in calculating the minimum offer you can make the IRS when pursuing an offer in compromise, unless you are able to provide evidence that would lead the IRS to think otherwise.
How to compete the form
Section 1: In establishing your minimum offer, the 433-B will first ask for some basic facts concerning the entity, such as its EIN (or employer identification number) and the schedule of tax deposits. This form requests the identity of all partners, officers, LLC members, and major shareholders associated with the business.
Section 2: In section 2, you are to provide business asset information, including: bank accounts, investment accounts, and notes receivable. Also, here you’ll provide information regarding vehicles, equipment, and real estate.
Section 3: This section asks for your business income. The form requests your average gross monthly business income based on documentation from the most recent 6-12 months. Now, if you also present a profit and loss report for the period, you can present an average amount of profit from these figures instead.
Section 4: This portion aims to find out the business expenses. The form is looking for average gross monthly business expenses supported by documentation from the recent six — twelve months. Yet, again, if you go ahead and provide a profit and loss report for this time period, you can present an average expense amount determined by these data instead.
When calculating an offer
There are two means of determining the offer amount here, this is dependent on whether you plan to pay the offer within a period of 5 months or extending passed a 5-month period. If you’ll pay the offer of in 5 months, the calculations are as shown below.
[Business income in excess of expenses x 48] Total available assets
The formula below is for calculating the offer when you do not plan to complete payment within a period of 5 months.
[Business income in excess of expenses x 60] Total available assets
The sixth section
In the end, Form 433-B asks for certain miscellaneous info that it will consider in settling your IRS back taxes debt. By way of example, this section queries whether your business has ever filed for bankruptcy before. This inquiry is important as your company is ineligible to apply for an offer in compromise on its tax liability currently in a bankruptcy proceeding. This sectionalso queries to find out if the business has other affiliations, whether any related parties owe finances to the company, and seeks to find out whether your company has been party to a litigation. Further, it asks whether the business has sold any assets within these last Ten years at a discount.
You can discover more of our offers of compromise guide at
Lake Forest Park CPA
Tax Preparers and Quickbooks Pros
Tax Preparers and Accountants in Federal Way
What Travel Expenses are Eligible for Tax Breaks
Comparable to other expenditures in doing business, you are permitted to claim income tax deductions for travel expenses you personally incur so that you may provided services to your clients. However, it is important to plan ahead for your trips for you to get the maximum deductions.
Expenses you could consider excessive will not gain approval for the deduction. You may only deduct business travel costs if they are typical an necessary. Consider the following types of travel expenses are usually deductible:
- Meals and hotel.
- Dry cleaning and laundry expenses occurred during business travel.
- Transportation costs while travelling from a personal home to the client’s site.
- Gas and fuel and the etcetera automotive costs you have to pay while working at the client location.
The everyday commute between home and the office is considered a personal expense.
You have to journey a considerable distance in order to claim a deduction in business travel expenses. During the trip, you must depart from your main worksite. And, you need to travel more than a short pace from your office building in order to meet with a client. This generally means you must leave the city where your company is located or, for small towns, the surrounding area. Generally, travel expenses are eligible for a tax deduction when you’ve travelled long or far enough that you’ll have to spend the night.
But know, you can’t be away from your tax home for too long a length of time, or else you risk losing the deduction. You are able to deduct travel expenses incurred while temporarily working away from your tax home. However, if you provide your services at a client site for unspecified period of time, you may possibly not be permitted to claim a travel expenses business deduction. This could possibly mean that you are permitted to stay at a client site and claim travel expense tax deductions for no period longer than a year. Now when you reasonably expect you will work there for a period longer than a year, however, you can no longer claim a deduction for any future expenses of travelling to this client site.Keeping exact records is key. Establish this practice to ensure easier tax prep, and support the travel expense deductions you claim on your return.
See your CPA for any help.
Another chapter in our Self-Employed Tax Guide.
Through charitable contributions, your small business can benefit through getting tax breaks and concurrently increasing favorable media coverage. Let’s investigate this a bit further.
Goods and servicesA contribution to a second-hand store such as Value Village greater than $250, should qualify as a substantial contribution. By receiving a receipt from the non-profit organization you’ll have the supporting documents to confirm the receipt of goods and as a result make a case for a tax write off. If your small business has a surplus of a product, you might opt to donate the exess item. By doing so, you’ll acquire a tax advantage, you will open up room for different supply, and reveal (if you publicize) that your business is a compassionate organization that helps provide for those that are in need.
Donating time and services to a charitable cause will also qualify you for a tax deductions and gain you a occasion for self-promotion. Charity jogs and other similar events can attract considerable crowds of people. Your business very well could become more visible. You can qualify for a tax write-off. Not to mention, you can feel very good for being able to help those in need. Donating scrap materials left from finished goods product is another such for instance. This may be unused food or fabric. The fair market value rules again apply. To assess the FMV, consider what an item might go for in a quick sale.
In compliance with internal revenue service regulations, a receipt is mandatory for any sole donation in excess of $250 in order to claim the tax deduction. This sort of contribution is the most common and is easy to maintain. One approach is planned giving. This can be done monthly, quarterly, or annually depending upon your preference. As a self-employed person, this is a good way to plan your annual charitable deduction and maintain your cash flow reserves, arriving a predictable outcomes. Keep in mind to confer your accountant for rules on the Schedule C form. Your small business can certainly broaden its marketing reach, benefit the community, and obtain a tax break in one single play. References for this information can be found in Publication 526 and guidelines for disclosures in PUB 1771.
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