Home Business Tax Deductions

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1 Home Business Tax Deductions 10 th Edition Stephen Fishman, J.D.

2 Chapter 1 Some Tax Basics... 1 Learning Objectives... 1 Introduction... 1 How Tax Deductions Work... 1 Types of Tax Deductions... 1 You Pay Taxes Only on Your Business Profits... 2 Claiming Your Deductions... 2 Make Sure You Are in Business... 2 How Businesses Are Taxed... 2 Basic Business Forms... 3 Sole Proprietorship The Most Popular Home Business Entity... 3 Tax Treatment... 4 What Businesses Can Deduct... 5 Start-Up Expenses... 5 Operating Expenses... 5 Capital Expenses... 6 Inventory... 6 Adding It All Up: The Value of Tax Deductions... 6 Federal and State Income Taxes... 6 Self-Employment Taxes... 7 Total Tax Savings... 8 Review Questions Review Answers Chapter 2 Is Your Home Really a Business Learning Objectives Introduction Proving That You Are in Business Profit Test Behavior Test Tax Consequences of Engaging in a Hobby Investing and Other Income-Producing Activities Tax Consequences of Income-Producing Activities Types of Income-Producing Activities Trading in Stocks as a Business Real Estate as a Business Review Questions Review Answers Chapter 3 Getting Your Business Up and Running Learning Objectives Introduction What Are Start-Up Expenses? Common Start-Up Expenses Special Rules for Some Expenses Buying an Existing Business Expanding an Existing Business When Does a Business Begin? Home Manufacturers Knowledge Workers Service Providers Existing Businesses Claiming the Deduction If Your Business Doesn t Last 15 Years... 30

3 Expenses for Businesses That Never Begin General Start-Up Costs Costs to Start or Acquire a Specific Business Avoiding the Start-Up Tax Rule s Bite Review Questions Review Answers Chapter 4 Home Business Operating Expenses Learning Objectives Introduction Requirements for Deducting Operating Expenses Ordinary and Necessary Current Expense Business Related Reasonable in Amount Operating Expenses That Are Not Deductible How to Report Operating Expense Deductions Review Questions Review Answers Chapter 5 Deducting Long-Term Assets Learning Objectives Introduction Long-Term Assets Repairs Versus Improvements Inventory Methods for Deducting Long-Term Assets Rules for Deducting Any Long-Term Asset Disposing of Long-Term Assets Section 179 Deductions Property You Can Deduct Property Used Primarily (51%) for Business Calculating Your Deduction Recapture Under Section Bonus Depreciation Property that Qualifies for Bonus Depreciation Placed In Service Date Class-Wide Requirement Calculating the Bonus Amount Opting Out of the Bonus Regular Depreciation Depreciation Period Depreciation Methods Depreciation Rules for Listed Property Real Property Deducting Business Vehicles Is Your Vehicle a Passenger Automobile? Annual Depreciation Limits for Passenger Automobiles Tax Reporting and Record Keeping Leasing Long-Term Assets Leasing Versus Purchasing Leases Versus Installment Purchases Review Questions Review Answers Chapter 6 The Home Office Deduction Learning Objectives ii

4 Introduction Qualifying for the Home Office Deduction Threshold Requirements: Regular and Exclusive Business Use Additional Requirements Corporation Employees Calculating the Home Office Deduction How Much of Your Home Is Used for Business? What Expenses Can You Deduct? New Simplified Home Office Deduction Method How the Simple Method Works IRS Reporting Requirements Audit-Proofing Your Home Office Deduction Prove That You Are Following the Rules Keep Good Expense Records Review Questions Review Answers Chapter 7 Eating Out and Going Out: Deducting Meal and Entertainment Expenses Learning Objectives Introduction What Is Business Entertainment? Activities That Aren t Entertainment Meals Can Be Travel or Entertainment Who You Can Entertain Deducting Entertainment Expenses Business Discussions before or after Entertainment Business Discussions during Entertainment Entertaining at Home Entertainment in Business Settings Calculating Your Deduction Expenses Must Be Reasonable Going Dutch Expenses You Can t Deduct Entertainment Tickets Reimbursed Expenses Reporting Entertainment Expenses on Your Tax Return Review Questions Review Answers Chapter 8 Getting Around Town: Car and Local Travel Expenses Learning Objectives Introduction Deductible Local Transportation Expenses Travel Must Be for Business Trips from Your Home Office If You Have No Regular Workplace The Standard Mileage Rate How the Standard Mileage Rate Works Requirements to Use the Standard Mileage Rate The Actual Expense Method How the Actual Expense Method Works Record Keeping Requirements Vehicle Depreciation Deductions Leasing a Car How to Maximize Your Car Expense Deduction Use the Method That Gives the Largest Deduction Keep Good Records iii

5 Other Local Transportation Expenses Reporting Transportation Expenses on Your Tax Return Sole Proprietors LLCs and Partnerships Corporations When Clients or Customers Reimburse You Review Questions Review Answers Chapter 9 Leaving Town: Business Travel Learning Objectives Introduction What Is Business Travel? Where Is Your Tax Home? Your Trip Must Be for Business Deductible Travel Expenses Traveling First Class or Steerage Taking People With You How Much You Can Deduct Travel within the United States Travel outside the United States Conventions Travel by Ship Calculating Time Spent on Business Fifty Percent Limit on Meal Expenses Maximizing Your Business Travel Deductions Plan Ahead Make a Paper Trail Maximize Your Business Days Take Advantage of the Sandwich Day Rule Travel Expenses Reimbursed by Clients or Customers Review Questions Review Answers Chapter 10 Inventory Learning Objectives Introduction What Is Inventory? Supplies Are Not Inventory Incidental Supplies Long-Term Assets Maintaining an Inventory When You Provide Services and Sell Merchandise Supplies for Providing a Service Deducting Inventory Costs Computing the Cost of Goods Sold Determining the Value of Inventory IRS Reporting Review Questions Review Answers Chapter 11 Hiring Help: Employees and Independent Contractors Learning Objectives Introduction Employees versus Independent Contractors Tax Deductions for Employee Pay and Benefits Employee Pay iv

6 Payroll Taxes State Payroll Taxes Employee Fringe Benefits Reimbursing Employees for Business-Related Expenditures Accountable Plans Unaccountable Plans Unreimbursed Employee Expenses Employing Your Family or Yourself Employing Your Children Employing Your Spouse Rules to Follow When Employing Your Family Employing Yourself Tax Deductions When You Hire Independent Contractors No Deductions for ICs Taxes Paying Independent Contractors Expenses Review Questions Review Answers Chapter 12 What If You Get Sick? Deducting Medical Expenses Learning Objectives Introduction The Health Care Reform Act ( Obamacare ) Health Insurance Mandate Exemptions From the Mandate Tax Penalty for Noncompliance The Employer Mandate What Is Required Under the New Law State Health Insurance Exchanges Health Insurance Premium Tax Credits The Personal Deduction for Medical Expenses Deducting Health Insurance Premiums Personal Income Tax Deduction for the Self-Employed Deducting Health Insurance as a Business Expense Tax Credits for Employee Health Insurance Health Reimbursement Arrangements What Is a Health Reimbursement Arrangement?? Impact of Obamacare on HRAs What Expenses May Be Reimbursed? How to Establish an HRA Sample HRA Complying with Annual Reporting and Fee Requirements Health Savings Accounts What Are Health Savings Accounts? Establishing Your HSA Making Contributions to Your HSA Withdrawing HSA Funds Are HSAs a Good Deal? HSAs for Employees Tax Reporting for HSAs Review Questions Review Answers Chapter 13 Deductions That Can Help You Retire Learning Objectives Introduction Why You Need a Retirement Plan (or Plans) Tax Deduction v

7 Tax Deferral Individual Retirement Accounts (IRAs) Traditional IRAs Roth IRAs Employer IRAs SEP-IRAs SIMPLE IRAs Keogh Plans Types of Keogh Plans Setting Up a Keogh Plan Withdrawing Your Money Solo 401(k) Plans Review Questions Review Answers Chapter 14 More Home Business Deductions Learning Objectives Introduction Advertising Goodwill Advertising Giveaway Items Website Development and Maintenance Business Bad Debts Requirements to Deduct Bad Debts Types of Bad Debts Casualty Losses Amount of Deduction Damage to Your Home Office Tax Reporting Charitable Contributions Dues and Subscriptions Education Expenses Starting a New Business Minimum Educational Requirements Traveling for Education Gifts Insurance for Your Business Homeowner s Insurance for Your Home Office Car Insurance Interest on Business Loans Home Offices Car Loans Loans from Relatives and Friends Loans to Buy a Business Interest You Can t Deduct Deducting Investment Interest Keeping Track of Borrowed Money Legal and Professional Services Buying Long-Term Property Starting a Business Accounting Fees Taxes and Licenses Income Taxes Self-Employment Taxes Employment Taxes Sales Taxes Real Property Taxes vi

8 Other Taxes License Fees Review Questions Review Answers Chapter 15 Record Keeping and Accounting Learning Objectives Introduction What Records Do You Need? Business Checkbook and Credit Cards Records of Your Income and Expenses Paper Versus Electronic Records Create Your Own Spreadsheet Personal Finance Software Small Business Accounting Software Online Bookkeeping Tracking Your Business Expenses Supporting Documents Records Required for Specific Expenses Automobile Mileage and Expense Records Entertainment, Meal, Travel, and Gift Expenses Listed Property How Long to Keep Records What If You Don t Have Proper Tax Records? Accounting Methods Cash Method Accrual Method Which Is Better Accrual or Cash Method Accounting? Tax Years Review Questions Review Answers Chapter 16 Husband and Wife Home Business Learning Objectives Introduction An Employer-Employee Arrangement Social Security Tax Savings Bona Fide Employee Requirement Reasonable Compensation Requirement Your Spouse Won t Qualify For Social Security? So What! What about Limited Liability? Establish a Qualified Joint Venture Qualifying for QJV Status Community Property Sole Proprietorships Form a Business Entity Do Nothing Review Questions Review Answers Chapter 17 Staying out of Trouble with the IRS Learning Objectives Introduction What Every Home Business Owner Needs to Know about the IRS Anatomy of an Audit The IRS: Clear and Present Danger or Phantom Menace? You Are the IRS s Number One Target How Tax Returns Are Selected for Audits vii

9 Ten Tips for Avoiding an Audit Tip #1: Be Neat, Thorough, and Exact Tip #2: Mail Your Return by Certified Mail Tip #3: Don t File Early Tip #4: Don t File Electronically Tip #5: Form a Business Entity Tip #6: Explain Items the IRS Will Question Tip #7: Avoid Ambiguous or General Expenses Tip #8: Report All of Your Income Tip #9: Watch Your Income-to-Deduction Ratio Tip #10: Beware of Abnormally Large Deductions Review Questions Review Answers Chapter 18 Help Beyond This Book Learning Objectives Introduction Secondary Sources of Tax Information Information From the IRS Other Online Tax Resources Tax Publications Tax Software The Tax Law Internal Revenue Code IRS Regulations Court Cases IRS Rulings, Interpretations, and Tax Advice Review Questions Review Answers Glossary Index viii

Home Business Tax Deductions

Home Business Tax Deductions 15 th Edition Stephen Fishman, J.D. Chapter 1 Some Tax Basics... 1 Learning Objectives... 1 Introduction... 1 How Tax Deductions Work... 1 Types of Tax Deductions... 1 You