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 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... 5 Pass-Through Tax Deduction... 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... 9 Review Answers... 10 Chapter 2 Is Your Home Business Really a Business?... 11 Learning Objectives... 11 Introduction... 11 Proving That You Are in Business... 11 Profit Test... 12 Behavior Test... 13 Tax Consequences of Engaging in a Hobby... 15 Investing and Other Income-Producing Activities... 16 Tax Consequences of Income-Producing Activities... 16 Medicare Tax on Investment Income... 17 Types of Income-Producing Activities... 18 Review Questions... 20 Review Answers... 21 Chapter 3 Getting Your Business Up and Running... 23 Learning Objectives... 23 Introduction... 23 What Are Start-Up Expenses?... 23 Common Start-Up Expenses... 24 Special Rules for Some Expenses... 24 Buying an Existing Business... 25 If Your Business Doesn t Last 15 Years... 25 Expenses for Businesses That Never Begin... 25 General Start-Up Costs... 25 Costs to Start or Acquire a Specific Business... 26 Avoiding the Start-Up Tax Rule s Bite... 26 Review Questions... 27 Review Answers... 28
Chapter 4 Home Business Operating Expenses... 29 Learning Objectives... 29 Introduction... 29 Requirements for Deducting Operating Expenses... 29 Ordinary and Necessary... 29 Current Expense... 31 Business Related... 31 Reasonable in Amount... 32 Operating Expenses That Are Not Deductible... 32 How to Report Operating Expense Deductions... 33 Review Questions... 34 Review Answers... 35 Chapter 5 Deducting Long-Term Assets... 37 Learning Objectives... 37 Introduction... 37 Long-Term Assets... 37 Deducting Inexpensive Property: The De Minimis Safe Harbor and Materials and Supplies Deduction 38 The De Minimis Safe Harbor... 38 Maximum De Minimis Amount... 39 The Materials and Supplies Deduction... 41 Interaction With De Minimis Safe Harbor... 41 General Rules for Deducting Long-Term Personal Property... 41 Disposing of Long-Term Assets... 44 Bonus Depreciation... 45 Property That Qualifies for Bonus Depreciation... 45 Calculating the Bonus Amount... 46 Opting Out of the Bonus... 46 Bonus Depreciation Percentages... 47 Section 179 Deductions... 47 Deducting Repairs and Improvements... 48 Regular Depreciation... 48 When to Use Regular Depreciation... 48 Deducting Business Vehicles... 52 Is Your Vehicle a Passenger Automobile?... 52 Annual Depreciation Limits for Passenger Automobiles... 52 Heavy Deductions for Heavy Metal: Bonus Depreciation for SUVs and Other Weighty Vehicles... 53 Tax Reporting and Record Keeping... 54 Leasing Long-Term Assets... 54 Review Questions... 56 Review Answers... 58 Chapter 6 The Home Office Deduction... 61 Learning Objectives... 61 Introduction... 61 Qualifying for the Home Office Deduction... 61 Threshold Requirements: Regular and Exclusive Business Use... 62 Additional Requirements... 65 Corporation Employees... 68 Calculating the Home Office Deduction... 69 How Much of Your Home Is Used for Business?... 69 What Expenses Can You Deduct?... 72 Simplified Home Office Deduction Method... 78 How the Simple Method Works... 78 IRS Reporting Requirements... 80 Audit-Proofing Your Home Office Deduction... 80 Prove That You Are Following the Rules... 80 ii
Keep Good Expense Records... 81 Review Questions... 82 Review Answers... 84 Chapter 7 The Pass-Through Deduction... 87 Learning Objectives... 87 Introduction... 87 You Must Have a Pass-Through Business... 87 You Must Have Qualified Business Income... 87 You Must Have Taxable Income... 88 Deduction for Taxable Income Below $157,500 ($315,000 for Marrieds)... 88 Deduction for Income Above $157,500 ($315,000 for Marrieds)... 89 Are You a Specified Service Business?... 89 Deduction for Non-Service Businesses (Income Over $157,500/$315,000)... 89 Deduction for Specified Service Business Owners (Income Over $157,500/$315,000)... 91 Taking the Pass-Through Deduction... 91 Strategies to Maximize the Pass-Through Deduction... 92 Keep Service Business Income Below $207,500/$415,000 Threshold... 92 Form an S Corporation... 92 File a Separate Return... 93 Hire Employees... 93 Review Questions... 94 Review Answers... 95 Chapter 8 Getting Around Town: Car and Local Travel Expenses... 97 Learning Objectives... 97 Introduction... 97 Deductible Local Transportation Expenses... 97 Travel Must Be for Business... 97 Trips from Your Home Office... 98 If You Have No Regular Workplace... 98 The Standard Mileage Rate... 99 How the Standard Mileage Rate Works... 99 Requirements to Use the Standard Mileage Rate... 100 The Actual Expense Method... 100 How the Actual Expense Method Works... 100 Record-Keeping Requirements... 101 Vehicle Depreciation Deductions... 101 Leasing a Car... 101 Other Local Transportation Expenses... 102 Reporting Transportation Expenses on Your Tax Return... 102 Sole Proprietors... 102 LLCs and Partnerships... 103 Corporations... 103 When Clients or Customers Reimburse You... 103 Review Questions... 104 Review Answers... 105 Chapter 9 Leaving Town: Business Travel... 107 Learning Objectives... 107 Introduction... 107 What Is Business Travel?... 107 Where Is Your Tax Home?... 108 Your Trip Must Be for Business... 110 Deductible Travel Expenses... 111 Traveling First Class or Steerage... 112 Taking People with You... 112 iii
How Much You Can Deduct... 112 Travel Within the United States... 112 Travel Outside the United States... 113 Conventions... 115 Travel by Ship... 115 Calculating Time Spent on Business... 115 Fifty Percent Limit on Meal Expenses... 116 Maximizing Your Business Travel Deductions... 117 Plan Ahead... 118 Make a Paper Trail... 118 Maximize Your Business Days... 118 Take Advantage of the Sandwich Day Rule... 118 Travel Expenses Reimbursed by Clients or Customers... 119 Review Questions... 120 Review Answers... 121 Chapter 10 Inventory... 123 Learning Objectives... 123 Introduction... 123 What is Inventory?... 123 Supplies Are Not Inventory... 123 Incidental Supplies... 124 Long-Term Assets... 124 Deducting Inventory Costs... 124 Nonincidental Materials and Supplies Deduction... 124 Current Deduction for Inventory... 125 Maintaining an Inventory... 126 Determining the Value of Inventory... 126 Review Questions... 129 Review Answers... 130 Chapter 11 Hiring Help: Employees and Independent Contractors... 131 Learning Objectives... 131 Introduction... 131 Employees Versus Independent Contractors... 131 Tax Deductions for Employee Pay and Benefits... 133 Payroll Taxes... 134 State Payroll Taxes... 135 Employee Fringe Benefits... 136 Employing Your Family or Yourself... 137 Employing Your Children... 137 Employing Your Spouse... 138 Rules to Follow When Employing Your Family... 139 Employing Yourself... 141 Tax Deductions When You Hire Independent Contractors... 141 No Deductions for ICs Taxes... 142 Paying Independent Contractors Expenses... 142 Review Questions... 144 Review Answers... 145 Chapter 12 What if You Get Sick? Deducting Medical Expenses... 147 Learning Objectives... 147 Introduction... 147 The Affordable Care Act (Obamacare)... 147 Individual Health Insurance Mandate... 147 Exemptions from the Mandate... 148 Tax Penalty for Noncompliance... 148 iv
The Employer Mandate... 149 Obamacare Health Insurance Rules... 149 State Health Insurance Exchanges... 150 Open Enrollment Periods... 150 Health Insurance Premium Assistance Credits... 151 The Personal Deduction for Medical Expenses... 152 Deducting Health Insurance Premiums... 153 Personal Income Tax Deduction for the Self-Employed... 153 Deducting Health Insurance as a Business Expense... 154 Tax Credits for Employee Health Insurance... 156 Health Reimbursement Arrangements... 157 Spousal Health Reimbursement Accounts... 157 What Expenses May Be Reimbursed?... 158 How to Establish a Spousal HRA... 158 Sample Spousal HRA... 158 HRAs for Businesses With Multiple Employees... 159 Health Savings Accounts... 160 What Are Health Savings Accounts?... 161 Establishing Your HSA... 161 Making Contributions to Your HSA... 162 Withdrawing HSA Funds... 163 Are HSAs a Good Deal?... 164 HSAs for Employees... 164 Tax Reporting for HSAs... 165 Review Questions... 166 Review Answers... 167 Chapter 13 Deductions That Can Help You Retire... 169 Learning Objectives... 169 Introduction... 169 Why You Need a Retirement Plan (or Plans)... 169 Tax Deduction... 170 Tax Deferral... 170 Individual Retirement Accounts (IRAs)... 170 Traditional IRAs... 171 Roth IRAs... 172 Employer IRAs... 173 SEP-IRAs... 173 SIMPLE IRAs... 174 Keogh Plans... 174 Types of Keogh Plans... 174 Setting Up a Keogh Plan... 175 Withdrawing Your Money... 175 Solo 401(k) Plans... 175 Review Questions... 177 Review Answers... 178 Chapter 14 More Home Business Deductions... 179 Learning Objectives... 179 Introduction... 179 Advertising... 179 Goodwill Advertising... 179 Giveaway Items... 180 Website Development and Maintenance... 180 Business Bad Debts... 180 Requirements to Deduct Bad Debts... 180 Types of Bad Debts... 182 v
Casualty Losses... 183 Amount of Deduction... 184 Damage to Your Home Office... 185 Tax Reporting... 185 Charitable Contributions... 185 Dues and Subscriptions... 186 Education Expenses... 186 Starting a New Business... 186 Minimum Educational Requirements... 187 Traveling for Education... 187 Entertainment and Meals... 188 Entertainment... 188 Meals... 188 Gifts... 189 Insurance for Your Business... 189 Homeowners Insurance for Your Home Office... 190 Car Insurance... 190 Interest on Business Loans... 190 Home Offices... 190 Car Loans... 191 Loans from Relatives and Friends... 191 Loans to Buy a Business... 191 Interest You Can t Deduct... 191 Deducting Investment Interest... 191 Legal and Professional Services... 192 Buying Long-Term Property... 192 Starting a Business... 192 Accounting Fees... 192 Taxes and Licenses... 192 Income Taxes... 193 Self-Employment Taxes... 193 Employment Taxes... 193 Sales Taxes... 193 Real Property Taxes... 193 Other Taxes... 194 License Fees... 194 Review Questions... 195 Review Answers... 196 Chapter 15 Record Keeping and Accounting... 197 Learning Objectives... 197 Introduction... 197 What Records Do You Need?... 197 Business Checkbook and Credit Cards... 197 Records of Your Income and Expenses... 200 Paper Versus Electronic Records... 200 Create Your Own Spreadsheet... 200 Personal Finance Software... 200 Small Business Accounting Software... 201 Online Bookkeeping... 201 Tracking Your Business Expenses... 201 Supporting Documents... 203 Records Required for Specific Expenses... 205 Automobile Mileage and Expense Records... 205 Travel, Meal, and Gift Expenses... 208 Listed Property... 209 How Long to Keep Records... 210 vi
What If You Don t Have Proper Tax Records?... 210 Accounting Methods... 211 Cash Method... 211 Accrual Method... 213 Tax Years... 213 Review Questions... 215 Review Answers... 216 Chapter 16 Businesses Owned By Spouses... 217 Learning Objectives... 217 Introduction... 217 An Employer-Employee Arrangement... 217 Social Security Tax Savings... 218 Bona Fide Employee Requirement... 218 Reasonable Compensation Requirement... 218 Your Spouse Won t Qualify for Social Security? So What!... 219 What About Limited Liability?... 219 Establish a Qualified Joint Venture... 219 Qualifying for QJV Status... 219 Community Property Sole Proprietorships... 220 Form a Business Entity... 220 Do Nothing... 220 Review Questions... 221 Review Answers... 222 Chapter 17 Eight Tips for Avoiding an IRS Audit... 223 Learning Objectives... 223 Introduction... 223 Tip #1: Be Thorough and Exact... 223 Tip #2: Don t File Early... 223 Tip #3: Form a Business Entity... 223 Tip #4: Explain Items the IRS Will Question... 224 Tip #5: Avoid Ambiguous or General Expenses... 224 Tip #6: Report All of Your Income... 224 Tip #7: Watch Your Income-to-Deduction Ratio... 224 Tip #8: Beware of Abnormally Large Deductions... 224 Review Questions... 225 Review Answers... 226 Glossary... 227 Index... 231 vii