Archives for December 2018

Home Office Deduction

December 27, 2018 by BGMF CPAs

Do you take advantage of the home office deduction?

Under the new tax laws, with the increased standard deduction where many taxpayers won’t obtain deductions for their mortgage interest and real estate taxes, they can potentially take advantage of a portion of those deductions against their business income.

If you haven’t considered this deduction due to being informed this was a red flag with the IRS or other factors, you should re-consider your position.

Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

What Space Can Qualify?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

The home office deduction can help reduce your tax liability as long as you follow the regulations. In today’s marketplace many individuals are running businesses from home. This reason and the new tax laws make this potential deduction more viable in your tax strategy.

Contact our firm today to review if you’re taking advantage of all deductions available to you!

Home Equity Loan Interest Deduction

December 14, 2018 by BGMF CPAs

Home mortgage interest We have received a lot of questions asking if home equity interest is still deductible. This article should help you answer that question…

Most of us will agree that our biggest investment is in our home. So, it shouldn’t surprise you that your house or condo is your first port-of-call whenever there’s a need to borrow money. And the easiest way to draw funds against the security of real estate is by arranging a Home Equity Loan.

Home Equity funding helps us in important ways:

Number one, the interest rates payable on this type of loan are arguably the lowest available.
Secondly, you can get the cash working for you quickly with the least bother, paperwork and tedious protocol.
Then there’s the third big reason: help from Uncle Sam.

Up to now all interest payments on a Home Equity Loan were tax-deductible (barring the prior tax law thresholds). It made borrowing almost a no-brainer! Who wouldn’t opt for already-low interest rates to be pulled even lower? Benefits like this are rare in our modern world where it seems like everything, including financing fees, are only going up.

Well, it’s time for a retake on the “Uncle Sam thing”: the new taxation laws as per the Tax Cuts and Jobs Act of 2017, enacted in December of the same year, have removed some delectable treats from the traditional “Home Equity feast”.

Is it likely to change your borrowing behavior anytime soon? No, but it should give you pause. There’s a certain logic to it that really can’t be argued with. Here are the new Home Equity items to keep in mind:

The amount you can borrow is tied to the value of the residence, be it a primary or secondary home. The I.R.S. has decided that your total loan value cannot be more than the assessed value of the asset as a start.
And in combination with all other mortgages cannot exceed $750,000 (down from prior law). So Home Equity lending is not the bottomless well some may believe it to be.
Tax breaks haven’t disappeared but at the same time, they simply are not what they used to be. Any Home Equity draws you make from now on have to be used to build, renovate or essentially improve your residence to qualify the interest payable on them for a tax deduction.

So on this last point, for example: if you use your new funds to pay off student loans, reduce your credit card debt or splurge it on a vacation, nobody is going to stop you. What they are going to stop is anyone claiming tax relief for this type of expenditure for the foreseeable future.

TD Bank in a survey points out that 32% of Home Equity Lending fits the new definition for deductibility. Looking at it from the other side, 68% of the tax deductions we took for granted for so long now fall away. That said, we all know that there’s no substitute for smart thinking to make the most of new terms and conditions.

In addition, a high percentage of taxpayers who are used to itemizing their deductions (where you would deduct the interest), will potentially not itemize going forward due to the increased standard deduction.

Finally, the limitations do not relate to rental properties. Interest on loans are still fully deductible against rental income.

So don’t hesitate to consult with our professional tax team when it comes to making your Home Equity decisions, or to clarify your thinking on any tax matter. We often see benefits buried under the “strict letter of the law” – we could make a difference.

Is a Sole Proprietor the Best Option

December 7, 2018 by BGMF CPAs

Sole Proprietor versus Other Entity Structures…

Are you thinking of starting a business or currently operating as a sole proprietor? We want you to consider this may not be a viable option for your business moving forward.

Below are a few reasons why being a sole proprietor is a poor choice for operating your business and we want to explain why and help you understand how to solve this problem.

One major reason is you’ll be personally liable if an accident were to occur. Let us tell you a story of how this would work in real life…

Consider you have recently opened a small boutique in your town that you’ve dreamed of your entire life. You’ve saved, planned and now the dream is finally coming to fruition. You’ve waited for the day you could quit your job and do something you were passionate about knowing you could add more value to others.

Start-up capital is tight due to initial expenses during the opening. You decide to go against advice and not form an entity (even a simple LLC) to save money and figure you would do this once you had revenue. It’s your grand opening and you are excited to finally throw open your doors with a big smile and welcome the public into what you’ve put your blood, sweat and money into over the previous months.

Not a half hour into your opening someone slips and falls hurting themselves in your shop. You feel horrible for this person and do what you can to help them get immediate assistance. You go out of your way to ensure they’re alright. Unfortunately, a few days later you are served with a lawsuit because of this incident and before you know you are nearly out of business before it truly began.

Listen, you may be saying that’s not my type of business. We appreciate that thought, but there are additional reasons why operating this type of entity is a poor choice.

Let’s discuss those reasons now…

You put everything you own at risk if a lawsuit or judgement arises against the business.
You will pay self-employment tax at 15.3% on the taxable income from the business.
By operating in this manner, you aren’t building credit for the business.
You are more likely to be audited compared to other entity structures, especially if you are running at a loss (thereby risking hobby loss rules).
Based on the new 20% qualified business deduction, you are subject to phaseouts if your taxable income is above $315K.

Forming an LLC is one great option to pursue, but you will be taxed (if it is just one member) the same as a sole proprietor. This will give you asset protection, but you’ll have to deal with the other four issues.

Please note, this isn’t always the worst way to operate and we analyze that when we sit down with you to discuss your business that allow you to make decisions based on facts and figures.

If you would like to discuss starting a business, review your current operations or get help setting up the proper entity, please contact our of business advisors today!