Job hunting and taxes

If you're job hunting, be aware of the potential tax breaks. You can deduct the costs of looking for a new job in your present line of work, even if you don't get the job. Typical expenses include travel to job interviews, resume costs, and employment agency fees. You must itemize your deductions, and your total miscellaneous deductions must exceed 2% of your adjusted gross income.

Deductible charity requires recordkeeping

If spring cleaning leaves you with items that you want to donate to charity, remember that donations of used clothing and household items must generally meet certain requirements to be tax-deductible. First, such items must be in "good used condition or better." Second, a receipt from the charity is required. If the property is valued under $250 and a receipt is not available, such as at unattended drop-off locations, reliable written records are still required.

Can you qualify for the home office deduction?

The home office deduction is available when you use part of your home regularly and exclusively as your primary place of business, or for meeting clients.

If you're an employee who works from home, there's an additional rule: The exclusive use must be for the convenience of your employer.

In either case, "exclusive" is defined as "all or nothing." Conduct any personal activities in the space you've designated as your office and the deduction is lost.

But satisfy the requirements and you can write off part of the expenses of running your home, including utilities, interest, and property taxes, as a business deduction. That means those costs can directly reduce business income, saving you income tax. If you're a sole proprietor, the deduction may also reduce self-employment tax. Though the amount you can claim is generally limited to business income, disallowed expenses can be carried forward to future years.

What are the drawbacks? One drawback to taking a home office deduction is the potential for depreciation "recapture" that may apply when you sell your home, potentially reducing the amount of gain you can exclude from income.

Give us a call. We can answer your questions about the tax requirements of a home office deduction in your particular situation.

Business Tax Tip

Keep repairs separate from major improvements. Ordinary repairs and maintenance on business equipment and buildings are deductible business expenses. Improvements which materially add to the value of the property or significantly prolong its useful life must be depreciated over a period of years. To avoid losing tax deductions for repairs and maintenance, make major improvements completely apart from repairs and maintenance.

Don't let the tax tail wag the economic dog

Some tax-cutting strategies make good financial sense. Other tax strategies are simply bad ideas, often because tax considerations are allowed to override basic economics.

Here’s one example of the tax tail wagging the economic dog. Let’s say that you run an unincorporated consulting business. You want some additional tax write-offs, so you decide to buy $10,000 of office furniture that you don’t really need. If you’re in the 28% tax bracket and you deduct the entire cost, this purchase will trim your tax bill by $2,800 (28% of $10,000). But even after the tax break, you’ll still be out of pocket $7,200 ($10,000 minus $2,800) -- and stuck with furniture that you don’t really need.

There are other situations in which people often focus on tax considerations and ignore the bigger financial picture. For example:

* Someone increases the size of a home mortgage, solely to get a larger tax deduction for mortgage interest.

* A homeowner hesitates to pay off a mortgage, just to keep the interest deduction.

* Someone turns down extra income, because it might “push them into a higher tax bracket.”

* An investor holds an appreciated asset indefinitely, solely to avoid paying the capital gains tax.

Tax-cutting strategies are usually part of a bigger financial picture. If you are planning any tax-related moves, we can help make sure that everything stays in focus. For assistance, give us a call.

HSA limits increase for 2012

The amount you can set aside in a health savings account (HSA) in 2012 increased to $3,100 for an individual and to $6,250 for a family. If you’re 55 or older, you’re allowed an additional $1,000 contribution. HSAs permit taxpayers who have high deductible health insurance plans to set aside pretax dollars that can be withdrawn tax-free to pay medical expenses not reimbursed by insurance.

Some deductions are available even if you don’t itemize

If you’ve given up itemizing deductions, you’re not alone. These days over half of all taxpayers find they’re better off using the standard deduction. But even if you take the standard deduction, you can also deduct some individual expenses on your 2011 tax return, including the following:

* IRA and HSA contributions

On your 2011 tax return you may qualify to deduct up to $5,000 in contributions to a traditional IRA. That increases to $6,000 if you’re age 50 or older. Income limitations may apply in some cases. You can’t deduct contributions to Roth IRAs.

Health Savings Accounts (HSAs) are IRA-like accounts set up in conjunction with a high-deductible health insurance policy. The annual contributions you make to your HSA are deductible. Contributions are invested and grow tax-free, and you’re allowed to withdraw money in the account tax-free to pay for your unreimbursed medical expenses. The HSA contribution limit for 2011 is $3,050 for singles and $6,150 for couples. An additional $1,000 may be contributed by those 55 and older.

* Student loan interest and tuition fees

Deduct up to $2,500 interest on student loans for yourself, your spouse, and your dependents. For 2011, you can also deduct up to $4,000 of tuition and fees for qualified higher education courses. Income limitations apply, and you must coordinate these deductions with other education tax breaks.

* Self-employment deductions

If you’re self employed, you can generally deduct the cost of health insurance premiums, retirement plan contributions, and one-half of self-employment taxes.

* Other deductions

Don’t overlook deductions for alimony you pay, certain moving expenses, and early savings withdrawal penalties. Teachers can deduct up to $250 for classroom supplies that they purchased with their own money in 2011.

Email me at Vince@MyTexasCPA.com for more information on these and other deductions you may be entitled to take on your 2011 tax return.

News from the IRS

Here's a quick update on recent IRS activities that
might affect you:

* 2011 MILEAGE RATES RELEASED - The IRS has released adjustments to the mileage rates that can be used for business driving, charitable driving, or driving for medical or moving purposes.  Effective January 1, 2011, the standard mileage rates for the use of a car, van, pickup, or panel truck will be 51 cents per mile for business miles, 19 cents for medical or moving purposes, and 14 cents for charitable driving. 

* NEW LAW DELAYS RETURN FILING - If you itemize deductions or claim any of three restored deductions (for state and local sales tax, higher education tuition, or educator expenses), you must wait until mid February to file your 2010 tax return.  The IRS must reprogram its computers to handle the changes made to these items by the "2010 Tax Relief Act" passed in late December. 

* IRS CHANGES FILING DEADLINE - This year the deadline for filing various tax returns normally due on April 15 is being changed to April 18, 2011.  The reason?  Washington, D.C. is observing its Emancipation Day holiday on April 15, and though that's not a national holiday, the Treasury Department has extended Tax Day 2011 to Monday, April 18.  The new deadline applies to individual and partnership tax returns, extension requests, and other tax deadlines such as making 2010 IRA and education savings account contributions, and making the first 2011 estimated tax payment. 

Can I Deduct That? A Guide To Uncommon Expenses

IT'S TIME TO trim the tax bill.

When it comes to taking deductions, most business owners know pretty well the expenses that the Internal Revenue Service considers "ordinary and necessary" for business. There are specific rules, for instance, on writing off vehicle costs. Ditto with equipment, furniture, inventory, retirement savings, home offices and professional fees paid to accountants, lawyers and consultants.

Not every legitimate business expense falls neatly into one of these categories, however. A growing number of business owners are turning to professionals outside of accounting or law for advice on everything from mediating partner disputes to boosting workplace productivity. Some health-conscious bosses are stocking office kitchens with healthy snacks for the staff or hiring personal trainers for staff fitness sessions. And some weary business owners often tack vacation days onto their business travels.

So how do you determine whether those expenses, especially those that also yield a personal benefit, are fair-and-square business deductions? "These are things that aren't specifically contained in the law, so you have to navigate and see if they've been barred or allowed or not yet talked about," says Barbara Weltman, a Millwood, N.Y., tax attorney and author of "J.K. Lasser's Small Business Taxes 2008."

If court rulings and IRS pronouncements don't offer much guidance, then it's time for what tax pros refer to as the "laugh test." Can you write off an expense without snickering about pulling one over on the IRS? "If there is a concern in the taxpayer's mind, that probably means it's not deductible," says Keith Hall, national tax advisor in Dallas for the National Association of the Self-Employed.

Here are some not-quite-textbook expenses, and how tax experts view them:

Fees paid to nontraditional advisors

Did you hire an efficiency expert for tips on time management? Or a speech expert for help on public speaking? As long as you can argue that the advice was appropriate and helpful for your business, you should be able to deduct the fee, according to Weltman. There are gray areas, however, when it comes to professionals (such as business coaches) who offer a blend of personal and work-related advice. In those cases, use common sense; if a coach focused on personal matters, then don't claim it as a business deduction, she says. One exception is when a family business uses a consultant to settle sibling disagreements or other strained family relationships that impair a company's management. Those fees are typically deductible, she says.

Boondoggles
If you tack a few extra days onto the end of a work trip for personal R&R, you can deduct many of your travel-related expenses, according to Hall. The primary purpose of the trip must be business, however, and the cost shouldn't be overly extravagant. If that's the case, you can deduct the costs of airfare, taxis and 50% of your business meals. You can even deduct some out-of-pocket personal expenses if a Saturday night stay makes your business trip cheaper.

Snacks, food, beverages and other office-kitchen supplies.

Whether they're healthy or not, small bites or drinks that you supply staff for free count as a deductible business expenses. But be careful not to be too generous, as the IRS might view meals, in particular, as part of your employees' compensation. "If you were to give your employee a free lunch every day, that's probably an example of something that would be taxable to the employee," says Steve Hurok, tax director at BDO Seidman in Woodbridge, N.J. In most cases, however, the IRS considers small food or drink items as a fringe benefit that's "de minimis," meaning it doesn't have to be added to wages because the value is minimal. For more on fringe benefits, see IRS Publication 15-B.

Trips to the gym.

Sorry, but even if those daily workouts make you more physically fit to run your company you can't write off those health-club costs. However, a business owner can deduct the cost of installing an athletic facility (such as a small gym) for employees as long as it meets three rules: the facility is operated by the employer; located on the employer's premises; and primarily used by employees, according to Hurok. 

Clothing.

Uniforms for owners or employees that carry the company's name or logo are deductible as a business expense. However, "you can't take a deduction for clothing if it's adaptable to street use," says Weltman. "If you are an attorney, and you buy a $3,000 suit to look good in court, you can't deduct it." A contractor, however, could safely write off the cost of steel-tipped boots, and a party clown could deduct the cost of a clown suit, she says.
Classes, workshops and conferences. Tuition, books and related educational expenses are deductible as long as they're directly related to your business, says Hall. A business owner who takes a class to help her maintain or improve her business skills is deductible. But an art class taken at a local community college to relieve stress won't fly with the IRS. "Even though it makes some intuitive sense," he says, "it's going to be considered a personal expense."
Meals. For wining and dining to be deductible, the primary purpose must be business, and someone else (such as a client or customers) must be present, says Hall. If you drive a long way to meet with a client and stop to buy a meal for yourself on your way home, that's not deductible, he says. But, in most cases, if you have dinner with that client, you can deduct 50% of the meal's cost as a business entertainment expense.
Music. In an effort to create a comfortable or creative work environment, a number of small businesses like to play soft background music. When that's the case, the cost of the stereo equipment can be deducted as a business expense, Weltman says.

If you have any questions about what might be deductible for your business or personal taxes give us a call.

IRS pumps up standard mileage rates

Due to rising gas prices, the IRS has increased the
"standard mileage rate" for business drivers in 2008.

The standard mileage rate is an IRS-approved shortcut.
Instead of tracking all the actual business expenses of
your vehicle, you can use the prescribed flat rate for
the year. But you still must keep detailed records of
every business trip.

The new rate of 58.5¢ per business mile - up 8¢ per
mile - applies to travel during the last half of this
year. For the first half, the previous rate of 50.5¢ per
mile still applies. In addition, you may deduct any
business-related parking fees and tolls.

EXAMPLE: You drive 1,000 business miles a month in 2008.
Over the course of the year, you incur $500 in related
tolls. For the first six months, you can deduct $3,030
(50.5¢ x 6,000). For the last six months, the deduction
increases to $3,510 (58.5¢ x 6,000). When you add $500
in tolls, your deduction for 2008 equals $7,040 ($3,030
+ $3,510 + $500).

Note that the IRS also increased its standard mileage
rate for medical and job-related moving expenses from
19¢ a mile to 27¢ a mile for the last six months of this
year. However, the rate for charitable driving, which is
set by law, remains at 14¢ per mile.

Proceed carefully: The new mileage rates are available
to many - but not all - drivers. Give us a call if you
need details on how the changes affect your situation.

About Porter & Company, CPA's

The staff of Porter & Company have been practicing in the Dallas/Fort Worth metroplex for over 30 years. We are focused on meeting the demands of small to medium sized businesses as well as the individuals behind the business. We have an extensive practice area of tax and business solutions to bring cost effective results to you and your company.

Do You Have a Deductible Home Office?

Whether you are self-employed or an employee, if you use a portion of your home exclusively and regularly for business purposes, you may be able to take a home office deduction.

You can deduct certain expenses if your home office is the principal place where your trade or business is conducted or where you meet and deal with clients or patients in the course of your business. If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.

Your home office will qualify as your principal place of business if you use it exclusively and regularly for the administrative or management activities associated with your trade or business. There must be no other fixed place where you conduct substantial administrative or management activities. If you use both your home and other locations regularly in your business, you must determine which location is your principle place of business, based on the relative importance of the activities performed at each location. If the relative importance factor doesn't determine your principle place of business, you can also consider the time spent at each location.

If you are an employee, you have additional requirements to meet. You cannot take the home office deduction unless the business use of your home is for the convenience of your employer. Also, you cannot take deductions for space you are renting to your employer.

Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction will be limited if your gross income from your business is less than your total business expenses.

Expenses that you can deduct for business use of the home may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting and repairs. However, you may not deduct expenses for lawn care or those related to rooms not used for business.

There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

For more information, see IRS Publication 587, Business Use of Your Home.

If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure your home office deduction and report those deductions on line 30 of Schedule C, Form 1040. Employees can use the worksheet in Pub. 587 to figure their allowable expenses and claim them as a miscellaneous itemized deduction on Schedule A, Form 1040.

To be on the safe side, you may also want to review IRS Publication 4035, Home-Based Business Tax Avoidance Schemes, which describes schemes that claim to offer tax relief but which actually result in illegal tax avoidance.

If you're thinking about deducting your home office our office a call. We can help you lower your tax bill by using this deduction along with several others.