How to Make the Most of Home Office Tax Deductions

Did you know that you may be able to deduct a portion of your home for business use – even if your business has a different primary location?

To claim a business deduction for your home there must be an area used exclusively and regularly for business. When the area is not your principal place of business, it must be a part of your home used only to meet or deal with clients, customers or patients in the normal course of business. It may also be a separate structure not attached to your home with an exclusive and regular connection to your business. For storage uses, you are required only to use the location regularly but not necessarily exclusively.

Terms Defined

“Exclusive use” means a specific area of the home is used only for trade or business. “Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use.

Corporations

If your business is a corporation – including an S corporation – you may be able to claim a home office deduction under the rules that apply to employees. For an employee to deduct home office expenses, the regular and exclusive business use must be for the convenience of the employer. When a home office is merely helpful, you cannot deduct expenses for the business use of your home.

The convenience requirement is often met when the principal business location is a manufacturing facility without office space. In that case, office functions done at home by the company president may qualify as meeting the convenience condition.

Is Your Business Wasting Money with Payroll Errors?

It seems that many business owners could be wasting money because of bookkeeping errors relating to payroll.

The thing is that taxes you pay that are associated with payroll are not your payroll tax expense, and if your bookkeeping records show that they are, your accountant has to fix the error. That’s not an easy task, considering how many pay periods there are in an entire year. This inevitably leads accountants to make a “reasonable” determination about your actual payroll expenses in order to prepare your income tax return. This results in higher costs and missed tax deductions.

Payroll Tax Explained

Your payroll tax expense does not include the taxes withheld from employee pay. That is wages expense. The employees pay the deducted taxes. You simply withhold them and remit them to the Internal Revenue Service (IRS) for the employees.

Your quarterly payroll reports reflect this. Remember, the IRS receives a quarterly payroll tax report with this information. It also obtains your annual income tax return. The IRS compares details from both sources. The wages stated on the quarterly reports must match your income tax return. If they do not match, you are likely to receive a notice from the IRS requesting an explanation. A reply requires time and is costly.

Your quarterly payroll reports to the IRS should also match your annual filing of employee W-2s. If you decide to pay some bonuses at year-end, they must be reported on both the W-2s and the fourth-quarter payroll report to the IRS.

How Your Accountant Can Save You Money

Your accountant helps you by ensuring that deductible wages on your tax return equal wages on the W-2s. If your bookkeeping does not show the exact total on the W-2s as your deductible wages, your accountant does an important exercise. The amount your books show as wages is added to the amount indicated as payroll taxes. The accurate amount of wages – known from the W-2s or quarterly payroll reports – is then subtracted. The remainder must be the payroll taxes. If that figure is not reasonable, more time and cost are involved to determine the error.

To avoid the time delay and cost for locating errors, minor inaccuracies are often ignored. This is a disadvantage to businesses with inaccurate records, because discrepancies are simply lost tax deductions. The cause is normally failure to record in the bookkeeping payroll those taxes that have accrued at year-end. Cash basis accounting records expenses, except for payroll taxes,  when they are paid. The taxes are deductible expenses for the year that the wages are paid. So the payroll taxes you incur for payroll dates this year are tax-deductible this year – even if the taxes are remitted next January. Likewise, the payroll taxes remitted in January of this year relating to wages paid last year should not be recorded in your bookkeeping as current year expenses. Those are last year’s expenses.

You cannot rely on your accounting software to eliminate the possibility of error. Your accountant should help you correctly set up the automated system. Have your payroll accounting reviewed by your accountant at least one other time during the year in addition to tax preparation season. Make sure your payroll reports match your bookkeeping to avoid costly problems and missed tax deductions.