Episode 26: Tax Tips – Home Office & Business Travel
Ben Smith, CPA, & Senior Tax Manager from Etrends Tax & Accounting shared some amazing tax tips with us on “Rules on Home Office Deductions, and Business Travel”.Expand to read the Full Transcript
Rules For Home Office Deductions
Hello Ben Smith here. I’m a CPA and your Prosperity Advisor at Etrends Group. How do you deduct part of your home? The easiest way to do it is with a home office deduction. I’m going to go over the rules for a home office deduction today. Hopefully it helps you out and maybe you can rearrange your life a little bit to capture this deduction. So there’s a few rules:
- The exclusive test and that is that your home office has to be used exclusively for business. This is probably the test that trips the most tax payers up. They have a difficult time setting aside maybe a part of their home and only use it for business. Well do a little planning and you can probably get there. Exclusive means you can’t watch TV at night in the room, you can’t use it as a puzzle room for your kids, it’s just for business. Alright, you go in there and you do business, that’s it, exclusive.
- Regular is the second test. It has to be used regularly for business. Let me give you two examples: one that qualified as regular and one that did not. The first, it qualified as regular. There was a contractor who used his home office one hour in the morning and a couple hours at night. He did billing, followed up with clients and made phone calls, made notes, did payroll, things like that and he did that in the morning and evening, so maybe 2-3 hours a day. That was regular. Another tax payer tried to deduct a home office, but he only used it once very 2 weeks to have a management meeting. That was not regular according to the courts, so it needs to be regular. Test number 3, it has to be for business okay so it’s not for checking your stock portfolio unless that’s your business. It’s not for clipping coupons or whatever. Just because what you do in there might be to your financial benefit doesn’t mean it’s for business, so it has to be for business.
- It has to be your principle place of business. That sounds scarier than it is. If you do administrative tasks, that qualifies your home office as a principle place of business. For instance, if you were a doctor and you saw patient’s at a clinic pretty much every day, that’s okay. If you use your home office for administrative tasks, taking notes, billing, managing the business, whatever, all those activities if they’re done at your home office that qualifies your home office as your principle place of business.
Now, who takes advantage of the home office deduction?
Generally it is sole proprietors, people who are filing schedule C’s on their individual income tax returns as well as partners in partnerships who have properly structured their partnerships. They can take the home office deduction on their individual income tax return. You can actually also have a home office maybe if you’re doing rental properties.
Here’s the thing, there’s also an opportunity to gain or get home office deduction even though it’s not called a home office deduction, it’s essentially the same if you are operating as a corporation. The way you do it is you don’t take your home office deduction on your personal income tax return, you take it on your business tax return and you have to do it through employee reimbursements. So in other words, your corporation as the employer reimburses you as the employee for expenses that you as the employee incur in maintaining an office at home. So it’s a great way to do it. It’s also actually a relatively easy way to do it. It’s not as difficult as doing it like you normally would as a sole proprietor. You don’t have to fill out a whole extra form on your tax return in order to take advantage of this deduction if you own a corporation.
Let me give you one other benefit for having a home office. It’s going to increase your vehicle expense deduction. That’s because when you have a home office all the sudden the miles that you drive from your home office to other places of business become deductible. If you don’t have a home office, those miles are commuting miles and they are not deductible. So now you’ve captured a home office deduction and you’ve captured additional vehicle expenses that you can deduct. Your home office deduction is a great deduction.
If you need help sorting it out or figuring it out, come see me. I’m more than willing to answer your questions and maybe even strategize with you how we get there. Just with a little bit of planning you can probably do it.
By the way there’s other things you can do. For instance, the exclusivity test is not applicable to the storage of inventory. So if you sell on Amazon of Ebay or something like that, or you have your own online store, you can store inventory in your home and the exclusivity test is no longer applicable. Maybe if you’re selling clothing you could use your closet, use a garage space, you could do a number of things and still use those spaces for personal use as well.
How To Get A Bigger Bang For Your Buck When You Business Travel
I’m in Las Vegas and you know what they say, or at least they started saying I think yesterday, “What happens in Vegas only happens in Vegas.” I don’t think that’s any more true than when it comes to food. In Las Vegas you can eat really well from all around the world. Tonight I had a meal here at Minchia’s. It’s an Italian restaurant here in Las Vegas and a great meal.
There’s only one thing better than having a great meal and that is being able to deduct your great meal. I wanted to explain to you about the travel rules and also covering meals. Maybe give you a couple hints how you can get a bigger bang for your buck when you travel, and of course the best way to travel is to make it business travel, because business travel is deductible.
When travel is for business you get to deduct your transportation costs. You get to deduct your lodging costs and you get to deduct your meal costs as well as some other miscellaneous costs.
So how do you get there and how do you do it and still be able to enjoy yourself? Maybe put in a few personal things into that travel and still legally get to deduct it.
Well without going too long let me give you one quick key, and that is you need to have more work days than you have personal days.
Here’s the key!
For a day to be a work day you have to work 4 hours and one minute, and if you have a weekend, lets say you work 4 hours and one minute on Friday and you work 4 hours and one minute on Monday, well then guess what? Those weekend days just became work days too and by the way that works with holidays too.
Let’s say it could be a 3 day weekend, there could be a holiday on Monday. You work on Friday, work on Tuesday and guess what, all those weekend days including the holiday become work days and you get to deduct your lodging, your meals, transportation, and miscellaneous other things.
You know what, if I needed a haircut today I could go get a haircut and those would become deductible. If I needed my clothes cleaned, I could deduct those while I’m traveling. There’s a lot of costs I could deduct while I’m traveling including meals and of course for meals you get to deduct half the cost of your meal. Well hey for many of you that more than pays for the tip.
About Ben Smith, CPA, Tax
I have 19 years of experience in business management, accounting, taxation, and finance. I enjoy solving problems and make it my personal challenge to leave every organization I touch better. The most valuable services I offer help my clients see their future potential and provide them a road map to success. I help hold my clients accountable to their own expectations and together with my professional team I provide clients with a needed different perspective.
I specialize in taxation and the regulatory environment including the recent health care reform in the Patient Protection and Affordable Care Act. Today the regulatory environment makes up a significant part of the overall business environment and more consideration should be given to its various aspects than ever before.