If you are small business owner and use part of your home exclusively for business then you may be able to take a deduction for your home office. In order to be able to take the deduction then you must you the “home office” portion of your home:
Exclusively and regularly as your principal place of business, as a place to meet with clients or customers in the normal course of your business, or in connection with your business where there is a separate structure not attached to the home; or
On a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility.
If you meet this test then you may take as a deduction the business portion of any real estate taxes, mortgage interest, utilities, insurance, rent, painting, repairs, and improvements, and depreciation.
Also, if you are an employee who as a home office then you can only take this deduction if the office is used exclusively for business at the convience of the employer and that portion of your home is not rented by your employer.
If you have a den in your house that you use for business and your family also uses for watching TV, using the computer, or doing their own work, then you do not have an office that can be deducted. The office must be exclusively used for business - meaning no other activities can be performed there.
It is always best to seek the advice of a tax professional before deciding whether or not you qualify for the home office deduction.
If you have a used car you want to donate to a charity and are wondering if you can deduct the donation on your tax return, then here are the steps you need to take.
First, make sure the charity you want to donate to is a qualified organization. You will need to make sure that they are 501(c)(3) and can do so by calling the IRS at 877-829-5500 if you have any doubts.
You also must itemize deductions on your personal tax return by filing Schedule A. If you are not a Schedule A filer, but instead take the Standard Deduction, then you cannot deduct the donation of the car.
Next comes the amount you are able to deduct for the donation. This depends on what the charity plans to do with the vehicle. If the charity sells the vehicle (as they generally do) then your deduction is limited to the gross proceeds of the sale. So if you donate your car and the charity sells it for $500, then that is your deduction. This is the case even if you think the fair market value of the car is higher. You will also need to get a written statement from the charity with your information on it and a statement saying they sold the car and how much they sold it for. This is true for any car that is sold for more than $500.
If your donation is worth more than $5000 then a written appraisel will be necessary and it will need to be attached to your tax return.
If you have any questions about donating an automobile to charity then it is best to consult your tax advisor for advice on your particular situation.
When keeping track of meals for your business as an expense, keep in mind that some meals are only 50% deductible while others are deductible at 100%.
Meals that are 50% deductible:
Meals for business meetings of employees, stockholders, etc.
Meals during business travel.
Meals at conventions and seminars
Meals with clients and customers
Meals that are related to employee travel that are reimbursed to the employee at 100% are still only 50% deductible
Meals that are 100% deductible:
Company parties
Snacks for the office like coffee and donuts
Food used in promotion that is made available to the public for free
Meals provided to employees in the office for the convenience of the employer (provided it is given to more than half of the employees). This works if you want to give employees dinner to keep them working later
If you have questions regarding whether your meal expense is 50% or 100% deductible it is always best to consult your tax advisor. Always remember to keep adequate records of your meals by keeping things such as the reciepts.
Real Estate Professionals have special rules for reporting and deducting rental income and losses on their personal tax returns (form 1040). If you are a real estate professional then rental activities that you materially participate in during the year are not passive activities. This means that any losses are not limited by the passive activities rules.
Qualifications to be a Real Estate Professional:
More than half of the personal services you performed in all trades or businesses during the year were performed in real propertry businesses in which you materially participated.
You performed more than 750 hours of services during the year in real estate businesses in which you materially participated.
If you qualify to be considered a Real Estate Professional for tax purposes then you have the option of choosing to treat all of your real estate interests as one activity. Once you make this choice, it is binding for the year you make it and any later years that you qualify as a real estate professional.
The main benefit of delaring yourself a real estate professional on your tax return is so that your rental losses are not limited. This way if you have rental losses of $40,000, you can take the entire loss and not be limited to the $25,000 passive activity loss rules.
Before preparing your tax return as if you are a Real Estate Professional, it is always wise to consult your tax accountant to make sure your tax return will be correctly prepared.
Rental losses for real estate activities are generally considered passive activities and the amount of loss you can deduct is limited. You can usually deduct more of a loss if you “actively” participate in your rental activity. Active participation is if you own at least 10% of the rental property and you made management decisions in a significant sense.
If your rental losses are less than $25,000 and you actively participated in the rental activity then the passive activity limits do not apply to you.
If your rental losses are more than $25,000 and you actively participated then your loss is limited to the $25,000 unless you have other passive income to offset the loss.
If you do not actively participate then any loss is deductable only to the extent that you have other passive income.
Any suspended losses due to the limits on passive activity will be released when the property is sold. Also, there is an income phase out for the $25,000 deduction limitation. If your modified AGI is $100,000 or less, then no limits apply. If your modified AGI is between $100,000 and $150,000 then this loss is limited to 50% of the difference between $150,000 and your modified AGI. If your modified AGI is more than $150,000 your cannot generally use the special allowance.
Rental loss deductions can be complicated. Make sure to contact your tax advisor to make sure you are making the most of your rental losses.
Depreciation is used for items that cannont be fully expensed in the year they were paid for. For a rental property this would include items such as the building, appliances, furniture, and improvements.
Property that should be depreciated meets the following requirements:
You own the property
You use the property in your rental
The property has a dterminable useful life
The property is expected to last more than 1 year
The property is not excepted property (such as property placed in service and disposed of in the same year)
For rentals, the following are examples of depreciable property and their useful lives:
Building - 27.5 years
Appliances - 5 years
Carpets - 5 years
Furniture - 7 years
Fences - 15 years
Additions and improvements - 27.5 years
When you start to rent a residential home, part of the cost basis of the home must be allocated to land. Land is not a depreciable item. You can figure the portion of the building cost attributable to land by using proprety tax records or a professional appraisal.
If questions arise about whether or not a rental item should be expenses or depreciated for tax purposes it is always best to consult a tax professional. This way you can make sure your tax return is correct.
If you rent out only part of a property you need to be sure to account correctly for the expenses. If you rent only part of a property then you must divide the expenses between personal and rental use. You can deduct the rental portion of the expenses on Schedule E of your 1040 and the personal expenses (such as mortgage interest and property taxes) on the Schedule A of your 1040. If you have any expenses that belong only to the rental portion of the building, then these do not need to be divided.
For example, if you have an apartment attached to your home that you rent out then you must divide expenses such as mortgage interest and property taxes between the part of the home you live in and the part that is rented out. You can do this based on the square footage of the total house and the part you rent out. You must also divide expenses like homeowners insurance and utilities between the rental and non-rental portion. The non-rental portion of the insurance and utilities is not deductible on your tax return, but the rental portion is deductible as a rental expense on Schedule E of your 1040. If you have something like a phone line running only to the rental then this expense in fully deductible as a rental expense since it is not being used by the rest of the home.
If you have any questions about what is deductible as part of your rental and what expenses need to be divided then it is best to consult a tax professional.
If you own some property and decide to start renting it out, there are a few things you should note for tax purposes. If you change your home or other property to rental use at any time during the year, then you must divide the expenses, such as taxes and insurance, between rental and personal use.
For example, if you start renting your home out on July 1st, then for the year, 50% of all expenses will be deductible on Schedule E to offset rental income. Examples of the expenses would be mortgage interest, taxes, cleaning and maintenance, and utilties. For the 1st half of the year only mortgage interest and taxes would be deductible and would go on Schedule A of your tax return.
For depreciation purposes you should use the conversion date as the date the property was placed in service. So in the above example on the depreciation schedule you would list July 1st as the date placed in service. The first half of the year would not be depreciable for tax purposes since it was used personally.
The big thing to note is that once you convert the property to rental use you need to start tracking expenses as of the conversion date to make sure you are recording all your expenses for tax purposes.
If you own rental real estate property you may be wondering what all can be deducted as expenses on your tax return. There are a few general rules about deducting rental expenses.
You can generally deduct your rental expenses in the year you pay them
You can start deducting expenses paid from the time you make it available to rent, whether or not there is an actual tenant.
You may not deduct uncollected rent.
When it comes to repairs and improvements, repairs may be fully deducted in the year they are paid, while improvements must be depreciated over their useful like. A repair is anything necesssary to keep your property in good operating condition and does not materially add value to the property or substanitally prolong its life, such as painting, fixing leaks, or replacing broken windows. An improvement adds value to the property, prolongs its life, or adapts it to new uses. Some examples are additions of new rooms, new roof, new carpeting.
Here are a list of other expenses that are generally deductable on your tax return.
Advertising
Cleaning and maintenance
Utilities
Insurance
Taxes
Interest
Commissions
Tax return prep
Travel
Local Transportation Expenses
If you have any questions abotu whether or not expenses are deductible or if they have to be depreciated, please contact your tax professional for help.
When you own a rental home the rental income is any payment you receive for the use or occupation of the property. All rental income must be included in the gross rental income on the Schedule E of your 1040 tax return.
You must report rental income according to the following:
You must report income on your return for the year you actually received it.
Any advance rent must be included in income when you receive it, regardless of the time peroid it is for.
You do not include security deposits as income if you plan to refund it at the end of the lease. If you end up keeping part or all of the deposit, then it becomes income the year it was kept.
If you rent property that you also use as your home and it is rented for fewer than 15 days of the year, then do not include the rent you recieve as income and also, do not deduct the expenses.
If you have any questions about whether or not money collected is actually rental income that should be included on your tax return then it is best to consult your tax advisor.
