There is a federal 20% deduction on qualified business income available in 2018.  Qualifying for this deduction will depend on the type of business you have and your individual taxable income before the deduction.  Taxpayers with taxable income over $157,500 ($315,000 married filing jointly) are subject to additional limitations on this deduction. Businesses in the service industry where the principal asset is the reputation or skill of one or more of its employees will have even greater limitations on this deduction.

Here are some basic examples to see if you qualify:

Specified Service Businesses

Fact: Individual taxable income under $157,500 single or $315,000 Married Filing Joint (MFJ)

Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income.

Fact: Individual taxable income between $157,501-$207,500 ($315,001-$415,000 MFJ)

Result: Deduction limited

Fact: Individual taxable income over $207,500 ($415,000 MFJ)

Result: No Deduction

Non-Specified Service Businesses

Fact: Individual taxable income under $157,500 single or $315,000 Married Filing Joint (MFJ)

Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income.

Fact: Individual taxable income between $157,501-$207,500 ($315,001-$415,000 MFJ)

Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income. Subject to wages and assets limitations.

Fact: Individual taxable income over $207,500 ($415,000 MFJ)

Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income. Subject to wages and assets limitations.

Qualifying for this deduction could change your federal tax liability dramatically and there is a delicate balance between qualified business income and taxable income that must be considered.  If you are a taxpayer that expects taxable income near the phaseout range ($157,500 single or $315,000 MFJ) it might be time to contact your tax advisor to determine how best to take advantage of this deduction.

Welcome to another tax season!  To make this busy time a little easier, you can download all the necessary documents right here.

We ask all of our clients to fill out and return a signed Engagement Letter, and Questionnaire. We also have an Organizer that you can fill out to help gather your tax information.

2017 Individual Engagement Letter

Fiduciary Engagement Letter – Available upon request.

Individual Questionnaire  This is a "fill in" PDF form, but will need to be either printed to .pdf or paper to record your answers.

Fiduciary Questionnaire Print and record your answers on paper.

Individual Organizer (Not available for Fiduciary)

If we did your return in 2016, you will receive an Organizer with your prior year information.  If you need a new Organizer, please contact Carrie to have one sent to you.

If you are a new client, please download and complete the blank Organizer that pertains to your situation.

1. Basic- For taxpayers without Schedule C business income, or rental property.
2. Business Income- For taxpayers with self-employment income. Please make sure to fill out this Organizer AND the Basic Organizer.
3. Rental Income– For taxpayers with rental properties. Please make sure to fill out this Organizer AND the Basic Organizer.
4. Complete- This is the complete version for taxpayers with multiple activities such as business, rental, farm, or foreign income.

If you have Adobe Acrobat see our Instructions for filling out your organizer in Adobe.

A business is permitted to deduct the ordinary and necessary expenses it incurs for carrying on the business.  Is it possible to write off the cost of tickets to a sporting event?  The short answer is yes, but certain conditions must be met. This is an area that is often challenged by the IRS.  Proper documentation and some planning ahead of time can make it much easier to prove the eligibility of the expense upon examination.

The first condition to make the tickets deductible is that the event be directly related to the conduct of business.  This means that you must actively engage in a business meeting, negotiation, discussion, or other bona fide business transaction during the event.  This is not the most difficult condition to meet, and the IRS realizes that so there are two other requirements to meet.  First, tickets cannot be provided to an existing or prospective client without a company representative being present.  Without a representative of the company, the tickets are considered a gift which is only deductible up to $25 per person per year.  Second, the environment must be suitable for conducting business. Substantial distractions can lead the IRS to determine that no business transactions could be conducted there.  It can be debated otherwise, but this generally means that general admission tickets do not qualify.  The noise and distraction of the crowd are not favorable to business being conducted.  It is recommended that you use a more secluded section, such as a suite.  No matter which tickets are purchased you need to document which business transactions occurred before, during, and/or after the event.

The cost of a luxury suite is limited to the face value of tickets for non-luxury seats.  You can use the highest priced non-luxury seats that are available to the general public in figuring the amount that is deductible.  Any amount above this price level is not deductible.  Most suite rentals have additional components, other than the cost of the ticket, including advertising, food and beverage, and other fees for use of the suite.  You can work with the venue to determine amounts for each.

The amount recognized for the tickets and food and beverage are subject to a 50% limit.  This is generally applied to all business meals and entertainment expenses.  Any amount determined to be advertising is fully deductible as a business expense.  Generally, any other costs are considered non-deductible.

Businesses regularly take clients to sporting events to develop new or existing relationships.  Start a conversation with your tax advisor to determine the possible tax deduction for sporting event tickets.

When you are a shareholder of an S-corp but also work for the company you are considered an employee.  Having employee status means that any home office deductions must be reported on Schedule A which requires that the deduction be greater than 2% of your adjusted gross income in order to have any tax benefit. This is generally not the case.  However there is another way to get a business deduction for the cost of your home office.   If you are not aware if you are eligible for the home office deduction please see our article “Work from Home? A Possible Deduction…”

For S-Corp owners that are eligible for the home office deduction, the IRS allows the S-Corp to reimburse the owner and employees for ordinary and necessary business expenses including expenses directly related to keeping an office in their home as a "working condition fringe benefit."

The following steps must be followed to take advantage of this reimbursement plan and business deduction:

1. The employer must adopt an accountable plan for business expense reimbursements and follow the substantiation rules.  Example
2. The employee must provide an accounting (expense report with supporting documents) of the following expenses and apply a business use percentage based on the square footage of the area used exclusively for business to the entire home.

The following expenses are allowed (subject to the business use "square footage" percentage):

1. Utilities
2. Insurance
3. Repairs and maintenance

The following "direct" expenses are allowed 100%:

1. Office supplies
2. Computer equipment
3. Cell phone charges

The following expenses are NOT allowed for reimbursement:

1. Depreciation of home
2. Mortgage interest
3. Property taxes

Mortgage interest and property taxes may be deductible elsewhere on your personal tax return so they do not qualify for reimbursement by the employer.  If you rent your home, you may also be able to deduct the business percentage of the rent paid as well.  Please contact your tax advisor if you have any questions and to discuss your specific situation.

If you work from home you may be entitled to a tax deduction.  This deduction ordinarily benefits self-employed persons, but is available to employees as well.  Though it is available to employees, most will not see a tax benefit as the deduction is subject to a 2% of adjusted gross income reduction.  A future article will explain a way for certain employees (S-corp shareholders) to take advantage of the home office deduction.

In order to qualify for the home office deduction you must meet certain criteria.  The office space must be used exclusively and regularly as a principal place of business.  Let's break down these components separately.  Exclusive use means that the home office is not used for personal matters.  So an office that doubles as a spare bedroom does not qualify.  The regular use condition is satisfied if you use the space continually and in the normal course of business.  Occasionally meeting clients at home does not qualify.  Meeting the principal place of business requirement is more ambiguous but there are two main factors used to determine eligibility.  First, the importance of activities performed must be essential to the business.  The second factor, used if the first one is not clear, is the time spent in/at each place.

If you are an employee there is an additional requirement that the home office must be for the convenience of the employer.  This is a difficult test to meet, and lots of employees will not qualify.  Each situation should be evaluated specifically as there are exceptions but here is a quick reference that answers the basic question.  If you have space to conduct your business (i.e. office space) provided by your employer, you do not qualify.  The opposite is also true, if your employer does not provide office space; the home office is for the convenience of the employer.

If you meet the criteria and are eligible for a home office deduction how much is it worth?  As with most situations with the IRS there isn't just one solution.  There are two possible ways to calculate what your deduction may be.

• Simplified Method – You receive a $5 deduction per square foot of office space; with a maximum of 300 square feet. With this method the record keeping requirements and allocations discussed below are eliminated.
• Standard Home Office Deduction – There are three main components to the home office deduction
  1. Indirect expenses – these are taken based on the business use square footage percentage; the percentage of your home that the office occupies. These expenses impact the entire home.
     1. Utilities
     2. Insurance
     3. Repairs & maintenance
     4. Property taxes
     5. Landscaping & snow removal
  2. Direct expenses – related to the home office only.
     1. Repairs & maintenance for the office only
  3. Depreciation –this is a deduction for the decrease in value of your home over time. This deduction is allowed on the same percentage basis as indirect expenses.

As you can see, the amount of work to calculate and maintain the records for the standard home office deduction are quite substantial.  Also keep in mind that when you eventually sell the home any depreciation allowed for the period used for business must be taken into account for the purpose of determining taxable gain on the sale.  You can determine each year whether to take the simplified or the standard home office deduction.

We recommend taking advantage of every tax deduction available to you.  Not everyone qualifies for the home office deduction but if you do, it can be very advantageous.  With a little planning it is much easier to track and record everything needed.  If you have questions related to your specific situation, please contact your tax advisor.

Welcome to another tax season!  To make this busy time a little easier, you can download all the necessary documents right here.

We ask all of our clients to fill out and return a signed Engagement Letter, and Questionnaire. We also have an Organizer that you can fill out to help gather your tax information.

Individual Engagement Letter

Fiduciary Engagement Letter

Individual Questionnaire – This is a “fill in” PDF form, but will need to be either printed to .pdf or paper to record your answers.

Fiduciary Questionnaire  – Print and record your answers on paper.

Individual Organizer (Not available for Fiduciary)

If we did your return in 2014, you will receive an Organizer with your prior year information.  If you need a new Organizer, please contact Carrie to have one sent to you.

If you are a new client, please download and complete the blank Organizer that pertains to your situation.

• Basic – For taxpayers without Schedule C business income or rental property.
• Business Income – For taxpayers with self-employment income. Please make sure to fill out this Organizer AND the Basic Organizer.
• Rental Income – For taxpayers with rental properties. Please make sure to fill out this Organizer AND the Basic Organizer.
• Complete – This is the complete version for taxpayers with multiple activities such as business, rental, or farm income.

If you have Adobe Acrobat see our instructions for filling out your organizer in Adobe.

Companies that do not submit financials to the SEC or have their financial statements audited each year could only deduct repair expenses up to $500 under the IRS's de minimis safe harbor.  This safe harbor applies to a large number of small businesses.  The IRS has increased the de minimis safe harbor amount to $2,500 for tax years beginning after 2015.  They also stated that they will not challenge this for earlier years if other conditions are met.  You must have a policy in place at the beginning of the year to take advantage of this safe harbor.  Consider adopting this policy soon to prepare for the 2016 tax year.  Do not hesitate to contact your tax advisor to ask about this new policy change.

Sample Capitalization Policy