If you employ someone to work for you around your house, it is important to consider the tax implications of this type of arrangement. While many people disregard the need to pay taxes on household employees, they do so at the risk of paying stiff tax penalties down the road.
While it probably seems like tax season just ended, it is never too early to do a “Paycheck Checkup” to make sure the right amount of tax is withheld from earnings – and avoid a tax surprise next year when filing your 2020 tax return. As a reminder, because income taxes operate as a pay-as-you-go system, taxpayers are required by law to pay most of their tax as income is received.
The IRS mails millions of notices and letters to taxpayers every year for a variety of reasons. If you receive correspondence from the IRS don’t panic. You can usually deal with a notice by simply responding to it; most IRS notices are about federal tax returns or tax accounts. Each notice has specific instructions, so read your notice carefully because it will tell you what you need to do. In most cases, your notice will be about changes to your account, taxes you owe or a payment request; however, your notice may also ask you for more information about a specific issue.
Unless you are specifically instructed to do so, there is usually no need for a taxpayer to reply to a notice. For example, if your notice says that the IRS changed or corrected your tax return, review the information and compare it with your original return. If you agree with the notice, you usually don’t need to reply unless the notice gives you other instructions or you need to make a payment.
If you don’t agree with the notice, you will need to write a letter that explains why you disagree and include information and documents you want the IRS to consider. Mail your response with the contact stub at the bottom of the notice to the address on the contact stub. Allow at least 30 days for a response.
For most notices, there is no need to call or visit the IRS. If you have questions, call the phone number in the upper right-hand corner of the notice. Be sure to have a copy of your tax return and the notice with you when you call. As always, keep copies of any notices you receive with your tax records.
Be alert for tax scams as well. As a reminder, the IRS sends letters and notices by mail and does NOT contact people by email or social media to ask for personal or financial information.
If you need assistance understanding an IRS Notice or letter, believe it is in error, or discover you owe additional tax, please call the office.
San Jose: (408) 252-1800
Watsonville: (831) 726-8500
With more people working from home than ever before, taxpayers may be wondering if they can claim a home office deduction when they file their 2020 tax return next year. The short answer is that self-employed taxpayers who use their home for business may be able to deduct expenses for the business use of it whether they rent or own their home. If you are an employee, however, you are not eligible to take the home office deduction – even if you are working remotely in your home office.
Here is what taxpayers should keep in mind when it comes to understanding the home office deduction and whether they can claim it:
1. Regular and Exclusive Use. Generally, taxpayers must use a part of their home regularly and exclusively for business purposes. The part of a home used for business must also be:
For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
The term “home” for purposes of this deduction is defined as a house, apartment, condominium, mobile home, boat or similar property. It does not include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.
2. Expenses that can be deducted. Taxpayers can deduct certain expenses such as mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent. They must meet specific requirements to claim home expenses as a deduction, and the deductible amount of these types of expenses may be limited.
3. Simplified Option. To use the simplified option, multiply the allowable square footage of the office by a rate of $5. The maximum footage allowed is 300 square feet. As such, the maximum deduction under this method is $1,500. This option saves time because it simplifies how to figure and claim the deduction and makes it easier to keep records. The rules for claiming a home office deduction remain the same.
4. Regular Method. This method includes certain costs paid for a home. For example, part of the rent for rented homes may qualify. Deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.
5. Deduction Limit. If the gross income from the business use of a home is less than expenses, the deduction for some expenses may be limited.
Taxpayers who are self-employed and choose the regular method should use Form 8829, Expenses for Business Use of Your Home, to figure the amount to deduct. Claim the deduction using either method on Schedule C, Profit or Loss from Business.
Please call if you would like more information about the home office deduction and how it applies to your tax situation.
San Jose: (408) 252-1800
Watsonville: (831) 726-8500
The use of digital signatures on certain forms that cannot be filed electronically will now be temporarily allowed. Expanding the use of digital signatures will help to protect the health of taxpayers and tax professionals during the coronavirus pandemic by reducing in-person contact between taxpayers and tax professionals.
Form 1040, U.S. Individual Income Tax Return, already uses an electronic signature when it is filed electronically, either by using a taxpayer self-selected PIN, if self-prepared or a tax-preparer selected PIN, if using a tax professional. While more than 90 percent of Form 1040s are filed electronically, if you haven’t filed your 2019 tax return this year, it is important to consider e-filing forms whenever possible, due to COVID-19.
The following forms can be submitted with digital signatures if mailed by or on December 31, 2020:
This temporary option for e-signatures is subject to change at any time. Please contact the office with questions about this or any tax-related information:
San Jose: (408) 252-1800
Watsonville: (831) 726-8500
On August 29th and 30th, Team Wheeler – consisting of Steve Stringari, Tim McLaughlin, Kenny Tims and our very own Dennis Campbell – attended the 11th annual JL Challenge held at Spring Hills Golf Course. The challenge is an annual fundraising event for the Jerry Loyola Foundation whose mission is to provide quality of life support for families battling cancer, and to promote junior golf within the community. The foundation serves to honor Jerry Loyola, a talented young golfer who lost his battle with cancer in 2009 at the age of 24. Wheeler Accountants has made participation in the challenge a tradition since 2017 and is recognized as a major sponsor.
Despite the challenges faced this year, the Jerry Loyola foundation was able to hold a scaled back event while observing proper social distancing. Team Wheeler scored a 5 under par net score of 66 and tied for 14th place overall. We are happy to support a great cause and look forward to another challenge next year!
The Small Business Administration released a new interim final rule this week, effective 8/24, to address the Treatment of Owners and Forgiveness of Certain Nonpayroll Costs.
Items to note:
Amounts attributable to the business operation of a tenant or subtenant may not be considered for eligible nonpayroll costs. The document provides some examples for shared leases and mortgages (including home-based businesses).
Rent to related parties may be eligible nonpayroll costs so long as the amount of the loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by the business. Keep in mind that the lease/mortgage must have been entered into prior to February 15, 2020.
Finally, there appears to be clarification regarding owner-employees with less than 5% ownership in C or S corps: they are not subject to the owner-employee compensation rule. The exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.
We will continue to be on the lookout for these items as we prepare forgiveness applications.
Selecting your business successor is a fundamental objective when planning your exit strategy and requires a careful assessment of what you want from the sale of your business and who can best give it to you.
There are only four ways to leave your business and the more you understand about each one, the better the chance is that you will leave your business on your terms and under the conditions you want. With that in mind, here’s what you need to know about each option:
It’s always a good idea to plan for what to do in case of a disaster. Here are some simple steps you can take right now to prepare:
1. Backup Records Electronically. Many people receive bank statements by email. This is a good way to secure your records. You can also scan tax records and insurance policies onto an electronic format. You can use an external hard drive, CD, or DVD to store important records. Be sure you back up your files and keep them in a safe place. If a disaster strikes your home, it may also affect a wide area. If that happens you may not be able to retrieve your records.
2. Document Valuables. Take photos or videos of the contents of your home or business. These visual records can help you prove the value of your lost items. They may help with insurance claims or casualty loss deductions on your tax return. You should store them with a friend or relative who lives out of the area. The IRS has a disaster loss workbook, Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property), which can help taxpayers compile a room-by-room list of belongings.
3. Update Emergency Plans. Review your emergency plans every year. Personal and business situations change over time as do preparedness needs, so update them when your situation changes. Make sure you have a way to get severe weather information and have a plan for what to do if threatening weather approaches. In addition, when employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.
4. Get Copies of Tax Returns or Transcripts. Use Form 4506, Request for Copy of Tax Return, to replace lost or destroyed tax returns or need information from your return. You can also file Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript or Form 4506-T, Request for Transcript of Tax Return. If you need assistance filling this form out, please call.
5. Check on Fiduciary Bonds. Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
If you fall victim to a disaster, help is just a phone call away. Don’t hesitate to call the office regarding any disaster-related tax questions or issues you might have.
San Jose: (408) 252-1800
Watsonville: (831) 726-8500
If you discover a mistake on your tax return after you’ve already filed, don’t panic. In most cases, all you have to do is file an amended tax return. Here’s what you need to know:
