Home Office Deduction
Bill Roeser, CPA
The Home Office Deduction
One of the great things about setting up a home office is that you can make it as comfy as possible. Assuming you’ve done that, another good idea is getting comfortable with the home office deduction.
To qualify for the deduction, you generally must maintain a specific area in your home that you use regularly and exclusively in connection with your business. What’s more, you must use the area as your principal place of business or, if you also conduct business elsewhere, use the area to regularly conduct business, such as meeting clients and handling management and administrative functions. If you’re an employee, your use of the home office must be for your employer’s benefit.
The only option to calculate this tax break used to be the actual expense method. With this method, you deduct a percentage (proportionate to the percentage of square footage used for the home office) of indirect home office expenses, including mortgage interest, property taxes, association fees, insurance premiums, utilities (if you don’t have a separate hookup), security system costs and depreciation (generally over a 39-year period). In addition, you deduct direct expenses, including business-only phone and fax lines, internet, utilities (if you have a separate hookup), office supplies, painting and repairs, and depreciation on office furniture.
But now there’s an easier way to claim the deduction. Under the simplified method, you multiply the square footage of your home office (up to a maximum of 300 square feet) by a fixed rate of $5 per square foot. You can claim up to $1,500 per year using this method. Of course, if your deduction will be larger using the actual expense method, that will save you more tax. Please call us with any questions.
ROESER ACCOUNTANCY CORP - CPA's & Business Advisors
Fresno, CA
Section 179 Depreciation Expense for Year 2016
Bill Roeser, CPA
Section 179 Depreciation Expense for 201
2016 Deduction Limit = $500,000
This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2016, and the equipment must be financed/purchased and put into service by the end of the day, 12/31/2016.
2016 Spending Cap on equipment purchases = $2,000,000
This is the maximum amount that can be spent on equipment before the Section 179 Deduction available to your company begins to be reduced on a dollar for dollar basis. This spending cap makes Section 179 a true "small business tax incentive".
Bonus Depreciation: 50% for 2016
Bonus Depreciation is generally taken after the Section 179 Spending Cap is reached. Note: Bonus Depreciation is available for new equipment only. For more details on limits and qualifying equipment, as well as Section 179 Qualified Financing, please read this entire website carefully.
What is the Section 179 Deduction?
Most people think the Section 179 deduction is some mysterious or complicated tax code. It really isn't, as you will see below.
Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
Several years ago, Section 179 was often referred to as the "SUV Tax Loophole" or the "Hummer Deduction" because many businesses have used this tax code to write-off the purchase of qualifying vehicles at the time (like SUV's and Hummers).
Today, Section 179 is one of the few incentives included in any of the recent Stimulus Bills that actually helps small businesses. Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses - and millions of small businesses are actually taking action and getting real benefits.
Essentially, Section 179 works like this:
When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example).
Now, while it's true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it.
In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting over the next few years. That's the whole purpose behind Section 179 - to motivate the American economy (and your business) to move in a positive direction. For most small businesses, the entire cost can be written-off on the 2016 tax return (up to $500,000).
Limits of Section 179
Section 179 does come with limits - there are caps to the total amount written off ($500,000 for 2016), and limits to the total amount of the equipment purchased ($2,000,000 in 2016). The deduction begins to phase out dollar-for-dollar after $2,000,000 is spent by a given business, so this makes it a true small and medium-sized business deduction.
Who Qualifies for Section 179?
All businesses that purchase, finance, and/or lease less than $2,000,000 in new or used business equipment during tax year 2016 should qualify for the Section 179 Deduction.
Most tangible goods including off-the-shelf software and business-use vehicles (restrictions apply) qualify for the Section 179 Deduction. For basic guidelines on what property is covered under the Section 179 tax code, please refer to this list of qualifying equipment. Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2016 and December 31, 2016.
The deduction begins to phase out if more than $2,000,000 of equipment is purchased - in fact, the deduction decreases on a dollar for dollar scale after that, making Section 179 a deduction specifically for small and medium-sized businesses.
What's the difference between Section 179 and Bonus Depreciation?
Bonus depreciation is offered some years, and some years it isn't. Right now in 2016, it's being offered at 50%.
The most important difference is both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is "new to you"), while Bonus Depreciation covers new equipment only.
Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $2,000,000) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation - unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.
Section 179's "More Than 50 Percent Business-Use" Requirement
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the monetary amount eligible for Section 179.
Prepare Now to Sell Your Business
START PREPARING YOUR BUSINESS FOR BUYER SCRUTINY NOW
BILL ROESER, CPA
The best time to prepare your business for sale is the day you form or buy it. Always operate your company in a way that optimizes its value — whether you intend eventually to pass it on to the next generation or sell to your partners or an outside buyer. Unfortunately, most business owners are too busy with everyday activities — satisfying current customers or clients, pursuing new business and responding to crises — to worry about what seems like a distant event. This means that, when the time comes to sell, you may find your business unprepared and the challenges of getting it into shape great.
Addressing shortcomings
If you're ready to retire or move on to a new venture but haven't spent a lot of time preparing for a sale, it's essential to assemble a team of advisors. It should include a CPA, attorney and a Merger & Acquisition (M&A) advisor.
These advisors can help identify the unique advantages of your business and also its shortcomings, or what buyers might perceive as drawbacks to acquiring your business. This list of shortcomings deserves your immediate attention because, if you want to maximize the sales price, you need to develop strategies to remedy them. Your advisors will help you prepare a Selling Memorandum (Confidential Information Memorandum) which will serve to highlight your strengths.
Perhaps the first area deserving of scrutiny is your financials. Compare them to industry norms and trends; any potential buyer will want to know how you measure up to the competition. Current financial performance relative to your company's past performance is also important.
Be particularly alert to reserves and allowances in areas such as obsolete or slow-moving inventory, uncollectible receivables, and equipment no longer in use but still on the books. Also, look for ways to build your residual revenue stream. Buyers prefer business with steady income streams and strong backlogs. You can further improve the appearance of financials by eliminating expenditures that are wasteful or don't contribute materially to the value of the business. Buyers generally place an emphasis on current trends, so it's never too late to make changes for an immediate impact. Buyers are also likely to closely examine your accounting system. Make sure your financials are prepared using Generally Accepted Accounting Principles (GAAP). Even if you're a private company and not legally required to apply GAAP principles, following GAAP helps assure buyers your books are clean and accurate.
Marketing efforts
Your public image is crucial when you sell your business. This is the ideal time to upgrade our Web site because it may be where potential buyers first encounter your name. Don't get caught with outdated news on your homepage or an online ordering system that's full of bugs.
By the same token, review printed marketing materials to make your you're sending the right message — namely, that your business is a highly competitive and respected player in the industry. If you haven't already done so, assemble a package of customer testimonials that compliment your products, services, employees and business practices. Quality, on-time delivery, and the positive impact your business has had on customers can build your brand in the mind of buyers.
Other improvements
While financials and marketing should be primary concerns, don't forget other areas that may make a difference when you're ready to sell.
Contracts: Review any significant commitments and obligations, such as leases and contracts, and assess their impact on your business's value. While one buyer may value a long-term lease, another may wish to terminate a lease as quickly as possible. Generally, you should avoid making any long-term commitments to employees, landlords, customers or suppliers that can't be terminated at a reasonable cost.
Facilities: Clean up facilities such as offices, warehouses, and production areas. Dusty shelves and inventory tell a buyer business is slow, even if it isn't. and don't forget exterior landscaping — it's the first thing buyers see when they inspect your facilities.
Management: Make sure your management team favorably represents the quality of your business. When they acquire a business, buyers often rely on the expertise of senior managers. So consider weeding out marginal performers before they come under buyer scrutiny.
Get an early start
Keep in mind that buyers value the positive impact of changes regardless of when they were implemented. It's always better to make improvements six months before you put your business on the block than to do nothing and hope you can explain away problems. That said, it's best to start preparing your business for buyer scrutiny as early as possible.
