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How small business owners can deduct their home office from their taxes

Photo by Annie Spratt on Unsplash

Tax tip 2022-10 from IRS.gov

The home office deduction allows qualified taxpayers to deduct certain home expenses when they file taxes. To claim the home office deduction on their 2021 tax return, taxpayers generally must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business.

Here are some details about this deduction to help taxpayers determine if they can claim it:

Employees are not eligible to claim the home office deduction.  

The home office deduction, calculated on Form 8829, is available to both homeowners and renters.  

There are certain expenses taxpayers can deduct. These may include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.  

Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.  

The term “home” for purposes of this deduction:  

Includes a house, apartment, condominium, mobile home, boat or similar property.

Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.

Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.

Generally, there are two basic requirements for the taxpayer’s home to qualify as a deduction:  

There generally must be exclusive use of a portion of the home for conducting business on a regular basis. 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 home must generally be the taxpayer’s principal place of 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.  

Expenses that relate to a separate structure not attached to the home may qualify for a home office deduction. They will qualify only if the structure is used exclusively and regularly for business.  

Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:  

The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.

When using the regular method, 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.

Share this tip on social media — #IRSTaxTip: How small business owners can deduct their home office from their taxes. https://go.usa.gov/xtbkP

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BBB: Tips to avoid tax scams

From the Better Business Bureau

January 19, 2022 — It is the new year, and that means preparing to file your taxes. While the actual due date seems far away, starting early can save you from headaches down the road. 

Scams are common during tax season. The number one scam to watch out for is identity theft. This happens when a scammer uses your Social Security number and other personal information to file a tax return in your name in order to collect your refund. Consumers often don’t realize they’re victims until they get a written notice from the IRS saying someone else had already filed a return.

“The easiest way to avoid a tax scam is to file as early as possible, so the scammers don’t have a chance to use your information and file before you do,” says Lisa Frohnapfel, President & CEO of the Better Business Bureau Serving Western Michigan. “It is always important to protect your personal information; however, filing early can help protect your tax return.” 

Another popular scam involves people impersonating the IRS. The scammers call, email or text claiming to be from the IRS. They pressure you to provide personal information or a payment. They may claim you owe money and must pay right away by prepaid debit card or wire transfer. If you don’t comply, the scammer threatens you with arrest and fines. 

The Better Business Bureau Serving Western Michigan has tips on how to avoid falling victim and file safely. 

File your taxes as early as possible. 

The IRS does not initiate contact with taxpayers by email, text or social media to request personal financial information. This includes requests for PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts.

If you do owe, the IRS will give you a chance to ask questions or appeal. The IRS will never demand immediate payment, require a specific form of payment, or ask for credit or debit card numbers over the phone. Pressure to act quickly is a red flag that it is a scam. 

Write down your Identity Protection Pin from the IRS before you file your return. Victims of identity theft and others can be issued a six-digit number that will be used to confirm your identity, along with your Social Security number. But, once you apply for a PIN, you cannot opt-out and must use the pin each year you file your federal tax return. You will receive a new PIN each December by mail. Visit the IRS for more information about the program. Read BBB’s tips about the IRS PIN. 

Make sure you are accessing the REAL IRS when filing electronically. Visit irs.gov, and make sure the lock symbol is in the browser window. This means the website is secure and safe to enter personal sensitive information.

Only deal with trustworthy tax preparation services. See our tips for finding the right tax preparer for you. 

If you are the victim of tax identity theft, contact the IRS at 1-800-908-4490. You should also file a complaint with the Federal Trade Commission (FTC) at ftc.gov/complaint or by calling 1-877-FTC-HELP. The FTC also offers a personalized identity theft recovery plan at identitytheft.gov.

Visit bbb.org/taxtips for more resources on how to find a qualified accountant or tax preparer near you and learn more ways to avoid tax scams. 

Report any tax scams to bbb.org/scamtracker.

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The tax responsibilities that come with shutting down a business

From the IRS

There are many reasons a business owner may choose to close their doors, and there are many things that must be done to go out of business. Two important steps all business owners must take are fulfilling their federal tax responsibilities and informing the IRS of their plans. The closing a business page of IRS.gov is designed to help owners navigate the process of shutting down.

Small businesses and self-employed taxpayers will find a variety of information on the page including:

• What forms to file

• How to report revenue received in the final year of business

• How to report expenses incurred before closure

The page also details steps all business owners should take when closing a business.

File a final tax return and related forms. The type of return to file and related forms depends on the type of business.

Take care of employees. Business owners with one or more employees must pay any final wages or compensation, make final federal tax deposits and report employment taxes.

Pay taxes owed. Even if the business closes now, tax payments may be due next filing season.

Report payments to contract workers. Businesses that pay contractors at least $600 for services including parts and materials during the calendar year in which they go out of business, must report those payments.

Cancel EIN and close IRS business account. Business owners should notify the IRS so they can close the IRS business account.

Keep business records. How long a business needs to keep records depends on what’s recorded in each document.

The page also provides helpful information for business owners declaring bankruptcy, selling their business and terminating retirement plans.

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IRS resources to help small business employers understand and meet their tax responsibilities

Last week was National Small Business Week. The IRS acknowledges that small business employers have unique tax responsibilities, and they make valuable contributions to the economy. The agency has a variety of information and resources to help employers understand and meet these unique tax responsibilities. Most of these resources are available anytime at IRS.gov.

Due to the COVID-19 pandemic, new legislation was enacted to aid not only struggling business owners, but also individuals. Employers have direct access to people who may be eligible for advance Child Tax Credit payments. The IRS is asking employers to help spread the word about these payments during National Small Business Week.

Materials for employers and others who can help are available on the IRS website at https://www.irs.gov/newsroom/2021-child-tax-credit-and-advance-child-tax-credit-payments-resources-and-guidance.

Other IRS online resources can help employers answer common tax-related questions about worker classification, employment taxes deadlines, what forms to file and more. Here are a few of these resources:

Small Business and Self-Employed Tax Center 

This page features links to useful tools and common IRS forms with instructions. Taxpayers can find help on topics such as starting or operating a business, recordkeeping, filing and paying taxes. A link to the IRS Tax Calendar for Businesses and Self-Employed also provides at-a-glance key tax dates for businesses. https://www.irs.gov/businesses/small-businesses-self-employed

Self-Employed Individuals Tax Center

This a great resource for sole proprietors and others who are in business for themselves. This site has many handy tips and references to tax rules a self-employed person may need to know. Self-employed taxpayers will find info on a variety of topics, including how to make quarterly payments and self-employed tax obligations. https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

Sharing Economy Tax Center

For taxpayers engaged in the sharing economy, this site provides answers to tax questions, links to forms and resources related to the sharing economy. The gig economy—also called sharing economy or access economy—is activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website. https://www.irs.gov/businesses/gig-economy-tax-center

Small Business Forms and Publications

Employers can select and download multiple small business and self-employed forms and publications or call 800-829-3676 to order forms and publications through the mail. Aspiring entrepreneurs who are unsure which tax publications may be relevant to them should review the Starting a Business section (https://www.irs.gov/businesses/small-businesses-self-employed/starting-a-business), for an overview of federal tax responsibilities. https://www.irs.gov/businesses/small-businesses-self-employed/small-business-forms-and-publications

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Income tax deadline in a week

LANSING, Mich.—The Michigan Department of Treasury (Treasury) is reminding taxpayers that state individual income tax returns are due next week.

State individual income tax returns must be submitted electronically or sent through the U.S. Postal Service before midnight on Monday, May 17. For the convenience of taxpayers, the state’s individual income tax deadline is the same date set by the Internal Revenue Service.

“There is still time to file a return or make a payment,” State Treasurer Rachael Eubanks said. “Taxpayers who owe taxes should be sure to make their payments on time to avoid penalties and interest. I encourage those taxpayers who may be owed a refund to not wait to file their returns. Every dollar helps right now as we navigate these extraordinary times.”

Choosing electronic filing and direct deposit is convenient, safe and secure. Last year, more than 4.4 million Michigan taxpayers e-filed, which is 86 percent of state income tax filers. For more information about e-filing, go to www.mifastfile.org.

Individuals who e-file typically receive their refunds approximately two weeks after receiving confirmation that the tax return was accepted by the state of Michigan.

Taxpayers can pay their outstanding tax balance by eCheck, debit or credit card.

Individual taxpayers who need additional time to file beyond the May 17 deadline can request an extension to Oct. 15, 2021. Taxpayers requesting additional time to file should estimate their tax liability and pay any taxes owed by May 17, 2021, to avoid additional interest and penalties.

A Taxpayer Notice issued by the state Treasury Department provides details about the individual income tax deadline change.

Questions?

Taxpayers with questions about their state income taxes are encouraged to use Treasury eServices. The online platform enables taxpayers to ask state income tax-related questions when convenient and avoids the extended wait times for calls this time of year.

To get started with Treasury eServices, go to www.michigan.gov/incometax and click on “eServices Individual Income Tax.”

To learn more about the state Treasury Department, go to www.Michigan.gov/Treasury or follow @MiTreasuryon Twitter.

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An offer in compromise may help some taxpayers settle their tax bill

Individual taxpayers and business owners can use the IRS’s recently updated Offer in Compromise Booklet to learn how an offer in compromise works and decide if it could help them resolve their tax debt.

An offer in compromise is an agreement between a taxpayer and the IRS that settles a tax debt for less than the full amount owed. An offer in compromise is an option when a taxpayer can’t pay their full tax liability. It is also an option when paying the entire tax bill would cause the taxpayer a financial hardship. The goal is a compromise that suits the best interest of both the taxpayer and the agency.

When reviewing applications, the IRS considers the taxpayer’s unique set of facts and any special circumstances affecting the taxpayer’s ability to pay as well as the taxpayer’s:

  • Income
  • Expenses
  • Asset equity

The booklet covers everything a taxpayer needs to know about submitting an offer in compromise, including:

  • Who is eligible to submit an offer
  • How much it costs to apply
  • How the application process works

The booklet also includes the forms that taxpayers must complete as part of the Offer in Compromise process. The current application fee is $205. However, taxpayers who meet the definition of a low-income taxpayer don’t have to pay this fee.

More information

Offer In Compromise Pre-Qualifier tool: https://irs.treasury.gov/oic_pre_qualifier/

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IRS reminds people to prepare for natural disasters

WASHINGTON–The Internal Revenue Service reminds everyone that May includes National Hurricane Preparedness Week and is also National Wildfire Awareness Month. Now is a good time to create or review emergency preparedness plans for surviving natural disasters.

In the last year, the Federal Emergency Management Agency (FEMA) declared major disasters following hurricanes, tropical storms, tornados, severe storms, flooding, wildfires and an earthquake. Individuals, organizations and businesses should take time now to make or update their emergency plans.

Secure key documents and make copies

Taxpayers should place original documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space. Duplicates of these documents should be kept with a trusted person outside the area of the taxpayer. Scanning them for backup storage on electronic media such as a flash drive is another option that provides security and portability.

Document valuables and equipment

Current photos or videos of a home or business’s contents can help support claims for insurance or tax benefits after a disaster. All property, especially expensive and high value items, should be recorded. The IRS disaster-loss workbooks in Publication 584 can help individuals and businesses compile lists of 

Employers should check 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. The IRS reminds employers to carefully choose their payroll service providers.

Rebuilding documents

Reconstructing records after a disaster may be required for tax purposes, getting federal assistance or insurance reimbursement. Those who have lost some or all their records during a disaster can visit IRS’s Reconstructing Records webpage as one of their first steps.

IRS stands ready

After FEMA issues a disaster declaration, the IRS may postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. There is no need to call the IRS to request this relief. The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. Those impacted by a disaster with tax-related questions can contact the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues.

Taxpayers who do not reside in a covered disaster area, but suffered impact from a disaster should call 866-562-5227 to find out if they qualify for disaster tax relief and to discuss other available options.

Find complete disaster assistance and emergency relief details for both individuals and businesses on our Around the Nation webpage on IRS.gov. The FEMA Prepare for Disasters web page includes information to Build a Kit of emergency supplies.

Related items:

• Publication 2194, Disaster Resource Guide for Individuals and Businesses

• Publication 583, Starting a Business and Keeping Records

• FS-2017-11, Reconstructing Records After a Natural Disaster or Casualty Loss

• Small Business Administration

• Disasterassistance.gov

• Ready.gov

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Taxpayers should consider filing an amended return for unemployment benefit tax relief

Some e-filer providers will not charge a fee for amended returns

LANSING, Mich. Taxpayers who filed their individual income tax returns and collected unemployment benefits in 2020 should consider filing an amended return if they haven’t yet received their entitled tax relief, according to the Michigan Department of Treasury.

The federal American Rescue Plan Act excludes unemployment benefits up to $10,200 from income for tax year 2020 for those within certain income brackets, providing tax relief on both federal and state income taxes. Taxpayers who may have anticipated owing taxes may now be entitled to a refund or a lesser payment.

“We have been waiting for the Internal Revenue Service to provide us guidance so we can determine the best way to provide taxpayers tax relief without requiring additional paperwork,” State Treasurer Rachael Eubanks said. “However, we still do not have clear guidance from the IRS. We don’t want to wait any longer to get refunds in taxpayers’ hands during this extraordinary time. That’s why we’re encouraging individuals to file an amended return.”

On April 1, the state Treasury Department previously asked taxpayers to wait to file an amended return until further guidance was provided by the IRS.

There is no need for taxpayers to file an amended federal return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.

Taxpayers who e-filed their original return should e-file their amended return. Software products have been programmed to accommodate this change.

Some software providers will not charge a fee if the original return was e-filed through their service.

Individuals who desire to file a paper return should do so carefully to avoid mistakes. This includes checking the “Amended Return” box on Form MI-1040 and outlining the reason for the amended return on the Schedule AMD.

Details about properly filing an amended paper return can be found on www.Michigan.gov/IIT.

Further guidance can be found in a Notice: Update to April 1, 2021 Notice Regarding the Treatment of Unemployment Compensation for Tax Year 2020 provided by the state Treasury Department.

Questions?

Taxpayers with questions about their state income taxes are encouraged to use Treasury eServices. The online platform enables taxpayers to ask state income tax-related questions when convenient and avoids the extended wait times for calls this time of year.

To get started with Treasury eServices, go to www.michigan.gov/incometax and click on “eServices Individual Income Tax.”

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Taxpayers shouldn’t believe these myths about federal tax refunds

Now that many taxpayers have filed their federal tax returns, they’re eager for details about their refund. When it comes to refunds, there are several common myths that can mislead taxpayers.

Myth #1: Getting a refund this year means there’s no need to adjust withholding for 2021.

To help avoid a surprise next year, taxpayers should make changes now to prepare for next year. One way to do this is to adjust their tax withholding with their employer. This is easy to do using the Tax Withholding Estimator. This tool can help taxpayers determine if their employer is withholding the right amount. This is especially important for anyone who got an unexpected result from filing their tax return this year. Also, taxpayers who experience a life event like marriage, divorce, birth of a child, an adoption or are no longer able to claim a person as a dependent are encouraged to check their withholding.

Myth #2: Calling the IRS or a tax professional will provide a better refund date.

Many people think talking to the IRS or their tax professional is the best way to find out when they will get their refund. The best way to check the status of a refund is online through the Where’s My Refund? tool or the IRS2Go app.

Taxpayers can call the automated refund hotline at 800-829-1954. This hotline has the same information as Where’s My Refund? and IRS telephone assistors. There is no need to call the IRS unless Where’s My Refund? says to do so.

Myth #3: Ordering a tax transcript is a secret way to get a refund date.

Doing so will not help taxpayers find out when they will get their refund. Where’s My Refund? tells the taxpayer their tax return has been received and if the IRS has approved or sent the refund.

Myth #4: Where’s My Refund? must be wrong because there’s no deposit date yet.

Updates to Where’s My Refund? ‎on both IRS.gov and the IRS2Go mobile app are made once a day. These updates usually occur overnight. Even though the IRS issues most refunds in less than 21 days, it’s possible a refund may take longer. If the IRS needs more information to process a tax return, the agency will contact the taxpayer by mail. Taxpayers should also consider the time it takes for the banks to post the refund to the taxpayer’s account. People waiting for a refund in the mail should plan for the time it takes a check to arrive.

Myth #5: Where’s My Refund? must be wrong because a refund amount is less than expected.

There are several factors that could cause a tax refund to be larger or smaller than expected. Situations that could decrease a refund include:

The taxpayer made math errors or mistakes

The taxpayer owes federal taxes for a prior year

The taxpayer owes state taxes, child support, student loans or other delinquent federal non-tax obligations

The IRS holds a portion of the refund while it reviews an item claimed on the return

The IRS will mail the taxpayer a letter of explanation if these adjustments are made. Some taxpayers may also receive a letter from the Department of Treasury’s Bureau of the Fiscal Service if their refund was reduced to offset certain financial obligations.

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Dos and don’ts for taxpayers who get a letter or notice from the IRS

The IRS mails letters or notices to taxpayers for a variety of reasons including if:

• They have a balance due.

• They are due a larger or smaller refund.

• The agency has a question about their tax return.

• They need to verify identity.

• The agency needs additional information.

• The agency changed their tax return.

Here are some do’s and don’ts for taxpayers who receive one:

Don’t ignore it. Most IRS letters and notices are about federal tax returns or tax accounts. The notice or letter will explain the reason for the contact and gives instructions on what to do.

Don’t panic. The IRS and its authorized private collection agencies generally contact taxpayers by mail. Most of the time, all the taxpayer needs to do is read the letter carefully and take the appropriate action.

Do read the notice. If the IRS changed the tax return, the taxpayer should compare the information provided in the notice or letter with the information in their original return. In general, there is no need to contact the IRS if the taxpayer agrees with the notice.

Do respond timely. If the notice or letter requires a response by a specific date, taxpayers should reply in a timely manner to:

  ° minimize additional interest and penalty charges.

  ° preserve their appeal rights if they don’t agree.

Do pay amount due. Taxpayers should pay as much as they can, even if they can’t pay the full amount. People can pay online or apply for an Online Payment Agreement or Offer in Compromise. The agency offers several payment options.

Do keep a copy of the notice or letter. It’s important to keep a copy of all notices or letters with other tax records. Taxpayers may need these documents later.

Do remember there is usually no need to call the IRS. If a taxpayer must contact the IRS by phone, they should use the number in the upper right-hand corner of the notice. The taxpayer should have a copy of their tax return and letter when calling. Typically, taxpayers only need to contact the agency if they don’t agree with the information, if the IRS request additional information, or if the taxpayer has a balance due. Taxpayers can also write to the agency at the address on the notice or letter. If taxpayers write, they should allow at least 30 days for a response.

Do avoid scams. The IRS will never contact a taxpayer using social media or text message. The first contact from the IRS usually comes in the mail. Taxpayers who are unsure if they owe money to the IRS can view their tax account information on IRS.gov.

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Ray Winnie
Intandem Credit Union

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