Tax Saving Tips

Make Sure You Grab Your Home Internet Deduction If you do some work at home, you’re probably using your home internet connection. Are your monthly internet expenses deductible? Maybe. The deduction rules depend on your choice of business entity (proprietorship, corporation, or partnership). Deduction on Schedule C Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander If you operate your business as a sole proprietorship or as a single-member LLC, you file a Schedule C to report your business income and expenses. As a Schedule C taxpayer, you may deduct ordinary and necessary expenses, which include business-related internet subscription fees. You can deduct your use of your home internet whether or not you claim the home-office deduction, as follows: If you claim the home-office deduction on your Form 1040, the internet expense goes on line 21 (utilities) of IRS Form 8829 as either a direct or an indirect expense. If you do not claim the home-office deduction, enter the business portion of your internet expenses as utilities expenses on line 25 of your Schedule C. Deduction When You Operate as a Corporation When you operate your business as a corporation, you are an employee of that corporation. Because of the Tax Cuts and Jobs Act (TCJA), the only way for you to reap the benefits of the home internet deduction (or a home office) is to have your corporation reimburse you for the deduction. In the case of a reimbursed employee expense, the corporation deducts the expense as a utility expense, and you receive the reimbursement as a tax-free reimbursed employee business expense. Why is the reimbursement method the only way for the corporate owner to get the deduction? The TCJA eliminated the 2018-2025 deduction for miscellaneous itemized expenses. These include unreimbursed employee expenses, such as internet connection fees. Deduction When You Operate as a Partnership If you have deductible home internet expenses and/or a home office and operate as a partner in a partnership, you have two ways to get a tax benefit: Deduct the costs as unreimbursed partner expenses (UPE) on your personal return. Or get reimbursed tax-free from your partnership via an accountable plan (think “expense report”). Substantiating Your Home Internet Expense Deduction Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Where business owners can run into trouble with the IRS is in substantiating their internet expense deduction. You should have no problem showing the total cost for your home internet connection—just total your monthly bills. The problem is in establishing what percentage of the total cost was for business, because only that percentage is deductible. Ideally, you should keep track of how much time you use your home internet connection for business and how much time for personal use. A simple log or notation on your business calendar or appointment book—indicating approximately how many hours you were online for business each day while working at home—should be sufficient. Google it and you can find software and apps that will track your internet use. Instead of tracking your home internet use every day throughout the year, you could use a sampling method such as that permitted for tracking business use of vehicles and other listed property. There is no logical reason the IRS shouldn’t accept such a sampling for internet use. Selling Your Home to Your S Corporation Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander The strategy behind creating an S corporation and then selling your home to that S corporation comes into play when you want to convert your home to a rental property and take advantage of the exclusions, or you need more time to sell the home to realize the benefits of the $250,000 exclusion ($500,000 if filing a joint return). With this strategy, one question often comes up: If a married couple sells their home to their S corporation to be a rental property, can the owners be the renters? Answer: No. In this situation, the tax code treats your S corporation as you, the individual taxpayer, and thus you would be renting from yourself, and that would produce no tax benefits. In effect, the S corporation renting the residence to the owner of the S corporation is the same as homeowners renting their residence to themselves. It produces no tax benefits.   On the other hand, your S corporation could rent the home for use as a principal residence to your son or daughter or other related party, and the tax code would treat that rental the same as any rental to a third party. Reverse Mortgage as a Tax Planning Tool Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander When you think of the reverse mortgage, you may not think of using it as a tax planning tool. If you are house rich but cash poor, the reverse mortgage can give you the cash you desire, save you a boatload of both income and estate taxes, when used in the right circumstances. With a reverse mortgage, you as the borrower don’t make payments to the lender to pay down the mortgage principal over time. Instead, the reverse happens: the lender makes payments to you, and the mortgage principal gets bigger over time. You can receive reverse mortgage proceeds as a lump sum, in installments over a period of months or years, or as line-of-credit withdrawals. After you pass away or permanently move out, you or your heirs sell the property and use the net proceeds to pay off the reverse mortgage balance, including accrued interest. So, with a reverse mortgage, you can keep control of your home while converting some of the equity into much-needed cash. In contrast, if you sell your residence to raise cash, it could involve an unwanted relocation to a new house and trigger a taxable gain way in excess of the federal home sale gain exclusion break—up to $500,000 for joint-filing couples and up to $250,000 for unmarried individuals. The combined federal and state income tax hit from selling could easily reach

Wander CPA, Accountant, Tax Advisor Wander CPA, Michael wander Is Your Sideline Activity a Business or a Hobby? Do you have a sideline activity that you think of as a business? From this sideline activity, are you claiming tax losses on your Form 1040?Will the IRS consider your sideline a business and allow your loss deductions? The IRS likes to claim that money-losing sideline activities are hobbies rather than businesses. The federal income tax rules for hobbies have been anti-taxpayer for years, and now an unfavorable change enacted in the Tax Cuts and Jobs Act (TCJA) made things even worse for 2018-2025. If you have such an activity, we should have your attention. Here’s the deal: if you can show a profit motive for your now-money-losing sideline activity, you can classify that activity as a business for tax purposes and deduct the losses. Factors that can prove (or disprove) such intent include: Conducting the activity in a business-like manner by keeping good records and searching for profit-making strategies. Having expertise in the activity or hiring advisors who do. Spending enough time to justify the notion that the activity is a business and not just a hobby. Expectation of asset appreciation: this is why the IRS will almost never claim that owning rental real estate is a hobby, even when tax losses are incurred year after year. Success in other ventures, which indicates that you have business acumen. The history and magnitude of income and losses from the activity: occasional large profits hold more weight than more frequent small profits, and losses caused by unusual events or just plain bad luck are more justifiable than ongoing losses that only a hobbyist would be willing to accept. Your financial status: “rich” folks can afford to absorb ongoing losses (which may indicate a hobby), while ordinary folks are usually trying to make a buck (which indicates a business). Elements of personal pleasure: breeding race horses is lots more fun than draining septic tanks, so the IRS is far more likely to claim the former is a hobby if losses start showing up on your tax returns. Self-Directed IRAs Tax-advantaged retirement accounts such as IRAs are a great way to save for retirement. But when you establish a traditional IRA with a bank, a brokerage, or a trust company, you are ordinarily limited to a narrow range of investment options, such as CDs and publicly traded stocks, bonds, mutual funds, and ETFs. The IRA custodian will not permit you to invest in alternative investments such as real estate, precious metals, or cryptocurrency. A self-directed IRA could be for you if you want to walk on the wild side and invest your retirement money in assets such as real estate or cryptocurrency. You can invest in almost anything other than collectibles such as art or rare coins, life insurance, or S corporation stock with a self-directed IRA. Investment options include, but are not limited to, the following: Real estate Private businesses Trust deeds and mortgages Tax liens Precious metals such as gold, silver, or platinum Private offerings LLCs and limited partnerships REITs Livestock Oil and gas interests Franchises Hedge funds Cryptocurrency Promissory notes Aside from the vast array of investment options, a self-directed IRA is the same as a traditional IRA and subject to the same rules. The income the investments in your IRA earn is not taxed until you take distributions, but distributions before age 59 1/2 are subject to a 10 percent penalty unless an exception applies. You can also have a self-directed Roth IRA for which distributions are tax-free after five years. But you must avoid self-dealing and other prohibited transactions or your self-directed IRA could lose its tax-advantaged status. Establishing a self-directed IRA need not be too difficult. You first open an account with a custodian that offers self-directed investments. You can also acquire checkbook control over your self-directed IRA by forming a limited liability company to own all the IRA investments. Investing in alternative assets such as cryptocurrency is riskier than stocks, bonds, and mutual funds. The rewards can be great, as you’ve seen with recent returns for cryptocurrency investors. And the damage to your investment portfolio can be substantial, as we’ve also seen over the years. When it comes to alternative investments, you need to know what you are doing or have an investment professional you trust to do this for you. Using a Vacation Home as a Rental Property and for Personal Use When you use a home for both rental and personal use, regardless of that home’s location at the beach or in the city, you run into the tax code’s vacation home rules that make that home either a residence or a rental property. It’s a residence when you rent it for more than 14 days during the year and use it for personal purposes for more than the greater of 14 days or 10 percent of the days that you rent the home out at fair market rates. Example. You own a beachfront vacation condo. During the year, you rent it out for 180 days. You and members of your family stay there for 90 days. The property is vacant the rest of the year except for seven days at the beginning of winter and seven days at the beginning of summer, which you spend maintaining the property. Your condo falls into the tax code–defined personal residence because you rented it out for 180 days, which is more than 14 days, and you had 90 days of personal use, which is more than 14 days and more than 10 percent of the rental days. Disregard the 14 days you spent maintaining the place. The fundamental principle that applies when your vacation home is a personal residence is that expenses other than mortgage interest and property taxes allocable to the rental use cannot exceed the gross rental income from the property. In other words, rental operating expenses and depreciation cannot cause a tax loss on