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US Tax Deadline & "Working from Home" Tax Tips

Posted by PayMotion Marketing - April 14, 2020 in , , , ,

With an increasing amount of people now doing their work at home and tax season in full swing, it’s important to know what (and who) is and isn’t eligible for a write-off, and what items can actually be deducted.

With that in mind, we’ve prepared some tax tips and considerations (from TurboTax and the IRS.gov websites) that remote businesses can follow.

Federal Tax Update

Whether you’ve always operated a remote business, or you’re one of the millions that has been forced to make the transition to a remote workforce due to the coronavirus, chances are you’re likely wondering how – among other things – this may affect things come tax time.

The first thing to realize is, if you’re living in the US, the federal tax deadline has been extended to July 15th, 2020, depending on which state you’re in, allowing you additional time to adjust to the current global circumstances. You don’t need to file for an extension or do any action on your part.

Now that you have a little extra breathing room in terms of the deadline, it’s time to start shifting your focus on what is and is not considered an eligible write off when it comes to operating a business at home

Eligibility

Disclaimer: Before we get any deeper into tax tips and write-offs, for work-from-home business owners and professionals, it is important to note: we are not tax professionals, or tax advisors.

We have compiled and cited these tips from TurboTax and IRS.gov. It is important to verify tax information with your licensed tax advisor, who is eligible to advise you in your "state of residence, and business registration", for your specific personal and professional tax situations.

Working from Home?

It’s important to realize that any employees that would have normally worked in an office before the social distancing measures were put into place, and are now in a remote workspace, are likely not going to be eligible to write off any additional costs and expenses this year!

This is because of recent changes made to the unreimbursed employee expenses deduction and the elimination of the home office deduction for employees working from home for an employer.

There are two key requirements to meet in order to determine if you’re eligible for tax write-offs as a business owner:

  • You’re an independent contractor or a self-employed entrepreneur
  • You regularly and exclusively use your home office to manage your business

The second bullet is particularly important to expand on. Your home office doesn’t expand to your living room or kitchen table. It must be a designated portion of space that’s the only purpose is for your business activities. It cannot be used for anything else.

Items to Deduct

Now that you know if you’re eligible or not, the next – and likely most important thing you’re wondering is what exactly can and cannot be written off as an office-related dependency.

There are actually quite a few things that you can declare a portion of when it comes to tax write-offs:

  • Mortgage interest or rent
  • Homeowner’s insurance
  • Property taxes
  • Utilities; Phone
  • Internet
  • +others

There are also a few important considerations you need to make when declaring some of the above items:

  • You have a deduction cap of whatever the net profit your business makes that year (although you can carry these into future years)
  • Depreciation of your home and then selling for a profit requires a capital gains tax payment of up to 25% on gain attributable to the home office depreciation write-offs you declared.
  • You are required to complete and submit IRS form 8829 and submit it with your 1040.
  • IRS tax rules change every year, so use a certified tax professional, who is registered in your state, to help you with deductions for your specific circumstances and taxable situations.

Methods to Follow

Now that you’ve learned a few tax tips remote businesses like yours can use, the final piece of the puzzle is your understanding of the actual methods for claiming the right amounts. There are two ways this can be done: either by using the standard option or the simplified option. The rules can be very specific, so be sure to follow the official IRS guidelines.

Standard Option

This option requires you to deduct a portion of some of your overall expenses based on how much square footage it takes up in your home or apartment.

For example: if your office space is 15% of the total square footage in your home, that means that you can deduct 15% of the total cost of the expenses listed in the previous section (utilities, insurance, depreciation, etc.) when doing your taxes.

It’s worth noting that the standard option is considered to be the more difficult approach but will likely net you more savings in deductions.

Simplified Option

As its name suggests, this option is the easier method, so if you’re writing off your home office for the first time, this may be the path you want to take.

Rather than having to collect and document all of your expenses over the course of the past year, you can instead deduct $5 per square foot of your home office, up to 300 square feet, for a maximum of $1,500.

Even if you’re comfortable doing the additional work with the standard approach, the simplified option may be more worthwhile if your home office space is under 100 square feet due to the fact that the extra savings you’d make using the standard approach are very minimal with a home office that’s below that size.

Whatever option you pursue, be mindful of these considerations:

  • You can choose either method in any given year
  • Once you’ve chosen a method, you must stick with that method for that same year
  • If you went with the simplified option in a previous year and are now switching to the standard option this year, you must calculate the depreciation deduction for the subsequent year
  • These rules & guidelines can change from year-to-year, so be sure to consult your certified tax professional, for final guidance in your state.

Temporary Remote Work

Now that more people are working from home temporarily while we all wait for the coronavirus situation to improve, you may be wondering what your options are if you’re only working remotely for a few months.

If you meet the requirements we stated earlier, you can do a partial home office deduction.

To do this, you simply choose either method listed above and prorate the total deduction amount based on the number of months you’ve been working remotely.

Summary

You should now have a much clearer understanding of whether or not you’re eligible to make any tax deductions, what precisely you can deduct, and the methods for going about filing your taxes this year.

So, whether your business operations have changed because of coronavirus, or you’re weighing out your tax options as a business owner for the first time, you are now equipped with the tools you need to go about it swiftly and accurately.

Here is a good summary video with some tax tips.

If you’d like to review more tax tips remote businesses like yours can leverage, you can find more information at IRS.gov. Finally, be sure to connect with a reputable local tax advisor.

About the Author

PayMotion Marketing

We love sharing our expertise in online payments and helping our customers succeed. From the technical team to our customer service team, everyone at PayMotion is ready to support your success. Our goal is to reduce your expenses and risks while optimizing your revenue, by managing your online payments for you. The PayMotion payment solution is there to keep your payments in motion, so you don’t have to.

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