Accounting and Tax Tips and Information

written by Lauren Bakken, owner of Bakken CPA PC and co-author of the book, One-Income Household

Bakken CPA PC is dedicated to providing timely, professional, personalized service to businesses and individuals.

Tag Archives: tax deductions

Fixing Up Your House May Lower Your Taxes!

If you have done any work on your house to make it more energy efficient before January 1, 2012, you may be able to claim a credit on your tax return!

 

There are two credits the IRS call

 

  • Nonbusiness Energy Property Credit and
  • Residential Energy Efficient Property Credit.

 

These credits were supposed to expire in 2010 but were extended by one year to 2011 and have new rules and limitations.

 

The Nonbusiness Energy Property Credit is a nonrefundable credit that relates to your primary residence. The credit rate for 2011 is 10 percent of the qualified energy efficiency improvements cost. Qualifying improvements can be replacing items such as

  • exterior doors,
  • windows,
  • insulations,
  • heat pumps,
  • furnaces,
  • water heaters or
  • central air conditioning

 

The maximum lifetime limit is $500, which means that if you have already claimed this credit on a previous tax return, you may not be eligible to take it again, if your earlier credit was equal to or over the $500 maximum. Qualifying improvements must have been installed during certain time frames; before January 1, 2008, or after December 31, 2008 but before January 1, 2012.

 

The Residential Energy Efficient Property Credit has been established to help taxpayers pay for residential alternative energy equipment in their primary residence. The credit equals 30 percent of what the taxpayer spent on the qualifying equipment and can include labor costs. This relates to the costs of

  • eligible solar water heaters,
  • solar electric equipment,
  • fuel cell plants,
  • qualified small wind energy property and
  • qualified geothermal heat pump property

 

These pieces of equipment must be installed before January 1, 2017. There is no set maximum for this particular credit, except for the fuel cell plants. However, there is a limit on the amount of nonrefundable personal credits a taxpayer can claim in one year. Any amount over this limit can be carried forward to the next year.

 

It is important to know that not all energy efficient improvements qualify for these tax credits, so you should check the certifications of the products before you begin improvements. These credits can be claimed on Form 5695 when you file your 2011 tax return. Keep in mind that it is best to consult a tax professional before claiming these credits!

Tax Break on Employee Health Insurance Contributions

If you own a small business and offer your employees health insurance, you may be able to claim a credit on your tax return for it. The credit is based on a percentage of the amount of premiums that your business pays for employees to have health care coverage. And, of course, you must meet certain requirements to take advantage of this credit:

 

  • You must cover at least 50% of the cost of health care for some of your workers based on the single rate,
  • Your firm must have less than the equivalent of 25 full time employees to qualify as being a small business, and
  • You must pay your employees (individually) less than $50,000 a year.

 

This credit applies to both for profit and tax exempt employers, but the rates vary between the two types.

 

The amount of the credit can be up to 35 percent of the business’ health insurance premium costs in 2011 for taxable businesses and is up to 25 percent for tax exempt businesses.

 

This credit is set at these rates until January of 2014, at which time they will increase to 50% for taxable employers and 35% for tax exempt employers.

 

The credit amount is calculated on your Form 8941, Small Employer Health Insurance Premiums. If the credit ends up being more than your tax liability, you can chose to apply it to a previous tax return or a future tax return, and in certain circumstances you can even receive it as a refund!

 

To take advantage of this and many other credits offered to small businesses, it is best to consult a tax professional!

Can You Take a Tax Deduction for Your Car?

If you use your car for business purposes, you may be able to claim a deduction for the expenses you incur during the year. But, there are certain rules and requirements to have them qualify as deductible car or truck expenses.

 

All or a portion of the cost of owning and using a vehicle may be claimed as a business expense.

 

You may claim these, as long as you maintain records that can substantiate your business use and expenses.

  • You must record the vehicle make and model;
  • If the weight is greater or less than 6,000 pounds;
  • Date of purchase and evidence of amount paid;
  • The date the vehicle was placed in service for business, and
  • The odometer reading on the first and last day of the tax year.

 

Along with these records, you must also maintain an accurate log of actual business travel. This must include the mileage, date and purpose of the travel.

 

There are two methods you can use to determine your eligible deduction: standard mileage rate or the actual expense method.

 

If your vehicle is used for both personal and business purposes, the costs related to the vehicle must be divided based on the mileage driven for each purpose. If you lease a car, you must use the standard mileage rate for the entire lease period, including renewals.

 

To use the standard mileage rate, you must track your miles with a log because the rate varies for use throughout the year 2011. For all of the miles driven for business use from January 1, 2011 to June 30, 2011 the rate is 51 cents per mile. For all of the miles driven for business use from July 1, 2011 to December 31, 2011 the rate is 55.5 cents per mile.

 

To apply the actual expense method, you must determine what it costs to operate the car for the business portion of the overall use of the vehicle. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation attributable to the portion of the total miles driven that are business miles. Car expenses for personal property tax, parking fees and tolls attributable to business use are deductible, whether you use the standard mileage rate or actual expenses.

 

To determine which method is more beneficial for you and if the IRS will allow you to use it, it is best to consult a CPA. This is a broad overview of a very complex topic with more regulations than listed above. But, hopefully you gained an understanding of this tricky tax topic!

Home Office Deduction

Do you have space in your home that you use strictly for business? That area  may qualify as a home office space that will allow you to take deductions on your tax return for expenses related to the business use of your home, Form 8829. There are specific conditions that the area must meet in order to qualify:

  • The area is used regularly and exclusively for trade or business purposes as opposed to other profit-making activity.
    • Exception: If the home is used as a day care facility for children, adults 65 and over, or individuals who are mentally or physically incapacitated.
    • Exception: If the area is used for inventory or storage of produce (must be regular but not exclusive).
  • The area is used for convenience of the employer.
  • The area represents the primary place of business, or the area is the place of contact with clients or customers in the normal course of the trade or business or the area is a separate structure used in connection with the trade or business.

Once you have determined if your business space in your home qualifies, you are able to take deductions for expenses such as:

  • Operating expenses
  • Depreciation
  • Mortgage interest
  • Real estate taxes
  • Rent (with the exception of rent paid by the employer for the area in question)
  • Casualty and theft losses
  • Utility costs
  • Cleaning and other services
  • Homeowner’s insurance
  • Security system costs
  • Repair costs (labor and supplies)

The expenses listed above are categorized as either direct or indirect. Direct expenses are those that affect only the part of the home used for the trade or business, such as the cost of painting or furnishing an office. Direct costs are deductible in full. Indirect expenses involve the costs of maintaining the entire home of which the office is only a part. But, only the business use percentage of an indirect expense is deductible.