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Home Office Deductions
If
you are-self-employed (or considering becoming self-employed) and working
out of an office in your home, there are strict rules that apply to deducting
expenses related to a home office. If you are able to meet these requirements,
the expenses related to your home office will qualify for the more favorable
treatment as above-the-line business expenses.
Expenses related to the home
office include both direct and indirect expenses. Direct expenses include
the costs of painting or repairing the home office, depreciation deductions
for furniture and fixtures used in the home office, etc. Indirect expenses
of maintaining the home office include the properly allocable share of
utility costs; depreciation, insurance, etc., for your home, as well as
an allocable share of mortgage interest, real estate taxes, and casualty
losses.
If your home office is your principal place of business, the costs of
traveling between your office and other work locations in that business
are deductible transportation expenses, rather than nondeductible commuting
costs. An additional benefit includes the ability to deduct the cost of
computers and related equipment used in your home office.
If you are in the business of selling retail or wholesale products, you can deduct home office expenses related to the space in your home, if it is your sole fixed business location, when it is used regularly to store inventory or product samples.
Finally, deductions related
to your home office are subject to limitations based on the income attributable
to the business conducted in the home office. So, you must be careful
not to deduct ineligible expense items.
With proper planning, you will
be able to benefit from the maximum deductions available related to your
home office. Please call us if you would like to discuss this issue in
further detail. We can review the specific requirements that will apply
to eligible deductions for your business and any applicable limitations.
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Tax Calendar
October 15
-Personal returns that received
an automatic six-month extension must be filed today and any tax, interest,
and penalties due must be paid.
-Partnerships that received
an additional six-month extension must file their Forms 1065 today.
October 3I
-The third quarter Form 941
(Employer's Quarterly Federal Tax Return) is due today and any undeposited
tax must be deposited. (If your tax liability is less than $2,500, you
can pay it in full with a timely filed return.) If you deposited the tax
for the quarter in full and on time: you have until November 13 to file
the return.
-If you have employees, a federal
unemployment tax (FUTA) deposit is due if the FUTA liability through
September exceeds $500.
December I7
-Calendar-year corporations
must deposit the fourth installment of estimated income tax for 2007.
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Honda FCX Eligible for Tax Credit
The IRS recently acknowledged
Honda's certification that one of its vehicles meets the requirements
for classification as a qualified fuel cell vehicle. Purchasers of the
2005 and 2006 Honda FCX, which operates on hydrogen, are eligible for
a $12,000 qualified fuel cell motor vehicle credit. These are the first
fuel cell powered vehicles to be certified as eligible for the credit.
To qualify for the credit, the taxpayer must acquire their Honda FCX by
purchase or lease and not for resale. In addition, the original use of
the vehicle must commence with the taxpayer.
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No Prorating for 2007 HSA-Contributions
If you were planning to contribute
to a Health Savings Account (HSA) but thought it was too late in the year
to maximize your deductible contribution, think again. That would have
been the case in 2006 when prorating your HSA contribution for the number
of months you were eligible to participate was required. Beginning in
2007, an individual eligible during the last month of the tax year is
treated as having been eligible for the entire year. Thus, the maximum
annual contribution (up to $5,650 in 2007) plus any catch-up contribution
for someone age 55 or older (up to $800 in 2007) does not have to be prorated
based on the number of months of eligibility.
As with most tax benefits,
there are specific conditions that apply in order to receive that tax
break. If, except for death or disability, you become ineligible during
a 12-month testing period (which generally runs through November of 2008),
contribution amounts for the months you would have been ineligible in
2007 will be added to your 2008 income. In addition, a penalty of 10%
of that amount will be assessed. So, there is still time to participate
in an HSA in 2007 and receive a meaningful tax break; just follow the
rules.
Tax Implications of Investment Strategies
Taxes are not specifically an
issue in investment strategy decisions. However, the tax implications
of those investment strategy decisions must be considered in evaluating
the suitability of the various alternatives. Tax payments resulting from
portfolio gains will reduce the net return on your investments, so every
effort should be made to minimize your tax liability.
The type of account, taxable
or tax deferred (e.g., qualified retirement plan), could affect the investment
strategy in a number of ways. Qualified retirement plans, because of their
tax-deferred nature, tend to favor the following strategies:
1. More frequent turnover (securities transactions within the portfolio)
can be tolerated. Recognition of gains is not an issue in a qualified
plan account; therefore, a strategy that allows frequent buying and selling
(turnover) of the underlying investments would not have a detrimental
effect because of associated tax liabilities.
2. More active management might be appropriate for a qualified plan, whereas
passive investments, such as index funds, might be held in taxable accounts.
3. Large-cap investments, which are more likely to be dividend-paying
companies, may be better suited for qualified plan accounts because the
income is not currently taxed.
4. Portfolio rebalancing (e.g., shifting funds from small cap to large
cap stocks) is best accomplished using assets in a qualified plan to minimize
the recognition of taxable income.
Taxable
accounts tend to favor the following strategies:
1. Buy-and-hold strategies are most appropriate to limit gain recognition
and to limit gains to assets that qualify for preferential long-term gain
treatment.
2. Passive investments, particularly index funds that have minimal taxable
distributions, are more appropriate for taxable accounts.
3. International funds, which
frequently have associated foreign tax credit, can be claimed.
4. Small-cap growth stocks
are more appropriate because of the minimal dividend income generally
associated with these types of investments.
A
topic of continuing discussion among investment professionals is where
to hold fixed income investments and, correspondingly, where to hold
equity investments. Generally, sufficient fixed-income investments need
to be in taxable accounts to provide liquidity. Those investments will
be either tax-free or taxable bonds, depending on the after-tax yield
as determined by your marginal tax rate. The need for current income will
also affect whether additional fixed-income investments are held outside
of qualified plans. Beyond the liquidity amount and provision for current
income, the remainder of the fixed-income portfolio can be held in a qualified
plan.
Similarly, for stocks, that part of the portfolio that is intended to
be long-term, low turnover, passively managed investments can be held
in the taxable accounts. More aggressive parts of the portfolio that call
for active management and potentially high turnover can be held in qualified plans.
Don't
Buy a Tax Liability with Your Mutual Fund
Many taxpayers make adjustments
to their investment portfolio during the final quarter of the year to
take profits, recognize tax losses, reallocate their assets, and for myriad
other reasons. When making purchases of mutual funds near yearend, taxpayers
should exercise caution not to purchase a tax liability.
Mutual
funds must payout their gains and income to shareholders at least annually
to avoid taxation at the fund level. Income and balanced funds typically
make taxable distributions to shareholders either monthly or quarterly.
However, equity funds normally make one annual distribution at or near
the fund's year-end. These taxable distributions to shareholders reflect
the income and net gains realized by the fund for the period.
An equity fund that appears
to have a minimal or negative overall return for the year may actually
make taxable distributions to shareholders because of gains the fund recognized
on appreciation that occurred in prior years. From an investor's standpoint,
distributions do not result in additional return on their investment;
instead, distributions are already reflected in the fund's per share value,
so after a distribution is made, the per share value is reduced accordingly.
Because of the income distributions
mutual funds must make, the timing of a share purchase in a particular
fund can affect your tax liability. Purchasing shares just before the
record date (i.e., the date that determines which shareholders will receive
the distribution) is essentially purchasing a tax liability. This is because
the price of the shares just before the distribution includes the income
that is about to be paid out.
When
the distribution is made, the price per share falls although the total
investment value remains the same (i.e., if income is reinvested, the
shareholder now owns more shares with a lower-value per share; if income
is distributed, the cash received plus the share value equals their investment
before the distribution). Thus, mutual fund investors should pay particular
attention to when they invest. This is especially true for equity funds
that make only one distribution each year. So, be sure to check with the
mutual fund company to determine the status and nature of any forthcoming
dividends when purchasing equity mutual funds late in the year to avoid
an unexpected tax liability.
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