January 2000
Home Up April 2000 May 2000 June 2000 July 2000 December 2000 March 2000 February 2000 January 2000

 

In This Issue

Q & A: Business Use of Your Home
Social Security Wage Base Increases for 2000
Standard Business Mileage Rate Goes Up
Tax Calendar 

 

Do You Know . . .

where the month of January got its name?  It comes from the Latin "Januarius" which means "the month of Janus." Janus was a Roman god represented by a doublefaced head to represent his knowledge of the present and the future.  He was the god of the doorway and protected all entrances.

 Q & A: Business Use of Your Home-Part I

Recent tax law changes have made using your home office as a place of business easier, but this area of the tax law can be confusing for many people. Here are answers to the most common questions regarding business use of your home.

Q: I have heard you can claim a deduction for the business use of your home. How do you know whether you qualify?

A: You can claim the deduction for the portion of your home you use for business, but you must meet the following two tests:

1) Your use of the business part of your home must be:

a) Exclusive (there are exceptions to this rule),

b) Regular, and 

c) For your trade or business;

and

2) The business part of your home must be one of the following:

a) Your principal place of business,

b) A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, 

or

c) A separate structure (not attached to your home) you use in connection with your trade or business.

Q: I work for a company and sometimes use my home for my employer's business.  Can I claim a deduction?

 A: If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use.  You must meet the tests discussed previously, plus:

1) Your business use must be at the convenience of your employer, and

2) You do not rent all or part of your home to your employer and use the rented portion to perform services as an employee.

Whether you home's business use is for your employer's convenience depends on all the facts and circumstances.  However, business use is not considered to be for your employer's convenience just because it is appropriate or helpful.

 Q: The test says the use of the business part of  your home must be "exclusive." How does the IRS define "exclusive"?

 A: To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business.  The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. The test is not met if you use the area both for business and for personal purposes.

Example: You are an attorney and use a den in your home to write legal briefs and prepare client tax returns. Your family also uses the den to watch TV. Since the den is not used exclusively in your profession, you cannot claim a business deduction for its use.

 Q: Are there exceptions to this exclusive use rule?

 A: Yes. You don't have to meet the exclusive use test if:

1) You use part of your home for the storage of inventory or product samples, or

2) You use part of your home as a day-care facility.

When you do use part of your home for the storage of inventory or product samples, the exclusive test does not apply. However, you must meet all of the following five tests:

1) You keep the inventory or product samples for use in your trade or business.

2) Your trade or business is the wholesale or retail selling of products.

3) Your home is the only fixed location of your trade or business.

4) You use the storage space on a regular basis.

5) The space you use is an identifiably separate space suitable for storage.

Example: Your home is the sole fixed location of your business of selling mechanics' tools at retail.  You regularly use half of  your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.

Q: What else do you need to do to qualify?

A: To qualify, you must also pass the other two parts of the use test, that is, a portion of the home must be used regularly and for trade or business. Under the regular use criteria, you must use a specific area of your home for business on a continuous basis. You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose.

To qualify under the trade or business use criterion, you must use part of your home in connection with a trade or business. If you use your home for a profit-seeking activity that is not a trade or business, you can't take a deduction for its business use.

Example: You use part of your home exclusively and regularly to read financial periodicals and reports, and you carry out similar activities related to your own investments.  You don't make investments as a broker or a dealer. Since your activities are not part of  a trade or business, you can't take a deduction for the business use of your home.

Q: I meet those three parts of the test.  Do I qualify for the deduction?

A: Not necessarily. You must still meet the second part of the test.  If you do, then you can take the deduction.  In the second part of the test, your home must meet one of the three criteria listed previously. The first criterion is that your home is your principal place of business. Beginning in 1999, a new definition of principal place of business applies.  Your home office qualifies if:

1) You use it exclusively and regularly for the administrative or management activities of your trade or business, and

2) You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

To determine your principal place of business, you must consider all of the facts and circumstances. If, after considering your business locations, you can't identify one as your principal place of business, you can't deduct home office expenses. The two primary factors to consider are the relative importance of the activities performed at each location, and the time spent at each location.

Example 1: John Stone is a self-employed plumber.  His only office is a room in his home that he uses regularly and exclusively to phone customers, order supplies, and review books of the business. He also employs a full-time administrative assistant to answer phones, do bookkeeping, etc. John spends 40 hours a week at clients' homes and 10 hours a week in his office. His home office activities, though essential, are less important and take less time than the work he does at his clients' homes. Therefore, his home office is not his principal place of business.

Example 2: Sarah James is a salesperson.  She makes most of her sales to customers by telephone or mail from her home office. She spends an average of 30 hours a week in her office and 12 hours a week visiting potential customers and making deliveries. The essence of Sarah's business requires her to make telephone or mail contact mainly from her office, which is in her home.  Visits to customers actually are less important; therefore, she can deduct the expenses for the business use of her home.

Q: I don't meet the "principal place of business" criterion. Is there another option?

A: Yes. If you meet or deal with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business if:

1) You physically meet with patients, clients or customers on your premises, and

2) Their use of your home is substantial and integral to the conduct of your business.

Using your home for occasional meetings and telephone calls won't qualify you, but doctors, dentists, attorneys, and other professionals who maintain offices in their homes to meet patients or clients generally will qualify under this criterion.

Example: June Quinn, an attorney, works three days a week in her city office. She works two days a week in her home office, which is used only for business. She regularly meets clients there. Her home office qualifies for a business deduction because she meets clients there in the normal course of her business.

Q: I don't meet either the "principal place of business" or the "place to meet clients" criteria.  Is there any way to still qualify?

A: Yes. You must meet the third criterion of having a separate structure on your home premises dedicated for business. You can deduct expenses for a separate freestanding structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or a place where you meet clients, customers, or patients.

Example: Chris Berry operates a floral shop in town. He grows plants for his shop in a greenhouse behind his home.  Since he uses the greenhouse exclusively and regularly in his business, he can deduct the expenses for its use, subject to a deduction limit.

Summary

In order to qualify for the deduction for the business use of your home, you must meet a two-part test. The first part has three criteria, that is, the use must be exclusive, regular, and for your trade or business. The second part of the test requires you to meet only one of the following criteria:

The business part of your home must be

1) your principal place of business,

or

2) a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,

or

3) a separate structure (not attached to your home) you use in connection with your trade or business.

Next Month: Part II - Figuring the Deduction and the Deduction Limit.

back to menu

Social Security Wage Base Increases for 2000

The Social Security Administration announced increases in the wage bases for 2000. The base for the old-age and survivors insurance portion of Social Security and self-employment taxes, as well as the maximum amount of earnings subject to the payroll tax, will increase from $72,600 in 1999 to $76,200 in 2000.  This means the maximum yearly Social Security tax paid by employees and employers will increase by $223.20.  For self-employed workers, it will rise by $446.40.

Social Security and Supplemental Income (SSI) benefits will increase 2.4% in 2000.  This increase will begin with benefits received in January 2000. For Social Security beneficiaries, the average monthly benefit amount for all retired workers will rise from $785 to $804.  The maximum federal SSI monthly payment to an individual will increase from $500 to $512.  For a couple, the maximum federal SSI payment will increase from $751 to $769.

The maximum amount of earnings that a beneficiary under age 65 may earn without losing any Social Security benefits will increase from $9,600 to $10,080 in 2000. For those beneficiaries age 65 to 69, the maximum amount he or she may earn without losing any benefits increases from $15,500 in 1999 to $17,000 in 2000.

back to menu

Standard Business Mileage Rate Goes Up

The IRS has increased the optional standard mileage rate for business use of an automobile.  Last year, the rate was reduced to 31 cents, but for this year, the rate has been increased to 32.5 cents.  The rate for the charitable use of an automobile remains the same at 14 cents per mile.  The rate for automobiles used for medical purposes or moving remains unchanged at 10 cents per mile.

For purposes of using the fixed and variable rate method to compute deductible expenses for a leased vehicle, the standard automobile cost may not exceed $27,300 in 2000.

back to menu

Tax Calendar

January 3

Employers. Stop advance payments of the earned income credit for any employee who did not give you a new Form W-5 for 2000.  Make sure you give your employees their copies of Form W-2 for 1999 by February 1.

January 18

Individuals. Make a payment of your estimated tax for 1999 if you did not pay your income tax for the year through withholding (or did not pay enough that way).  This is the final installment date for 1999 estimated tax. However, you don't have to make this payment if you file your 1999 return and pay any tax due by January 1, 2000.

Farmers and Fishermen. Pay your estimated tax for 1999. You have until April 17 to file your 1999 income tax return.  If you don't pay your estimated tax by this date, you must file your 1999 return and pay any tax due by March 1, 2000, to avoid an estimated tax penalty.

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in December 1999 if the monthly deposit rule applies.

January 31

Individuals. File your income tax return for 1999 if you did not pay your last installment of estimated tax by January 18.  Filing your return and paying any tax due by this date prevents any penalty for late payment of the last installment.

All businesses.  Give annual information statements to recipients of certain payments you made during 1999. Payments that are covered include: 1) compensation for workers who are not considered employees, 2) dividends and other corporate distributions, 3) interest, 4) amounts paid in real estate transactions, 5) rent, 6) royalties, 7) amounts paid in broker and barter exchange transactions, 8) payments to attorneys, 9) profit-sharing distributions, 10) retirement plan distributions, 11) original issue discount, 12) prizes and awards, 13) medical and health care payments, 14) debt cancellation (treated as payment to debtor), and 15) cash payments over $10,000.

All employers. For nonpayroll taxes, file Form 945 to report income tax withheld for 1999 on all non-payroll items, including backup withholding and withholding on pensions, annuities, and gambling winnings.  

For Social Security, Medicare, and withheld income tax, file Form 941 for the fourth quarter of 1999. Deposit any undeposited tax. (If the total is less than $1,000 and not a shortfall, you can pay it with the return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.

February 10

Employers. For nonpayroll taxes, file Form 945 to report income tax withheld for 1999 on all nonpayroll items. This due date applies only if you deposited the tax for the year in full and on time.

For Social Security, Medicare, and withheld income tax, file Form 941 for the fourth quarter of 1999. This due date applies only if you deposited the tax for the quarter in full and on time.

For federal unemployment tax, file Form 940 (or 940-EZ) for 1999. This due date applies only if you deposited the tax for the year in full and on time.

February 15

Individuals.  If you claimed exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in January if the monthly deposit rule applies.

Begin withholding income tax from the pay of any employee who claimed exemption from withholding in 1999, but did not give you a new Form W-4 to continue the exemption in 2000.

February 28

All businesses. File information returns (Form 1099) for certain payments you made during 1999. These payments are described under January 31. There are different forms for different types of payments.

February 29

All employers.  File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 1999.  If you file Forms W-2 electronically (not by magnetic media), your due date for filing them with the Social Security Administration will be extended to March 31. The due date for giving the recipient these forms will still be January 31.

back to menu