Do You Know . . .
What measurements a surveyor uses to measure the borders and
dimensions of a tract of land? In the U.S., the customary units are 7.92 inches
= 1 link; 100 links = 1 chain; 1 chain = 4 rods = 66 feet; 80 chains = 1 survey
mile = 5,280 feet.
Last month, we discussed how to qualify for the business use of
your home deduction. In order to qualify for the deduction, 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. Once you meet these tests, you
are eligible to take the deduction.
Q: I’m eligible for the deduction, but I’d like to know how
it is computed?
A: To figure your deduction, you need to know that your
deduction is limited by the following:
1) The percentage of your home used for business (business
2) The deduction limit.
Q: What is the business percentage?
A: The business percentage is calculated by comparing the size
of the part of your home that you use for business with the size of your whole
house. The resulting percentage is used to figure the business part of the
expenses for operating your entire home. You can use any reasonable method to
determine the business percentage. The following are two common methods you can
use to figure the percentage.
1) Divide the area (length multiplied by width) used for
business by the total area of your home.
2) Divide the number of rooms used for business by the total
number of rooms in your home. You can use this method if the rooms in your home
are all about the same size.
Example 1: Your office is 240 square feet (12 feet by 20 feet).
Your home is 1,200 square feet. Your office is 20% (240/1,200) of the total area
of your home, so your business percentage is 20%.
Example 2: You use one room in your home for business. Your
home has four rooms, all of about equal size. Your home office is 25% of the
total area of your home, so your business percentage is 25%.
Q: I started using my home for my business on July 1 of this
year. Can I still take the deduction?
A: Yes, but only for the part of the year you did use your home
for business purposes. Since you started using the home for business in July,
consider your expenses only from July 1 until the end of the year in figuring
Q: What is the deduction limit?
A: If your gross income from the business use of your home
equals or exceeds your total business expenses (including depreciation), you can
deduct all your business expenses. If your gross income from that use is less
than your total business expenses, your deduction for certain expenses for the
business use of your home is limited. Your deduction of otherwise nondeductible
expenses, such as insurance, utilities, and depreciation allocable to business,
is limited to your gross income from the business use of your home, minus the
sum of the following:
1) The business part of expenses you can deduct even if you did
not use your home for business (such as mortgage interest, real estate taxes,
and casualty and theft losses).
2) The business expenses that relate to the business activity
in the home (for example, salaries or supplies), but not to the use of the home
If you are self-employed, don’t include in number 2, above,
your deduction for half of your self-employment tax.
Q: What happens to any expenses that aren’t allowed? Can I
use them another year?
A: If your deductions are greater than the current year’s
limit, you can carry over the excess to your next tax year. They are subject to
the gross income limit from the business use of your home for the next tax year.
The amount carried over will be allowable only up to your gross income in the
next tax year from the business in which the deduction arose, whether or not you
live in the home during that year.
Q: What types of expenses are deductible?
A: Whether you can deduct an expense depends on two things:
1) Whether the expense is direct, indirect, or unrelated to
your business, and
2) The percentage of your home that is used for business.
A direct expense is one that is incurred only for the business
part of your home, such as painting the area used for the business. This would
be deductible in full. An indirect expense is one that you incur for running
your home, such as insurance, utilities, and general repairs. An indirect
expense is deductible based on the percentage of your home used for business.
Both direct and indirect expenses are subject to the deduction limit. An
unrelated expense is one that is incurred only for the parts of your home not
used for business, such as lawn care. This type of expense is not deductible.
Below are some examples of how to treat certain specific expenses.
Real estate taxes. To figure the business part of your real
estate taxes, multiply the real estate taxes paid by the percentage of your home
used for business.
Deductible mortgage interest. To figure the business part of
your deductible mortgage interest, multiply this interest by the percentage of
your home used in business. You can include the interest on a second mortgage in
this computation. If your total mortgage debt is more than $1 million or your
home equity debt is more than $100,000, your deduction may be limited.
Rent. If you rent rather than own a home, but you meet the
requirements for business use of your home, you can deduct part of the rent you
pay by multiplying your rent payments by the percentage of your home used for
Casualty losses. If you have a casualty loss on your home that
you use in business, the casualty loss can be treated as a direct, indirect, or
unrelated expense, depending on the property affected. Treat it as a direct
expense if the loss is on the portion of the property you use only in your
business. Use the entire loss to figure the business use of the home deduction.
Treat it as an indirect expense if the loss is on property you use for both
business and personal purposes. Use only the business portion to figure the
deduction. If the loss is on property not used in your business, it is an
unrelated expense, and you don’t use any of the loss to figure your deduction.
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.
Once you qualify for the deduction, the amount you can deduct
is limited by the following:
1) the percentage of your home used for business (business
2) the deduction limit. The business percentage is calculated
by comparing the size of the part of your home that you use for business with
the size of your whole house. The resulting percentage is used to figure the
business part of the expenses for operating your entire home. Your deduction, if
your gross income from the business use of your home equals or exceeds your
total business expenses (including depreciation), is 100%. You can deduct all
your business expenses. If your gross income from that use is less than your
total business expenses, your deduction for certain expenses for the business
use of your home is limited.
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Your business may be able to claim a valuable tax credit for
research, experimentation, and development by looking carefully at prior year
returns. Congress extended the research tax credit through June 30, 1999, and is
expected to retroactively extend it again. In addition, treasury regulations
have expanded what constitutes research and experimentation (R&E). As a
result, it may be worthwhile for your business to amend open-year returns and
claim the credit.
Activities that may qualify for the credit don’t necessarily
need to happen in a research and development department or cost center. R&E
opportunities can occur in other areas, and frequently go unnoticed. For
example, R&E can be used to create products more efficiently or with fewer
materials, or it can be used to design a special piece of equipment, software,
or packaging that is not commercially available and that helps in innovation,
efficiency, or product damage prevention.
Speak with others in your company — from engineers to
management to information systems staff—to find out what activities may be
eligible for the tax credit. Keep in mind that even those activities that were
not successful may be eligible.
The research tax credit is generally a 20% credit based on the
excess of qualifying research expenses over a base amount. An alternative method
is also available, which increases the eligibility for some taxpayers that
otherwise would not qualify for the credit because of a high base amount, thus
providing additional incentives to look into this credit.
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For a child under the age of 14, unearned income exceeding
$1,400 is taxed at the parents’ top rate rather than at the child’s rate.
Compensation income received by a child under age 14 is taxed at the child’s
A child with earned income can claim a standard deduction up to
$4,300 and may be eligible for the $2,000 deductible IRA contribution. The child
should also consider contributing to a nondeductible Roth IRA.
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Tax Relief This Year
Estate and gift taxes often can take an enormous portion out of
the estate. The payment of those taxes often forces the sale of many small
businesses and family farms. However, some relief is in sight. Effective January
1, the exclusion from federal estate taxes will increase from $650,000 in 1999
to $675,000 this year. The exclusion eventually will reach $1 million in 2006.
* * *
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If you’re self-employed and don’t have a retirement plan or
account, consider a SEP plan, a Simplified Employee Pension plan (SEP). Unlike
other retirement plans, a SEP can be established by the due date of your 1999
return, and your contributions to it will be deductible as long as they are made
by that due date.
If you established a Keogh plan in 1999 before December 31, you
can still make a contribution. The full contribution to the plan need not be
made until the due date of your 1999 return, including extensions.
NOTE: In our last issue, in discussing the business use of your
home, example 1 on page 2 stated that John Stone the plumber could not deduct
his home office. In 1998, this would have been true. However, under new rules
effective for 1999, his home office now qualifies for the deduction.
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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.
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.
All businesses. File information returns (Form 1099) for
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.
There are different forms for different types of payments.
All employers. File Form W-3 ss, 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.
Individuals. If you are a farmer or a fisherman and owe
estimated tax, file your 1999 income tax return by this date to avoid an
underpayment penalty. However, you have until April 15 to file if you paid your
1998 estimated tax by January 18, 2000.
Corporations. File a 1998 calendar year income tax return (Form
1120 or 1120-A) and pay any tax due. If you want an automatic six-month
extension of time to file the return, file Form 7004 and deposit what you
estimate you owe.
S corporations. File a 1999 calendar year income tax return
(Form 1120S) and pay any tax due. Provide each shareholder with a copy of
Schedule K-1 (Form 1120S), Shareholder’s Share of Income, Credits, Deductions,
etc., or a substitute Schedule K-1. If you want an automatic six-month extension
of time to file the return, file Form 7004 and deposit what you estimate you
S corporation election. File Form 2553, Election by a Small
Business Corporation, to choose to be treated as an S corporation, beginning
with calendar year 1999. If Form 2553 is filed late, S treatment will begin with
calendar year 2000.
Electing large partnerships. Provide each partner with a copy
of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an
Electing Large Partnership. This due date is effective for the first March 15
following the close of the partnership’s tax year.
Employers. For Social Security, Medicare, withheld income tax,
and nonpayroll withholding, deposit the tax for payments in February if the
monthly rule applies.
All businesses. File Forms 1098, 1099, and W-2G with the IRS.
This due date applies only if you file electronically (not by magnetic media).
Otherwise, see February 28.
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