Tax Deduction For Business Use of A Home

Many individual taxpayers do some income producing work out of their homes and feel that they should be allowed to deduct part of the costs of their home on their income tax returns. For example a bankruptcy lawyer might work on some of his briefs on his home computer on weekends. However, the tax law limits the situations in which the deduction is available.

Basically a taxpayer may take a deduction for business use of the home, if it is the principal place of a taxpayer’s business, if the home is used to meet clients or customers, if the home is used to store inventory for a retail or wholesale business ,or the home is used to provide day care services. Also a detached structure from the main residence used for business purposes such as an office over a detached garage can qualify.

Each category also has specific requirements that must be met. For example space must be used exclusively for the business purpose to be deductible as a principal place of business, as a place to meet customers, or as a detached structure from the main residence. A space deducted for meeting customers must involve actual physical meetings, not merely phone calls or emails.

Tax Deduction For Building Repairs

A taxpayer can take an income tax deduction for repairs and maintenance of property used in a business or as an investment. However, the cost of an improvement to property has to the property be treated as a capital expenditure, which means that no tax deduction is available.

In some cases the difference between a repair and an improvement is obvious. Painting a building the taxpayer uses to operate a retail business would be a deductible repair, while adding a second story to the premises would be a non deductible capital improvement. Other items though could fall in a grey area, such as replacing windows or doors with much higher quality windows or doors; and as I know well as a bankruptcy lawyer having to argue with the IRS can prove expensive.

Fortunately beginning in 2014 small businesses can rely on a safe harbor for repair expenses for buildings . Taxpayers with less than $10,000,000.00 of annual gross receipts can now elect to deduct all expenses on a building that costs up to $1,000,000.00 provided the deduction for the year does not exceed the lesser of $10,000.00 or 2% of the building’s unadjusted basis.

Tax Deduction of Business Start Up Costs

When an individual starts a business he or she will generally incur certain costs in starting up the business that are not actually costs of running the business. These would include consultant fees to help plan the business or advertising costs or wages incurred before the business opens.

Since these costs are not an expense of running a business, they cannot be currently deducted on the tax return of the business. Instead they are required to be capitalized and written off on the tax return over 180 months or 15 years. There is an exception that allows the taxpayer to take a current tax deduction for the first $5,000.00 of start up expenses, which for many small businesses would cover the entire expenditures. Any start up costs in excess of $5,000.00 would still have to be written off over 180 months.

As any bankruptcy lawyer can tell you though, many new ventures do not stay in business for 15 years, and an entrepreneur, who discontinues operations before the amortization period is complete will want to know what happens to the costs that he has not deducted before he closes. Fortunately, the tax law allows these remaining costs to be deducted as a loss in the year the business is disposed of.

Tax Deduction For Business Software

As a bankruptcy lawyer I have seen that software can be a substantial expense in a business, and if the business is going to succeed an entrepreneur needs to make sure to take an income tax deduction for the costs of acquiring software.

If one purchases software for a business the general rule requires that he or she amortizes it for tax purposes over 36 months. Most small businesses however can get around this through Section 179 of the Internal Revenue Code, which allows taxpayers to expense rather than depreciate equipment purchases up to a certain dollar limit. If the software is purchased as part of the acquisition of a business however, it needs to be amortized as an intangible asset over 15 years.

Generally a taxpayer can take a current tax deduction for the cost of developing software for use in a business. Rental payments for leased software are deducted currently the same as any other rental payments.

Taxation of Qualified Dividends

Most corporate dividend are taxable income to the recipients; but, if it is a qualified dividend the income is taxed at the capital gains rate rather than at the rate for ordinary income.

As an estate planning lawyer I have seen that this break can produce a significant amount of tax savings; however, qualified dividends must comply with certain rules.

Qualified dividends generally must be from domestic U.S. corporations, although there are some foreign corporation dividends that also qualify such as possession corporations and foreign corporations covered by certain tax treaties. The dividends cannot be from tax exempt corporations, mutual savings banks, or on employer securities owned by an ESOP. Qualified dividend treatment also requires a holding period for the stock of at least sixty before or after the ex-dividend date (90 days for certain dividends on preferred stock). They will also not qualify if the taxpayer is required to make related payments with respect to positions on similar property, or if the taxpayer elects to treat the dividends as investment income.

Taxation of Personal Injury Awards As a bankruptcy lawyer I frequently deal with people who have been injured in accidents, and some of them are able to bring lawsuits to recover damages based on the injuries. One advantage that many people do not realize they have in this situation, is that damages received in a lawsuit for a personal injury are not subject to income taxes. Like what seems to be the case with all tax rules however, there are specific rules that need to be followed. The payment has to be paid for compensation of the injury, which means that punitive damages are fully taxable. Emotional distress is not considered a personal injury, but if the emotional distress is caused by an injury or sickness the non punitive damages for emotional distress will be excluded from taxable income. The exclusion also applies to recoveries of any medical expenses attributed to emotional distress.

Collection Efforts When A Debtor Is About To File Bankruptcy

When an individual or a business files bankruptcy, the bankruptcy law attempts to maintain some equality among creditors in dividing up whatever funds are available to pay debts. Following the same philosophy Section 547 of the bankruptcy code can allow a bankruptcy trustee to recover payments made to creditors within 90 days before the bankruptcy was filed.  The idea is that these creditors are receiving preferential transfers, and the funds should be divided among all the creditors.

It can come as quite a shock to a business person, who feels he was only being paid for goods or services provided, when he gets a letter from a bankruptcy trustee wanting a payment returned , because the customer filed bankruptcy within 90 days after the payment. The creditor in this case can argue that the transfer was made in the ordinary course of business , which is a defense against the recovery of a preferential payment in bankruptcy.  What constitutes the ordinary course of business is a question of fact, and the courts look at such points as how long the parties have been dealing with one another and what the sales and payment patterns were before the 90 day period.

What might strike some lenders as unfair is that increased collection efforts during this 90 day period could destroy the ordinary course of business defense.  Frequently, debtors will be having trouble paying, if they are close to bankruptcy, and it seems that the ordinary business practice might be to pick up collection efforts, when someone is not paying.  Nonetheless this can be used against the lender, when a trustee attempts to recover preferential transfers.