In fact, the IRS has set the goal to audit 6,000 companies over the next three years and has already begun training agents.

Also, it looks like small businesses will be a main target.  After all, it is common to hire people as contractors, which avoids payroll taxes.  Unfortunately, noncompliance could result in heavy penalties and interest.

Other areas of focus include:  expense reimbursements, corporate credit cards and personal use of autos.

The reason for this:  simply put, people did not file their returns.

If you think you qualify, you will need to file a return by April 15th.  And, you must mail it in.  The good news is that there will be no penalty for filing.

Answer:  Very sorry to hear about that….
 
As for filing separate, it usually makes sense if one spouse makes substantially more than the other — in terms of getting tax savings.  But, one way to find out is to do a return for both filing statuses.
 
Some other things to consider when filing separate:
 
1.  Many deductions/credits are not available (child/dependent care, IRA contributions, qualified education loan interest deduction, etc).
2.  If you live in a community property state, you are likely required to split the income on your returns (unless you lived apart for the whole year).
3.  Both spouses must either itemize or claim the standard deduction.
 
Now, some people file separately because they think their spouse may be engaging in tax fraud.  Keep in mind that if you sign a joint return, there is joint and several liability.

The IRS actually has a broad definition of a “home.”  It can include the following:

• Traditional Home
• Condo
• Apartment (yes, you do not have to be a homeowner to get the deduction)
• Boat
• Mobile Home
• Greenhouse
• Barn
• Unattached Garage
• Guest House

As for the use of the home office, it need not be for a traditional desk, cabinets and computer setup.  For example, the location can be for a sound studio or work area.

In fact, the home office does not have to be a room.  It can actually be part of a room.  One approach is to use room dividers.

Next, you need to meet three threshold requirements:

1.  You Have a Business:  This cannot be a hobby.  But, it is OK for the business to be part-time.

2.  You use the home office exclusively for business:  There may be no personal use for this space.  It’s only for your business.  For example, if you use your kitchen for your cooking business, you will not be able to get the deduction.  The reason is that the kitchen is also used to cook your personal meals.  As a result, it is a good idea to keep only business-related items in your home office. 

3.  You use the home office on a regular basis:  How much?  Unfortunately, the IRS is not clear on this.  Although, based on court cases, it looks like this is a minimum of 12 to 15 hours per week.

If you meet the above three requirements, you still have another hurdle.  That is, you must meet one of the following:

1.  Your Home Is Your Principal Place of Business:  This is the most common one.  In some cases, this requirement is easy (especially for those who do not have another office or do not travel much).

Even if you have other office locations, you can still have your house be the principal place of business.  This is the case if you use it for the majority of your work that results in revenue.

2.  You Do Administrative Work at Your Home:  This is for those business owners who perform much of their work away from the office.  Examples include:

• Traveling salespeople
• Landscapers
• House painters
• Doctors who work at hospitals

So what does “administrative mean”?  This would include:

• Ordering supplies
• Keeping books
• Billing
• Scheduling
• Collecting from customers
• Researching
• Writing Reports

It’s still fine to have some administrative services performed by third-parties (like a payroll provider).

3.  Place for Meeting Customers or Clients:  If your home office is not your principal place of business, it can still qualify for the deduction if you use the location to meet customers or clients.  These meetings must be in-person (not by phone or other form of communication).

These meetings must be on a regular basis.  This may be one to two days per week (but the IRS is not clear-cut on this).  To help substantial this, it is a good idea to log your appointments.

How do you calculate the home office deduction?

To calculate the home office deduction, you need to first determine the amount of space that is used exclusively for business purposes.  There are several of approaches:

1.  Square Footage Method:  You divide the square footage of the office to the total square footage of the home.  Interestingly enough, you can exclude the square footage for common areas, such as stairs, garages, attics, hallways and so on.  This will likely increase the percentage of the office use.

2.  Room Method:  This is allowed if the rooms in your home are roughly all the same size.  Thus, you will divide the number of rooms for business use to the total number of rooms.  You will exclude bathrooms, closets and storage areas.

While the room method usually gives the largest percentage, it is still worth testing both approaches.

What expenses can you take for the home office deduction?

There are two types of expenses you can take for the home office deduction.  They include:

1.  Direct Expenses:  This is an expense solely for the home office.  Examples include:  painting, carpeting, replacing a window and so on.  These expenses are 100% deductible.

2.  Indirect Expenses:  These are expenses for both your home office and personal uses.  For these expenses, you can only deduct the home office percentage (this is the portion of your home used for your home office).

Here are some of the main indirect expenses:

• Rent
• Deductible mortgage interest and property taxes:  The amount you take cannot also be used as an itemized deduction on your Schedule A.
• Utilities:  If your business requires the usage of heavy amounts of electricity, you might be able to deduct more than the business percentage allows.
• Depreciation:  This is allowed if you own the home.  Also, the recovery period is usually 39 years.  To record the depreciation, you will fill out Form 4562.
• Homeowner’s and renter’s insurance
• Home business insurance
• Home maintenance (cleaning, etc):  You can include lawncare if you have customers that come to your home office.
• Casualty losses (damage from storms, earthquakes, floods, theft, etc):  If only the home office is damaged, then the business percentage does not apply.  But you must exclude any amount you get from insurance.
• Condo association fees
• Security system

What is the gross income limit on the home office deduction?

The home office deduction may not exceed the gross income of the business.  This is usually the profit that’s reported on your Schedule C.  But, there may be some adjustment needed, which is done by filling out IRS Form 8829.

However, you can use the excess expenses for future years (there is no limit on this).  In fact, you do not have to remain living in the house.

In other words, even if you cannot get a deduction — because you had a net loss — you should still apply for Form 8829, so you can get the benefit from future deductions.

How to reduce the odds of getting audited for a home office deduction?

Moreover, there are some things to consider to help bolster your case for the deduction:

• Use your home address for key materials, such as advertisements, letterhead and business cards
• Have your business mail sent to the home office
• Try to have clients visit the home office
• Keep a log of activity (customer visits, etc)
• Take pictures of the home office, with date stamps (this could be important if you move out of the home or no longer use the office space)
• Get a dedicated phone line
• Keep receipts for the expenses (utility bills, insurance invoices, mortgage payments and so on)

Let’s take a look (also, if you have any questions, please click here to contact us at Taulli.com):

What is a tax credit?

A tax credit allows you to reduce your tax obligation dollar-for-dollar.  This is better than a deduction, which reduces your income (which is then taxed).

Moreover, the homebuyer’s credit is refundable.  This means that even if you do not owe any taxes, you will still get a check from the IRS.

What is the deadline?

You must purchase the home by April 30th, 2010 and the transaction must close by June 30th, 2010.  If you miss the deadline, you still may be able to get the credit if you have a binding contract before May 1st.

If you are a member of the armed forces — who has served at least 90 days overseas — the deadlines are extended by one year.

When will you get your refund?

Because of the documentation requirements, you may not receive a refund until four to eight weeks.  Of course, this assumes your return is in order and has the necessary documents attached.

To speed things up, you might want to setup a direct deposit arrangement with the IRS.

Who is eligible?

There are two types of homebuyers that qualify for the credit (both rules apply to the spouse as well):

First-Time Homebuyer:  This is someone who has not owned a home during the three-year period ending on the purchase date of a home.

Example:  Four years ago, you sold your home for $400,000 because you thought real estate prices were ready for a fall.  Since then, you have rented.  In this case, you would be eligible for the credit.

Long-Time Resident:  This is someone who has owned and used the same home as the main home for any 5-year consecutive period during the eight-year period on the purchase date.  In other words, it is possible for an existing home owner to qualify for the credit.

Example:  Two years ago, you sold your house for $500,000.  You owned it for six years.  The house was also your principal residence.  Since then, you have rented a place.  But early this year, you agreed to purchase another home.  In this case, you would be eligible for the homebuyer’s tax credit.

Keep in mind that if the house costs more than $800,000 you cannot get the credit.

How do you calculate the credit?

The credit depends on what type of buyer are you are:

First-Time Homebuyer:  The credit is 10% of the purchase price for a maximum of $8,000 ($4,000 if married filing separately).

Long-Time Resident:  The credit comes to 10% of the purchase price for a maximum of $6,500 ($3,250 if married filing separately).

What do you need to file?

To get a refund, you will need to fill out Form 5405.

You will also need to substantiate the credit.  This is done by attaching documents that prove you are eligible.  As a result, you cannot e-file your return.

To prove your claim, you need to provide one of the following:

• A copy of your settlement statement that has all the parties’ names and signatures, the property address, the contract sales price and the date of purchase.  This is usually the executed Form HUD-1, Settlement Statement.
• If you cannot get a settlement statement — since you purchased a mobile home — then you can provide a copy of the executed retail sales contract, which shows all the parties’ names and signatures, the property address, the purchase price and the date or purchase.
• If the property is a newly constructed home and there is no settlement statement, then you can get a certificate of occupancy that shows your name, the property address, and the date of the certificate.

Next, if you are a long-time resident, then you must show evidence you lived in the home for a five-consecutive period over the past eight years.  To this end, you will need to provide one of the following:

• Form 1098, Mortgage Interest Statement (or substitute statement)
• Property tax records
• Homeowner’s insurance records.

What is considered a home for the credit?

A home is a detached:

• House
• Condominium
• Town house
• Co-op
• Mobile home (affixed to land)

Moreover, the above must be your principal residence.

Are there income limits?

Unfortunately, you may not qualify for the credit because of your modified adjusted gross income (MAGI). 

Your credit will phaseout based on the following:

Single Taxpayer

• Purchase before November 7th:  MAGI of $95,000 or over
• Purchase after November 6th:  MAGI of $145,000 or over

Married Taxpayer

• Purchase before November 7th:  MAGI of $170,000 or over
• Purchase after November 6th:  MAGI of $245,000 or over

What are some of the other limits on the credit?

You cannot get the credit if:

• You are a nonresident alien.
• The home is located outside the US.
• You purchased a home from a relative (spouse, parents, grandparents, children, grandchildren) or a corporation or partnership you have a majority interest in.

The following are limits for a home purchased after November 6th, 2009:

• You purchased a home from a person related to your spouse (see the rule above) or a business with a majority interest.
• If you can be claimed as a dependent on another person’s tax return.
• You are under 18 (this also includes your spouse) on the date of the purchase.

For what tax year can you claim the credit?

You claim the credit on your 2008 return or amended return for a purchase in 2009.  Or, you can claim the credit on your 2009 return or amended return for a purchase in either 2009 or 2010.  Basically, you select the year that you get the most tax benefits.

Can you use the credit for a down payment or for closing costs?

Yes, it is possible so long as it is used for the down-payment requirement — which comes to 3.5% — for FHA-insured loans.  The loan must also be processed through a state housing finance agency.  You can find out more at www.ncsha.org.

Might you have to give back the credit?

To keep the credit, you need to stay in the home for the next three consecutive years.  If you sell the home or no longer use it as a primary residence before this time, you will have to repay your credit back to the IRS.  The exception is for qualified military personnel who are on extended duty.