S-Corp Home Office Deduction

A large number of small S corporations use the home office of one of the shareholders (or the sole shareholder) as their principal business office, which is used exclusively and regularly for corporation business. The costs related to this home office can be handled for tax purposes in a number of different ways, but generally the easiest method and the one that results in the most favorable tax treatment for the corporation/shareholder is for the corporation to reimburse the shareholder under an accountable expense reimbursement plan. Under this arrangement, the corporation will reimburse the shareholder for the home office costs on a monthly or other agreed upon basis. The amount the corporation pays is a deductible business expense, and, because the reimbursement is under an accountable plan, the reimbursement is not included in the taxable income of the shareholder.

As an accountable expense reimbursement, the shareholder must keep track of the actual expenses of maintaining the office. First of all, the percentage of the square footage that the office represents to the entire square footage of the home must be determined. Then, the various office expenses must be calculated or tracked. These expenses will generally include depreciation, homeowner’s insurance, utilities, mortgage interest, real estate taxes, and maintenance.

The pro rata portion of these expenses should then be submitted as an expense reimbursement by the shareholder to the S corporation, and a check should be drawn payable to the shareholder in reimbursement.

In QuickBooks, the memo section of the “check” should clearly indicate the nature of the expense, and the reimbursement request should contain the support for the amount and be filed similar to all other check support.

On his/her own personal tax return, the deductions on Schedule A for mortgage interest and real estate taxes should be reduced by the amount of the reimbursement for these items during the year

3 Simple Checks to Save on Business Property Taxes

One of the hardest taxes to swallow which Indiana business owners are subject to is the business personal property tax. This tax is assessed based on the value of all depreciable personal property that is being used by a business as of March 1st every year, and is payable May & November of the following year. A new business owner is generally aware of and expecting to pay payroll taxes and income taxes; on the other hand, when advised of the existence of the business personal property tax, the business owner begins to wonder how a profit can be made, when it seems the government’s hand is in his/her pocket at all times.

The following are three areas where mistakes or oversights by preparers are fairly common, and which a business owner should check to ensure that the business personal property tax is not being overpaid:

  • The basis of the value of personal property a business owns and reports on its business personal property tax return is its depreciation schedule for federal income tax purposes. In many instances, the fully depreciated items that show up on a depreciation schedule have long been disposed of or retired from use by a business, but have not been deleted from the depreciation schedule. Therefore, they are included, in error, in the total value of property subject to tax on the business personal property tax return. The business owner needs to make sure that the depreciation schedule is being kept up to date from year to year, and only includes business assets that are currently in use by the business.
  • Vehicles and trailers that are required to be plated with the Bureau of Motor Vehicles are not subject to the personal property tax. While the fact that vehicles should not be included in the total value of personal property subject to tax is generally caught by the preparer, it is more common that the value of over-the-road trailers are inadvertently included in the total value of personal property subject to tax.
  • Application software is a depreciable item for federal income tax purposes, and is included on the federal depreciation schedule, but is not subject to the personal property tax. Again, the business owner should make a quick check or inquiry of the preparer to make sure these items are excluded from the business personal property tax return.

5 Worst Start-up Mistakes

Starting up a new business, making it successful and building long-term value in it is a challenging proposition. Working with small businesses, we see first hand the crushing mistakes that start-ups can make. We would rank the following five as the worst.

Think you’re personal spending pattern won’t need to change. The start-up period is a double barreled financial shot. Not only is your income from your prior job no longer coming in, but now you’re incurring costs that have to come from savings to get your start-up off the ground. Prior to beginning your new business, prepare the family and get buy-in from them, go through every personal expense that you or your family have, and cut out all unnecessary ones. Trade in the BMW for the compact, terminate the premium cable, and be prepared to go without vacations for a year or two or three.
Overspend on nebulous marketing and promotion of your business.

Choose the one or two business development activities that you believe will be the most successful in directly bringing in new business, track business received for money spent, and continue to invest only in those activities that are proven winners.

Start a business with a partner. You and your old college friend think it would be cool and exciting to be in business together, or you’re just a little scared about going it alone. Whatever the case, we have not tracked the actual success rate of start-ups that have multiple owners, but in our experience, they rarely work. No matter how comforting or cool you think it will be, start-ups involve outlays of cash, lots of tough decisions, long work hours, and stress.  It is a tough path to navigate with a partner or co-owner. Go it alone where at all possible, get help or advice from mentors and advisors, and save your emotional capital for your significant other.

Don’t consult with an attorney and/or CPA. We are hired by many clients, who if they had hired us or another advisor sooner, would have saved significant dollars and trouble. We know, it’s difficult to find an attorney or CPA that you trust, who you are comfortable will have your best interests at heart and is not just looking to fatten their bank accounts at your expense. Do your homework, ask business acquaintances for a referral, and hire an advisor(s) to guide you through the initial maze of legal and financial questions. If you find the right advisor, you will save much more than you ever spend.

Have a good year, so celebrate via conspicuous consumption. In that first year or two, you hit it big. Business is magically walking through the door and the bank account is overflowing. Go on that dream vacation, surprise your wife with that piece of jewelry she has always wanted. Don’t. Know that business is cyclical, and you will also have those down years. So spend sensibly, and build the financial resources in the good years to get you through the not-so-good.