Tag Archives: small business

small business taxes

The Right Way for Corporations to Reimburse Home Office Expenses

small business taxes

If your company has people working from home offices, many of their business expenses are reimbursable. However, a corporation must reimburse these expenses the right way, or the IRS could consider the reimbursements improper and trigger an audit with financial penalties. Let’s look at the two main methods of seeking home office reimbursements – the actual expense method and the safe harbor method. For a corporation, one option is clearly better than the other.

What is the Actual Expense Method?

The actual expense method directly reflects the amount of business expenses a home-based worker is experiencing. The employee would submit receipts and other proof for reimbursement from the company. If the expense comes from a house-wide cost, its reimbursement will be calculated as a percentage of the total household cost. This percentage is usually found by determining how many square feet of the home is used for business use only, then using that percentage as the guide. So, if their home office is 15% of the total home space, they should never be requesting reimbursement for any amount above 15% of an expense that applies to the entire home.

What is the Safe Harbor Method?

The safe harbor method is also for work-from-home taxpayers who have business expenses. It gives them a certain level of safety in claiming business expenses up to a threshold amount. However, there are still many limitations and requirements to consider. In general, the maximum amount a taxpayer can deduct annually under the safe harbor method is $1,500. Consult a tax attorney to ensure you qualify for safe harbor before using it.

Why Does the Safe Harbor Method Exist?

The IRS introduced the safe harbor method to help taxpayers affected by changing laws. Lawmakers working on the 2010 economic stimulus package inadvertently penalized taxpayers who were simply trying to claim legitimate business deductions. In response, the IRS introduced the safe harbor method, also called the safe harbor escape, to give these taxpayers another choice. If people feel too uneasy about claiming business deductions for fear of triggering an IRS audit, they could seek the safe harbor option.

Can a Corporation Use the Safe Harbor Method?

No. Corporations should not use the safe harbor method. A corporation should use the actual expense method for reimbursements. This means that any request for reimbursement coming from an employee or employee-shareholder should be based on their actual expense, with proof in the form of receipts and other paperwork. For more information about handling reimbursements properly, reach out to your corporation’s tax attorney.

Dutton Legal Group – Indiana’s Tax Resolution Law Firm

The Dutton Legal Group helps the people and businesses of Indiana navigate ever-changing State and Federal tax codes. Our goal as experienced tax attorneys is to assist you in finding an immediate, cost-effective answer to your tax challenges. We provide a variety of tax services from balance resolution and return preparation to wage garnishment relief and audit assistance. Make Dutton Legal Group your next call at 1-800-334-0255 or send an email to request a free consultation. Trustworthy and affordable, for over 15 years.

indiana tax attorney

10 Proven Strategies to Lower S Corporation Taxes

indiana tax attorney

One of the biggest benefits of setting up an S corporation is avoiding double taxation by not paying corporate income tax. Shareholders absorb profits and losses, paying tax when they file their individual returns. Of course, this makes S corporation owners wonder whether there are additional ways to lower taxes even further. The good news: S corp taxes can be lowered using reliable methods of keeping your tax burden as small as possible.

How Can Limiting Owner Wages Lower S Corp Taxes?

An S corporation is taxed in part at the level of its owner’s wages. By reducing the owner’s salary, the corporation’s taxes can be cut by thousands of dollars. Additional payments can be made to the owner through distributions – a sort of periodic bonus plan – without adding to the corporation taxes. The only caveat with this approach is that the owner’s salary can’t be so small that it falls below the IRS “reasonable compensation” threshold.

Can I Employ My Adult Children to Lower S Corp Taxes?

Do you know each of your children can make up to $12,000 without paying any federal income taxes on what they earn? This comes as great news for family businesses operating as S corporations, when you employ a second generation of family workers. It means you can not only provide a job for your children but also decrease the family tax burden at the same time. Keep in mind that you’re still responsible for payroll taxes for every employee, including your children.

What Happens If I Rent a Home to the S Corporation?

For up to 14 days a year, an S corporation owner can rent their home to the company and receive a tax deduction. To pursue this option, draw up formal paperwork for the transaction and have the S corporation deduct the full amount of the rental fees at tax time. The net result is that the owner of the company receives tax-free income.

Can Selling a Home to the S Corporation Also Lower Taxes?

This is a great option if you’re already considering turning a home into a rental property. Sell the house to the S corporation first and avoid taxes through something known as the home-sale profit exclusion. You can exclude a $250,000 gain from your income if filing individually and $500,000 if filing jointly. 

How Does Using Owner-Employee Health Care Reimbursement Help?

The 21st Century Cures Act removes penalties for owner-employees who have health insurance through the company. If the S corporation owner holds more than 2% of the company, establish a health insurance plan for them and the S corporation can reimburse them for the premiums.

How Can Business Deductions Lower S Corp Taxes?

  • Deduct home office expenses. The deduction of home office expenses must be well-documented for the IRS, but it’s worth doing. The owner is reimbursed for the expenses. It’s like tax-free income. Make sure you create expense reports and a clear paper trail, in case the IRS questions your purchases.
  • Deduct depreciation. Under IRS rules, depreciation is an allowable reimbursement – although some people may try to convince you otherwise. If you have depreciation related to a vehicle, building or other asset used for the business, you can take it as a deduction.
  • Deduct vehicle expenses. Does your company use vehicles for business? Take advantage of the tax break this offers. If a vehicle is used for business trips, deliveries or day-to-day business driving, it almost certainly qualifies – especially if it is a “heavy vehicle” used for commercial purposes. Plus, don’t forget the depreciation deduction related to these vehicles.
  • Deduct travel. Travel expenses are deductible. We must caution you that the IRS pays close attention to these kinds of deductions, so make sure you keep receipts, fill out detailed expense reports and submit them to your S corporation financial executives just as any employee should.
  • Deduct cell phone costs. Don’t forget about cell phones at tax time. S corporations that provide employees with smartphones and other communications equipment can reimburse the employees for the full cost of the phone – including non-work-related use – and deduct it from their corporate tax return. For the employee, this is like tax-free income and comes as a very welcome fringe benefit of working for your company.

Dutton Legal Group – Indiana’s Tax Resolution Law Firm

The Dutton Legal Group helps the people and businesses of Indiana navigate ever-changing State and Federal tax codes. Our goal as experienced tax attorneys is to assist you in finding an immediate, cost-effective answer to your tax challenges. We provide a variety of tax services from balance resolution and return preparation to wage garnishment relief and audit assistance. Make Dutton Legal Group your next call at 1-800-334-0255 or send an email to request a free consultation. Trustworthy and affordable, for over 15 years.