The Facts about Home Office Deductions

New tax clients ask me all the time about taking a home office deduction. It’s is a popular idea, but it doesn’t work for everyone, even if you have your own business. Lots of rules and your exact circumstances dictate what you can do. It can be pretty confusing.

So let’s “un-confuse” it: When can you take a deduction and how much?

When can you take a home office deduction?

1. Exclusive and Regular Use: Space used for a home office must be used exclusively and regularly for business operations. No non-business activity can be conducted in the home office. That means no personal items in the home office.

2. Principal Place of Business: Your home must be used to substantially and regularly conduct your business. It’s okay if you also carry on business at another location, but your primary activities must be in your home office.

3. Employees: Wage earners may be able to deduct a home office if #1 and #2 apply AND it’s for the employer’s convenience, such as teleworking to reduce the employer’s real estate footprint.

What home expenses can be deducted?

4. Indirect Expenses: Expenses for keeping up and running the entire home, such as insurance, utilities, and general repairs are deductible based on the Business Use Percentage. A percentage of mortgage interest and real estate taxes can also be deducted.

5. Business Use Percentage: The business percentage equals the area of the home used for business divided by the total area. The most common method to calculate the percentage is dividing the square footage used exclusively for business by total square footage. Shared spaces, like hallways, cannot be included in office space.

6. Direct Expenses: Expenses that benefit only the area exclusively used for business, such as painting or repairs in the home office, are direct expenses that are fully deductible.

7. Unrelated Expenses: Expenses for the part of the home not used for business, such as lawn care or painting a room not used for business, are not deductible.

8. Simplified Option: A standard deduction is allowed of $5 per square foot used exclusively for business, limited to 300 square feet.

Qualifying for a home office deduction can really help reduce your tax liability, especially for business owners. The basic rules are outlined above. More rules are more on the IRS website. Check them out here.

Reputation is a Fragile Asset

Back in June, I blogged about the risks of Inappropriate Tone at the Top, and what leaders can do to promote an ethical culture. Making it clear that unethical conduct will not be tolerated helps to avoid the costs of lawsuits, fraud, and decisions that are not in the best interest of the organization. I was reminded of that blog when I read the news reports about Kobe Steel, in the New York Times article, Kobe Steel’s Falsified Data Is Another Blow to Japan’s Reputation,  and heard about it on NPR.

For decades, Kobe Steel, Volvo, Wells Fargo, and other companies built and sustained reputations for quality, reliability, value – the attributes that made their brands. Having a great reputation generally results in having a larger market share. A great reputation could also mean commanding a higher price than competitors. Why not? Clients and customers are willing to pay a premium for that reliability and quality.

It is difficult to imagine why the leader of any organization would take risks with a long-established, stellar reputation and completely blow it up. On top of all the greed and hubris, another reason must be that those leaders do not recognize that a good reputation is a valuable asset. A good reputation is also an incredibly fragile asset, as evidenced by the Kobe Steel example. What was built over decades can evaporate in a day, or less.

I do not pretend to know what motivated the leaders of Kobe Steel, Volvo, or other companies to squander their stellar reputations. I do, however, offer five questions to ask before using sub-standard materials, lying about test results, enrolling customers in unrequested programs/services, or engaging in other compromising behavior:

1. Would I be 100% comfortable if my actions or decisions were disclosed in the news?

2. Is meeting profit goals more important than meeting customer/client needs?

3. Is my product or service safe enough for my parent/child/spouse to use it?

4. Do I want to risk all of the time and effort I’ve invested in building my organization?

5. Is my organization protected from prosecution or other claims of negligence or malfeasance, if necessary?

Answers to these and other questions are completely subjective, of course. But these are valuable questions to reflect on in order to uphold your organization’s reputation. Treat your good reputation as the incredibly fragile asset it is. Don’t blow up in a day what took years to build.

 

 

Fraud and Cyber Risk

Last week, I attended a cyber risk workshop offered by the local chapter of the Institute of Internal Auditors. One of the presenter’s slides listed data breaches that occurred so far in 2017, including Equifax, the Securities and Exchange Commission, and Home Depot. It’s pretty scary, especially when you think about what the cyber criminals are after – your money.

 

Fraud has existed for a long, long time. Technology gives criminals new opportunities to perpetrate bigger frauds more quickly than ever before. Organizations fight back by adding more technology skills to their fraud prevention and investigation teams. According to the Association of Certified Fraud Examiners’ (ACFE’s) In-house Fraud Investigation Teams: 2017 Benchmarking Report, building forensics and cybersecurity expertise is a big focus.

 

Of the nearly 1,500 anti-fraud professionals who responded to the global survey:

 

  • 43% say their organization is seeking or expecting to add expertise in digital forensics to its fraud investigation team.
  • 36% say their fraud team has cybersecurity skills, while 37% are looking to add those skills.
  • Only 16% teams investigate data breach incidents frequently and 27% investigate them occasionally, indicating a possible lack of expertise.

Responding organizations cited that their fraud investigations were related to:

  • Employee embezzlement (40%)
  • Frauds committed by customers (40%)
  • Frauds committed by vendors or contractors (32%)
  • Human resources issues (30%)

IT security professionals often think that their organizations have the controls needed to prevent cyber threats that can lead to fraud. That is not enough! Everyone connected to your systems needs to understand and follow security practices and know why they are important.

 

Clarify your organization’s fraud controls and each person’s role to protect data and funds by:

 

  • Documenting responsibilities for security and secure work practices. Security is part of everyone’s job.
  • Training everyone about security and why it is important. People tend to follow procedures that they understand.
  • Implement incident detection to locate and shut down attacks that can become data breaches.

 

Fighting fraud requires that organizations ensure they have adequate technology skills on their fraud prevention and investigation teams. Recent reports – as well as recent events — tell us that many organizations still need to beef up their cyber teams to protect our money from fraud.

Your New Worker: Employee or Contractor?

When your organization needs more help, you might be too busy and stressed to think about all the details. Worker classification — employee or a contractor — takes a back seat to more immediate concerns, like the worker’s start date and assignments. In reality, how your workers are classified should be your first consideration because it impacts your cost.

 

What is Worker Classification?

 

Workers can be employees or independent contractors. Determining worker classification comes down to the amount of control over the worker and the work in three categories:

 

  1. Behavioral: Do you control what the worker does and how the job is done? For example, who determines work hours and how the work will get done? If you set work hours and procedures, your worker is an employee.

 

  1. Financial: Do you provide the infrastructure for the worker to perform the job, such as a work space, computer, and other tools? Your worker is an employee.

 

  1. Relationship: Is the work permanent or temporary? Are employee-type benefits provided? Permanent workers who receive employer-provided benefits are employees. Temporary workers could be employees or independent contractors, depending on your level of control under #1 and #2.

 

How Does Worker Classification Impact Cost?

 

Costs can be higher when workers are classified as employees vs. classifying them as contractors. Employee wages are subject to employment taxes, the employer portion of social security taxes and all federal and state unemployment taxes. Employees may also get employer-provided benefits, such as insurance. An independent contractor is responsible for paying all of her or his social security taxes and benefits. Compare the total cost of each worker classification to know how your decision will impact your bottom line.

 

What If a Worker is Misclassified?
Even if the costs are higher, workers whose job duties are controlled by the organization must be classified as employees. No choice. Organizations that misclassify employees as independent contractors to save on employment taxes may be held liable for unpaid employment taxes, plus interest and penalties. Making a worker classification error, accidentally or intentionally, can get pretty expensive.

 

The IRS has more helpful details at http://bit.ly/2h9qlho. Still have questions? Consult a qualified tax professional.