Home Office Deductions

The home office deduction topic often comes up when I speak with business owners. It’s been an even more popular subject in the last two years when COVID-19 has so many more people working from home. The thing is, however, everyone who works at home isn’t eligible for a home office deduction, even if she or he owns a business. As often happens when taxes are concerned, many rules apply for taking home office deductions.

Ask yourself these two questions to see if you are eligible for a home office deduction:

  1. Who is eligible for a home office deduction?

Only individuals who own a business can be eligible for the deduction. Yes, some employees used to be eligible under special circumstances, but those rules changed at the end of 2017. Now, only business owners who use space in her or his home exclusively and regularly to substantially conduct business operations can consider taking a home office deduction. Non-business activities cannot be conducted in the home office, including storing clothes in the closet.

  1. What home expenses can be deducted?

Deductible home office expenses are either direct or indirect. The deduction amount is based on the expense type and business percentage of the home used for business. The most common method used to calculate the business percentage is dividing the square footage used exclusively for business by total square footage of the living space. 

  • Direct Expenses: Expenses that benefit only the home area that is exclusively used for business, such as painting or repairs in the home office, are direct expenses that are fully deductible.
  • Indirect Expenses: Expenses for keeping up and running the entire home, such as the mortgage interest, real estate taxes, insurance, utilities, and general repairs are deductible based on the business use percentage, described above. Shared spaces, like hallways, cannot be included in office space calculation. Some home expenses, such as lawn care, are not deductible. 

For business owners who don’t want to hassle with tracking direct and indirect home office expenses, the IRS has a Simplified Option that allows a standard deduction of $5 per square foot, limited to 300 square feet. 

Eligibility for a home office deduction is determined by a lot of rules. The basics are addressed here, but the topic can get complicated. It’s a good idea to get more details on the home office deduction and read examples of how to apply the tax rules on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction.

Income Taxes for LLC Businesses

Business owners often choose to protect themselves for legal purposes by forming a Limited Liability Company (LLC). An LLC is a state-defined legal structure that business owners use to protect their personal assets in case their business is sued, or another event exposes them to financial liability. However, forming an LLC doesn’t automatically tell the business owner(s) – or the tax preparer – how the LLC operates for tax purposes

How an LLC files its business income taxes depends on the number of business owners and a few other considerations. Determining the best option depends on your objectives and circumstances. The decision can get complicated, so it’s probably a good idea to get professional advice. Here are the basics to get you started.

Income taxes for LLC businesses can be filed in one of three different ways:

  1. Sole Proprietorship

An individual business owner who has not incorporated is, by default, a Sole Proprietor. This is the simplest tax filing option. A Sole Proprietor reports income and expenses on a separate form filed with the owner’s individual income tax return, IRS Schedule C, “Profit or Loss from Business.” Net business profits are subject to income tax and to Medicare and Social Security taxes (i.e., 15.3% of net business profit).

  1. Partnership

Two or more individuals in business together without incorporating have, by default, formed a Partnership. Partnerships are considered a separate tax entity and are required to file a separate income tax return, IRS Form 1065, “U.S. Return of Partnership Income.” Partners receive an IRS Form K-1 for everyone’s pro-rata share of non-wage income, based on the operating agreement. 

  1. Subchapter S Corporation

Businesses with one to 100 domestic owners can take the Subchapter-S election. Sub-S Corps are considered a separate tax entity and are required to file a separate income tax return, IRS Form 1120S, “U.S. Income Tax Return for an S corporation.” Shareholders receive an IRS Form K-1 for their share of non-wage income, based on the operating agreement. Owners are considered employees, must be paid wages, and get a W-2.

How an LLC files its business income taxes depends on several considerations, including the number of business owners. Determining the best income tax option for your LLC isn’t easy. You’ll probably want more information, and some professional advice. Check the IRS website for income tax options and resources for business owners at https://www.irs.gov/businesses.

More Taxpayers Now Qualify for EITC

The Earned Income Tax Credit (EITC) was enacted back in 1975 to assist low- and moderate-income workers by lowering a taxpayer’s tax liability, sometimes resulting in a refund that is bigger than the amount of federal taxes withheld. Despite what a great financial boost it is, the IRS estimates that about 20% of eligible working taxpayers do not claim the EITC because they don’t know about it. And that’s too bad, especially now, when for the first time, the credit is now available to both younger workers and senior citizens.

A tax credit like EITC is even better than a tax deduction because it’s a dollar-for-dollar tax liability reduction, not a reduction of taxable income. For a worker in the 22% marginal tax bracket, a deduction means 22 cents less in tax where a credit means $1 less in taxes. Even better, the EITC is a refundable credit, meaning that the refund can be even more than the amount of income tax that was withheld or paid for the year.

Five tips to determine if you’re eligible for the EITC:

  1. Single and married taxpayers with children who have Social Security numbers can claim the credit, even if their children do not have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn’t qualify for the credit at all.
  1. For 2021, workers may choose to use her or his 2019 earned income to figure the EITC if the 2019 earned income is more than the 2021 earned income. This opportunity to get a higher EITC is part of the Taxpayer Certainty and Disaster Relief Act of 2020. 
  1. For 2021, the EITC is available to more filers without qualifying children, including those who are at least 19 years old with earned income below $21,430. The maximum EITC for filers with no qualifying children is $1,502, up from $538 in 2020.
  1. Workers and working families who have investment income can qualify for the credit. Starting in 2021, the amount of investment income they can receive and still be eligible for the EITC increases to $10,000. 
  1. Married but separated spouses can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse and must have a qualifying child living with them for more than half the year. 

The EITC is now available to more taxpayers, including more people without dependent children. Don’t leave this valuable tax benefit on the table! Check to see if you qualify for EITC when you prepare your 2021 income taxes. Learn the details, rules, and exceptions at


Scam High Alert – It’s Tax Season

Tax filing season officially started last Monday. The race to meet the April 18 deadline is on! Scammers are on a deadline, too. Scam artists prey on their victims all year long, but cybercrime activity seems to spike during tax season. They just can’t resist all those opportunities to fool or intimidate taxpayers who are in the middle of an unpleasant task that makes them nervous and vulnerable, especially online. Consequently, the IRS advises taxpayers to be on Scam High Alert during this filing season.

Since 2014, the IRS has issued an annual list of the “Dirty Dozen” top tax scams. The list is based on actual scams reported to its investigative and law enforcement units. The top twelve for 2021include five scams that are more likely to occur during tax season, targeting taxpayers with malicious intent to steal their refunds, bank account number, or personal information. 

Here are five of the 2021 tax-related scams highlighted by the IRS:

  1. Fake Charities:

Criminals frequently exploit natural disasters and other times of crisis by setting up fake charities to steal from well-intentioned people trying to help in times of need. Unfortunately, this is nothing new. The current COVID-19 pandemic and recent natural disasters are examples where scammers take advantage of your compassion.

  1. Immigrant and Senior Fraud: 

IRS impersonators and other phone scammers are known to target vulnerable people, like those with limited English proficiency and senior citizens. These scams are often threatening in nature, like where a taxpayer receives a telephone call threatening jail time, deportation, or revocation of a driver’s license from someone claiming to be with the IRS.

3. Offer in Compromise Mills:

Misleading tax debt resolution companies can exaggerate the chance to settle tax debts for “pennies on the dollar” through an Offer in Compromise (OIC) for a hefty fee. Later, the taxpayer learns that she or he is not one of the small number of individuals who are qualified to even apply for an OIC, after the fee is paid and it’s too late.

4. Unscrupulous Return Preparers:

Most tax professionals provide honest, high-quality service, but dishonest preparers pop up every filing season. They commit fraud, harming innocent taxpayers, or talk taxpayers into doing illegal things, like inflating deductions. These scammers may also have taxpayers deposit refunds into tax preparer accounts.

  1. Unemployment Insurance Fraud: 

Unemployment fraud often involves individuals acting in coordination with or against employers and financial institutions to get state and local assistance to which they are not entitled. These scams include submitting fraudulent applications and using stolen or fake identification information to perpetrate an account takeover.

The IRS helps taxpayers to be on Scam High Alert all year round, but especially during tax filing season, by issuing its annual “Dirty Dozen” top tax scam list. To learn more about these scams for the 2021 filing season, check out the IRS website at https://www.irs.gov/newsroom/irs-dirty-dozen-list-warns-people-to-watch-out-for-tax-related-scams-involving-fake-charities-ghost-preparers-and-other-schemes.