Work at Home? You May Qualify for the Home Office Deduction

IRS Tax Tip 2012-49, March 13, 2012

If you use part of your home for business, you may be able to deduct expenses for the business use of your home.

The IRS has the following six requirements to help you determine if you qualify for the home office deduction.
1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
• as your principal place of business, or
• as a place to meet or deal with patients, clients or customers in the normal course of your business, or
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

3.   Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4.   There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5.   If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.

6.   If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see IRS Publication 587, Business Use of Your Home, available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676)

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Tax Law Forum Tax Quote

“Because of the income tax, a penny saved is more than a penny earned.”

- Jeffery L. Yablon/

The Tax Law Forum is written by Attorney Rob Teuber of the law firm Weiss Berzowski Brady LLP. The blog discusses relevant Federal and Wisconsin tax law issues.

On December 23rd 2011, the United States Congress passed and President Barack Obama signed into law a two month continuation (into January and February 2012) of the 2% 2011 Social Security Payroll Tax reduction for employees.

The dynamics that the tax cut is limited to two months inherently creates a potential tax strategy for sharp taxpayers, tax lawyers, tax attorneys, tax accountants and tax advisors.  Had Congress not had the foresight to anticipate and close the opportunity for this tax strategy (tax loophole) taxpayers and tax professionals could have bunched their income into the first two months of 2012 to take advantage of the 2% reduction most or all of the year regardless of whether the Social Security Payroll Tax reduction is continued for the remainder of 2012.  To forestall this strategy, Congress included a “recapture” provision which essentially limits the 2% reduction to two twelfths of the $110,100 2012 Social Security Wage Base.  A parallel provision accomplishing the same result for self employment taxes is also included.  For employers who use payroll service or payroll software the additional computations should be hardly noticeable.  For employers who manually prepare their payroll this makes payroll preparation even more exciting.

For more information on payroll tax or other tax related legal concerns, contact the Chicago tax lawyers at Horowitz & Weinstein.

President Barak Obama’s Budget proposal includes a provision to convert the crime of Willful Failure to File a Federal Tax Return from existing law where it is currently a Misdemeanor and make it a Felony for Willful Failure To File a Federal Tax Return in any 3 of a 5 consecutive year period and the tax liability is $50,000.00 or greater.  A criminal tax conviction could result in a jail term of 5 years and a penalty of $250,000.00.

The practicality of this proposal is that the IRS prosecutes Failure to File a Tax Return as a misdemeanor all that often (Wesley Snipes is one of the exceptions) opting more often for prosecuting Tax Felonies.  If Willful Failure to File becomes a felony then prosecutions could be more often and affect many of the taxpayers who regularly fail to file their tax returns.  Therefore those taxpayers who regularly fail to file their tax return will want to begin complying with the law starting now in 2012 for 2011 tax returns (the theoretical date the new provision would become operative)

For more information on how the new proposed failure to file penalties affect your tax situation or for assistance with other tax related legal concerns, contact Horowitz & Weinstein.

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President Barack Obama welcomed a stronger than expected December unemployment report on Friday and urged Congress to extend a payroll tax cut until the end of 2012 to help the country’s economic recovery maintain momentum.

“We’re making progress. We’re moving in the right direction. And one of the reasons for this is the tax cut for working Americans that we put in place last year,” he said.

“When Congress returns they should extend the middle class tax cut for all of this year, to make sure we keep this recovery going,” he told workers at the Consumer Financial Protection Bureau to welcome its new director, Richard Cordray.

Obama appointed Cordray on Wednesday despite opposition from Republicans in the U.S. Senate.

Data earlier on Friday showed a 200,000 increase in December job creation that beat analyst expectations and helped bring the unemployment level down by a tenth of a percentage point to a still-historically high 8.5 percent.

The numbers are a boost for Obama as he seeks reelection in November. He must convince voters his policies are healing the economy after a savage recession, getting them to believe in a more promising future and forget the harsh recent past.

“We have made real progress. Now is not the time to stop, so I would urge Congress to make sure they stay on top of their jobs, to make sure that everybody else is able to enjoy hopefully an even more robust recovery in 2012,” Obama said.

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The Internal Revenue Service estimates that U.S. companies and individuals failed to pay $385 billion in taxes they owed in 2006, an increase from $290 billion five years earlier.

The agency said the rate of compliance remained almost unchanged at 85.5 percent, down slightly from 86.3 percent in 2001. The IRS announcement today is the first update to the so- called tax gap estimate in five years. The gap grew because the income base expanded between 2001 and 2006, the agency said.

“Despite what seems to be increasing complexity, Americans’ compliance remained steady,” Frank Keith, an IRS spokesman, said in a telephone interview today.

The U.S. recorded a $248.2 billion budget deficit (EHBBUS) in 2006, according to the White House Office of Management and Budget. If the IRS had collected all of the taxes owed that year, the U.S. could have had a surplus of as much as $136.8 billion.

The estimate is a comprehensive measure of the taxes the U.S. is owed and includes income taxes, the estate tax, employment and excise taxes.

The IRS uses computer models to estimate the amount owed by individuals and businesses who don’t pay their taxes or don’t pay their full tax bill. The agency said it is getting better at estimating the tax gap in part because of better data on small corporations.

The biggest chunk of money that goes uncollected — $235 billion — comes from individuals, the IRS said. Of that, $122 billion is estimated to be taxes owed on business income that would be reported on an individual return.

The IRS estimated that $67 billion in corporate income tax wasn’t collected in 2006. Most of that — $48 billion — was from large corporations with more than $10 million in assets, the agency said.

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Democrats are abandoning their demand for a surtax on millionaires to help finance payroll tax cuts in a sign that lawmakers are trying to broker a compromise on Congress’ highest-profile year-end dispute.

Even so, there is no clear path to quick bipartisan agreement on the legislation, which would prevent an automatic Social Security tax increase on 160 million workers and the expiration of jobless benefits for people out of work the longest. Both would occur Jan. 1 without congressional action.

Lawmakers are also embroiled in a squabble over a huge, separate spending bill, a dispute that would force a shutdown of most of the government on Saturday unless it is resolved. Neither party wants to risk the wrath of voters by shuttering government doors.

Republicans say they plan to try winning House approval for a $1 trillion measure financing dozens of agencies through next September.

But that means a conflict with the White House, whose communications director, Dan Pfeiffer, said President Barack Obama had problems with some social, environmental and other provisions in the legislation. Pfeiffer said Congress should approve a short-term bill to keep the government open while final disputes are resolved.

House Republicans officially unveiled the massive, bipartisan spending bill late Wednesday to fulfill transparency rules, but Senate Democrats had yet to officially sign on. However, the measure wasn’t expected to change much, if at all, before a vote Friday, despite White House protests and an explicit veto threat regarding provisions placing limits on the ability of Cuban immigrants to visit families on the island or send money back to them.

The pre-Christmas wrangling caps a contentious year in a capital hindered by divided government, with Democrats controlling the White House and Senate while Republicans run the House. Lawmakers have engaged in down-to-the-wire drama even when performing the most mundane acts of governing, such as keeping agencies functioning and extending federal borrowing authority, tasks that are only becoming more politically delicate as the calendar nears the 2012 election year.

That finger-pointing was reflected Wednesday in some of the back and forth between party leaders.

“My friend is living in a world of non-reality,” Senate Majority Leader Harry Reid, D-Nev., said of Senate Minority Leader Mitch McConnell, R-Ky., who had suggested that Congress quickly complete its spending work. Reid said unresolved disputes made that impossible.

“The House has done its work. It’s time for the Senate to do theirs,” said House Speaker John Boehner, R-Ohio, referring to House approval this week of payroll tax legislation.

That bill drew solid opposition from Democrats and Obama in part because it would force work on the Keystone XL oil pipeline from western Canada to Texas Gulf Coast refineries, which Obama would rather delay. They are also unhappy that the bill is financed by cuts to civilian federal workers, Obama’s health care overhaul bill and other programs that Democrats say would avoid meaningful contributions from the rich.

Senate aides said top Democrats are writing a new version of the payroll tax legislation that would exclude a 1.9 percent surtax on people earning more than $1 million a year, a levy Democrats relied on to pay for their previous payroll tax cut bills. Instead, they said, their new legislation’s savings would include higher fees that government-run Fannie Mae and Freddie Mac would charge to back mortgages and revenue from selling portions of the broadcast spectrum.

Republicans minimized the importance of the Democratic retreat on taxing high-income people.

“I don’t think it’s much of a concession,” said Boehner spokesman Michael Steel. “It never had any chance of passing the Senate, let alone the House.”

In one instance of cooperation, the Senate was expected to give final congressional approval Thursday to a $662 billion defense bill that would allow the administration to prosecute terrorism suspects in the civilian justice system.

The White House had initially issued a veto threat against the bill over language requiring the military to handle some terrorism suspects. An agreement was reached by including a provision ensuring that the role of domestic law enforcement agencies would be unchanged.

The bill, which the House approved Wednesday by 283-136, lays the groundwork for weapons purchases, U.S. military activity overseas and the Energy Department’s national security programs. Reflecting a period of tight budgets and diminishing U.S. involvement in Iraq and Afghanistan, the legislation envisions $27 billion less spending than Obama proposed — money that will be supplied in separate legislation.

Also Wednesday, the Senate rejected rival Republican and Democratic proposals to amend the Constitution to require a balanced federal budget.

On the dispute over the giant spending bill, GOP aides have said that as a backup plan, they might push a short-term bill through the House financing agencies into January if they can’t win enough support for the $1 trillion package.

Passage of the spending bill, by removing the threat of a federal shutdown, would take pressure off House Republicans to continue bargaining on the separate payroll tax legislation.

However, spotlighting the degree of disagreement between the two parties, they are even at odds over whether the $1 trillion measure is a bipartisan compromise or not.

Republicans and at least one Democrat said agreement had been reached earlier in the week. But the White House and Reid said disagreements remain, with Reid citing provisions relating to travel to Cuba and funding for the Commodities Future Trading Commission.

The spending bill would finance the Pentagon and nine other Cabinet-level departments, as well as scores of smaller agencies. It would trim the budgets of the Environmental Protection Agency, foreign aid and Congress itself while providing funds to combat AIDS in Africa, patrol the U.S.-Mexico border, operate national parks and boost veterans’ health care.

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According to a  recent report in the Huffington Post, Illinois ranks in only the eighth position of the top ten highest sales tax States in the United States.  That may come as a surprise to many residents of Cook County and perhaps even more of a surprise to residents of the City of Chicago where the local sales tax rate is 9.25% for general merchandise and can be even higher in restaurants and higher still in restaurants in special taxing zones.

The reason for the surprising eighth position is that the rankings are statewide averages.  If you look at a list of top highest sales tax cities in the United States, Chicago ranks more in keeping with where one would expect it.

Collections of Illinois Sales Tax, Retailers Occupation Tax (ROT), Use Tax (UT), Motor Fuels Tax, Service Use Tax (SUT) and Service Occupation Tax (SOT) are enforced by the Illinois Department of Revenue through Sales Tax Audits and Illinois Department of Revenue Collection Acts which could include Levy of bank accounts, levies on other property, revoke suspend, or hold a business certificate, and revoke a sales tax business certificate.

For more information on Illinois sales tax, the Illinois Department of Revenue, or other tax law concerns, contact the Chicago Tax Lawyers at Horowitz & Weinstein.

TAX LAWYER DIRECTORY

• IRS AUDITS – POST AUDIT LITIGATION
• IRS APPEALS – POST APPEAL LITIGATION
• SALES TAX & USE TAX AUDITS
• FEDERAL REFUND LITIGATION
• TAX COURT PETITIONS
• LITIGATION WITH ILLINOIS DEPARTMENT OF REVENUE

If you are in the need of civil or criminal tax attorney, check out the Tax Attorney Directory for top tax lawyers.

Los Angeles Mayor Antonio Villaraigosa proposed dismantling California’s Proposition 13, which helped begin a nationwide anti-tax movement, in favor of a “grand bargain” that would boost levies on business property.

The Democrat who leads California’s largest city called on Governor Jerry Brown not to shrink from making sweeping changes in state tax laws that Villaraigosa, 58, said could produce as much as $36 billion a year in new revenue.

Villaraigosa urged the removal of Proposition 13’s limits on commercial-property assessments while retaining its cap for homes. The mayor said boosting tax revenue in the most-populous state would shore up the University of California system, promote budget stability and restore public-school funds.

“It’s time to address the unfairness inherent in a system that allows Wall Street hedge-fund managers to devise complex real-estate investment trusts that give the super-rich a free pass on taxes every ordinary homeowner in California has to pay,” Villaraigosa said in a speech at the Sacramento Press Club. “Let’s apply, as an idea, Proposition 13’s protections to homeowners and homeowners alone.”

The 1978 referendum, which allows unlimited reassessments for tax purposes only when property is sold, excludes some commercial transactions in real-estate investment trusts, or REITs, according to the mayor.
Easier Overrides

Lower vote thresholds should apply when local communities seek to raise taxes and fees, Villaraigosa said, calling for passage of such measures by a simple majority, not the two- thirds required now. He also proposed extending the state’s 7.25 percent sales tax to service providers such as lawyers.

Proposition 13, which passed with 65 percent of the vote, inspired similar measures in Massachusetts, New York and New Jersey. It restricts tax assessments to 1 percent of a property’s purchase price, plus annual increases of no more than 2 percent, even if market values rise at a much faster pace.

Before its passage, cities, counties and school districts could set their own rates. In the first year under the law, property tax collections in California fell 52 percent to $4.9 billion from $10.3 billion in 1978, according to state data.

Since it became law, California public schools have fallen from seventh place among states to 27th in per-pupil spending, according to the U.S. Census Bureau, as the law curbed receipts from the biggest traditional source of education money.
Broadly Popular Law

The measure remains broadly popular, said Terry Christensen, who teaches politics at San Jose State University. Only by promising to keep residential property caps can Villaraigosa hope to persuade the public to support his proposal, Christensen said by telephone.

“You’ve heard it referred to as the Third Rail of California politics,” he said. “It’s still a very live rail. There’s a real knee-jerk reaction to any effort to change it. This conversation is going to be a very tough sell for many people.”

Brown, a 73-year-old Democrat who was governor when Proposition 13 passed, hasn’t publicly embraced changes in the measure. Gil Duran, a spokesman, declined to comment on the details of the mayor’s proposals.

“We appreciate the mayor adding his voice to the important debate about the future of California,” Duran said by e-mail.

The Howard Jarvis Taxpayers Association, named after Proposition 13’s late author, opposes exempting businesses from its limits, said Jon Coupal, the group’s president.
Struggling Businesses

“Right now small businesses and large businesses are struggling” in California, Coupal told reporters after Villaraigosa’s speech. “We have an effective unemployment rate above 20 percent. There is a correlation between taxes and the regulatory climate and economic development.”

Increasing taxes on commercial property would hurt small businesses disproportionately, said Rex Hime, president and chief executive officer of the California Business Properties Association, which represents owners and management companies.

“If anything homeowners have had an advantage in this marketplace,” Hime said by telephone. “Home values skyrocketed faster than everything else. Proposition 13 has created a certainty in terms of tax values.”

“Pension funds, insurance companies, retirement plans are invested in commercial property,” Hime said. “To undercut that has a significant economic impact.”

Villaraigosa, in his second term as mayor, also suggested reducing or eliminating levies “that don’t make economic sense.” He proposed credits for companies that hire workers; eliminating the state’s corporation tax, which is as high as 10.84 percent for banks; and studying an 11 percent across-the- board cut in income taxes. Villaraigosa also backed changes in pensions for California’s public employees.

“We can’t do it piecemeal,” he said in an interview after the speech. “We have to be bold.”

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