By Kristy McElroy, CPA
Manager, Tax Services

The IRS recently released an optional safe harbor method for deducting home office expenses that will ease the recordkeeping burden for taxpayers in 2013. Although this simplified method reduces the administrative and substantiation obligations of small business owners, the deduction will likely be less for most of our clients than under the regular method. The safe harbor home office deduction is calculated by multiplying the square footage of the home used in a qualified business by $5. The square footage of the home office cannot exceed 300 feet; therefore, the deduction is capped at $1,500. If the safe harbor method is elected, the taxpayer may not depreciate the home office portion of their residence, but may claim allowable mortgage interest, real estate taxes and casualty losses as itemized deductions on Schedule A. Under the regular method, a taxpayer has to allocate these itemized deductions between Schedule A and the home office deduction, as well as, compute depreciation and allowable deductions for insurance, repairs and utilities on the part of the home used in a qualified business.

Who Can Claim the Home Office Deduction?
There are two basic tests for your home to qualify as a deduction under either the safe harbor or regular methods.

• 1. Regular and exclusive use – you must regularly use part of your home exclusively for conducting business. Example: You are an accountant and use a small bedroom in your home to prepare clients’ tax returns. Your family also uses the bedroom as a guest room. The small bedroom is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the bedroom.
• 2. Principal place of your business – you must be able to support that you use your home as your principal place of business. This means that you perform administrative and management activities of your trade or business regularly and exclusively in your home office. If you use a location outside of your home to conduct your business but also use your home office substantially and regularly to conduct business, you may still qualify for the home office deduction.

Besides these requirements, there are additional tests for employee use. Meeting all of the tests and exceptions can be difficult. If you would like to find out more on whether you qualify to take the home office deduction or whether the safe harbor or regular method will produce a higher deduction, please contact Kristy McElroy at kmcelroy@bkl-cpa.com.

By Kristy McElroy, CPA
Manager, Tax Services

Due to tax changes passed by Congress under the American Taxpayer Relief Act (ATRA) on January 1, 2012, the IRS will begin to process individual income tax returns (whether filing by paper or electronically) on January 30, 2013. This additional time will allow the IRS to update 2012 forms impacted by the ATRA legislation. However, not all individual filers will be able to submit tax returns starting on January 30th. Those who claim residential energy credits, depreciation of property or general business credits will have to wait until the end of February or into the middle of March to file their returns. The IRS asserts that forms associated with these tax items and others will take longer to program and test as a result of the ATRA reform. To see the full list of forms that will be accepted later in the filing season, please click here. A target date for acceptance of these forms will be publicized by the IRS in the near future.

What does this mean for our clients?

Although our clients will experience delays in filing their tax returns, the delay does not mean that our clients should also delay sending in tax documents and completed organizers. BK+L will be preparing and reviewing tax returns in the interim period and will send our clients draft versions for review. Accordingly, BK+L will be ready to electronically file tax returns as soon as the IRS indicates that it is ready to accept them.

Even though BK+L will be working through the IRS delay period, some clients may still need to file extensions because some forms and tax documents may not be available soon enough to allow us time to complete our work by April 15th. To keep extension filings to a minimum, we recommend that our clients be proactive and submit their tax documents and organizers as soon as possible. BK+L is in the process of delivering tax organizers, so be on the look out!

We will send another notification once the IRS releases the second processing date. Please click here to read the official news release from the IRS.

BK+L will contribute $2,500 toward a scholarship fund provided to interns who successfully complete the program.

To learn more about the internship program, contact BK+L partner Scott Kaplan at skaplan@bkl-cpa.com.

The income tax credit will be available for tax years ending on or after December 31, 2012, and on or before December 31, 2016. It is equal to 20% of the gross wages paid to the qualified veteran, but may not exceed $5,000.

A “qualified veteran” was:
+ a member of the Armed Forces of the United States, a member of the Illinois National Guard, or a member of any reserve component of the Armed Forces of the United States

+ served on active duty on or after September 11, 2001

+ has provided, to the taxpayer, documentation showing that he or she was honorably discharged

+ and was initially hired by the taxpayer on or after June 1, 2012

Additionally, the veteran must have been unemployed for an aggregate period of four weeks or more during the six-week period ending on the Saturday immediately preceding the date he or she was hired by the taxpayer. The credit may be carried forward for five years, and taxpayers claiming this credit may not claim a different credit for the same veteran for that taxable year.

Sole Proprietorship
The simplest structure is the sole proprietorship, which usually involves just one individual who owns and operates the enterprise. If you intend to work alone, this structure may be the way to go.

Partnership
If your business will be owned and operated by several individuals, you’ll want to take a look at structuring your business as a partnership. Partnerships come in two varieties: general partnerships and limited partnerships. In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partner.

Corporation
The corporate structure is more complex and expensive than most other business structures. A corporation is an independent legal entity, separate from its owners, and as such, it requires complying with more regulations and tax requirements

To review the full article and read more in depth information: Business Structure Basis.

College-bound students and their parents typically want to make every dollar and every minute of the college experience count including money spent on tuition and time spent on the college financial aid application process. The Internal Revenue Service is helping minimize the time spent on the completion of the Free Application for Federal Student Aid (FAFSA) form by automating access to federal tax returns with the IRS Data Retrieval Tool. This tool provides the opportunity for applicants to automatically transfer the required tax data onto the FAFSA form.

Here are some tips on using the IRS Data Retrieval Tool:

Benefits The IRS Data Retrieval tool is an easy and secure way to access and transfer tax return information directly onto the FAFSA form, saving time and improving accuracy. Also, the increased accuracy reduces the likelihood of being selected for verification by the school’s financial aid office.

Eligibility Criteria Taxpayers who wish to use the tool to complete their 2012 FAFSA form must:

• have filed a 2011 tax return;
• possess a valid Social Security Number;
• have a Federal Student Aid PIN (individuals who don’t have a PIN, will be given the option to apply for one through the FAFSA application process);
• have not changed marital status since Dec. 31, 2011.

Exceptions If any of the following conditions apply to the student or parents, the IRS Data Retrieval Tool can not be used for the 2012 FAFSA application:

• an amended tax return was filed for 2011;
• no federal tax return for 2011 has been filed ;
• the federal tax filing status on the 2011 return is married filing separately; a Puerto Rican or other foreign tax return has been filed.

Alternatives If the IRS Data Retrieval Tool can not be used and if the college requests verification documentation, it may be necessary to obtain an official transcript from the IRS. To order tax return or tax account transcripts, visit www.irs.gov and select  Order a Transcript  or call the Transcript toll-free line at 1-800-908-9946.

In addition to helping reduce the time and effort involved in completing and submitting the FAFSA form through the IRS Data Retrieval Tool, the IRS offers money-saving information to college students and their parents.  Important information regarding tax credits and deductions for qualifying tuition, materials and fees is available at the IRS Tax Benefits for Education: Information Center and in IRS Publication 970, Tax Benefits for Education both of which are available at www.IRS.gov.

+          You may receive a notice if the IRS requests payment, notifying of account changes, or requesting additional information. The notice will cover a specified issue.

+         Your letter should provide specific instructions about what action needs to be taken.

+         If you receive a correction notice; make sure to review and compare. If you are in agreement with the notice, no further action is needed (unless otherwise stated). 

+         If you receive a correction notice, and do not agree with the notice respond the IRS as requested and send along supporting documentation. Mail the correspondence to the IRS address shown in the upper left hand corner and allow at least 30 days for a response.

+         Most correspondence can be handled without a phone call; if you wish to call the IRS you may do so by calling the number listed on the upper right hand corner.

+         Additional tips: make sure to keep copies of all correspondence. The IRS only sends out notices via US Mail and will not correspond via email.

Made a mistake on your taxes? Received additional information? The IRS has these tips to help you amend your taxes.

1. Use form 1040X to make an amendment to an individual income tax return.

2. An amendment form cannot be e-filed; amended returns need to be filed by paper and mailed.

3. You do not have to send an amended form for mathematical errors or forgetting to attach tax forms (W-2s or schedules). The IRS will make the adjustments and send information requesting such documents.

4. Generally you should file the amended 1040X within three years from the file date or two years from the date you paid the tax (whichever is later).

5. If you are amending more than one tax return; prepare a 1040X for each return and mail in separate envelopes to the appropriate IRS address.

6. If changes involve another schedule or form; you must attached the revised schedule to the amended form.

7. If you are filing to claim an additional refund, you must wait until you have received the original refund before filing an amended form.

8. If you owe additional 2011 tax, file Form 1040X and pay the tax before the due date to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.

Information on amended tax returns, visit the IRS website  (www.irs.gov) or visit the following links:

• For more Form 1040X, Amended U.S. Individual Income Tax Return (PDF 110K)
• Form 1040X Instructions (PDF 45K)
• Tax Topic 308 — Amended Returns

Keeping organized records of your charitable contributions throughout the year will make things easier when you go to prepare your tax return next year.  The Internal Revenue Service has compiled nine tips that you should keep in mind when contributing to charity:

1. In order to be deductible, charitable contributions must be made to qualified organizations. An online version of IRS Publication 78, which provides a list of organizations eligible to receive tax-deductible charitable contributions, is available at www.irs.gov/charities under the “Search for Charities” tab. Remember, generally contributions to political organizations are not deductible!

2. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

3. Generally, you can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.

4. If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.

5. Keep good records of any contribution you make, regardless of the amount. For any cash contribution, you must maintain a record, such as a cancelled check, bank or credit card statement, payroll deduction record or a written statement from the charity containing the date and amount of the contribution as well as the name of the organization.

6. Only contributions actually made during the tax year are deductible. For example, if you pledge $500 in September but only pay the charity $200 by Dec. 31, your deduction for the current year is $200.

7. Include credit card charges and payments by check in the year you give them to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

8. If your contribution is $250 or more, you must have a written acknowledgment from the organization. The acknowledgment must include the cash amount, and state whether the organization provided any goods or services in exchange for the gift. If you donate property, the acknowledgment must include a description of the items and a good faith estimate of its value. For items valued at $500 (this also means that the total of your non-cash donations are more than $500) or more you must complete Form 8283, Noncash Charitable Contributions, and attach it to your tax return. If you claim a deduction for a contribution of noncash property worth more than $5,000, generally an appraisal must be obtained, and Section B of Form 8283 must be completed and filed with your return.

9. Approximately 275,000 organizations automatically lost their tax-exempt status recently because they did not file required annual reports for three consecutive years, as required by law. Donations made prior to an organization’s automatic revocation remain tax-deductible. Going forward, however, organizations that are on the auto-revocation list that do not receive reinstatement are no longer eligible to receive tax-deductible contributions.  Check with the organizations website and the IRS website mentioned in tip 1 to verify the organization’s status.

If you’re like many Americans, you’ve filed your income tax returns by now and put a copy of the tax returns in a safe place.  But what about the tax documents that support income and expenses on your return?  Ever wonder what you should keep and for how long? 

IRS Publication 552, “Recordkeeping for Individuals”, provides a table of basic records to keep for supporting income and expenses.  Key documents to keep with your tax file include Form W-2, Form 1099, Schedule  K-1, brokerage statements and written communication from qualified charities.

If you’ve ever been audited and didn’t keep good records with your tax returns, then you know what a nightmare it is to go back and obtain canceled checks, invoices, and bank statements to support income and expenses from three years ago.    Now is the time to gather all of your tax documentation and keep it with your tax returns.  Doing so will provide you with some relief years later when you receive the dreaded letter from the IRS stating your charitable contribution deduction is being audited for the 2011 tax year.  Incidentally, there are different recordkeeping requirements for charitable contributions depending on whether the contribution is cash, non-cash, or out-of-pocket expenses.  For example, cash contributions of $250 or more require substantiation including written acknowledgement from the qualified organization.  The written acknowledgement must include the amount of the cash contribution, the date of the contribution, and a description and good faith estimate of the value of any goods or services contributed.  You should obtain this written communication by the earlier of the date you file your return for the year you make the contribution or the due date, including extensions, for filing the return.

 If your tax documents are collecting dust on your kitchen counter, take the time now to go through them and make sure you have consolidated the required documentation for each item of income and expense claimed on your return.   Include both the records you provided to your tax preparer and those you kept at home in your personal tax file -like receipts for medical deductions and employee business expenses.

If your tax documents are already placed in a safe place, you may be wondering how long you need to retain these documents.  The general rule of thumb is three years from date you file your return (if you filed your return before the due date, the three-year period begins on the filing deadline).  The IRS has outlined situations where the record retention period is longer than three years. You can check out these situations in Table 3 of IRS Publication 552.

If you have any specific questions on tax record retention, please contact Kristy McElroy at 847-733-7195 or kmcelroy@bkl-cpa.com.