As December approaches, it’s time to start thinking about your small business bookkeeping and closing out the year for your small business. While that may sound like an overwhelming feat to accomplish in addition to a busy holiday season, we’ve made the accounting part easy with our quick, printable year-end business accounting checklist. Click here to download.
As 2015 comes to a close, you have an opportunity to reflect on the past year with your small business. What worked? What disasters did you encounter/overcome? What was the one thing you knew you should do for your small business but could never find the time? Now is the time to make a plan for an even better business year in 2016 and crush the goals you set for yourself.
In order to conquer the small business world next year, there are a few logistics to take care of first. We’ve put together a quick and easy checklist of things to do and take care of in January so you have 11 full months of small business bliss. Download the printable version, here.
If you own a small business, you undoubtedly work from home, at least on occasion. If you’re like many small business owners in today’s world, you might even work exclusively from home. Whichever category you fall under, claiming a “home office” on your taxes and adding it into your small business bookkeeping can be tricky.
What qualifies as a home office?
What home office expenses are tax deductible?
How do I claim a home office on my taxes?
What if I do business outside of my home office?
Can I claim a bathroom as part of my home office?
Do you have other questions about your home office? We can help! Send us your questions or leave them on our Facebook page and we’ll be sure to answer them as quickly as possible.
If you own a small business, you undoubtedly work from home, at least on occasion. If you’re like many small business owners in today’s world, you might even work exclusively from home. Whichever category you fall under, claiming a “home office” on your taxes can be tricky. Here’s a quick step-by-step guide to make sure you’re in line with IRS standards when it comes to your home office.
Home Office for a Small Business Owner
First, to claim a home office on your taxes, both of these things must apply:
Exclusive Use Explained
Exclusive use means you use the area in your home for business purposes only. The area must meet these requirements to be considered “exclusive”:
Regular Use Explained
Regular use means you use part of the home on a continuous, ongoing, or recurring basis. You can use the space for more than one business, and you can have more than one business location (other than your home office) for each business as well. However, if you’re deducting a home office on your taxes, your home must be the principal place of business. Factors considered in “regular use” of a home office include:
If you’re employed by another company and work from home, you can also claim a home office. Here’s how:
If you’re already working from home and haven’t set up a home office, now is the time. Home office deductions can save you big money on your taxes and help keep your small business activities more organized.
When it comes to home offices, it’s all about the tax deductions, baby! You could sit on your couch, watch tv, and do your small business bookkeeping and billing...but there’s no tax benefit to that. By creating and maintaining a home office for your small business, you can claim home office deductions that in turn reduce your taxable income at the end of the year. If you have already set up a qualifying home office, start tracking expenses and keeping meticulous records for your income taxes.
Here’s a lengthy, though not comprehensive, list of common home office deductions. Keep in mind these do not include typical business expenses that you would normally deduct whether or not you had a home office.
Tax Deductible Home Office Expenses
You can deduct a portion of these expenses, based on the square footage of your home office:
Home office deductions can be tricky. While claiming a home office is not a red flag for the IRS, you want to be careful and not get overzealous when it comes to deductions. The simplified method can make it easier for you to claim the deduction but might not provide you with biggest deduction.
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Unfortunately, no. You can’t claim a bathroom as part of your home office, even though you likely take a potty break or two during your work day.
Remember the two most important words when it comes to home offices?
Exclusive and Regular. Even if you mostly use the bathroom closest to your home office while you work, the second you use it as a guest bathroom, for your children, or “off the clock,” it’s not exclusive anymore. In all reality, that’s not happening in most homes. Nine out of 10 times you can’t claim a bathroom as part of your home office.
Take this case study, for example:
“In T.C. Memo. 2011-201, Luis Bulas, Petitioner, v. Commissioner of Internal Revenue, Respondent, Docket No. 18977-09, U.S. Tax Court Judge Haines agreed with the IRS that taxpayer Luis Bulas was not entitled to a deduction for his use of the bathroom as a home office expense.
Bulas, a Florida taxpayer, knows a little something about the tax system. He has a master’s degree in accounting from Florida International University. Even better, he worked for the IRS for seven years as a tax technician, revenue agent, Appeals auditor, and Appeals officer, prior to starting his own tax agency. So, yes, for a long while, he was the guy who helped make decisions about whether a taxpayer was complying with the tax laws (cue music).
Bulas also happens to be a father of two daughters, one in high school and one in college, that helped him out with the business from time to time. This is only relevant because he claimed that he paid wages to his daughters and yet managed not to issue any forms 1099 or forms W-2 to them, a fact that also came up as part of his examination.
But, yawn. That’s kind of run of the mill boring stuff. Let’s get to the potty humor.
Bulas was flush enough (wince, I know, terrible pun) to have a personal residence which included a house, a garage, and a guesthouse. The total amount of space worked out to about 2,677.34 square feet.
Like many professionals, Bulas used one of the rooms in his home – in this case, a spare bedroom – as his office space. The total amount of the space for the bedroom was 226.3 square feet. Bulas eventually put an additional bathroom in his home, ostensibly for his clients’ use.
The IRS issued Bulas a notice of deficiency, denying the deductions for the wages paid to his daughters and the business use of his residence. Bulas, of course, appealed, which is how the case made it to Tax Court.
Bulas claimed that he used one of the bedrooms in his house exclusively for his office. Um, okay. That seems reasonable.
Bulas also argued, however, that he used the hallway – wait, he’s losing me here – and the bathroom exclusively for his accounting business. He went on to testify that his children and personal guests also used the bathroom.
The IRS was willing to grant him the use of the bedroom. The bedroom was, as mentioned earlier, about 226.3 square feet, which worked out to about 8.45% of the total square feet associated with Bulas’ residence. That means that he was entitled to pro-rate his allocable expenses and take 8.45% as a business deduction. No more. Bulas could not offer proof that the personal use of the hallway and bathroom met any exception under section 280A(c) of the Tax Code and thus, the personal use of the space trumped the business use. The result? He lost the deduction.”
Even though a regular office has a bathroom (let’s hope anyway!) you can’t claim one on your home office. There are, however, a plethora of other deductions available when claiming a home office. Capitalize on those and let go of that extra 100 sq ft you thought you might be able to claim this year.
If you read our last post, you know that in order for a home office to be claimed on taxes, it must be used exclusively and regularly for business use. However, that doesn’t mean it has to be the one and only place you do business. Here’s how to keep your home office status as an entrepreneur and still be able to conduct business where you need to.
You can still claim a home office if any of the following apply:
If you own multiple businesses and work on them both at home AND at an office:
Essentially, your home office doesn’t have to be the only place you do business. Your daily business activities as an entrepreneur will undoubtedly take you further than the walls of your home. However, the regular and exclusive use guidelines are most important when determining if your home office is tax deductible.
If you use part of your home for business, you may be able to claim a home office on your taxes this year. The home office deduction is available for homeowners and renters, and applies to all types of homes. Learn more if your workspace qualifies as a home office, here.
There are a few ways to claim a home office on your taxes. In 2013, the IRS rolled out the Simplified Method for home offices which can significantly reduce record keeping burden by allowing a small business owner or employee to calculate square footage of a home office and multiply that by a prescribed rate ($5 per square foot for a maximum of 300 square feet), instead of calculating actual expenses.
The Regular Method requires a small business owner to calculate the actual expenses of their home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Either method is fine for claiming a home office, and some small business owners find one way to be more beneficial than the other. Keep in mind that the method you use to claim your home office is not as important as the use of the space being used exclusively and regularly for business use.
For a full list of deductions and qualifications for a home office from the IRS, click here. Be sure to consult a professional accountant and virtual bookkeeper before claiming a home office on your taxes to make the most of your deductions. Vyde can help with any questions you may have about your home office.
1. Who qualifies for claiming a home office on taxes?
Homeowners and renters who use part of their home exclusively for business may qualify.
2. What are the methods available for claiming a home office deduction?
The Simplified Method and the Regular Method are the two options provided by the IRS.
3. How does the Simplified Method work?
It involves multiplying the square footage of the home office by a prescribed rate, offering a simplified approach to calculating deductions.
4. What expenses can be included when using the Regular Method?
Expenses such as mortgage interest, insurance, utilities, repairs, and depreciation can be considered.
5. Is it necessary for the home office to be a separate room?
No, as long as the space is used exclusively and regularly for business, it qualifies regardless of whether it’s a whole room or part of one.
The holiday season is the perfect time to show your clients and employees just how much you appreciate them. However, figuring out what to give, when to give it, and what’s tax deductible can be a daunting task. Vyde has made it easy with our comprehensive, deductible-focused Business Holiday Gift Giving Guide.
To get the most bang for your buck, you’ll want to give gifts that are tax deductible. While the IRS doesn’t list specific client gifts that you can or cannot deduct, there are limits on how much you can deduct for each client receiving gifts from you. So how do you know what is tax deductible when purchasing a holiday gift to a client or employee?
Purchasing Business Gifts that are Tax Deductible
Currently, the limit is $25 per recipient per year. There is no limit on how many people you can give business gifts to in a year, but the deductible portion for each recipient is $25. That means if you splurge on a $50 gift basket, only half of that amount is actually deductible. If you’ve already sent your clients a gift this year, be mindful of that running total and the $25 yearly limit.
The actual gift isn’t the only tax deductible portion of business holiday gift giving. Wrapping paper, cards, scissors, tape, ribbons and bows are all tax deductible so fancy it up before shipping it out! And when you get to that mile-long post office line this December, keep your receipts because shipping and stamps are deductible as well. These costs are an addition to the $25 per recipient limit, so the actual gift itself can be valued at $25 and these expenses are still deductible.
If the $25 limit feels restrictive to you, there is a way that can help you deduct even more—and probably cut your work in half, too. According to the IRS, if you give a gift of “entertainment,” you can deduct 50% of the cost.
Examples of entertainment gifts are concert tickets, sporting event tickets, movie passes, restaurant gift cards, vacations, hotel stays, etc. Clearly that $25 limit per recipient can quickly be surpassed in these categories, so your deductions may actually be greater than $25 each if you spend $50 or more. Your clients are sure to love the gift of entertainment and you won’t have to bother with the ribbons and bows. In fact, most of this shopping can be done online and sent to your client electronically.
Who to Send Business Gifts to this Holiday Season
Start making a list of those you’d like to give a holiday gift from your business this year and your list may be as long as Santa’s in no time. Here’s a little tip: focus your holiday gift giving on the people who make your company great.
Your business certainly wouldn’t be what it is without the people who support it–your clients. And if you’re not a one-man band, don’t forget about your employees either. Both of these lists of people are essential on your business holiday gift giving list. Other people you may consider sending business gifts to may include some service providers, potential clients, resources, consultants, contract workers, guest speakers, or those who have referred clients to you.
When it comes to client gift giving, things get complicated in a hurry. Maybe you have a lot of clients who pay only a small amount of money to your business each year. In this case, you’ll want to give smaller, more general items as gifts to your clients. That doesn’t mean a pen and notepad with your logo on it, or something cheap bought in bulk from Oriental Trading. This isn’t about promoting your business, it’s about strengthening that relationship you’ve worked so hard to form. Even if you’re on a tight budget for a lot of people, you can still send a thoughtful, meaningful gift.
If you’ve got too many clients to manage individualized gifts and would rather not send an actual item (inexpensive or not), a handwritten card is a genuine gift that shows your client that you care about them as an individual. Think about the message you want to convey, make it personal, express your gratitude, and hand write it. A personal message directly from you to a client occupies a larger space in their mind than a plastic yo-yo with your company name on it.
Or perhaps you have only a few clients with large accounts. In this case, you may want to invest more money in holiday gifts that show you care and value the business relationship you’ve formed.
Regardless of your situation, cost is undoubtedly on the forefront of your mind when it comes to gift giving. We’ve compiled a list of ideas, categorized by cost, to get you thinking.
Holiday Gift Giving Ideas for Clients and Employees
Gifts Under $15
Gifts under $25
Gifts under $50
Entertainment Gift Ideas
These gifts can actually be deducted 50% no matter the cost, rather than the $25 per recipient limit.
Keep in mind that not all holiday business gifts are created equal. You don’t have to give your $100 a month client the same gift you give your $1,000 a month client. It’s ok to send some clients cards and others more expensive gifts. Select a price range that feels right to you based on your relationship with each recipient and go from there.
The Do’s and Dont’s of Business Holiday Gift Giving
DO:
-Give. Don’t promote. You have all year to promote your business; allow the holidays to be a time to focus on your clients and let them know you’re grateful for them.
-Send a card. A handwritten card or personal email can be meaningful and memorable. Gift giving has lost its personal touch over the years and your client will love getting a special note from yours truly, with or without a gift.
-Keep an ongoing list of employees, clients, service providers, and others who make your business great throughout the year. The holidays are a busy time of year, making it easy to forget someone. Keeping a list throughout the year will ease your holiday stress and keep you from overspending at the last minute.
-Set a budget. Not all client gifts are equal, but you do need to have a budget in place before you start shopping.
-Check into a company’s gift giving and receiving policy before shipping your presents. The larger the company, the more likely a specific policy is in place. You don’t want to spend unnecessary cash on a contact who is not allowed to accept your gesture.
DON’T:
-Don’t wait until the last minute. Keep in mind many people take a lengthy break from work to travel during the Christmas season, so sending a gift to a client’s office on December 23rd may not work. Try to have your gifts sent out early in December to ensure on-time delivery.
-Don’t feel pressure to run out and buy a nice gift for everyone who sends you one. This is a quick way to go over budget and is not always necessary. Be sure to send a nice thank you card expressing your gratitude or a holiday card, and add that person to the list for the next year, if need be.
-Don’t send gifts that are too personal or religious. Keep it professional in the work place and avoid gifts like clothing, perfume, and other items people have personal (and sometimes very strong) opinions about.
-Don’t be a brown-noser. Give gifts because you’re grateful and keep it at that. Don’t try to out-do another employee or company, just give from the heart.
Regardless of what you actually send, clients and employees are sure to appreciate a genuine gesture that shows your gratitude for their business and service throughout the year. When in doubt when it comes to holiday gift giving, keep it simple and track expenses closely.
As customers and clients prepare for time off and holiday celebrations, you may find yourself knee-deep in the endless tasks of preparing your small business for the season. While you’re ordering extra supplies, planning events, amping up your marketing strategies, and closing out the year, it’s easy to let customer service slip.
With a little focus, planning, and goal-setting, you can make sure your customer satisfaction is high and the complaints are low. What is your small business doing to amp up customer service this holiday season?
Frequently Asked Questions:
How far in advance should I start planning for peak holiday periods to maintain customer satisfaction?
Start planning at least three months before peak periods to ensure smooth operations.
When should I hire and train employees for optimal customer service during the holidays?
It’s best to hire and train employees before October to prepare them adequately for the holiday rush.
How can I ensure my employees are motivated to provide excellent customer service?
Taking care of your employees by showing appreciation and providing incentives or rewards can help ensure they’re motivated and engaged.
What are some strategies to help customers help themselves and reduce customer service inquiries?
Provide an FAQ section on your website, along with multiple contact options and ample information to assist customers in resolving issues independently.
How can I effectively monitor and address customer feedback, especially on social media?
Regularly monitor your business’ social media platforms and promptly address any complaints or concerns raised by customers to maintain satisfaction levels.
