Can you deduct home office expenses?

Working from home has become commonplace. But just because you have a home office space doesn’t mean you can deduct expenses associated with it. And for 2018, even fewer taxpayers will be eligible for a home office deduction.

Changes under the TCJA

For employees, home office expenses are a miscellaneous itemized deduction. For 2017, this means you’ll enjoy a tax benefit only if these expenses plus your other miscellaneous itemized expenses (such as unreimbursed work-related travel, certain professional fees and investment expenses) exceed 2% of your adjusted gross income.

For 2018 through 2025, this means that, if you’re an employee, you won’t be able to deduct any home office expenses. Why? The Tax Cuts and Jobs Act (TCJA) suspends miscellaneous itemized deductions subject to the 2% floor for this period.

If, however, you’re self-employed, you can deduct eligible home office expenses against your self-employment income. Therefore, the deduction will still be available to you for 2018 through 2025.

Other eligibility requirements

If you’re an employee, your use of your home office must be for your employer’s convenience, not just your own. If you’re self-employed, generally your home office must be your principal place of business, though there are exceptions.

Whether you’re an employee or self-employed, the space must be used regularly (not just occasionally) and exclusively for business purposes. If, for example, your home office is also a guest bedroom or your children do their homework there, you can’t deduct the expenses associated with that space.

2 deduction options

If you’re eligible, the home office deduction can be a valuable tax break. You have two options for the deduction:

1. Deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space. This requires calculating, allocating and substantiating actual expenses.
2. Take the “safe harbor” deduction. Only one simple calculation is necessary: $5 × the number of square feet of the office space. The safe harbor deduction is capped at $1,500 per year, based on a maximum of 300 square feet.

More rules and limits

Be aware that we’ve covered only a few of the rules and limits here. If you think you may be eligible for the home office deduction on your 2017 return or would like to know if there’s anything additional you need to do to be eligible on your 2018 return, contact us.

Personal exemptions and standard deductions and tax credits, oh my!

Under the Tax Cuts and Jobs Act (TCJA), individual income tax rates generally go down for 2018 through 2025. But that doesn’t necessarily mean your income tax liability will go down. The TCJA also makes a lot of changes to tax breaks for individuals, reducing or eliminating some while expanding others. The total impact of all of these changes is what will ultimately determine whether you see reduced taxes. One interrelated group of changes affecting many taxpayers are those to personal exemptions, standard deductions and the child credit.

Personal exemptions

For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions can really add up.

For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates, might mitigate this increase.

Standard deduction

Taxpayers can choose to itemize certain deductions on Schedule A or take the standard deduction based on their filing status instead. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.

For 2017, the standard deductions are $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. (These amounts will be adjusted for inflation for 2019 through 2025.)

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.

Child credit

Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.

The new law also makes the child credit available to more families than in the past. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000, respectively.

The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.

Tip of the iceberg

Many factors will influence the impact of the TCJA on your tax liability for 2018 and beyond. And what’s discussed here is just the tip of the iceberg. For example, the TCJA also makes many changes to itemized deductions. For help assessing the impact on your tax situation, please contact us.

Tax Strategies for Virtual Currency (Bitcoin) in Business and Investments

Virtual currency, such as the Bitcoin, has been increasing in popularity. Virtual currency may be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency, but it does not have legal tender status in any jurisdiction.

For federal tax purposes, virtual currency is treated as property. As such, it can be classified as business property, investment property, or personal property. General tax principals applicable to property transactions apply to transactions using virtual currency.

Basis in virtual currency is the Fair Market Value (or FMV) of the currency on the date the currency is received. If received as payment for services, it is considered taxable income and will be subject to both income and social security taxes.

Using the virtual currency to obtain cash or purchase goods is a recognizable transaction. If the FMV of property received for the virtual currency exceeds the taxpayer’s adjusted basis in the currency, the taxpayer has a taxable gain. A loss will occur if the FMV is less than the taxpayer’s basis. The character of the gain or loss depends on whether the virtual currency is a capital asset for that particular taxpayer.

Example: Use of virtual currency in business

Abigail, a sole proprietor, accepts 10 Bitcoins from Fred in payment for services. At the time the services were performed, Bitcoins were worth $400 each. Therefore, Abigail recognizes $4,000 ($400 × 10) of business income. A month later when Bitcoins are worth $425 each, she uses 2 Bitcoins to purchase supplies for her business. At that time, she will recognize $850 in business expense ($425 × 2) and $50 of gain on the Bitcoins [($425 − $400) × 2]. Since Abigail in not in the trade or business of selling Bitcoins, the $50 gain is capital. Variation 1: The Bitcoins are worth $380 each at the time the supplies are purchased. Abigail will now have $760 in business expense ($380 × 2) and $40 of loss on the Bitcoins [($380 − $400) × 2]. The loss is a business capital loss.

Variation 2: Abigail uses the 2 Bitcoins worth $380 each to purchase a new TV for her personal use. Since the Bitcoins were not used in her trade or business and were not held for investment purposes, the loss is considered a personal capital loss and is not eligible for deduction.

Observation: If Fred was using Abigail’s services in his trade or business, he is subject to the Form 1099-MISC reporting requirements since the value of the Bitcoins is $600 or more.

Note: The market values in these examples may not reflect current prices.

Example: Use of virtual currency for investments

Arnold believes the Bitcoin will increase in value. He purchases 15 Bitcoins on March 15, 2017, for $400 each and 20 Bitcoins on May 19, 2017, for $460 each. On April 3, 2018, he sells 10 Bitcoins for $425 each. Since Arnold held the Bitcoins for investment purposes, any gain or loss will be capital in nature. If he sells 10 Bitcoins from his March 15 batch, he will recognize a $250 [($425 − $400) × 10] long-term capital gain. If he sells 10 Bitcoins from the May 19 batch, he will recognize a $350 [($425 − $460) × 10] short-term capital loss. Since the Bitcoins were held for investment purposes, the short-term capital loss may be included on Arnold’s Form 8949 for 2018.

Observation: When Bitcoins are purchased, they are placed in the taxpayer’s virtual “wallet.” For purposes of tracking basis and identifying which Bitcoins were sold, it is best that wallets be kept separately and not combined.

A 2016 report from the Treasury Inspector General for Tax Administration recommends the IRS do more to ensure that taxpayers are not using virtual currency to avoid taxes. Soon after, the IRS sought a court order to obtain customer records from a California virtual currency exchanger in order to crack down on possible tax evasion. Bitcoin transactions can be difficult to trace because the entire network of users, including their identities, is encrypted with no central authority keeping track of users. The IRS fears that taxpayers may use Bitcoins and other forms of virtual currency to hide income.

If you are currently using virtual currency for your business or making investments with it, please contact our office. We would love to talk about the best way to tax strategize for this coming up tax season. Contact us: 949-364-0334 or info@capatacpa.com .

The TCJA temporarily expands bonus depreciation

The Tax Cuts and Jobs Act (TCJA) enhances some tax breaks for businesses while reducing or eliminating others. One break it enhances — temporarily — is bonus depreciation. While most TCJA provisions go into effect for the 2018 tax year, you might be able to benefit from the bonus depreciation enhancements when you file your 2017 tax return.

Pre-TCJA bonus depreciation

Under pre-TCJA law, for qualified new assets that your business placed in service in 2017, you can claim a 50% first-year bonus depreciation deduction. Used assets don’t qualify. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture, etc.

In addition, 50% bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. But qualified improvement costs don’t include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.

TCJA expansion

The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.

The new law also allows 100% bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.

Beginning in 2023, bonus depreciation is scheduled to be reduced 20 percentage points each year. So, for example, it would be 80% for property placed in service in 2023, 60% in 2024, etc., until it would be fully eliminated in 2027.

For certain property with longer production periods, the reductions are delayed by one year. For example, 80% bonus depreciation would apply to long-production-period property placed in service in 2024.

Bonus depreciation is only one of the business tax breaks that have changed under the TCJA. Contact us for more information on this and other changes that will impact your business.