Organizational and Start Up Costs
Have you just started a new business? Did you know expenses incurred before a business begins operations are not allowed as current deductions? Generally, these start up costs must be amortized over a period of 180 months beginning in the month in which the business begins. However, based on the current tax provisions, you may elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred. The $5,000 deduction is reduced by any start-up or organizational costs which exceed $50,000. If you want to deduct a larger portion of your start up cost in the first year, a new business will want to begin operations as early as possible and hold off incurring some of those expenses until after business begins. Contact us to help determine how you can maximize your deduction for start-up and/or organizational expenses. For additional information on what costs constitute start-up or organizational expenses, refer to IRS publication 535, Business Expenses.
Business or Hobby?
It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take. You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit. So does an investment activity intended only to produce tax losses for the investors.
The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. For additional information on these entities, refer to business structures. It does not apply to corporations other than S corporations. In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:
- You carry on the activity in a business-like manner,
- The time and effort you put into the activity indicate you intend to make it profitable,
- You depend on income from the activity for your livelihood,
- Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
- You change your methods of operation in an attempt to improve profitability,
- You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
- You were successful in making a profit in similar activities in the past,
- The activity makes a profit in some years, and
- You can expect to make a future profit from the appreciation of the assets used in the activity.
Deductible Home Office
Whether you are self-employed or an employee, if you use a portion of your home exclusively and regularly for business purposes, you may be able to take a home office deduction.
You can deduct certain expenses if your home office is the principal place where your trade or business is conducted or where you meet and deal with clients or patients in the course of your business. If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.
Your home office will qualify as your principal place of business if you use it exclusively and regularly for the administrative or management activities associated with your trade or business. There must be no other fixed place where you conduct substantial administrative or management activities. If you use both your home and other locations regularly in your business, you must determine which location is your principle place of business, based on the relative importance of the activities performed at each location. If the relative importance factor doesn’t determine your principle place of business, you can also consider the time spent at each location.
If you are an employee, you have additional requirements to meet. You cannot take the home office deduction unless the business use of your home is for the convenience of your employer. Also, you cannot take deductions for space you are renting to your employer.
Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction will be limited if your gross income from your business is less than your total business expenses. Please contact us for more!
Filing Deadline and Payment Options
If you’re trying to beat the tax deadline, there are several options for last-minute help. If you find you need more time to finish your return, you can get a five or six month extension of time to file using Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, Other Returns. And if you have trouble paying your tax bill, the IRS has several payment options available.
The extension will give you extra time to get the paperwork to the IRS, but it does not extend the time you have to pay any tax due. You have to make an accurate estimate of any tax due when you request an extension. You can also send a payment for the expected balance due, but this is not required to get the extension. However, you will owe interest on any amounts not paid by the March 15 deadline, plus a late payment penalty if you have paid less than 90 percent of your total tax by that date.
Refund, Where's My Refund?
Are you expecting a tax refund from the Internal Revenue Service this year? If you file a complete and accurate paper tax return, your refund should be issued in about six to eight weeks from the date IRS receives your return. If you file your return electronically, your refund should be issued in about half the time it would take if you filed a paper return — even faster when you choose direct deposit.
You can have a refund check mailed to you, or you may be able to have your refund electronically deposited directly into your bank account. Direct deposit into a bank account is more secure because there is no check to get lost. And it takes the U.S. Treasury less time than issuing a paper check. If you prepare a paper return, complete Form 8050, making sure that the routing and account numbers are accurate, and attach it to the corporation’s tax return. Note that Form 8050 may only be filed with the original Form 1120 or 1120S, and the corporation is not eligible to receive direct deposit if the receiving financial institution is a foreign bank, or foreign branch of a U.S. bank. Incorrect numbers can cause your refund to be misdirected or delayed. Direct deposit is also available if you electronically file your return.
You may not receive your refund as quickly as you expected. A refund can be delayed for a variety of reasons. For example, a name or identification number and Social Security number listed on the tax return may not match the IRS records. You may have failed to sign the return or to include a necessary attachment, such as Form W-2, Wage and Tax Statement. Or you may have made math errors that require extra time for the IRS to correct.