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General

Take a closer look at home office deductions

Working from home has its perks. Not only can you skip the commute, but you also might be eligible to deduct home office expenses on your tax return. Deductions for these expenses can save you a bundle, if you meet the tax law qualifications.

Under the Tax Cuts and Jobs Act, employees can no longer claim the home office deduction. If, however, you run a small business from your home or are otherwise self-employed and use part of your home for business purposes, the home office deduction may still be available to you.

If you’re a homeowner and use part of your home for business purposes, you may be entitled to deduct a portion of actual expenses such as mortgage, property taxes, utilities, repairs and insurance, as well as depreciation. Or you might be able to claim the simplified home office deduction of $5 per square foot, up to 300 square feet ($1,500).

Requirements to qualify

To qualify for home office deductions, part of your home must be used “regularly and exclusively” as your principal place of business. This is defined as follows:

1. Regular use. You use a specific area of your home for business on a regular basis. Incidental or occasional business use isn’t considered regular use.

2. Exclusive use. You use a specific area of your home only for business. It’s not required that the space be physically partitioned off. But you don’t meet the requirements if the area is used for both business and personal purposes, such as a home office that you also use as a guest bedroom.

Your home office will qualify as your principal place of business if you 1) use the space exclusively and regularly for administrative or management activities of your business, and 2) don’t have another fixed location where you conduct substantial administrative or management activities.

Examples of activities that meet this requirement include:

  • Billing customers, clients or patients,
  • Keeping books and records,
  • Ordering supplies,
  • Setting up appointments, and
  • Forwarding orders or writing reports.

Other ways to qualify

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if you physically meet with patients, clients or customers on the premises. The use of your home must be substantial and integral to the business conducted.

Alternatively, you may be able to claim the home office deduction if you have a storage area in your home — or in a separate free-standing structure (such as a studio, workshop, garage or barn) — that’s used exclusively and regularly for your business.

An audit target

Be aware that claiming expenses on your tax return for a home office has long been a red flag for an IRS audit, since many people don’t qualify. But don’t be afraid to take a home office deduction if you’re entitled to it. You just need to pay close attention to the rules to ensure that you’re eligible — and make sure that your recordkeeping is complete.

The home office deduction can provide a valuable tax-saving opportunity for business owners and other self-employed taxpayers who work from home. Keep in mind that, when you sell your house, there can be tax implications if you’ve claimed a home office. Contact Patrick and Raines, CPAs if you have questions or aren’t sure how to proceed in your situation. You can set up an appointment by calling (904) 396-5400 or emailing Office@CPAsite.com.

© 2019

Let’s find a better way to manage your receivables

Our accountants here at Patrick and Raines, CPAs know that failure to collect accounts receivable (AR) in a timely manner can lead to myriad financial problems for your company, including poor cash flow and the inability to pay its own bills. To assist with your business management, here are five effective ideas to facilitate more timely collections:

1. Create an AR aging report. This report lets you see at a glance the current payment status of all your customers and how much money they owe. Aging reports typically track the payment status of customers by time periods, such as 0–30 days, 31–60 days, 61–90 days and 91+ days past due.

Armed with this information, you’ll have a better idea of where to focus your efforts. For example, you can concentrate on collecting the largest receivables that are the furthest past due. Or you can zero in on collecting receivables that are between 31 and 60 days outstanding before they become any further behind.

2. Assign collection responsibility to a sole accounting employee. Giving one employee the responsibility for AR collections ensures that the “collection buck” stops with someone. Otherwise, the task of collections could fall by the wayside as accounting employees pick up on other tasks that might seem more urgent.

3. Re-examine your invoices. Your customers prefer bills that are clear, accurate and easy to understand. Sending out invoices that are sloppy, vague or inaccurate will slow down the payment process as customers try to contact you for clarification. Essentially you’re inviting your customers to not pay your invoices promptly.

4. Offer customers multiple ways to pay. The more payment options customers have, the easier it is for them to pay your invoices promptly. These include payment by check, Automated Clearing House, credit or debit card, PayPal or even text message.

5. Be proactive in your billing and collection efforts. Many of your customers may have specific procedures that must be followed by vendors for invoice formatting and submission. Learn these procedures and follow them carefully to avoid payment delays. Also, consider contacting customers a couple of days before payment is due (especially for large payments) to make sure everything is on track.

Lax working capital practices can be a costly mistake. Contact Patrick and Raines, CPAs to help implement these and other strategies to improve collections and boost your revenue and cash flow. We can also help you with strategies for dealing with situations where it’s become clear that a past-due customer won’t (or can’t) pay an invoice. Set up an appointment by emailing Office@CPAsite.com or calling (904) 396-5400.

© 2019


It’s a good time to buy business equipment and other depreciable property

There’s good news about the Section 179 depreciation deduction for business property. The election has long provided a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time. And it was increased and expanded by the Tax Cuts and Jobs Act (TCJA).

Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for qualified assets. Under the 100% bonus depreciation tax break provided by the TCJA, the entire cost of eligible assets placed in service in 2019 can be written off this year.

Sec. 179 basics

The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit.

The annual deduction limit is $1.02 million for tax years beginning in 2019, subject to a phaseout rule. Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year. The amount is $2.55 million for tax years beginning in 2019. (Note: Different rules apply to heavy SUVs.)

There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule, and the taxable income limit).

In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging, such as furniture and appliances.

The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning equipment; fire protection and alarm systems; and security systems.

Bonus depreciation basics

With bonus depreciation, businesses are allowed to deduct 100% of the cost of certain assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. (Before the TCJA, you could deduct only 50% of the cost of qualified new property.)

This break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026 (or after 2027 for certain assets described above).

Bonus depreciation is now allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate.

Important: When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on it.

Maximize eligible purchases

These favorable depreciation deductions will deliver tax-saving benefits to many businesses on their 2019 returns. You need to place qualifying assets in service by December 31. Patrick & Raines, CPAs has been serving small businesses since 1982. Contact us if you have questions, or you want more information about how your business can get the most out of the deductions. Set up an appointment today by emailing Office@CPAsite.com or calling (904) 396-5400.

© 2019

M&A transactions: Avoid surprises from the IRS

If you’re considering buying or selling a business — or you’re in the process of a merger or acquisition — it’s important that both parties report the transaction to the IRS in the same way. Otherwise, you may increase your chances of being audited.

If a sale involves business assets (as opposed to stock or ownership interests), the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax returns for the tax year that includes the transaction.

What’s reported?

When buying business assets in an M&A transaction, you must allocate the total purchase price to the specific assets that are acquired. The amount allocated to each asset then becomes its initial tax basis. For depreciable and amortizable assets, the initial tax basis of each asset determines the depreciation and amortization deductions for that asset after the acquisition. Depreciable and amortizable assets include:

  • Equipment,
  • Buildings and improvements,
  • Software,
  • Furniture, fixtures and
  • Intangibles (including customer lists, licenses, patents, copyrights and goodwill).

In addition to reporting the items above, you must also disclose on Form 8594 whether the parties entered into a noncompete agreement, management contract or similar agreement, as well as the monetary consideration paid under it.

IRS scrutiny

The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the IRS finds that different allocations are used, auditors may dig deeper and the investigation could expand beyond just the transaction. So, it’s in your best interest to ensure that both parties use the same allocations. Consider including this requirement in your asset purchase agreement at the time of the sale.

The tax implications of buying or selling a business are complicated. Price allocations are important because they affect future tax benefits. Both the buyer and the seller need to report them to the IRS in an identical way to avoid unwanted attention. To lock in the best postacquisition results, consult with Patrick & Raines, CPAs before finalizing any transaction. Call (904) 396-5400 or e-mail office@CPAsite.com today to set up an appointment.

© 2019

How auditors use nonfinancial information

Every financial transaction your company records generates nonfinancial data that doesn’t have a dollar value assigned to it. Though auditors may spend most of their time analyzing financial records, nonfinancial data can also help them analyze your business from multiple angles.

Gathering audit evidence

The purpose of an audit is to determine whether your financial statements are “fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement.” To thoroughly assess these issues, auditors need to expand their procedures beyond the line items recorded in your company’s financial statements.

Nonfinancial information helps auditors understand your business and how it operates. During planning, inquiry, analytics and testing procedures, auditors will be on the lookout for inconsistencies between financial and nonfinancial measures. This information also helps auditors test the accuracy and reasonableness of the amounts recorded on your financial statements.

Looking beyond the numbers

A good starting point is a tour of your facilities to observe how and where the company spends its money. The number of machines operating, the amount of inventory in the warehouse, the number of employees and even the overall morale of your staff can help bring to life the amounts shown in your company’s financial statements.

Auditors also may ask questions during fieldwork to help determine the reasonableness of financial measures. For instance, they may ask you for detailed information about a key vendor when analyzing accounts payable. This might include the vendor’s ownership structure, its location, copies of email communications between company personnel and vendor reps, and the name of the person who selected the vendor. Such information can give the auditor insight into the size of the relationship and whether the timing and magnitude of vendor payments appear accurate and appropriate.

Your auditor may even look outside your company for nonfinancial data. Many websites allow customers and employees to submit reviews of the company. These reviews can provide valuable insight regarding the company’s inner workings. If the reviews uncover consistent themes — such as an unwillingness to honor product guarantees or allegations of illegal business practices — it may signal deep-seated problems that require further analysis.

Facilitating the audit process

Auditors typically ask lots of questions and request specific documentation to test the accuracy and integrity of a company’s financial records. While these procedures may seem probing or superfluous, analyzing nonfinancial data is critical to issuing a nonqualified audit opinion. Let’s work together to get it right! Contact Patrick & Raines, CPAs at (904) 396-5400 or office@cpasite.com to set up an appointment.

© 2019


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