Small Business Tax Record Keeping and Home Office Deductions

Preface: Accurate tax preparation begins with good record keeping. Small business owners often neglect this area of operations. This blog outlines a few of the reasons why investing in good record keeping is worth the effort.

Small Business Tax Record Keeping and Home Office Deductions

Small business owners should always keep good financials records. This applies to all businesses, whether they have a couple dozen employees or just a few. Whether you install software or make soft-serve. Whether they cut hair or cut lawns. Keeping good records is an important part of running a successful business. Here are some questions and answers to help business owners understand the ins and outs of good recordkeeping.

Why should business owners keep records?

Good records will help you as a business owner:

  1. Monitor the progress of business financial performance;
  2. Prepare financial statements for banks, creditors, and management;
  3. Identify concentrations of income sources;
  4. Keep track of expenses and assist with budgeting;
  5. More accurate tax returns and support items reported on tax returns;

What kinds of records should you keep?

Small business owners may choose any recordkeeping system that fits their business. They should choose one that clearly shows income and expenses. Except in a few cases, the law does not require special kinds of records. QuickBooks is a good choice for many small businesses.

How long should your business keep financials records?

How long a document should be kept depends on several factors. These factors include the action, expense and event recorded in the document. The IRS generally suggests taxpayers keep records for three years.

How should your business record transactions?

A good recordkeeping system includes a summary of all business transactions. For beginners, these are usually kept in books called journals and ledgers, which business owners can buy at an office supply store. All requirements that apply to hard copy books and records also apply to electronic business records.

What is the burden of proof?

The responsibility to validate information on tax returns is known as the burden of proof. Small business owners must be able to prove expenses to deduct them.

How long should businesses keep employment tax records?

Business owners should keep all records of employment taxes for at least seven years.

Tax Deduction for Home Office

Taxpayers who use their home for business may be eligible to claim a home office deduction. It allows qualifying taxpayers to deduct certain home expenses on their tax return. This can reduce the amount of the taxpayer’s taxable income. Here are some things to help taxpayers understand the home office deduction and whether they can claim it:

  1. The home office deduction is available to both homeowners and renters.
  2. There are certain expenses taxpayers can deduct. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent.
  3. Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.

The term “home” for purposes of this deduction:

Includes a house, apartment, condominium, mobile home, boat or similar property. Yes, you can work from a boat in the “Roaring 20’s.”

Also, ” home” includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse, or work ship on the water.

“Home” doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.

There are two basic requirements for the taxpayer’s home to qualify as a deduction:

  1. There must be exclusive use of a portion of the home for conducting business on a regularly basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
  2. The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home, but also uses their home to conduct business may still qualify for a home office deduction.

Expenses that relate to a separate structure not attached to the home will qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for business.

Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:

The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.

When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.

If you would like to discuss tax planning opportunities, small business record keeping, or understand the ways in which you can use your home regularly and exclusively for your business to reduce your tax bill, please call our office at your earliest convenience.

Individual Tax Planning for Itemized Deductions

Preface: Since the TCJA tax legislative update beginning with 2018, individual tax filers on Form 1040 have revised attributes including a higher standard deductions, therefore changing the applicability for itemizing.

The threshold for the Form 1040 standard deduction you are allowed in the current year depends on the filing status of your tax return for the year.

For those who are single (or married filing separately), the standard deduction for 2020 is increasing $200 to $12,400. If you file as a head of household, your standard deduction will be increasing $300 to $18,650. For married couples filing jointly, the standard deduction is increasing by $400, up to $24,800 for the tax year 2020.

This the legislated tax rule increase in the standard deduction for 2020, will see more people choosing this tax feature. But for those still interested in itemizing, here are a few key highlights.

Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, and disaster losses from a Federally declared disaster. You may also include gifts to charity and part of the amount you paid for medical and dental expenses.

You would usually benefit by itemizing on your individual tax filing if you:

• Can’t use the standard deduction or the amount you can claim is limited

• Had large uninsured medical and dental expenses

• Paid interest or taxes on your home

• Had large “other” deductions

• Had large uninsured casualty or theft losses from a Federally declared disaster

• Made large contributions to qualified charities

The higher standard deduction under Tax Reform means fewer taxpayers are itemizing their deductions. However, taxpayers may have an opportunity to itemize this year by keeping these tips in mind:

Deducting state and local income, sales and property taxes. The deduction that taxpayers can claim for state and local income, sales and property taxes is limited. This deduction is limited to a combined, total deduction of $10,000. It is $5,000 if married filing separately. Any state and local taxes paid above this amount can’t be deducted.

Refinancing a home. The deduction for mortgage interest is also limited. It’s limited to interest paid on a loan secured by the taxpayer’s main home or second home. For homeowners who choose to refinance, they must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described in the next bullet under “buying a home.”

Buying a home. People who buy a new home this year can only deduct mortgage interest they pay on a total of $750,000 in qualifying debt for a first and second home. It’s $375,000 if married filing separately. For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

Donating items and deducting money. Many taxpayers often find unused items in good condition they can donate to a qualified charity. These donations may qualify for a tax deduction. Taxpayers must itemize deductions to deduct charitable contributions and must have proof of all donations.

Deducting mileage for charity. Driving a personal vehicle while donating services on a trip sponsored by a qualified charity could qualify for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2020. 

Summary: Itemizing deductions for your 1040 tax filings is best performed by an experienced tax accountant for optimal tax benefits. If you think itemizing for your individual tax filing is the right choice for your 2020 taxes contact your trusted tax accountant.


How Will I Get Paid?

Credit: Jacob M. Dietz, CPA

Imagine you are a business owner, and the time has come to sell the business. You wipe away a few tears, and you begin to negotiate with a potential buyer. How much will you get paid? That answer may depend partially on how you get paid. This blog explores some options for getting paid.


Getting paid in cash may be attractive for a seller. After the seller has the cash, they can take the money and do with it as they please. They have the security of getting the cash in hand immediately.

One drawback to the cash sale for the seller is that it brings all the income from the sale into one year. That can throw the seller into higher tax brackets, and they may potentially lose out on credits. On the bright side, if they have a large tax bill from the sale, then at least they have cash to pay it.

With a cash deal, there is less risk to the seller. Consequently, they may not get as much cash for the sale. On the other hand, there may be more risk to the buyer. Therefore, the buyer does not want to pay as much.

Although I am calling this cash, it is cash from the seller’s perspective. For the buyer, the cash could be savings, or perhaps bank debt, or some other source of cash. Calling it cash does not mean that the buyer is debt-free. In fact, in a cash sale, the buyer may be deeply in debt, which can be risky.

Seller-Financed Debt

Another option for the sale is where the buyer agrees to pay the seller for the business, in the form of a loan, over time.

This arrangement increases the risk to the seller. What if the buyer defaults on the loan? The economy might go bad, and even an honest buyer may not be able to pay. Worse yet, the buyer may be dishonest and simply refuse to pay. With the increased risk comes the possible opportunity for a higher sales price. The seller incurs more risk, so they may ask for more money. On the other hand, the buyer may have less risk, at least if it is unsecured debt, and they may be willing to pay more. Also, there may be more potential buyers if the seller is willing to finance it.

How could there be more potential buyers? If a business would be for sale for $600,000, then there would be many people who could not afford that price, even if they wanted to buy it. A bank may offer some financing, but if the buyer does not have a significant enough down payment, the bank may not help them. On the other hand, if the seller finances it, then what was impossible may become possible with seller-financing. The seller and buyer might agree to some type of middle ground in which some of the sales price is paid immediately in cash and some is seller-financed. For example, if the total sales price of the business is $600,000, the seller may ask for $300,000 in cash and offer a 7 year note for $300,000.


Another part of the sales price could be a contingency. There could be different contingencies, but let’s use revenue as an example. The deal could specify that if revenues in year 1 equal $X, then an additional $20,000 or will be paid to the seller. A contingency can help reduce the risk of the buyer.

How and How Much

How the seller gets paid can affect how much they get paid. If the seller is taking on more risk, then they may want to ask for more money. On the other hand, if the buyer is taking on more risk, then the buyer may want to pay less. How the seller gets paid, therefore, may affect how much they ask to get paid.

If you are selling or buying, remember to think about both how the payments will be made, and how much they will be. Deals can be complex, and you will likely want to consult with your accountant on important deals.

Hoshi Ryokan

The ideology is among other things to be a small but powerful business.

One specific dream, one night, 1,300 years ago, was the start of one of the world’s oldest businesses. Hoshi Ryokan a traditional Japanese Inn, launched from Taicho Daishi’s dream, has been a family managed business since 718 A.D. The Inn is currently in its 46th generation of Hoshis, with Zengoro Hoshi preparing to transition the business to his grandson. The Hoshi family credits the success of the business and transition longevity to clear succession rules with each passing generation, as well as instilling a motto in each new generation “study the water running down a small current”.

The ideology is among other things to be a small but powerful business. The power of the water was the successful origin of the spa Inn. Taicho’s dream told him specific details where a special hot-spring was located that would serve the village people forever. Taicho sought the help of villagers to locate the hot-spring; the village sick who immerse themselves in the water soon found their health was immediately restored.

While many businesses stories are not that unique, we can learn from the Hoshi Ryokan family succession plan that strict training in family protocol, values and personal ethics has ensured the success of the business transitions for over 1,300 years. The protocol includes a strong set of ethics and values. Each generation has had its own set of idea’s but the Hoshi family hasn’t waivered from their commitment to family succession for 1,300 years. The family knows what made them successful, and they (the Hoshi family) is not permitted to forget.

Planning for the next five or ten years for your business? How important do you think the values of your management culture will be to your businesses continued success?

How Will You Measure Your Life?

Preface: Today we reflect on the life of Clayton Christensen, the Gentle Giant of Innovation. In 2019 Clay Christensen was inducted in the Thinkers50 Hall of Fame, honoring the most strategic thinkers in the world

 “Clay Christensen’s influence on the business world has been phenomenal.“ Stuart Crainer & Des Dearlove, Thinkers50

Clay’s article “How Will You Measure Your Life?” is one of the most downloaded articles in the history of HBR.

Read Two Master Pieces from a Truth-Seeker:

How Will You Measure Your Life? Clayton M. Christensen

After 25 years studying innovation, here is what I have learned

And we will always remember Clayton with this question, we once heard. “What valuation model does God use for a Soul?”