In order to educate taxpayers regarding their filing obligations, this fact sheet, the fourth in a series, explains the rules for deducting home office expenses.

Home Office Deduction: Basic Requirements

Generally, expenses related to the rent, purchase, maintenance and repair of a personal residence may not be deducted as a business expense. However, taxpayers who use a portion of their home for business purposes may be able to take a home office deduction if they meet certain requirements. Expenses that may be deducted include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs and depreciation. Note: The amount of depreciation deducted, or that could have been deducted, decreases the basis of your property.

In order to claim a deduction for that part of a home used for business, taxpayers must use that part of the home:

• §  Exclusively and regularly as their principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of their business, or in connection with their trade or business where there is a separate structure not attached to the home; or
• §  On a regular basis for certain storage use such as inventory or product samples or as a home daycare facility.

In addition, taxpayers working as employees can claim this deduction only if the regular and exclusive business use of the home is for the convenience of their employer and the portion of the home is not rented by the employer.

“Exclusive use” means a specific area of the home is used only for trade or business. “Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use.

Non-business profit-seeking endeavors such as investment activities do not qualify for a home office deduction, nor do not-for-profit activities such as hobbies.

Example: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns. The family also uses the den for recreation. The den is not used exclusively in the attorney’s profession, so a business deduction cannot be claimed for its use.

These requirements are discussed in greater detail in Publication 587, Business Use of Your Home.

Computing the Amount of Home Office Deduction

Generally, the amount of the deduction depends on the percentage of the home that is used for business. The deduction will be limited if gross income from the business is less than the total business expenses.

A taxpayer can use any reasonable method to compute business percentage, but the most common methods are to:

• §  Divide the area of the home used for business by the total area of the home, or
• §  Divide the number of rooms used for business by the total number of rooms in the home if all rooms in the home are about the same size (uncommon).

Taxpayers may not deduct expenses for any portion of the year during which there was no business use of the home. If the gross income from business use of the home is less than the total business expenses, the deduction for certain expenses is limited. Publication 587 includes examples, worksheets and additional information on computing the allowable deduction.

Personal Expenses Are Not Business Expenses

It is important for taxpayers to realize that business expenses may be deducted only if they are ordinary and necessary for the particular type of business. Personal, family and living expenses are not deductible under any circumstances. A common error is to deduct expenses for a portion of the home that is not used regularly and exclusively for business.

The IRS encourages taxpayers to familiarize themselves with the requirements before taking a home office deduction and to keep complete and accurate records to substantiate deductions. According to IRS research, understated business income, including underreported receipts and overstated expenses, is an area where compliance is a concern. In addition to increasing outreach and education in these areas, the IRS will also be focusing enforcement efforts, including examinations, on these issues.

Links:

• The Tax Gap
• Fact Sheet 2006-20, Business Income and the Tax Gap
• Fact Sheet 2006-23, Cost of Goods Sold and the Tax Gap
• Fact Sheet 2006-24, Third-Party Reporting Reminders
• Publication 587, Business Use of Your Home
• Publication 583, Starting a Business and Keeping Records
• Small Business and Self-Employed One-Stop Resource Center
• Online Learning and Educational Products
• Abusive Home-Based Business Tax Schemes

Most importantly, if you believe you may have trouble paying your tax bill contact the IRS immediately. There are steps we can take to help ease the burden. You also should file a tax return even if you are unable to pay so you can avoid additional penalties.

Here are some “What if” scenarios and the possible tax impact:

Job Related
What if I lose my job?
What if I receive unemployment compensation?
What if my income declines?
What if I am searching for a job?
What if my employer goes out of business?
What if I close my own business?
What if I withdraw money from my IRA?
What if my 401(k) drops in value?

Debt Related
What if I lose my home through foreclosure?
What if I sell my home for a loss?
What if my debt is forgiven?
What if I am insolvent?
What if I file for bankruptcy protection?

Tax Related
What if I can’t pay my taxes?
What if I can’t pay my installment agreement?
What if there is a federal tax lien on my home?
What if a levy on my wages is creating hardship?
What if I can’t resolve my tax problem with the IRS?
What if I need legal representation to help with my tax problem but can’t afford it?

Horizon Planning can help you navigate your tax concerns.  We offer year-round service to our tax clients and can answer questions based on your specific tax picture!

The Internal Revenue Service reminds taxpayers to keep in mind that many variables can affect the speed of a tax refund. Using e-file with direct deposit remains the fastest option for taxpayers.

Following technology improvements, the IRS will issue refunds to more taxpayers in as few as 10 days this year for those who e-file and select direct deposit. Overall, the IRS issues the vast majority (more than 9 out of 10) of all refunds — whether filed electronically or on paper — in 21 days or less.

Although refund speed will generally increase overall, the IRS emphasizes these are “best-case scenarios,” where tax returns are filed accurately and no corrections or review are required.

In addition, the IRS also cautions taxpayers it is increasing scrutiny of tax returns for signs of fraud. This means some tax refunds will face additional screening and review before being released, which will add time before the refund is delivered.

There are some simple ways for people to help ensure they receive their refund quickly.

E-file remains the best way to ensure an error-free return.

Taxpayers can help ensure their refund arrives as expected by submitting an error free return. Use the correct Social Security number or taxpayer identification number, the correct address, and the correct bank and routing number if electing direct deposit.

You don’t need to wait on the phone to check on the status of your refund. The fastest and best way to get information on your refund is through the “Where’s My Refund?” tool on IRS.gov and the IRS2Go phone app. Information about refund status is available about three days after the IRS acknowledges receipt of your e-filed return, or four weeks after mailing a paper return.

The free IRS2Go application is available at the Apple App Store and the Android Marketplace.

When checking the status of your refund through these IRS online tools, you will need to have your federal tax return handy. To get your personalized refund information you must enter the following information on the safe and secure IRS.gov website or phone app:

• Your Social Security Number or Individual Taxpayer Identification Number;
• Your filing status, which will be Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household or Qualifying Widow(er); and
• Exact whole dollar refund amount shown on your tax return.

Once you’ve entered your personal information, and depending on the status of your refund, our online tool may provide several pieces of information, including acknowledgement that your return was received and is being processed, the mailing or payment issuance date of your refund, and possibly a notification that the IRS could not deliver your refund due to an incorrect address.

The IRS must review tax returns to prevent fraudulent and erroneous refunds, while balancing customer service, fast refunds and protecting against fraud. If the IRS needs additional information to process your return, we will contact you by mail. You don’t need to call and wait on the phone. Taxpayers are encouraged not to tie major financial decisions to the receipt of their tax refund by a specific day, but please know that the IRS works hard to issue proper refunds as quickly as possible.

Related Items:

• 2012 Tax Season Refund Frequently Asked Questions
• Where’s My Refund?

The Earned Income Tax Credit (EITC) is a financial boost for people working hard to make ends meet. Millions of workers may qualify for the first time this year due to changes in their marital, parental or financial status.

The IRS urges everyone earning $49,078 or less from wages, self-employment or farming in 2011 to see if they qualify by using the EITC Assistant on IRS.gov.

Many special rules apply to the EITC. So if you plan to claim it, either on a return you prepare or someone else prepares for you, review the rules carefully.

Generally, the EITC has no effect on welfare benefits. In most cases, EITC payments will not be used to determine eligibility for Medicaid, Supplemental Security Income (SSI), supplemental nutrition assistance program (food stamps), low-income housing or most Temporary Assistance for Needy Families (TANF) payments. Though unemployment benefits are not earned income, they are taxable and thus affect the amount of EITC you can receive.

Credit Limits for Tax-Year 2011

The EITC varies based on income and family size. The table showing credit amounts can be found in the Instruction booklets for Forms 1040, 1040A and 1040EZ and in Publication 596, Earned Income Credit. This includes the expanded benefit, available through 2012, for families with three or more children.

Eligibility for EITC

Besides filing a tax return, people must meet various requirements. Some of these requirements apply to everyone. Then there are additional requirements that only apply to families, and another set of requirements that only apply to people without children.

Rules for Everyone:

• You must have earned income, such as wages, tips or the income you make from running a business or farm. Most other types of income, such as retirement pensions, though usually taxable, do not count as earned income.
• You must have a valid Social Security number for yourself, your spouse and your qualifying children.
• You can get the credit, even if you have a small amount of investment income, such as interest from a bank account. However, the amount of your investment income is limited to $3,150.
• Your filing status must be single, head of household, married filing jointly or qualifying widow or widower. If you file as married filing separately, you cannot get the credit.
• Generally, you must be either aU.S.citizen or resident alien.
• You cannot be a qualifying child of another person.
• You cannot file Form 2555 or Form 2555-EZ. These forms are used to claim the foreign earned income exclusion, a tax benefit for Americans who live and work abroad.

In addition, your income must be below certain limits. For tax year 2011, both earned income and adjusted gross income (AGI) must each be less than:

• $13,660 ($18,740 married filing jointly) with no qualifying children
• $36,052 ($41,132 married filing jointly) with one qualifying child
• $40,964 ($46,044 married filing jointly) with two qualifying children
• $43,998 ($49,078 married filing jointly) with three or more qualifying children

Special Rules for Families

If you claim the credit, based on having one or more qualifying children, each child must meet the relationship test, age test and residency test. Each child must meet all three tests.

Relationship test. The child is your:

• Son or daughter, including an adopted child or child placed for adoption,
• Stepchild or grandchild,
• Foster child placed by an authorized placement agency or court,
• Brother, sister, stepbrother, stepsister, half brother, half sister or a descendant of any of them.

Age test. At the end of 2011, the child was younger than you or your spouse. And:

• Younger than 19,
• Younger than 24 and a full-time student, or
• Any age if permanently and totally disabled

Residency test. The child lived with you in the U.S. for more than half of 2011. In addition, if a qualifying child files a joint return, he or she can only do so to claim a refund.

• A qualifying child cannot be used by more than one person to claim EITC. If a child meets the rules to be a qualifying child of more than one person, only one person can use that child to claim the EITC. Also, if a qualifying child can be claimed by both a parent and another person, the other person can only get the credit if his or her AGI is higher than the parent’s.

Special Rules for People Who Have No Children. Taxpayers without a qualifying child must meet three additional tests:

• Lived in the U.S. for more than half of 2011,
• At the end of 2011, was at least age 25, but under age 65,
• Cannot qualify as the dependent of another person.

Special Rule for Combat Pay. Combat pay received by members of the military serving in Afghanistan, Iraq and other combat zone localities is usually exempt from tax. But under a special rule, you can choose to count all of this income when you figure the EITC. In many cases, making this choice will enable you to claim the credit, or if you are already eligible, claim a larger credit.

Avoid Errors and Seek Accuracy

Even if someone else prepares your tax return, you are still responsible for the accuracy of your return. Because the EITC can be complex, many people claiming it make mistakes. Get help if you are not sure you qualify. If you receive an IRS letter requesting additional information, reply immediately to avoid delaying your refund. If you need help, call the phone number shown in the letter.

The Right Credit Amount for Those Eligible

Some people who claim the EITC either figure it incorrectly or are ineligible. A deliberate error can have lasting impact. Beware of scams promising to increase an EITC refund. Creating fictitious qualifying children or inflating income levels to get the maximum EITC are scams that may result in severe penalties. Among other things, you could be banned from claiming the credit for up to ten years. If an EITC claim was reduced or denied after tax year 1996 for any reason other than a mathematical or clerical error, you must attach Form 8862, Information To Claim Earned Income Credit After Disallowance, to your next return to claim the credit.

Almost two out of three EITC claims are prepared by tax professionals. To help ensure that only those eligible get the credit and that everyone who is eligible gets the right amount, the IRS now requires paid preparers to file Form 8867 with any federal return claiming the EITC. This is the same due diligence checklist that for over a decade preparers have been required to use for determining a client’s eligibility and then retain in their records.

This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their Preparer Tax Identification Numbers (PTINs).

Remember, you can get faster access to your refund by using direct deposit. The IRS can generally issue refunds to taxpayers who combine e-file and direct deposit in as few as 10 days.

The credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors, including the length of the veteran’s unemployment before hire, hours a veteran works and the amount of first-year wages paid. Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.

Normally, an eligible employer must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But according to today’s guidance, employers have until June 19, 2012, to complete and file this newly-revised form for veterans hired on or after Nov. 22, 2011, and before May 22, 2012. The 28-day rule will again apply to eligible veterans hired on or after May 22, 2012.

In an effort to streamline the certification requirements, IRS today clarified and expanded upon 2002 guidance to facilitate employers’ use of electronic signatures when gathering the Form 8850 for transmission to state workforce agencies. The guidance confirms that employers can transmit the Form 8850 electronically, and also allows employers to transmit the Form 8850 via fax, subject to the ability of the state workforce agencies to accept submissions in those formats. The IRS expects the Department of Labor to issue further guidance to the state workforce agencies providing further clarification.

Notice 2012-13, posted today on IRS.gov, and the instructions  for Form 8850 provide further details.

Businesses claim the credit on their income tax return. The credit is first figured on Form 5884 and then becomes a part of the general business credit claimed on Form 3800.

This credit is also available to certain tax-exempt organizations by filing Form 5884-C.  The guidance released today also provides instructions and a new set of forms for tax-exempt organizations to claim the credit.  For more information, including how to claim the credit, go to IRS.gov.

WASHINGTON – The Internal Revenue Service and the Justice Department today announced the results of a massive national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft.

Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states. The coast-to-coast effort took place over the last week and included indictments, arrests and the execution of search warrants involving the potential theft of thousands of identities and taxpayer refunds. In all, 939 criminal charges are included in the 69 indictments and informations related to identity theft.

In addition, IRS auditors and investigators conducted extensive compliance visits to money service businesses in nine locations across the country in the past week. The approximately 150 visits occurred to help ensure these check-cashing facilities aren’t facilitating refund fraud and identity theft.

“This unprecedented effort against identity theft sends a strong, unmistakable message to anyone considering participating in a refund fraud scheme this tax season,” said IRS Commissioner Doug Shulman. “We are aggressively pursuing cases across the nation with the Justice Department, and people will be going to jail. This is part of a much wider effort underway at the IRS to help protect taxpayers.”

“The Justice Department is working closely with the IRS to investigate, prosecute, and punish tax refund crimes committed through the theft of identities,” said Principal Deputy Assistant Attorney General John A. DiCicco of the Tax Division. “Now, more than ever, we must remain vigilant against the unauthorized use of identification information to defraud the U.S. government.”

The national effort is part of a comprehensive identity theft strategy the IRS has embarked on that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.

The law-enforcement sweep started last week across the country, reflecting investigative efforts stretching back months and even years.

The nationwide effort by the Justice Department and the IRS led to actions taking place in 23 locations across the country with 105 individuals. The actions included 80 complaints/indictments and informations, 58 arrests, 19 search warrants, 10 guilty pleas and four sentencings. A map of the locations and additional details on the actions are available on IRS.gov, the IRS Civil and Criminal Actions page and the Department of Justice Tax Division page.

Beyond the criminal actions, the IRS enforcement personnel conducted a special sweep last week and on Monday to visit 150 money services businesses to help make sure these businesses are not knowingly or unknowingly facilitating identity theft or refund fraud. The visits occurred in nine high-risk places identified by the IRS covering areas in and surrounding Atlanta, Birmingham, Ala., Chicago, Los Angeles, Miami, New York, Phoenix, Tampa and Washington, D.C.

In addition, the IRS has more than 250 check-cashing operations under audit across the country and will be looking for indicators of identity theft as part of the exam effort.

The information from these audits and compliance visits will be used to assist continuing IRS investigations into refund fraud and identity theft.

The IRS also is taking a number of additional steps this tax season to prevent identity theft and detect refund fraud before it occurs. These efforts includes designing new identity theft screening filters that will improve the IRS’s ability to spot false returns before they are processed and before a refund is issued, as well as expanded efforts to place identity theft indicators on taxpayer accounts to track and manage identity theft incidents.

To help taxpayers, the IRS earlier this month created a new, special section on IRS.gov dedicated to identity theft matters, including YouTube videos, tips for taxpayers and a special guide to assistance. The information includes how to contact the IRS Identity Protection Specialized Unit and tips to protect against “phishing” schemes that can lead to identity theft.

Identity theft occurs when someone uses another’s personal information without their permission to commit fraud or other crimes using the victim’s name, Social Security number or other identifying information. When it comes to federal taxes, taxpayers may not be aware they have become victims of identity theft until they receive a letter from the IRS stating more than one tax return was filed with their information or that IRS records show wages from an employer the taxpayer has not worked for in the past.

If a taxpayer receives a notice from the IRS indicating identity theft, they should follow the instructions in that notice. A taxpayer who believes they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. The taxpayer should contact the IRS Identity Protection Specialized Unit at 800-908-4490. The taxpayer will be asked to complete the IRS Identity Theft Affidavit, Form 14039, and follow the instructions on the back of the form based on their situation.

Taxpayers looking for additional information can consult the Taxpayer Guide to Identity Theft or the IRS Identity Theft Protection page on the IRS website.

In the instructions to Form 1099-MISC, the IRS has made it clear that payments made with a credit card, or through any third-party payer, are not reported on Form 1099-MISC. These amounts are now reported on Form 1099-K. Thus, if a business pays a service-provider with a credit card, debit card, gift card, or electronically via a service like PayPal, the payment is not included on a 1099-MISC.

Form 1099-K is new for 2011. The form is issued by a credit card company or other third-party payer (such as PayPal) to payees if the payee has more than 200 transactions and more than $20,000 of gross income paid to them. The 1099-K is not issued by either the buyer or seller.