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Tax Resolution

Working From Home? Consider Home Office Deduction!

Many people have been relegated to a work-from-home situation, while others didn’t have a choice. Since the coronavirus pandemic started, many people lost their jobs while some companies had to adapt to the challenge by implementing a work-from-home order for a lot of people.

There is still no vaccine or cure for the coronavirus, so it’s hard to go back to normal. As such, people and companies have to embrace the new normal.

Now, for people working from home, there is a home office deduction that they could avail themselves of. The Internal Revenue Service (IRS) itself made the reminder during the Small Business Week, a regular conference that was virtually done this year from September 22 to 24.

What is the home office deduction? It is a tax relief that can be imposed on the tax returns of people working from home by deducting certain expenses. Unfortunately, this could not be enjoyed by people who are considered regular employees. This tax feature is only for those in the gig economy.

Requirements

There are two basic requirements for people to enjoy the home office deductions:

  1. The taxpayer uses part of their house exclusively for work or to do business with clients.
  2. The house is the person’s main business area.

What does it mean when it says that part of the house should be used for business? For one, it should be the main area where business deals are made and when work is actually done. It could also be a separate structure from the house as long as it’s a place where the taxpayer does business. The same area, which is used as an office, should also be where documents like inventory and products are stored.

Now, the term home deduction is used. But what constitutes home? It’s a taxpayer’s lair of course, so it could be a house, apartment, condominium and even a mobile home like an RV or even a boat. Everything that is part of the property can be considered a home. For example, for those living in a house, the entire property might have a garage or barn or greenhouse. These are still part of the home.

Deductible expenses

So, what are the things that could be used as deductions in the tax returns? Taxpayers can deduct certain expenses for that area of the home that is used for business. That includes the following:

  • Real estate taxes
  • Rent
  • Utilities
  • Insurance
  • Casualty losses
  • Mortgage interest
  • Maintenance
  • Repairs
  • Depreciation

A taxpayer may claim the deduction via a regular or simplified method. The regular method allows the taxpayer to divide expenses of the house between personal use and business operations. The simplified method, on the other hand, imposes a rate of $5 per square foot of the area of the home used in business. There is a maximum deduction of $1,500.

There are also cases when part of the home is used for short-term rentals or as a daycare facility. When it comes to operating a daycare facility, the taxpayer may be able to claim a deduction for a space that is used for both the daycare and personal activities. In this case, the home or business should have the appropriate papers to indicate its role as a facility.

California Tax Changes During the Pandemic

The world is still in the midst of the coronavirus pandemic. It has been a few months now and some countries are still grappling with the effects of COVID-19. What makes the COVID-19 worse than any other illness is that there is no vaccine yet and there is no cure. 

However, the effects of COVID-19 are not limited to health. There are also economical, emotional and psychological effects. But let’s focus on the economic effects. Many people lost their jobs. So, how can these people buy food and pay their rent?

The role of the government is to ensure that disadvantaged people will have help. In this case, everybody is disadvantaged. The 116th Congress then passed the aptly named CARES Act (Coronavirus Aid, Relief, and Economic Security Act), which gave Americans some sort-of allowance to help them out during this trying time. 

Another legislation, the Families First Coronavirus Response Act, complemented the CARES Act. This was mainly for paid sick leave for people who may be affected by the coronavirus. 

Now, some states passed their own complementary legislations. But what about California? The state imposed some new tax changes of their own, but didn’t pass anything new. Still, these changes allowed families to cope with the pandemic better. 

Tax changes

In California, the Net Operating Losses (NOLs) are suspended for three years—from January 1, 2000 to December 31, 2022. 

There were some exemptions to the suspension though. For one, taxpayers whose personal income tax if net business income or modified gross income comes out less than $1 million. The same could be said for those with corporate income tax if business income subject to California taxation is also less than $1 million. 

Now, there may be NOL or NOL carryover that will be disallowed because of the suspension. What happens then? A maximum of 20-year carryover period will be extended by three years for NOL that occurred before 2020. An extension of two years will be imposed on NOLs that happened in 2020. Meanwhile, a one-year extension will be given to NOLs that incurred next year. 

There are also some changes to the business credit limit.

For the same taxable years mentioned in the NOL, business credits in California may not reduce tax by more than $5 million. This limitation may cause some credits not be used. In this case, the carryforward period will be increased. By how much? It will depend on the number of taxable years the credit, or a portion of it, was not allowed. 

Changes were also made for first-year LLC and LP tax exemption. Using the same time period of taxable years, there will be a new first-year exemption starting from the $800 tax on LLPs and LPs that filed a certificate of limited partners or at least have registered with the Secretary of State. The same could be imposed on LLCs that registered with the Secretary of State. 

An exemption of such nature was previously only applied to corporations. 

You know what this implies? If at all possible, taxpayers who want to form a new LLC or LP should wait until 2021 to start their business. 

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