The key to this tax deduction is that rental property owners may claim this write-off if they are active, which is to say you must be doing more than cashing checks. If you regularly spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.

After you’ve met this qualifier you will also have to meet the basic home office deduction thresholds. To begin with, you must use the home office exclusively for your rental business on a regular basis.

Then you’ll also have to meet at least one of the following:

1. This office must be your principle space for the day-to-day running of your rental property business.

2. You must have no other location from where you run the administrative end of your property managment rental business.

3. You connect with tenants there.

4. You use a separate structure on your property for business.

After you have applied the threshold tests above and determined that the work area in your home does in fact meet the requirements for the home office deduction, you have to look into what kind of expenses can be written off. There are direct and indirect types of home office deductions. Direct expenses exclusively benefit the home office area of your home, expenses such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the home office space and the rest of your house. Property tax, insurance, mortgage interest, and utilities are typical examples of indirect expenses. Square footage is the usual way of determining the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot house with a 200 square foot home office area would mean 10% of the indirect expenses could be written off as part of the home office deduction. You can also depreciate the house structure (not the value of the land) in the same percentage over 40 years. However, this may complicate matters if the house is sold.

Because you don’t want any trouble if you do get audited, you want to keep good records to establish that you were actually entitled to take the deduction and that the claim has been accurately reported. You should document the home office space with a diagram and/or photograph that supports your calculations. It is smart to use your home office address on your business cards and other forms of collateral and to have business mail delivered to the office address. You should keep a log of client meetings and other time spent working in this space. Records to keep proving expenses include: 1098 mortgage interest statements, property tax statements, utility bills, insurance premium notices and receipts for other relevant home office expenses.

Home office deductions can get complicated. Please do not consider this to be reasonable solution to the informed counsel of seasoned Bellevue CPA. But this should help you gain a basic understanding the requirements of successfully claiming home office deductions.

Bellevue Accountant +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Interest

If you’re renting a room in your home, or if it is a duplex and you’re occupying the other unit, you will need to pro rate the mortgage expense. (See the article titled Personal Use of Rental Property, included in this guide, for more on how to calculate personal use). Now if you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Also, if you own only a part interest in the rental, you must multiply the total amount of mortgage interest paid on the property by your ownership interest. Be aware, however, that certain expenses you pay to obtain a mortgage (such as title/recording fees and commissions) are capitalized as part of your depreciable basis for the property, and are not expensed. See the article titled Depreciation Expenses for Rental Property, included in this Guide, for more on depreciation expense. Other types of interest may also be deductible, if you incurred the interest solely for the benefit of the rental property.

Advertising

Promoting your rental property on the open market, through marketing efforts such as posting newspaper ads or paying for internet marketing, is a tax deductible expense.

Professional fees

If you pay a lawyer to write a rental agreement or initiate court actions in order to evict a renter, it’s possible to deduct these expenditures. Additionally you can deduct fees paid to a Bellevue accountant for prepping the Schedule E of your return from the previous year. Make sure you pro rate the entire fee between the rest of your return versus the Schedule E portion of you return based on time spent. Any fees unrelated to the Schedule E appear on Schedule A as personal tax preparation expenses. Also any commissions or management fees to realty groups for overseeing your rental property are deductible as well.

Bellevue CPA +John Huddleston has written numerous articles on accounting and tax related issues of interest to the small business owner. He is a graduate of Washington State University and the University of Washington School of Law with a Masters in Tax Law.

NOTE: These startup expenses reviewed in this write-up will not be the same variety of expenses that are allowable as a deduction according to Internal Revenue Code section 195. Under the section 195, specific startup expenses (in an active trade or business) are deductible up to $5,000 with a balance amortizable over fifteen years. But, section 195 does not apply to rental property this is because renting is not regarded an active business or trade, but rather it is regarded a passive activity. See the article Tax Deductible Rental Losses, included in this Guide, for more on passive activity rules.

Note: It isn’t just when you have literally rented a property that rental activity “begins”, but when you’ve made the property available for rent.

Expenses to Obtain Mortgage

Expenses such as mortgage commissions, abstract fees, and recording fees, are capitalized and turned out to be part of your basis in the property. And this means that you’ll have to depreciate such expenses, instead of expensing them all at once. Read the Depreciation Expenses for Rental Property article, included in this Guide, for more on depreciation.

Points

What are points? They are charges paid by a borrower to take out a mortgage or a loan. This points or charges may also be called origination fees, or premium charges, or maximum loan charges. Points are deductible as interest, but require that you amortize the points over the life of the loan. Determining the amount of points to amortize per year, is task beyond the scope of this article. Make an appointment with a certified public accountant.

Improvements versus Repairs

You must capitalize and depreciate improvements to the property previous to putting it on the market. Improvements prolong the use of the property or materially increase the property’s market value. On the other hand, you may freely deduct all repair expenses. A repair maintains your property in good working condition without adding to its value or prolonging its use. See the series of articles about deductions and depreciation, included in this Guide, for more information.

Bellevue Tax Accountant +John Huddleston is a graduate of the University of Washington School of Law, with a Juris Doctorate and a Masters in tax Law.

When forming an entity, you’ll have to visit www.sos.wa.gov to register.

TIP: Consult with a Bellevue Accountant or attorney before establishing an entity and transferring ownership of your rental property to it. This landlord tax guide isn’t meant to be an all-in-one solution you should seek the attention of a qualified professional.

Individual Ownership

This form of ownership is the most common and simplest method of ownership and occurs when you purchase a rental property in your name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The main advantage here is that this is straightforward, and does not require you to file any complicated paperwork or pay any lofty filing fees. The main disadvantage to this kind of ownership is that your creditors may be able to force a sale of the rental property if they attain a court judgment against you, or compel you into involuntary bankruptcy.

Legal Entity Ownership

Legal entities include limited partnerships, general partnerships, limited liability companies, and corporations. Let’s look at the differences a bit later. Now let’s look at the principal benefit of entity ownership, and that would be that with entity ownership your personal creditors cannot force a sale of the rental property. The only entity type that does not require registration with the secretary of state is the general partnership. Regarding taxes, the entity type doesn’t matter that much because in most cases rental income is taxed on your personal tax return, See the article titled “Necessary Tax Forms for Reporting Rental Activity,” which is included in the Landlord Tax Guide.

General partnership. This form of ownership takes place when two or more persons co-own a for profit business. Now with this general partnership each partner has equal management privileges, however each partner is personally liable for the debts of this partnership. And thus a general partnership is usually not preferred.

Limited partnership. A limited partnership is more complex because this method of ownership involves one limited partner and at least one general partner. The limited partner will not be personally liable for the debts resulting from the partnership, but also has no management rights. Now the general partner has sole management rights, as well as personal liability for the debts of the partnership. This arrangement is generally not recommended.

Limited liability partnership/company. A limited liability company and a limited liability partnership are rather similar entities, both provide for limited liability to the partners/members. This would mean that you will not be personally liable for the entity’s debts, except in cases when the debt is a result of your own wrongdoing. This mode of ownership often is preferable because of limited liability and also there are fewer formalities which require observance than with corporations.

Corporations. Corporations allow for perpetual existence and limited liability. And yet on the other hand, they demand the observance of unyielding formalities so as to preserve the limited liability shield. Without these formalities, a court order may “pierce the corporate veil” and hold you personally culpable. It is for this reason that LLPs and LLCs are typically more desirable for a rental property owner. Additionally, for tax purposes, corporations are split into “S” corporations and “C” corporations. When a corporation is taxed as a “C” corporation, it pays tax on the rental income, and then you will pay tax again when the corp pays out dividends. And you should steer clear of this “double taxation” catch.

Bellevue Tax CPA +John Huddleston is a graduate of both the University of Washington and Washington State University. He has written numerous articles on various tax related subjects.

Do Not Rush into This

Pace yourself. You are building the foundation of your future. Where do you want to live, how responsive will the community be to your new practice, how much of a rapport do you already have with the community?

Choosing the Best Location

Where is it that you would like to live? You’ll want to be a big part of this community, so you’ll need to make sure it’s a good fit. Dentists who involve themselves in community events and organizations are usually successful as they are meeting people and networking all the while. A short to medium commute is an important consideration. Avoid a long commute and you’ll have the opportunity to spend that time with friends and family. That’s not a bad trade off.

What sort of community is the right fit for you and your family? Suburbs? Intercity? Rural? Let the location of your competition inform your decision. Will your spouse be able to find work? Will your kids end up in a school district that will nurture them and grant you piece of mind?

Determine the Ideal Practice for You

Consider: size and type, Are you interested in specialized dentistry practice, or a generalized dental practice. Who is your competition and is there room for your particular niche? Create a thorough business plan.

Seek an Appraisal

Have the business appraised with the help of a certified public accountant or valuation specialist. A professional with experience in this industry is preferable. This way you’ll gain a better perspective.

Assemble a Team of Professionals

Trying to save money by being completely self-sufficient is a poor decision when you plan on purchasing a dental practice. There are many areas where you’ll need and benefit greatly from the expertise of others. In the long-run, investing in advisors will save you a lot of trouble. Here are a few people you’ll need:

• A CPA or accountant versed in aiding dentistry practices and other small businesses on remaining tax compliant and reducing tax burdens. You will want an accountant who can help you develop tax strategies. You’ll want a certified public accountant to advise you on how to structure your small business (S-Corp, C-Corp, LLC, PLLC, Sole Proprietorship).
• A Bookkeeper who has familiarity in a bookkeeping software system like Quickbooks. A certified Quickbooks Advisor is a title bestowed upon a bookkeeper which says the person is certified by the manufacturer of Quickbooks (Intuit Corporation) as competent with the bookkeeping platform.
• An attorney to review documents and legally protect your interests.
• A consultant for your new dental practice could prove useful in helping you meet goals.
• From the beginning, you should establish a relationship with a bank. Getting prequalified will help you gain a handle on how to put in a good offer and how much you can afford.
• Your insurance needs will increase ten-fold once you’re a business owner. An insurance rep will assess the value of your business and evaluate risk to see exactly how much coverage you will have to have.
• It is intelligent to seek the help of a mentor or business confidant of some kind, perhaps a veteran dentist who once went through the same process you’re going through now.
• A marketing pro that knows online marketing.

Prepare. Be a researcher. Trial and error is not a reasonable strategy.

Tax CPA John Huddleston is the author of the Self-employment Tax Guide which is a free resource for small business owners and the self employed for tax saving strategies and tax filing requirements. Mr. Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Tacoma & Everett area on various tax and accounting issues. His firm, Huddleston Tax CPAs, also provides tax preparation service, quickbooks consulting, business valuation, general accounting and bookkeeping service. Profile information on CPA John Huddleston and the CPAs employed by Huddleston Tax CPAs is available at the profile tab. Seattle CPA John Huddleston is a frequent publisher of tax saving ideas.

An Offer in Compromise (OIC) is a tax debt settlement offer provided by the Internal revenue service to taxpayers, either an individual or a business unable to manage their tax debt. There are certain strict criteria that determine who will be eligible to request the OIC. If you do satisfy these requirements, you’ll need to fill out Form 656 and submit a number of supporting documents to be considered for the offer.

Preparing Form 656

You need to fill out a Form 656 to file for an OIC in two circumstances. In the Doubt as to Collectability situation, there exists a reasonable amount of doubt over your ability to pay the full amount of your claims within the specified period. In the Effective Tax Administration case, your contention for a tax settlement is that paying the full amount of the dues will create economic hardship for you.

Now that you know the circumstances in which you will need to prepare Form 656, here’s what you should remember when completing the form

• Each person submitting the offer should provide social security numbers.

• You will need to give the names of both the persons if you are applying for a joint offer for joint liabilities. If you owe a joint liability and both you and the other party are submitting an offer, then do so on Form 656, just one single form. You might owe a liability, such as employment taxes for yourself and hold other liabilities, such as income taxes, with another person. If you are the sole submitter of this form, then you will have to list all liabilities on one of Form 656. In case both of you want to submit this application, then you have to include all tax liabilities on your Form 656 and the other person must show only the joint tax liability on their Form 656.

• You will have to include the relevant information In each field in the form.

• You will need to show the employer identification numbers of all businesses, except corporate concerns, that you own, either wholly or partly.

• If your claim to an Offer for Compromise is based on a Doubt as to Collectability, you need to also furnish a completed Form 433A if you are an individual taxpayer and Form 433B if you are a business taxpayer.

• If your claim to an Offer for compromise is based on Effective Tax Administration, then on top of submitting a Form 433B or 433A, you’ll also need to fill out the information in the “Explanation of Circumstances.” You may include additional bits of relevant information in separate sheets along with your social security and employer identification numbers.

• When filling out the total amount of your offer, you don’t include a sum that the Internal revenue service owes you or any of the amounts that you’ve already paid in taxes.

• All persons submitting the offer should sign the Form 656 and supply the date. They need also give the titles and names of authorized corporate officers, trustees, Powers of Attorney, and executors where requested.

• Be sure that you provide the name and if possible, the address of the Offer in Compromise preparer.

• You might want the IRS to get in touch with a a friend, a family member, or some other acquaintance to discuss your case so that they might understand your situation more fully. In that case, you need to tick the “Yes” box in the “Third Party Designee” field. Additionally, if you’d like a Certified public accountant, your attorney, or an enrolled agent to represent your case, you will have to furnish the 2848 Form and submit it along with your offer. to better the chances of your offer being accepted by the IRS. After you’ve compiled all the above-mentioned documents for submission, ensure that you make duplicates for personal records. Additionally, you might also submit documents that support your claim for this genuine offer.

Pay Attention to the Details

The application process for an Offer for compromise is a complicated process. Be sure to spend enough time on Form 656 and submit the entire set of supporting documents to improve your chances of getting approval on the offer.

Visit the offer in compromise guide at:
Seattle Business Valuation
Seattle Tax Debt Relief
Seattle Offer in Compromise

Establish the bookkeeping practices and procedures that you will use at the very start. Establish an accounting plan that is forward-thinking, so that you’re business growth doesn’t have to pause while you refigure your bookkeeping methods

Decide upon a Software Package for Your Business

Eventually your business may outgrow Spreadsheets, and you will have to decide which small business accounting software is right for you. You might as well plan ahead for this. That is you might as well plan for success. If you are forward thinking in your bookkeeping practices, you will not be snared into trying to make a laborious transfer of your books from one accounting method to a completely different bookkeeping platform.

Anticipate your bookkeeping needs. There are accounting software packages that focus on project accounting, and there is accounting software that works best for real estate/real property (fixed income accounting). Specialized accounting software is most often more costly than the more generic software packages which are very appropriate for sales of goods, but if you can anticipate where your business is headed, you could choose the appropriate accounting software at the very beginning can save time and money down the line.

How to Select the Accounting Method that Works Best for You

As a self employed small business owner, you’ve some leeway in how you track your financial comings and goings. As you’re no large corporation, it isn’t necessary for you to produce statements in line with Generally Accepted Accounting Principles, or GAAP. For example, you might prefer recording your income when you deposit a payment into your banking account and report the expenses whenever you make out a check to cover an expense. Accountants refer to this accounting method the cash method of accounting. While this means of bookkeeping does not fall in line with GAAP, it is adequate for a small start-up.

As your business grows, then, you might elect to adopt a more sophisticated financial recordkeeping method. At this point, you may need to consider the accrual method of accounting. With this model, you record income when you have an invoice for services provided, rather than waiting to get paid for that service. You recognize a business expense when you receive a bill from a supplier, rather than waiting until you pay the supplies. This method of accounting is preferable because it allows you to more closely match the income your business generates to the expenses you incurred to earn it. For example, you may have received an advanced cash payment before you provided services to a customer. You may want to wait and record that amount as revenue during the year you actually provided the services, rather than the year in which you received the cash.

From an income tax perspective, the IRS is flexible in allowing you to choose an accounting method. According to its rules, you may use any method as long as it clearly reflects income and expenses and you treat all items of income and expenses in the same manner from one year to the next. Though, when you sell, produce, purchase product, special rules apply on when you’ll have to use the accrual method. If your business handles inventory whatsoever, you should consult your accountants to define when to use the accrual method.

Create a Budget

You’ll also want to be certain that the accounting software you choose enables you to produce a budget.

Compare your performance

And you’ll want to choose an accounting software that allows you to compare the current year financial statement with those of the previous year. This could help you set goals, gain insight, and see trends.

By way of example, if your revenue increased by 30-percent for 2011 over that from 2010, whereas your expenses only increased by 10 percent, this indicates that your business model may be super efficient. So it’s wise to ask yourself, were all expenses recorded? Is there a chance some revenue was duplicated? And did you really manage to increase your return on investment? It is critical to understand the base cause of these trends so as to form the proper picture of your business’s performance and to make critical regarding the finances of your small business. On the flip side, if your revenue increased by 10-percent in 2011 over that from 2010, but, to do so, your expenses increased by 30-percent, this suggests a lack of efficiency in your business plan. Are you investing in assets with the greatest return on investment? Or maybe you forgot to supply invoices during the year?

If you’d like, you can visit our tax library for further guidance at:

Self Employed Tax Guide
or
Startup Tax Guide

Booklet 656 form 433b is necessary for those business owners that have businesses that are any other entity than sole proprietorships. This form calculates the minimum offer you can make the IRS when attempting an offer in compromise, unless you’re able to provide evidence that would persuade the IRS to think otherwise.

How to complete form 433b of the 656

Section 1 is where you’ll provide an employer identification number, partners, officers, LLC members, major shareholders, and frequency of tax deposits.

Section 2: Next, the form asks for business asset details. This would include the company’s banking accounts, investment accounts, and notes receivable. Additionally it requests facts on the business’s real estate, vehicles, and equipment. However, in reporting their worth, the internal revenue service will let you exclude your equity in any income producing assets.

Section 3: In section 3 you are to provide information regarding your business income, such as average gross monthly income (supported by corroborating documents).

Section 4: This section seeks to know the business expenses. This form seeks average gross monthly business expenses found in documentation from the recent 6-12 months. Yet, again, if you do supply a profit and loss report for the time period, you can present an average amount of the expenses determined through these figures instead.

When calculating an offer

After entering your business’s financial specifics, Form 433-B establishes your lowest offer amount. The 433b then offers two calculations methods dependent upon whether you mean to pay the offer in full within five months or at some point later. Should you choose to pay sooner rather than later, you may establish your lowest possible offer as follows:

[ 48 x Business income in excess of expenses] Total available assets

If you choose to pay the offer beyond the five month mark, your base minimum offer increases to the following amount:

[Business income in excess of expenses x 60] Total assets available

the method you

In section 6

In portion 6, you will supply information such as whether your business has filed bankruptcy before, and whether or not your company has other affiliations that may owe money to your business. In this section, you will also be asked to disclose specifics on whether you have unloaded any assets at a discount in these past ten years.

Visit the offer of compromise Guide at:
Mercer Island CPA
Seattle Business Valuation
Seattle Tax Debt Relief

Similar to some other costs in doing business, you may receive income tax deductions for any travel expenses you personally incur so that you may provided services to your clients. However, it is smart to plan ahead for business travel as a way to get the maximum deduction.

Expenditure that might be called unnecessary do not qualify for the deduction. You may only deduct travel expenses if they are ordinary in nature. Consider the following types of travel expenses are usually deductible:

• Meals and hotel costs.
• Dry cleaning and laundry expenses occurred during business travel.
• Transportation costs in travelling from your personal home to the client’s site.
• Gas and fuel and the etcetera automotive costs you pay when working at the client location.

There isn’t a rigid or concrete rule regarding when travel expense is business-related. However, you cannot claim a deduction for the expense of your everyday trip from your residence and the office. Instead, the daily trip is counted as a personal expense.

Tax deductible travel expenses demand that you travel more than just a short distance from your main worksite to provide service to a client. This in generic terms, means you’ll have to leave the city in which you usually conduct business or, for smaller towns, you will have to leave the general surrounding area. Generally, travel expenses are eligible for a tax deduction if you have travelled far on long enough that you must sleep the night.

It is allowable to deduct for business travel expenses incurred while operating away from your tax home. However, if you do provide services at a client location for an indefinite amount of time or for over a year, you cannot claim the deduction.Keeping detailed records is key. Establish this practice to ensure easier tax preparation, and support the any and all deductions you claim on your return.

More information on travel expenses and deductions could be found at www.irs.gov (Travel, Entertainment, Gift and Car Expenses).

Through charitable donations, your business could benefit by gaining tax deductions and also earning good media coverage. Let’s study this a bit further.

Goods and servicesA donation to a second-hand store such as Value Village above $250, ought to qualify as a substantial donation. By acquiring a receipt from the non-profit organization you are going to have the supporting documents to confirm the acceptance of goods and as a result merit a tax break. If your business has an excess of a good, you may elect to donate the exess item. In doing so, you will then acquire a tax advantage, you’ll clear space for different products, and show (that is if you make public the contribution) that your business is a compassionate organization that provides for those of us that are in need.

Another example would be for services that you offer to the public. This approach is a way to perform community service and also acquire a tax deduction as well. The United Way and other such organizations often host events where low-income and indigent folks gather to receive, en masse, services that they could not afford or have access to. Your assistance would be classified as a charitable contribution at fair market value and the organization would give you a receipt declaring the value associated with these services for tax purposes. On your side, this receipt as well as all of the materials utilized could be considered write offs. Please make note these events afford such a large gathering of people that by means of word of mouth and direct exposure your small business will possibly be seen by numerous individuals. Similar examples might include donating scrap from your finished product. This could be excess vegetables, or a product which just doesn’t fulfill company specifications and consequently could not be sold. Once again fair market value regulations apply.

Cash Contributions

In compliance with internal revenue service policies, a receipt is wanted for any single donation over $250 so as to claim the tax deduction. This type of contribution is popular and is the easiest to maintain. One means is planned giving. This can be established to regularly occur. As a business owner, this is a smart way to plan your annual charitable deduction and maintain your cashflow reserves, arriving a predictable outcomes. These are just a few instances of how your small business can benefit the community, improve your public image, and get a tax break in addition. Please remember whenever possible, consult your tax preparer for directions on the Schedule C form because limitations apply to this type of deduction. The above details can be found in PUB 526 and guidelines for disclosure in Publication 1771.