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Question. If you have an office outside your personal home—say, downtown—can you have a tax-deductible office inside your home for the same trade or business?

Answer. Yes.

Q. Who says that?

A. The IRS.

Q. Show me where they say that!

In IRS Publication 587, the IRS says this:

Your home office will qualify as your principal place of business if you meet the following requirements:

1. You use it exclusively and regularly for administrative or management activities of your trade or business.
2. You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

The quote above mirrors the law and the legislative history, as you will see below. Note the following points:

• The administrative office is a “principal” office.
• You must use this office exclusively for business.
• You must use this office regularly for business.
• You must do your administrative work in your home office.
• You must not do your administrative work in the office outside the home.

Here is a second important quote from IRS Publication 587:

You can have more than one business location, including your home, for a single trade or business.

The IRS makes this rule very clear and straightforward: you may have more than one office for your business, including an office in your home.

If you own your own business and operate as a proprietorship or partnership (wherein your spouse is not a partner), one of the smartest tax moves you can make is hiring your spouse to work as your employee.

But the tax savings may be a mirage if you don’t pay your spouse the right way. And the arrangement is subject to attack by the IRS if your spouse is not a bona fide employee.

Here are four things you should know before you hire your spouse that will maximize your savings and minimize the audit risk.

1. Pay benefits, not wages. The way to save on taxes is to pay your spouse with tax-free employee benefits, not taxable wages. Benefits such as health insurance are fully deductible by you as a business expense, but not taxable income for your spouse.

Also, if you pay a spouse only with tax-free fringe benefits, you need not pay payroll taxes, file employment tax returns, or file a W-2 for your spouse.

2. Establish a medical reimbursement arrangement. The most valuable fringe benefit you can provide your spouse-employee is reimbursement for health insurance and uninsured medical expenses. You can accomplish this through a 105-HRA plan if your spouse is your sole employee, or an Individual Coverage Health Reimbursement Account (ICHRA) if you have multiple employees.

3. Provide benefits in addition to health coverage.There are many other tax-free fringe benefits you can provide your spouse in addition to health insurance, including education related to your business, up to $50,000 of life insurance, and de minimis fringes such as gifts.

4. Treat your spouse as a bona fide employee. For your arrangement to withstand IRS scrutiny, you must be able to prove that your spouse is your bona fide employee. You’ll have no problem if:

• you are the sole owner of your business,
• your spouse does real work under your direction and control and keeps a timesheet,
• you regularly pay your spouse’s medical and other reimbursable expenses from your separate business checking account, and
• your spouse’s compensation is reasonable for the work performed.

As you likely know by now, the Paycheck Protection Program (PPP) loan and its forgiveness process have been an ever-changing (and often confusing) ride so far.

With the new rules for PPP loans of $50,000 or less, you escape from the most difficult part of the loan forgiveness if you had to consider employees.

And you may even obtain more loan forgiveness than you would have otherwise.

Before

Before the $50,000-or-less rule, you had to either suffer a reduction in loan forgiveness or meet one of the many exceptions that allowed you to

• cut annual salaries or hourly wages by more than 25 percent, and/or
• reduce the average number of employees or average hours paid.

After

Now, with a PPP loan of $50,000 or less, you don’t have to consider the myriad rules about employees. Regardless of what you did with your employees, you qualify for full forgiveness if

• your PPP loan is for $50,000 or less,
• you spent the PPP money on costs that are eligible for forgiveness, and
• at least 60 percent of the forgiveness is for qualified payroll costs (including defined payroll for owners).

Example. Henry obtained a PPP loan of $34,000 based on his 2019 Schedule C income and pay to his part-time employee. When COVID-19 hit, Henry laid off his part-time worker and has not rehired him. Using SBA Form 3508S and the 24-week covered period, Henry qualifies for 100 percent forgiveness of his $34,000 loan because he spent $20,833 (61 percent) on the deemed payroll to himself and the remainder on five months’ rent and utilities.

Planning note. Henry is not an employee of his Schedule C business. He receives no W-2 income. But the PPP rules deem Henry’s 2019 Schedule C profits as his payroll for PPP loan purposes. The rules cap the Schedule C taxpayer’s loan amount and forgiveness at a maximum of $20,833 when Schedule C income is $100,000 or more.

If a loved one passes away and you serve as the executor or inherit assets, you need to consider your duties and so some tax planning.

Filing the Final Form 1040 for Unmarried Decedent

If the decedent was unmarried, an initial step is to file his or her final Form 1040.

That return covers the period from January 1 through the date of death. The return is due on the standard date: for example, April 15, 2021, for someone who dies in 2020, or October 15, 2021, if you extend the return to that date.

Surviving Spouse May Be Able to Use Joint Return Rates for Two Years Following Deceased Spouse’s Year of Death

The benefits of the married-filing-joint status are extended to a qualified widow or widower for the two tax years following the year of the deceased spouse’s death.

In general, to be a qualified widow/widower for the year, the surviving spouse must be unmarried as of the end of the year.

If Decedent Had a Revocable Trust

To avoid probate, many individuals and married couples of means set up revocable trusts to hold valuable assets, including real property and bank and investment accounts.

These revocable trusts are often called “living trusts” or “family trusts.” For federal income tax purposes, they are properly described as “grantor trusts.”

As long as the trust remains in revocable status, it is a grantor trust, and its existence is disregarded for federal income tax purposes. Therefore, the grantor or grantors are treated as still personally owning the trust’s assets for federal income tax purposes, and tax returns of the grantor(s) are prepared accordingly.

Basis Step-Ups for Inherited Assets

If the decedent left appreciated capital gain assets—such as real property and securities held in taxable accounts, the heir(s) can increase the federal income tax basis of those assets to reflect fair market value as of

• the decedent’s date of death, or
• the alternate valuation date of six months after the date of death, if the executor of the decedent’s estate chooses to use the alternate valuation date.

When the inherited asset is sold, the federal capital gains tax applies only to the appreciation (if any) that occurs after the applicable magic date described above. The step-up to fair market value can dramatically lower the tax bill. Good! 

Co-ownership. If the decedent was married and co-owned one or more homes and/or other capital gain assets with the surviving spouse, the tax basis of the ownership interest(s) that belonged to the decedent (usually half) is stepped up.   

Community property. If the decedent was married and co-owned one or more homes and/or other capital gain assets with the surviving spouse as community property in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), the tax basis of the entire asset—not just the half that belonged to the decedent—is stepped up to fair market value.

This strange-but-true rule means the surviving spouse can sell capital gain assets that were co-owned as community property and only owe federal capital gains tax on the appreciation (if any) that occurs after the applicable magic date. That means little or no tax may be owed. Good!

The purpose of this article is to get the IRS to owe you money.

Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.

Here are seven powerful business tax deduction strategies that you can easily understand and implement before the end of 2020.

1. Prepay Expenses Using the IRS Safe Harbor

You just have to thank the IRS for its tax-deduction safe harbors.

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Under this safe harbor, your 2020 prepayments cannot go into 2022. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Thursday, December 31, 2020, you mail a rent check for $36,000 to cover all of your 2021 rent. Your landlord does not receive the payment in the mail until Tuesday, January 5, 2021. Here are the results:

• You deduct $36,000 in 2020 (the year you paid the money).
• The landlord reports taxable income of $36,000 in 2021 (the year he received the money).

You get what you want—the deduction this year.

The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.

Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2020, he would have had to pay taxes on the rent money in tax year 2020.

2. Stop Billing Customers, Clients, and Patients

Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2020. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)

Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Jim Schafback, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December, he sends no bills. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2020 income by moving that income to 2021.

3. Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2020.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

4. Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

5. Don’t Assume You Are Taking Too Many Deductions

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.

If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years; however, the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.

What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

6. Thank COVID-19

Let’s be real: there’s little to be grateful for with COVID-19, with one of the several exceptions being the potential opportunities to turn NOLs into cash for your business.

Two NOL opportunities come from the Coronavirus Aid, Relief, and Economic Security (CARES) Act:

1. The CARES Act allows NOLs arising in tax years beginning in 2018, 2019, and 2020 to be carried back five years for refunds against prior taxes.
2. The CARES Act allows application of 100 percent of the NOL to the carryback years.

Before the CARES Act, you could not carry back your 2018, 2019, or 2020 losses, and your NOL could offset only up to 80 percent of taxable income before your Section 199A deduction.

7. Deal with Your Qualified Improvement Property (QIP)

In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made in the TCJA.

QIP is any improvement made by the taxpayer to the interior portion of a building that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.

If you have such property on an already filed 2018 or 2019 return, it’s on that return as 39-year property. You now have to change it to 15-year property, eligible for both bonus depreciation and Section 179 expensing.

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The clock continues to tick. Your retirement is one year closer.

You have time before December 31 to take steps that will help you fund the retirement you desire. Here are four things to consider:

1. Establish Your 2020 Retirement Plan

First, a question: As you read this, do you have your (or your corporation’s) retirement plan in place? 

If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2020.

For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.

2. Claim the New, Improved Retirement Plan Start-Up Tax Credit of Up to $15,000

By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of

• $500 or
• the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.

The credit is based on your “qualified start-up costs,” which means any ordinary and necessary expenses of an eligible employer that are paid or incurred in connection with

• the establishment or administration of an eligible employer plan, or
• the retirement-related education of employees with respect to such plan.

3. Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)

The SECURE Act added a nonrefundable credit of $500 per year for up to three years beginning with the first taxable year beginning in 2020 or later in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.

The new $500 auto contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You simply need to add the auto-enrollment feature.

4. Convert to a Roth IRA

Consider converting your 401(k) or traditional IRA to a Roth IRA.

If you make good money on your IRA investments and you won’t need your IRA money during the next five years, the Roth IRA over its lifetime can produce financial results far superior to the traditional retirement plan.

You first need to answer this question: How much tax will I have to pay now to convert my existing plan to a Roth IRA? With the answer to this, you know how much cash you need on hand to pay the extra taxes caused by the conversion to a Roth IRA.

Here are four reasons you should consider converting your retirement plan to a Roth IRA:

1. You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax-free and penalty-free, because you invested previously taxed money into the Roth account.
2. You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free. (If you make that conversion withdrawal within five years, however, you pay a 10 percent penalty. Each conversion has its own five-year period.)
3. When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59 1/2, provided you’ve had your Roth IRA open for at least five years.
4. Unlike with the traditional IRA, you don’t have to receive required minimum distributions from a Roth IRA when you reach age 72—or to put this another way, you can keep your Roth IRA intact and earning money until you die. (After your death, the Roth IRA can continue to earn money, but someone else will be making the investment decisions and enjoying your cash.)

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Are you one of the millions of businesses that have an outstanding non-disaster Small Business Administration (SBA) loan? These include:

• 7(a) loans: general small business loans of up to $5 million,
• 504 loans: loans of up to $5.5 million to provide financing for major fixed assets such as equipment or real estate, and
• microloans: short-term loans of up to $50,000 for small businesses.

If so, you have already benefited, or soon will benefit, from a little-known provision included in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Congress appropriated $17 billion so that the SBA could provide a temporary loan payment subsidy to businesses with these non-disaster SBA loans. Under this provision, the SBA automatically makes six monthly loan payments on behalf of borrowers. There is no need to file an application.

Are the SBA loan subsidies taxable income to you?

Unfortunately, the CARES Act is silent on this subject and the IRS has yet to issue any guidance on this particular loan subsidy program. In the past, the IRS advised that similar loan payments were includible in income by the taxpayer-borrower.

It’s unclear whether the IRS will follow this prior guidance.

The IRS could instead conclude that these loan subsidies are not taxable under the general welfare exclusion. The general welfare exclusion has often been used to exempt from tax SBA disaster payments made to individual taxpayers. The exclusion ordinarily does not apply to payments to business. But the IRS could make an exception due to the extraordinary nature of the COVID-19 pandemic.

It’s also possible that Congress will act to make the SBA loan payments tax-free. This could be done in a future stimulus bill.

Right now, the prudent course is to assume that the SBA loan subsidies are taxable income and plan accordingly.

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Here’s an easy question: Do you need more 2019 tax deductions? If yes, continue on.

Next easy question: Do you need a replacement business vehicle?

If yes, you can simultaneously solve or mitigate both the first problem (needing more deductions) and the second problem (needing a replacement vehicle), but you need to get your vehicle in service on or before December 31, 2019.

To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2019. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.

Now that you have the basics, let’s get to the tax deductions.

1. Buy a New or Used SUV, Crossover Vehicle, or Van

Let’s say that on or before December 31, 2019, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four big benefits:

1. The ability to elect bonus depreciation of 100 percent (thanks to the Tax Cuts and Jobs Act)
2. The ability to select Section 179 expensing of up to $25,500
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

Example. On or before December 31, 2019, you buy and place in service a qualifying used $50,000 SUV for which you can claim 90 percent business use. Your business cost is $45,000 (90 percent x $50,000). Your maximum write-off for 2019 is $45,000.

2. Buy a New or Used Pickup

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2019, then this newly purchased vehicle gives you four big benefits:

1. Bonus depreciation of up to 100 percent
2. Section 179 expensing of up to $1,020,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

• a GVWR of more than 6,000 pounds, and
• a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. The vehicle is still eligible for either expensing of up to the $25,500 SUV expensing limit or 100 percent bonus depreciation.

The easiest way to avoid the headaches and potential penalties caused by issuing 1099s to independent contractors is to structure your activities to

1. minimize the number you have to issue, and
2. prepare in advance if you do have to issue them.

Strategy 1: Select Contractors That Operate as Corporations

Your business does not have to report payments made to corporations, including S corporations, on Form 1099-MISC (unless the corporation collects attorney fees or payments for health and medical services). This rule also applies to LLCs that elect corporate status for federal tax purposes.

If all your independent contractors are corporations or LLCs taxed as corporations for federal tax purposes, you have no 1099 filing requirements. Period!

Strategy 2: Make Payments by Credit Card or Third-Party Payment Networks

Don’t report payments made via credit card and other third-party payment networks like PayPal on a Form 1099-MISC. Credit card companies and third-party networks report these payments to the contractors on a Form 1099-K.

Strategy 3: Always Get a W-9 Up Front Before Making Any Payments to the Contractor

By getting the W-9 up front before you make a payment to the independent contractor, you guarantee several things:

1. You know whether you have a 1099 filing requirement for the independent contractor, because he, she, or it discloses the business type to you.
2. You know whether an LLC is classified as a corporation for federal tax purposes and, therefore, excluded from 1099 reporting.
3. You won’t have to chase the contractor down next year for the required information if you have to file a 1099. Once you’ve paid the contractor, your leverage for the 1099 information is gone and the contractor might not give you the information you need.

Watch your wallet: the median cost in 2018 for an assisted living facility was $48,000 and over $100,000 for nursing home care.

If you could deduct these expenses, you’d substantially reduce your income tax liability—possibly down to $0—and dramatically reduce your financial burden from these costs. As you might expect, the rules are complicated as to when you can deduct these expenses. But I’m going to give you some tips to help you understand the rules.

Medical Expenses in General

On your IRS Form 1040, you can deduct expenses paid for the medical care of yourself, your spouse, and your dependents, but only to the extent the total expenses exceed 10 percent of your adjusted gross income.

Medical care includes qualified long-term care services. Assisted living and nursing home expenses can be qualified long-term care expenses, depending on the health status of the person living in the facility.

If you operate a business, with the right circumstances, your business could establish a medical plan strategy that could turn the medical expenses into business deductions.

Qualified Long-Term Care Services

The term “qualified long-term care services” means necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which

• are required by a chronically ill individual, and
• are provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Chronically Ill Individual

A chronically ill individual is someone certified within the previous 12 months by a licensed health care practitioner as

1. being unable to perform, without substantial assistance from another individual, at least two activities of daily living for a period of at least 90 days due to a loss of functional capacity;
2. having a similar level of disability (as determined under IRS regulations prescribed in consultation with the Department of Health and Human Services) to the level of disability described in the first test; or
3. requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

A licensed health care provider is a doctor, a registered professional nurse, a licensed social worker, or another individual who meets IRS requirements.

Activities of Daily Living Test

For someone to be a chronically ill individual, at least two of the following activities of daily living must require substantial assistance from another individual:

• Eating
• Toileting
• Transferring
• Bathing
• Dressing
• Continence

Substantial assistance is both hands-on assistance and standby assistance:

• Hands-on assistance is the physical assistance of another person without which the individual would be unable to perform the activity of daily living.
• Standby assistance is the presence of another person within arm’s reach of the individual that’s necessary to prevent, by physical intervention, injury to the individual while the individual is performing the activity of daily living.

Examples of standby assistance include being ready to

• catch the individual if the individual falls while getting into or out of the bathtub or shower as part of bathing, or
• remove food from the individual’s throat if the individual chokes while eating.

Cognitive Impairment Test

Severe cognitive impairment is a loss or deterioration in intellectual capacity that is comparable to, and includes, Alzheimer’s disease and similar forms of irreversible dementia, and measured by clinical evidence and standardized tests that reliably measure impairment in the individual’s short- or long-term memory; orientation as to person, place, and time; and deductive or abstract reasoning.

Substantial supervision is continual supervision (which may include cuing by verbal prompting, gestures, or other demonstrations) by another person that is necessary to protect the severely cognitively impaired individual from threats to his or her health or safety (such as may result from wandering).