Before we dive into this week’s edition, a quick plug to check out your favorite CPA jamming on the piano along with - you guessed it - tax tips! Can you guess what tune I’m playing?

Now that we’re all jazzed up, on to today’s topics!

Receipts & Records. 

A very common question I get asked is - how long should a business keep their receipts/records and what constitutes good support? A good rule is AT LEAST three years - since this is how long the IRS can audit your records and you need to be able to show proof to support your deductions. These records can be kept by paper or digitally, but I HIGHLY suggest digitizing them all since receipts have a nasty little habit of fading overtime.

So what constitutes good support? A 3rd party documentation of the transaction is a good start - such as a receipt or even a bank statement in some circumstances.

Whether it’s a receipt or a bank statement - you need to provide the detail the IRS would want to know around that transaction - the who/what/when/where/why. Because of this - receipts will typically work better as support since you will have an itemized breakdown of the transaction in question. Additionally, even having the receipt might not be enough, you potentially need to provide additional information (like on a meal expense) such as who you were with, and what business was discussed.

A very common theme in tax court cases I read is expenses being disallowed because the taxpayer cannot prove their business use because they have either incomplete or no records, so if you want to be able to justify your deductions in audit, you must keep complete and detailed records.

Mojo Dojo Casa House Depreciation Recapture.

If you are self-employed/own a business, if you qualify, you have the option of deducting your home office. To do that - you must use it regularly (it’s your primary place of work) and exclusively (you can’t use it for anything else eg a guest bedroom, your dining room table, etc).

There are two different methods you can use for this - the simplified or the actual method.

With the simplified, you just take your home office square footage, multiply it by five, and that’s your deduction for the year (100 square feet x 5 = $500 home office deduction).

With the actual method - you take your actual home expenses (property taxes, mortgage interest, utilities, depreciation) and allocate the % of that expense to your home office based on square footage of your home office and your entire house (100 square foot office, 2,000 square foot hours = 5% home office use allocation of those expenses). ONE thing to be careful of if you own your home and do the actual method - when you sell your home you will be subject to depreciation recapture.

Depreciation recapture is when we take the depreciation expense we deducted in all the prior years, then add it back as a taxable event at ordinary income rates when you sell your house, and is not eligible for the primary residence sale exclusion. This means if you sold your home, and over the course of 10 years you deducted $10,000 in depreciation expense in your home office, all those prior years of depreciation expenses are now added as INCOME in the year you sold your house.

Now I know what you’re thinking, you’re going to try and get all clever and say, well I will take actual expenses, but I just won’t take the depreciation deduction. Now I won’t have to recapture anything when I sell. Huzzah!

WRONG - even if you DON’T take the depreciation expense, the fact that you were eligible to, counts as if you did. So now you have to recapture and expense you didn’t even take!

In short - if you have a home office and use the actual expense method, please use a licensed tax professional to assist in your return to avoid mistakes on this deduction.

Fresh Start Scam. 

Logan Allen posted about this on Twitter last week - TaxRise - a tax resolution business, is falsely claiming that the IRS has “launched’ a 2023 Fresh Start Program to help more people with tax relief.

Except they didn’t.

The Fresh Start initiative has been around since 2011, and is a way to help taxpayers with tax debt by giving them multiple options for paying past-due taxes based on a series of eligibility requirements. You can either take advantage of this program and work with the IRS directly, or go through a company to do it.

Shame on TaxRise for lying and using this as click-bait to try and get more clients.