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Q&A: No Business Income, No Home-Office Deduction: Wrong

Posted on July 29th, 2019

Question

My CPA told me that if I don’t have any income in 2018, I can’t have a home-office deduction. True or false?

Answer

First, this is bad advice, as you will see.

Let’s examine what your CPA is telling you. Your CPA is saying that you will not receive any 2018 tax benefit from your home office because you have no income. On the surface that would appear true, but it’s not, as we explain.

Your Situation

You state that you don’t have any 2018 income. This could mean that you started your business late in the year and that you have expenses but have not yet received any income. In this case, you have tax deductions that you can claim and likely a tax loss that you can carry forward to 2019.

Or perhaps you have a continuing business that simply had a bad year, and your expenses are more than your income. Again, you would have a tax loss that you can carry forward to 2019.

Bad Advice No. 1

If you have a tax loss from your business and you are told not to file a tax return, that’s bad advice, because that tax loss can produce future benefits. Under current tax law, you may carry forward a 2018 tax loss to 2019, where that loss reduces your 2019 taxes.

The official name for the loss that you can carry forward is the net operating loss (NOL).1 As a business taxpayer, you should think of the NOL as a tax deduction savings account for future years.

Planning tip no. 1. Always claim all your tax deductions, even when you have a tax loss.

Planning tip no. 2. Always file a tax return even if it shows a loss, so the IRS knows about your loss and you have the loss documented.

Bad Advice No. 2

The advice not to claim the home office because you are not going to get a 2018 deduction from the home office is wrong on two counts:

  • First, failing to claim the home office as your principal place of business means you have commuting mileage (i.e., ugly, personal, nondeductible mileage).
  • Second, failing to claim the home office because it gives you no current-year benefit robs you of the home-office deduction carryovers to future years.

Below, we’ll examine the (a) loss of business miles and (b) loss of the carryover benefit.

Loss of Business Miles

Without a home office, you have personal mileage on your trips from your home to your first business stop, and from your last business stop to your home.2

Example 1. You do not have a home office, and you drive 22 miles roundtrip to see a client. The 22 miles are personal miles.

Example 2. You do not have a home office, and you drive 18 miles roundtrip to your downtown office. The 18 miles are personal miles.

Turning the Miles into Business Miles

When you have an office in your home that rises to the level of a principal office, you treat the miles in examples 1 and 2 as business trips.3 In other words, you have no commuting mileage.

But to make this happen, you need to claim the office in your home as your principal place of business, which is easy to do as we explain in When the Second Office in the Home Is a Principal Place of Business.

Loss of Carryover

If you have no current-year Schedule C income, you have no current-year tax benefit from the home office, but the deductions disallowed this year carry over to next year.4

If you don’t claim the home-office deduction, you have no expenses to carry over.

Qualifying for the Carryover

To qualify for the carryover when you have no income, you need to claim the home office.

Takeaways

Deduct the office in your home as your principal place of business.

By claiming the office in the home as your principal place of business when you have no business income for the year or perhaps a business loss for the year, you gain three tax benefits:

  1. Your Schedule C-denied home-office deductions that produced no tax benefits this year carry over to next year, where they offset your business income.
  2. You no longer commute from your home to business stops. Instead, all such trips produce business mileage.
  3. Any business loss apart from the home office can create an NOL that you can apply against next year’s taxes.

 

1 IRC Section 172 2018.
2 Walter R. Strohmaier v Commr. 113 T.C. No. 5; IRS Pub. 463, Travel, Gift, and Car Expenses (2018), dated Feb. 22, 2019, ps. 12 and 13.
3 Rev. Rul. 99-7.
4 IRC Section 280A(c)(5).

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Tax Deduction for Classic or Antique Cars Used in Business

Posted on July 22nd, 2019

Question

I enjoy your articles on the dollars-and-cents aspects of buying antique furniture for use in a business.

It would be interesting if you could give an example of, say, buying an antique or a classic car versus a new car as a business-use vehicle. Let’s say a 1972 Pontiac GTO versus a 2019 Lexus GS. Read More…

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New Opportunities for Deferring Taxable Gains: Qualified Opportunity Zones 101

Posted on July 19th, 2019

What are Qualified Opportunity Zones and how can I benefit as a taxpayer?

Recently, I’ve had many clients – individuals, business owners, and investors – ask me about the recent buzz surrounding Qualified Opportunity Zones (QOZs). They’ve come to me saying they’ve heard that QOZs can help them defer…and even reduce…their tax liability on capital gains.

The first thing I tell them is, yes, all of the above is true. Next? I warn them that it’s complicated, like many of the tax regulations that have emerged from 2018’s Tax Cuts and Jobs Act. You must consult with a qualified CPA to ensure you’re following proper protocol required for reaping the rewards of investing in a Qualified Opportunity Zone. Read More…

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Your Canceled Debt Could Be Taxable

Posted on July 2nd, 2019

Generally, debt that is forgiven or canceled by a lender is considered taxable income by the IRS and must be included as income on your tax return. When that debt is forgiven, negotiated down (when you pay less than you owe), or canceled you will receive a Form 1099-C, Cancellation of Debt, from your financial institution or credit union. Form 1099-C shows the amount of canceled or forgiven debt that was reported to the IRS. Creditors who forgive $600 or more of debt are required to issue this form. Read More…

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IRS Ends Tax Transcript Fax and Third-Party Services

Posted on July 2nd, 2019

Due to ongoing efforts to protect taxpayers from identity thieves, the Internal Revenue Service no longer offers tax transcript faxing service and third-party mailing of tax returns and certain transcripts. These measures are effective June 28 and July 1, 2019, respectively, and affect individual and business transcripts. Read More…

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Special Tax Breaks for Members of the Armed Forces

Posted on July 2nd, 2019

Active members of the U.S. Armed Forces should be aware that there are special tax benefits available to them such as not having to pay taxes on some types of income or more time to file and pay their federal taxes. If you’re an active member of the armed forces, here’s what you should know about these important tax benefits. Read More…

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Deducting Business-Related Car Expenses

Posted on July 2nd, 2019

If you’re self-employed and use your car for business, you can deduct certain business-related car expenses.

There are two options for claiming deductions: Read More…

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10 Facts About the 2019 Child Adoption Tax Credit

Posted on July 2nd, 2019

If you adopt a child in 2019, you may qualify for a tax credit, and if your employer helped pay for the costs of an adoption, you may be able to exclude some of your income from tax. Here are ten facts you should know about the Adoption Tax Credit. Read More…

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What to Do if You Receive an IRS CP2000 Notice

Posted on July 1st, 2019

An IRS CP2000 notice is mailed to a taxpayer when income reported from third-party sources such as an employer, bank, or mortgage company does not match the income reported on the tax return.

It is not a tax bill or a formal audit notification; it merely informs you about the information the IRS has received and how it affects your tax. It is, however, important to pay attention to what your CP2000 notice states because interest accrues on your unpaid balance until you pay it in full. Read More…

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Tax Reform Reminder: Changes to Itemized Deductions

Posted on July 1st, 2019

Under tax reform, many tax laws changed, including those affecting itemized deductions. While many people no longer need to itemize due to the nearly doubling of the standard deduction, certain taxpayers whose total deductions exceed the standard deduction may still want to consider itemizing. As a reminder, here is a quick summary of how tax reform affected four itemized deductions used by many taxpayers in prior years: Read More…

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