High Net Worth Taxes

Home Office Tax Rule Changes

Home Office 2There was a time that determining the correct deductions for your home office was complicated and could lead directly to an audit. Luckily, those days are in the past. The IRS no longer considers a home office a red flag, and they have found ways to simplify the process of taking this deduction.

Before 2013, business owners that worked out of their home were required to determine the actual expenses of their home office. This could include items such as utilities, insurance, and mortgage interest. The amount that could be deducted as a business expense was determined by the percentage, of the total square footage of your home, that was used for office space, but in 2013 that all changed.

For taxable years of 2013 and beyond, the IRS has introduced a simplified option. This allows business owners to multiply a prescribed rate by the square footage of the home that is being used as office space to determine the allowable deduction.

This change permits business owners to reduce the need for recordkeeping as actual expenses no longer need to be tracked.

There are two requirements that a business owner needs to meet to be eligible for the home office tax deduction. First, the area of your home that is used for your office must be used exclusively for conducting business. That means a kitchen table is not a home office, but if you have a room in your home that you use for office space exclusively, that would qualify.

Secondly, your home office must be your principal place of business. That doesn’t mean you can’t have an office elsewhere, but you need to be using your home office for meetings with clients, or some other activity that would suggest it is not simply an area that you work in from time-to-time.

If you have a home office, don’t hesitate to take the deduction you are entitled to. With the simplified option to determine your deduction, this is one time the IRS has made it too easy to pass up.

Trump Fires Shot at Hedge Funds

Don Trump2If you pay attention to recent headlines, it may seem that being a hedge fund manager is the equivalent of being a punching bag, but while Donald Trump and others may be wagging their fingers and sparring verbally, there may be good reason to do so.

According to Trump, “The hedge fund guys didn’t build this country. These are guys that shift paper around and they get lucky. It is the wrong thing. These guys are getting away with murder.”

He goes on to say, “They are energetic. They are very smart. But a lot of them – they are paper-pushers. They make a fortune. They pay no tax. It’s ridiculous, ok?”

While one might argue whether or not hedge fund managers are paper pushers, there is much truth when it comes to using hedge funds to avoid paying taxes. Most hedge funds are limited partnerships with the investors being the partners. There is also a person that manages the fund. This person is paid a certain percent of the profits of the fund.

Due to the fact that the manager is compensated on the profits, the vast majority of the income that is generated by the fund is not taxed as compensation or salary. Instead it is taxed as a return on investment. This means that the income this person receives is taxed as capital gains instead of regular income.

The bottom line is that the fund manager is paying 20% income tax, (capital gains), instead of the typical 39.6% tax rate for those in this tax bracket. It is this loop hole of claiming regular income as capital gains and paying a much lower rate of tax instead of paying ordinary income tax rates that rightfully causes concern and scorn from some politicians and others such as Donald Trump. It is the typical argument of one set of rules for the rich and another set for the middle class.