Tax Tips September 2020

Click on the links below to jump to each section in this article:

• IRS Form 1040-X Now Available for E-Filing
• The Home Office Deduction
• Record-keeping Tips for Individuals and Businesses
• What To Do If You Get a Letter From the IRS
• E-Signatures Temporarily Allowed for Certain Forms

IRS Form 1040-X Now Available for E-Filing

Form 1040-X has been one of the last major individual tax forms that still needed to be paper-filed, but now taxpayers can quickly correct previously filed tax returns by submitting Form 1040-X, Amended U.S. Individual Income Tax Return electronically using commercial tax-filing software.

Approximately 3 million Forms 1040-X are filed by taxpayers each year and taxpayers must mail a completed Form 1040-X to the IRS for processing. The new electronic option, however, allows the IRS to receive amended returns faster while minimizing errors normally associated with manually completing the form. The process is also simplified because the tax-filing software allows users to input their data in a question-answer format. The new form also makes it easier for IRS employees to answer taxpayer questions since the data is entered electronically and submitted to the agency almost simultaneously.

Currently, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically, but additional improvements are planned for the future. Taxpayers still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form.

As always, don’t hesitate to call if you have any questions.

The Home Office Deduction

With more people working from home than ever before, taxpayers may be wondering if they can claim a home office deduction when they file their 2020 tax return next year. The short answer is that self-employed taxpayers who use their home for business may be able to deduct expenses for the business use of it whether they rent or own their home. If you are an employee, however, you are not eligible to take the home office deduction – even if you are working remotely in your home office.

Here is what taxpayers should keep in mind when it comes to understanding the home office deduction and whether they can claim it:

1. Regular and Exclusive Use. Generally, taxpayers must use a part of their home regularly and exclusively for business purposes. The part of a home used for business must also be:

• A principal place of business, or
• A place where taxpayers meet clients or customers in the normal course of business, or
• A separate structure not attached to the home. Examples could include a garage, barn, greenhouse, or studio.

For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.

The term “home” for purposes of this deduction is defined as a house, apartment, condominium, mobile home, boat or similar property. It does not include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.

A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.

2. Expenses that can be deducted. Taxpayers can deduct certain expenses such as mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent. They must meet specific requirements to claim home expenses as a deduction, and the deductible amount of these types of expenses may be limited.

3. Simplified Option. To use the simplified option, multiply the allowable square footage of the office by a rate of $5. The maximum footage allowed is 300 square feet. As such, the maximum deduction under this method is $1,500. This option saves time because it simplifies how to figure and claim the deduction and makes it easier to keep records. The rules for claiming a home office deduction remain the same.

4. Regular Method. This method includes certain costs paid for a home. For example, part of the rent for rented homes may qualify. Deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.

5. Deduction Limit. If the gross income from the business use of a home is less than expenses, the deduction for some expenses may be limited.

Taxpayers who are self-employed and choose the regular method should use Form 8829, Expenses for Business Use of Your Home, to figure the amount to deduct. Claim the deduction using either method on Schedule C, Profit or Loss from Business.

Please call if you would like more information about the home office deduction and how it applies to your tax situation.

Recordkeeping Tips for Individuals and Businesses

The key to avoiding headaches at tax time is keeping track of your receipts and other records throughout the year. Whether you use an excel spreadsheet, an app, an online system or keep your receipts organized in a folding file organized by month, good record-keeping will help you remember the various transactions you made during the year.

Taxpayers should add tax records to their files throughout the year as soon they receive them. This includes Notice 1444, Your Economic Impact Payment, and unemployment compensation documentation. Reviewing your recordkeeping systems now – or setting one up if you don’t already have one in place – will pay off when it comes time to file your 2020 tax return next spring. Keeping good records also helps document any deductions you’ve claimed on your return and you will need this documentation should the IRS select your return for audit.

Normally, tax records should be kept for three years, but some documents – such as records relating to a home purchase or sale, stock transactions, IRA, and business or rental property – should be kept longer. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return such as:

• Unemployment compensation
• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged, or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

Taxpayers should also keep records relating to property they dispose of or sell. These types of records are used to figure their basis for figuring gains or losses.

As a reminder, taxpayers should keep records for three years from the date they filed the return. Taxpayers who have employees must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.Good record-keeping throughout the year saves you time and effort at tax time.

For more information on what kinds of records you should keep or assistance on setting up a recordkeeping system that works for you, please call the office.

What To Do If You Get a Letter From the IRS

The IRS mails millions of notices and letters to taxpayers every year for a variety of reasons. If you receive correspondence from the IRS don’t panic. You can usually deal with a notice by simply responding to it; most IRS notices are about federal tax returns or tax accounts. Each notice has specific instructions, so read your notice carefully because it will tell you what you need to do. In most cases, your notice will be about changes to your account, taxes you owe or a payment request; however, your notice may also ask you for more information about a specific issue.

Unless you are specifically instructed to do so, there is usually no need for a taxpayer to reply to a notice. For example, if your notice says that the IRS changed or corrected your tax return, review the information and compare it with your original return. If you agree with the notice, you usually don’t need to reply unless the notice gives you other instructions or you need to make a payment.

If you don’t agree with the notice, you will need to write a letter that explains why you disagree and include information and documents you want the IRS to consider. Mail your response with the contact stub at the bottom of the notice to the address on the contact stub. Allow at least 30 days for a response.

For most notices, there is no need to call or visit the IRS. If you have questions, call the phone number in the upper right-hand corner of the notice. Be sure to have a copy of your tax return and the notice with you when you call. As always, keep copies of any notices you receive with your tax records.

Be alert for tax scams as well. As a reminder, the IRS sends letters and notices by mail and does NOT contact people by email or social media to ask for personal or financial information.

If you need assistance understanding an IRS Notice or letter, believe it is in error, or discover you owe additional tax, please call the office.

E-Signatures Temporarily Allowed for Certain Forms

The use of digital signatures on certain forms that cannot be filed electronically will now be temporarily allowed. Expanding the use of digital signatures will help to protect the health of taxpayers and tax professionals during the coronavirus pandemic by reducing in-person contact between taxpayers and tax professionals.

Form 1040, U.S. Individual Income Tax Return, already uses an electronic signature when it is filed electronically, either by using a taxpayer self-selected PIN, if self-prepared or a tax-preparer selected PIN, if using a tax professional. While more than 90 percent of Form 1040s are filed electronically, if you haven’t filed your 2019 tax return this year, it is important to consider e-filing forms whenever possible, due to COVID-19.

The following forms can be submitted with digital signatures if mailed by or on December 31, 2020:

• Form 3115, Application for Change in Accounting Method;
• Form 8832, Entity Classification Election;
• Form 8802, Application for U.S. Residency Certification;
• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;
• Form 1120-RIC, U.S. Income Tax Return For Regulated Investment Companies;
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;
• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;
• Form 1120-L, U.S. Life Insurance Company Income Tax Return;
• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; and
• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms.

This temporary option for e-signatures is subject to change at any time. Please contact the office with questions about this or any tax-related information.