Small Business Tax and Health Care Reminders for the 2014 Tax Season

As we head into the home stretch of the 2014 filing season, here are a couple of reminders related to returns that include Schedule C or other small business income tax returns.

Simplified Home Office Deduction
Beginning with Tax Year 2013 returns, a taxpayer may choose to calculate their home office expense by using the new simplified method thus removing the requirement to file Form 8829 (Expenses for Business Use of Your Home).

By using the new simplified method, the taxpayer may use a flat deduction amount of $5 per square foot for up to 300 square feet of their home for business purposes.

If this method is used, then the entire allowable home mortgage interest and property taxes may be claimed on Schedule A.

It is important to note that the criteria for claiming an office in home deduction does not change if the taxpayer chooses to use the simplified method.

For more details see the Simplified Option for Home Office Deduction page on IRS.gov and/or the 2014 Schedule C instructions for Line 30.

Small Business Health Care Tax Credit
The Small Business Health Care Tax Credit is available to businesses with fewer than 25 full time employees with average wages of less than $50,000. To be eligible, a qualifying employer must provide health insurance that covers at least 50 percent of the cost of single health care coverage for their employees.

Eligible small employers may claim this credit by completing Form 8941 (Credit for Small Employer Health Insurance Premiums) and including it with their 2013 federal tax return.

Credit is calculated on a sliding scale with a maximum credit of 35% of the employer's contribution that is made for their employees' health insurance premiums.

Maximum credit is available to employers with 10 or fewer full time employees and average wages of no more than $25,000. The credit is then reduced based on each additional employee and for each $1,000 increase in the average wages until the limits are reached.

For more information on the Small Business Health Care Tax Credit see the following:

• 2013 Form 8941 instructions
• What You Need to Know about the Small Business Health Care Tax Credit page on IRS.gov.
• IRS news article of March 10, 2014 encouraging small employers to take advantage of the Small Business Health Care Tax Credit.

Reminders for Upcoming 2014 Filing Season

Below are some reminders about when the 2014 Filing Season will begin and some of the new tax law changes that will affect individual returns for Tax Year 2013:

Start of Filing Season
Both the individual and business filing season will be starting later due to the government shutdown this past October 2013.

First day of filing season will be:

• For individual returns: Friday, January 31, 2014
• For business (Corporate, Partnership, Fiduciary) returns: Monday, January 13, 2014

New Tax Provisions for 2013 Federal Returns
The following federal provisions are new for the upcoming filing season:

• New Simplified Method for Home Office Deduction
  In order to provide simplification for taxpayers that claim the home office deduction on Schedule C, the IRS now gives taxpayers the option to use a simplified method to calculate the home office deduction. Instead of using Form 8829, the taxpayer may multiply the square footage used for business footage by $5.
  For more information, see the following on the IRS website:
  • Simplified Option for Home Office Deduction
  • 2013 Schedule C instructions
• Itemized Medical Expense Deduction Threshold Percentage 
  Starting with 2013 individual returns, the threshold percentages for when medical expenses are included as an itemized deduction have changed to:
  • Taxpayers under age 65: 10%
  • Taxpayers age 65 and older: 7.5%
  For more information see the 2013 Instructions for Schedule A.

• Changes for High Income Individuals
• New 39.6% tax rate when AGI exceeds $400,000 ($450,000 for Married Filing Joint (MFJ))
• Itemized Deduction and Personal Exemption will begin to be phased-out when AGI reaches $250,000 ($300,000 for MFJ)
• Additional 3.8% tax will be imposed on net investment income when AGI exceeds $200,000 ($250,000 for MFJ). This will be calculated on new Form 8960 (Net Investment Income Tax Individuals, Estates and Trusts).
• Additional Medicare Tax will be due for taxpayers with wage and self-employment income over $200,000 ($250,000 for MFJ). This will be calculated on new Form 8959 (Additional Medicare Tax).

For more details on these changes, see the following:

• IRS Questions and Answers for the Additional Medicare Tax
• IRS Questions and Answers on the Net Investment Income Tax
• 2013 Form 1040 instructions (Deduction for Exemptions Worksheet on Page 40) for phase out of the personal exemption
• 2013 Schedule A instructions (Itemized Deductions Worksheet on page A-13) for phase out of itemized deductions

For a complete listing of federal tax law changes that will affect individual 2013 tax returns, see the Things to Know for the Current Tax Year section of the CrossLink Tax Resource Center.

Additional 2013 Federal Tax Changes

In order to reduce taxpayer burden, the IRS has added the following new options to Schedule C and Schedule D:

Home Office Deduction — New Simplified Method
This new simplified method has been added to Schedule C and may be used by taxpayers that use 300 square feet or less of their home for business purposes.

Here are highlights of the simplified method:

• Uses flat deduction amount of $5 per square foot to calculate the expenses for business use of your home on Schedule C, line 30.
• If simplified option is used, then Form 8829 (Expenses for Business Use of Your Home) does not need to be completed.
• Allowable mortgage interest and property taxes may be claimed in full on Schedule A if the simplified method is used.
• A depreciation deduction may not be claimed for years that the simplified option is used.
• If the home office expense that is calculated using the simplified method is limited because it exceeds the business gross income, the excess may not be carried forward to a future year. Under the regular method any excess can be carried forward.
• You may choose to use either the simplified method or the regular method (complete Form 8829) for any taxable year. This means you can switch back and forth each year.

For more details see the Simplified Option for Home Office Deduction.

Aggregate Transaction Reporting on Schedule D
(Capital Gains and Losses)
For stock sales, if the basis that is reported on the Form 1099-B (Proceeds From Broker and Barter Exchange Transactions) is correct, then the totals of all of these transactions may be reported directly on Schedule D on new lines 1a or 8a instead of completing Form 8949 (Sales and Other Dispositions of Capital Assets).

Tax Update: IRS and Schedule C Due Diligence Letters and Visits

As part of the IRS’s continued efforts to increase paid preparer accuracy and due diligence in preparing tax returns, the IRS has begun to focus on returns that include a Schedule C. This past November and last month (January 2013) the IRS sent out 4,000 letters to preparers whom had been identified as preparing Schedule C’s that may have contained errors. Read more

In November, 1,200 return preparers received a letter informing them that the IRS would be conducting an educational visit to go over their responsibilities in preparing returns containing a Schedule C.

Click here to read more about the IRS and Schedule C Due Diligence Letters and Visits, as well as to view IRS Letters 4810, 5102, and 5105 for further details.