Author: Leon Clinton

Do you claim a tax deduction for a home office?

Should you include or exclude your garage space in your calculations of business-use percentage?

Ronald Culp earned an office deduction for 78 percent of his home. That’s a nice percentage, but what’s really interesting is how the court looked at Mr. Culp’s home in deciding that 78 percent business use.

Here’s how the court made the computation that produced the 78 percent business use of Mr. Culp’s home: 

• The court counted the garage as office space because it could find no basis in law or fact for excluding it. (The garage held two printing presses and a large paper cutter that were integral to Mr. Culp’s business.)
• Regarding the utility room in the basement where the water heater and furnace were located, the court said this space failed the exclusive business-use standard for the home-office deduction and that such space counted as personal space.
• The attic, which measured 1,128 square feet, contained only 100 square feet of usable space. The court ruled that the other 1,028 square feet were not functional, because that footage was not accessible due to the slope of the roofline and/or the lack of flooring.

Observation. The printing took place in the garage, but the IRS said that such space was not usable space, and the IRS did not want it counted in the calculations. The taxpayer and the court agreed that the space should be counted in the calculations. Will this be true for other garages?

According to the court’s description, Gene Moretti rented a 5.5-room house consisting of two bedrooms, a den, a living room, a dining room, and a half-kitchen. The court noted that “the house also had a garage” and that Mr. Moretti claimed business use of the den, living room, dining room, and garage.

The court concluded that only the den met the regular and exclusive use requirements for qualification as an office in the home. 

To calculate the business percentage, the court used the number-of-rooms method and calculated that one room (the den) of the 5.5 rooms represented the business-use percentage of this home. The court ignored the garage even though Mr. Moretti tried to claim it as office space.

The two-garage case.In an effort to save time, the court tried two separate day-care cases together. Each case involved the use of a garage.

In both of these court cases, the IRS excluded the garages from its computations. 

The court took the opposite view. First, it included both garages in the business-use-of-home calculations. Although it found that one garage met the requirements for the home-office deduction and one garage did not, the key point is that both garages were included in the calculations.

As you can see, the garage presents possibilities for the home-office deduction. If you would like to discuss your garage, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• July 21, 2021

Did you take a coronavirus distribution (CVD) of up to a combined limit of $100,000 from one or more of your traditional IRAs in 2020? 

You can recontribute the CVD amount(s) back into one or more traditional IRAs within three years of the withdrawal date(s). You treat each withdrawal and later recontribution within the three-year window as a federal-income-tax-free IRA rollover transaction. That’s the tax advantage.

The non-tax advantage is that there are no restrictions on how you can use CVD funds. You can use the money to pay bills and recontribute later—within the three-year window—when your financial situation permits. You can help out your adult kids now and recontribute later. Whatever. 

Key point. The favorable tax treatment applies equally to CVDs taken from garden-variety traditional IRAs, SEP-IRAs, SIMPLE-IRAs, and employer retirement plans that allowed CVDs.

Unfortunately, you must put up with some potentially awkward interim tax consequences before you arrive at the tax-free-rollover-equivalent outcome. The interim tax consequences can diminish the cash-management advantages of the CVD deal, and they require filing amended returns to gain federal-income-tax-free treatment. 

You always have the option of simply keeping all or part of your CVD money. You’ll have taxable income from the CVD amount that you don’t recontribute.

Good news. Regardless of what you choose to do with your CVD, you won’t owe the dreaded 10 percent early withdrawal penalty tax that generally applies to traditional IRA withdrawals taken before age 59 1/2. CVDs are completely exempt from the penalty tax. 

The same is true for the SIMPLE-IRA. IRS Notice 2020-50 clarifies that CVDs taken from a SIMPLE-IRA are exempt from the 25 percent early distribution penalty tax that generally applies to SIMPLE-IRA withdrawals taken before age 59 1/2. 

More good news. When you recontribute a CVD amount within the three-year window, it’s deemed to be a direct trustee-to-trustee transfer that’s exempt from the one-IRA-rollover-per-year limitation.

Bad news. According to IRS Notice 2020-50, beneficiaries of inherited IRAs can receive CVDs as long as

• they are eligible individuals,
• they can follow the three-year ratable inclusion rule to report taxable income from CVDs, and
• their CVDs are exempt from the 10 percent early distribution penalty tax.

But only an IRA CVD that is otherwise eligible for tax-free rollover treatment can be recontributed. Therefore, CVDs received by beneficiaries of inherited IRAs (other than the surviving spouse of the IRA owner) cannot be recontributed. So, no tax-free-rollover-equivalent deal for those folks. Sorry.

If you have questions about your CVDs, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• July 17, 2021

The tax law can jump up and bite you in unexpected places. One example of that is the nanny tax. 

Do you have a household employee such as a nanny, a caregiver for an elderly relative who moved in with you during the pandemic, or a live-in housekeeper? 

You may have hired somebody to help out during difficult circumstances caused by the COVID-19 mess. 

Maybe that was a temporary arrangement, or maybe it has turned into a permanent one. In either case, the dreaded nanny tax issue may be in play.

The nanny tax refers to your duty to withhold and deposit a household employee’s share of Social Security and Medicare taxes on wages paid to the employee and also to deposit the employer’s share of those taxes.

First, let’s clarify who can potentially count as a household employee. According to IRS Publication 926, Household Employer’s Tax Guide, household employees are individuals who do household work—such as performing as a nanny, caretaker, private nurse, babysitter, housekeeper, maid, driver, or butler. Household work includes only performing services in or around your private home. 

According to IRS Publication 926, a person who does household work is your employee if you control not only what work is done but also how the work is done. So, if a worker regularly comes to your home on a schedule dictated by you and is supervised by you, the worker is probably an employee. 

It doesn’t matter whether the work is full time or part time, or whether you hired the worker through an agency. But if an agency supplies the worker and controls what work is done and how it’s done, the worker is not your employee. 

Yard care workers, pool service guys, maids, and the like who provide services to the general public and just show up at your place periodically to go about their business are not your employees. 

For 2021, the FICA tax issue arises only if you pay a household employee $2,300 or more during the year.

The nanny tax rules are complicated, and complying with them can be a time-consuming nuisance.

If you would like to discuss the nanny tax, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• July 8, 2021