Welcome to CPA at Law, helping individuals and small businesses plan for the future and keep what they have.

This is the personal blog of Sterling Olander, a Certified Public Accountant and Utah-licensed attorney. For over thirteen years, I have assisted clients with estate planning and administration, tax mitigation, tax controversies, small business planning, asset protection, and nonprofit law.

I write about any legal, tax, or technological information that I find interesting or useful in serving my clients. All ideas expressed herein are my own and don't constitute legal or tax advice.

Home Office Deduction Safe Harbor

In addition to being a rumored audit risk, the deduction for a home office has been relatively complex, both the deduction calculation itself as well as its effect on other parts of Form 1040. For example, under the regular home office deduction method, actual expenses such as rent, real estate taxes, internet, gas and electric, phone, insurance, and other costs attributable to the square footage of the home office space must be calculated and detailed records maintained. Furthermore, home-related itemized deductions must be apportioned between Schedule A and Schedule C. Finally, while depreciation can be deducted for the portion of the home used for business, that depreciation must be recaptured upon the sale of the home.

In Revenue Procedure 2013-13, the IRS has provided an easier option. Using the "simplified" or "safe harbor" home office deduction method, a business owner can take a standard $5 deduction for each square foot of the home used exclusively for business, up to 300 square feet. There is no need to apportion house expenses to the office space, and all home-related itemized deductions may be claimed in full on Schedule A.

There is no home depreciation deduction or later recapture of depreciation for the years the simplified option is used. While deduction amounts in excess of gross income may not be carried forward as in the regular method, preparing Form 8829 is not required when electing the simplified method; calculated expenses are simply entered on Line 30 of Schedule C.

The criteria for who can take the regular or simplified home office deduction is the same: The room or section of the home used for business must be exclusively used on a regular basis (1) as a place of business used by patients, clients, or customers; (2) in connection with the trade or business if it is a separate structure unattached to the home; or (3) as the principal place of business. A home office will qualify as a principal place of business if it is used exclusively and regularly for administrative or management activities of the trade or business and no other fixed location for conducting substantial administrative or management activities of the business exists.

The IRS is strict about the exclusivity requirement. If the home office doubles as a guest bedroom, for example, the taxpayer does not qualify to take the deduction. However, the home office can be a section of a room if clearly partitioned from the rest of the room and personal activities are excluded from the business section.

While the extra complexity of the regular home office deduction method may be worth it for large home offices with high expenses, the simplified method is a good option for many other business owners who work out of their house.

Income Shifting to Children

A fundamental tax-mitigation technique is shifting income from taxpayers in high tax brackets to taxpayers in lower brackets. One of the ways this can be accomplished for business owners is by paying their children a salary for working for the business. Not only does this shift taxable income from the parent's higher-bracket to the children's lower-bracket while keeping everything within the family, this technique can also save payroll taxes compared to hiring non-family employees.

According to the IRS, "[p]ayments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child." Furthermore, children claimed as dependents on a parent's return and who make less than $6,200 for 2014 do not owe any income tax and are not required to file a tax return, although filing would be necessary in order to receive a refund of income tax withheld.

A parent can also match the child's wages up to $5,500 with a Roth IRA contribution in the child's name. This will reduce the parents' future tax on investment income by the amount of the return on the contribution, which would grow tax-free.

In addition to passing income in the form of "active" wages to children, "passive" income can also be passed to children. In order to take advantage of this opportunity, the "kiddie tax" must be avoided. If the tax applies, the income is taxed at the parent's highest rate instead of the child's, completely negating the strategy. However, parents can still transfer income-generating assets to children, and if the income for the tax year is under $2,000 in 2014, the child's lower rate applies. As children reach the age of majority and continue earning substantially less than their parents, the opportunities to shift passive income increases.