Written by attorney Marty Davidoff

Tax Changes, Challenges and Opportunities!

New Safe Harbor Option for Claiming Home Office Deduction

Effective on or after January 1, 2013, the IRS provided an optional safe harbor method for calculating the deduction for expenses related to the business use of a residence, which is intended to reduce the paperwork and record keeping burden on small businesses. Taxpayers who meet the existing requirements for having a Qualified Home Office under IRC Sec. 280A, including the regular and exclusive use requirement, may now elect to multiply the square footage used for business purposes (up to 300 square feet) by the $5 prescribed rate, rather than the calculation and allocation of actual expenses otherwise required. The optional deduction will be claimed by completing a simplified form and not on Form 8829. Although homeowners using the new option cannot depreciate their home used in a trade or business, they can claim all allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A (and no longer need to allocate between personal and business use under the regular method). Please contact our office to assist you in determining the best option for you. More details about this new election can be found in Revenue Procedure 2013-13 .

IRS Tax Relief Extended for some NJ and NY Hurricane Sandy Victims Tax return filing and tax payment deadlines are extended through April 1, 2013 for affected taxpayers in Monmouth and Ocean counties, NJ and in Nassau, Queens, Richmond and Suffolk counties, NY. This includes the individual estimated tax payments generally due January 15, 2013; payroll and excise tax returns and related payments normally due on October 31, 2012 and January 31, 2013; calendar year corporate income tax returns due March 15; and applies to tax-exempt organizations filing Form 990 series returns with filing deadlines falling during this period.

Tips for Avoiding the Challenge of Tax Fraud / Identity Theft

Unfortunately, identity theft is prevalent. Some recommendations to limit your exposure to becoming a victim of identity theft are as follows: 1) file your tax returns early, 2) watch credit reports, 3) advise your CPA about IRS mail received and do not click on or open attachments from email claiming to be from the IRS, 4) safeguard and secure your SSN information (request masked SSNs when possible), 5) purchase and use a shredder before discarding documents, 6) Protect computers with updated firewalls, anti-spam and anti-virus software and regularly change passwords.

Hurricane Sandy Relief and Other Related Tax Saving Opportunities

Many people were significantly impacted by Hurricane Sandy. The President declared New Jersey and many counties in New York, Connecticut and Rhode Island as federal disaster areas. Over 40,000 families in New Jersey alone are still displaced and / or homeless and tens of thousands of businesses have yet to reopen. Tax savings opportunities are available for Sandy victims who incurred deductible casualty losses.

Casualty losses are calculated to be the lesser of a) the decrease in fair market value of your property or b) your basis in the property, which is generally your original cost plus improvements (less depreciation allowed or allowable for business and income-producing property). The loss is reduced by the amount of insurance reimbursement you receive or expect to receive (you are required to file an insurance claim).

Casualty losses to personal use property are further reduced for each casualty by $100 (per event, not per item lost or damaged) and the deduction is limited to the amount that exceeds 10% of your adjusted gross income (AGI).

You may incur a gain from the damages caused by a casualty. This can occur, for instance, if your insurance proceeds exceed your adjusted basis in the damaged or destroyed property. Casualty gains and losses are generally reported on Form 4684. Additionally, casualty losses from personal use property are reported as an itemized deduction on Schedule A, subject to the 2%-of-AGI floor rule. If you have a gain, it is reported on Schedule D of Form 1040, Capital Gains and Losses. Gains and losses from business and income-producing property are also reported on Form 4684 and on either Schedule A (subject to the 2%-of-AGI floor rule), Form 4797, or Schedule D.

Affected taxpayers with qualifying disaster-related casualty losses have the option of electing to claim the loss on their current year income tax return, 2012 for those affected by Sandy, or on an amended income tax return for the preceding year, 2011. We can assist you in determining if you are eligible for a disaster-related casualty loss and in properly reporting your loss.

Other Disaster Relief Benefits and Opportunities for Tax Savings:

Qualified disaster relief payments are not subject to income tax, self-employment tax or employment taxes as long as the expenses compensated by these payments are not otherwise reimbursed by insurance or other reimbursement. These include payments you receive (regardless of the source) for reasonable and necessary expenses incurred as a result of a federally declared disaster for: a) personal, family, living or funeral expenses, b) expenses incurred for the repair or rehabilitation of a personal residence, and c) expenses insured for the repair or replacement of the contents of a personal residence. They also include amounts paid to affected individuals by a federal, state and local government in connection with a federally declared disaster. You should keep records of all costs incurred by a federal disaster as discussed above, including living expenses, temporary housing, transportation and medical costs.

While appraisal costs and valuation fees are not included in the determination of the deductible casualty loss, they may be deducted as miscellaneous itemized deductions, subject to the 2%-of-AGI floor rule.

Related or incidental expenses, such as for temporary housing, car rental, etc. are not part of the casualty loss, but they may be deductible as business expenses if the damaged or lost property is business property.

Additional resources provided by the author

The Article above was written by my partner and friend Robbin R. Weiner, CPA

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