A question about schedule c and the office in home portion...I pretty well have the schedule figured out otherwise.
My wife (U.S. citizen PR of canada) started a small business in 2014 - sole propietor.
Our CPA in Canada completed our T1, we used the square footage of the office to claim the percentage of office in home expenses for the business. It worked out to $820 based on 6% of our home total square footage.
Because of her overall loss the home office expenses cannot be used but rather carried forward.
It was advised not to claim CCA or depreciation on the home office due to possible negative impact if we decide to sell our Canadian house in the future.
I realize that there are taxes (if you are over $250k profit) on home sales in the USA. Or if you are a USC resident in Canada with a home sale in Canada.
IRS schedule c gives 2 options - simplified method (safe harbour provision) for claiming the deduction for business use of home, or form 8829 - claiming actual expenses for home office.
For her type of scenario is there a method that is recommended that will align with Canada? I believe it is form 8829..
If we use the irs simplified method, we take the square footage of office and multiply by $5, this gives us $660usd.
Converting her home office expense (in Canada) of $820 cad to usd (using yearly average exchange for 2014) works out to $714usd - higher than the $660. Also with Simplified method you can't deduct expenses related to home office (heat, hydro, property tax etc) or depreciation, it's simply based on a dollar amount per square foot...
If she uses 8829, can she do so without depreciating our home? I believe that form 8829 will closer resemble the method that is used in Canada - actually deducting expenses related to office in home vs using simplified method.
However with her not taking home office CCA or depreciation in Canada, would we want to reflect the same with irs?
For IRS purpose, is there any negative impact by not depreciating our home office in Canada?
I understand that IRS rules say that when you sell your home, you must pay taxes on any home office depreciation that you claimed or were entitled to claim (even if you didn't)...this applies to years after 1997.
Is this applicable only if you have a home office in the USA, or does it also apply to U.S. citizens who are Canadian residents with home business in Canada?
As always, this forum has been a great resource, thank you.
IRS schedule C
Moderator: Mark T Serbinski CA CPA
The depreciation rules apply everywhere.
But I would not suggest depreciating for CRA purposes just because of this.
Also, the same exemptiuon for home sale applied to homes in Canada held by US citizens, no difference where the house is.
when you sell, you will have other income and other strategies to reduce any possible US tax on your home or other income, so I would noy do anything special.
But I would not suggest depreciating for CRA purposes just because of this.
Also, the same exemptiuon for home sale applied to homes in Canada held by US citizens, no difference where the house is.
when you sell, you will have other income and other strategies to reduce any possible US tax on your home or other income, so I would noy do anything special.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Nelsona, as always, thank you.
Just want to clarify where you suggest not depreciating for CRA purposes....did you mean do not depreciate for IRS purposes?
The reason I ask is that when we filed our Canadian taxes, we in fact did not claim depreciation on the home office under advisement of our CPA.
We filed the office in home expenses ($820 worth) but were unable to claim the deduction due to overall business loss. The expenses are available to be carried forward to future years. No depreciation claimed on CRA return.
When I file my wife's IRS return, I will use schedule C for the business expenses. I also plan to use form 8829 (expenses for business use of your home), this will align closely with the method used in Canada.
As with the Canadian return, she will not be able to use the home office expenses as a deduction on her IRS return due to business loss but they will be available for carry forward and future use.
Also with the IRS return, we will not be claiming depreciation on the home office (part III of form 8829). I believe this is what you were referring to in the first part of your reply?
Just want to clarify where you suggest not depreciating for CRA purposes....did you mean do not depreciate for IRS purposes?
The reason I ask is that when we filed our Canadian taxes, we in fact did not claim depreciation on the home office under advisement of our CPA.
We filed the office in home expenses ($820 worth) but were unable to claim the deduction due to overall business loss. The expenses are available to be carried forward to future years. No depreciation claimed on CRA return.
When I file my wife's IRS return, I will use schedule C for the business expenses. I also plan to use form 8829 (expenses for business use of your home), this will align closely with the method used in Canada.
As with the Canadian return, she will not be able to use the home office expenses as a deduction on her IRS return due to business loss but they will be available for carry forward and future use.
Also with the IRS return, we will not be claiming depreciation on the home office (part III of form 8829). I believe this is what you were referring to in the first part of your reply?
I don't know if you have really have choice but to depreciate for US purposes, or not, if you claim expenses,
As you realize, you will have to pay tax on depreciation when you sell, whether you claimed it or not.
So, the question becomes why use your home as an expense at all, for US purposes.
You aren't taxable in US and will never be while living in Canada, so why make your self taxable in future. I'm sure you have more than enough foreign tax credits to go round.
And should she be exempting this foreign earned income anyways.
As you realize, you will have to pay tax on depreciation when you sell, whether you claimed it or not.
So, the question becomes why use your home as an expense at all, for US purposes.
You aren't taxable in US and will never be while living in Canada, so why make your self taxable in future. I'm sure you have more than enough foreign tax credits to go round.
And should she be exempting this foreign earned income anyways.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
I did a bit more digging and from what I gather, it seems as though not everybody who uses form 8829 for expenses claims the depreciation part of it. So I'm guessing its not mandatory.
However, as you mentioned, you will have to pay capital gains tax on the depreciation deductions whether you take the deductions or not when you sell your home....these recaptured deductions are taxed at 15% or 25% depending on your tax bracket.
I can see why residents of the USA might want to claim depreciation on their home office as it gives them the deduction in the current tax year. So a benefit if they have positive net business income. They are not saving any taxes later by not depreciating their home as they have to pay the recaptured gains tax regardless. however, by not depreciating they lose valuable deductions now.
You raise a very valid point that I had not thought of: Why use our home as an expense at all for IRS purposes.
This makes sense. I can simply file the IRS return with schedule C to show the business expenses and leave out form 8829 for the home office expenses - not even claim them at all. It wouldn't matter for 2014 anyway because of the loss, but taking those expenses out of the equation removes any question of whether or not to claim depreciation. This will remove the potential tax burden of recaptured depreciation if we decide to sell the house down the road.
In fact, as 2014 was the first year of the business and we were not able to use the office in home deduction in Canada anyway due to a loss, I think going forward starting with 2015 we may stop claiming the office in home deduction here in Canada as well. It only amounts to $800 or so, so not a huge impact.
This will keep things somewhat the same on both sides of the border regarding expenses and dedcutions, something to think about anyway...
The reason why she didn't exempt the foreign income is due to always using form 1116 for FTC...this in order to benefit from the additional child tax credit for our 2 children. But because in 2014 she ended up with 0 tax paid in Canada we don't need to use form 1116, there is nothing to credit....
It looks as though this year will be the first year we don't get the full $2000 actc. It has been reduced to $1100 due to using publication 972 to figure out the line 4a earned income for schedule 8812. A combination of income from wages, income from home business and a business loss directed us to using pub 972..
Still need to verify using TaxAct, I was just working through things pen and paper..
However, as you mentioned, you will have to pay capital gains tax on the depreciation deductions whether you take the deductions or not when you sell your home....these recaptured deductions are taxed at 15% or 25% depending on your tax bracket.
I can see why residents of the USA might want to claim depreciation on their home office as it gives them the deduction in the current tax year. So a benefit if they have positive net business income. They are not saving any taxes later by not depreciating their home as they have to pay the recaptured gains tax regardless. however, by not depreciating they lose valuable deductions now.
You raise a very valid point that I had not thought of: Why use our home as an expense at all for IRS purposes.
This makes sense. I can simply file the IRS return with schedule C to show the business expenses and leave out form 8829 for the home office expenses - not even claim them at all. It wouldn't matter for 2014 anyway because of the loss, but taking those expenses out of the equation removes any question of whether or not to claim depreciation. This will remove the potential tax burden of recaptured depreciation if we decide to sell the house down the road.
In fact, as 2014 was the first year of the business and we were not able to use the office in home deduction in Canada anyway due to a loss, I think going forward starting with 2015 we may stop claiming the office in home deduction here in Canada as well. It only amounts to $800 or so, so not a huge impact.
This will keep things somewhat the same on both sides of the border regarding expenses and dedcutions, something to think about anyway...
The reason why she didn't exempt the foreign income is due to always using form 1116 for FTC...this in order to benefit from the additional child tax credit for our 2 children. But because in 2014 she ended up with 0 tax paid in Canada we don't need to use form 1116, there is nothing to credit....
It looks as though this year will be the first year we don't get the full $2000 actc. It has been reduced to $1100 due to using publication 972 to figure out the line 4a earned income for schedule 8812. A combination of income from wages, income from home business and a business loss directed us to using pub 972..
Still need to verify using TaxAct, I was just working through things pen and paper..