How Renting Out Your Vacation Home Affects Your Taxes
When you’re not using your vacation home, renting it out can generate extra income. But it can also affect your taxes, depending on how often you rent and use the property personally.
The 14-Day Rule
In some situations, renting out a vacation home can generate tax-free rental income. If it’s rented for 14 or fewer days during the year, the rental income typically doesn’t need to be reported on your tax return.
However, deductions are limited. You may generally deduct property taxes and qualified mortgage interest if you itemize deductions, but you can’t deduct operating expenses or depreciation. (The property tax deduction is subject to the state and local tax deduction cap. Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)
More Than 14 Days
If your vacation home is rented for more than 14 days during the year, the rental income generally must be reported as taxable income. But you can deduct a portion of operating expenses and depreciation, subject to certain rules.
Expenses must be allocated between personal and rental use. For example, if the home is rented for 90 days and used personally for 30 days, 75% of the total use is rental use (90 out of 120 total days).
In that case, you can allocate 75% of your costs, such as maintenance, utilities and insurance, plus 75% of your depreciation allowance, interest and property taxes to the rental activity. The personal use portion of taxes is separately deductible as an itemized deduction. The personal use portion of interest on a second home may also be deductible, but only if the personal use exceeds the greater of 14 days or 10% of the rental days and the home mortgage interest deduction rules are met. Depreciation on the personal use portion isn’t allowed.
Can You Claim a Loss?
If deductible expenses for your vacation home exceed rental income, you may be able to claim a rental loss. Here’s the test: If personal use is more than the greater of 14 days or 10% of rental days, the property is generally treated as a personal residence. In that case, deductions attributable to rental use generally can’t create a loss. Instead, they’re limited to rental income, and unused deductions may be carried forward to future years.
If the property isn’t considered a personal residence based on your personal use, you must still allocate expenses between personal and rental use. But the home will be considered a rental property and, if your rental deductions exceed rental income, you can potentially claim the loss. (However, the loss is “passive” and may be limited under passive loss rules.)
Moving Forward
Vacation home tax rules can be complex. Additional rules may apply if you qualify as a real estate professional or if you own multiple rental properties. Contact the office if you have questions.
Simple Retirement Solutions for Small Business Owners
Offering employees retirement options can be an effective way for small business owners to attract and retain talent. If you’re concerned about cost and administrative complexity, you’re not alone. Fortunately, several options are available, including a Simplified Employee Pension (SEP) plan.
Establishing a SEP Plan
You can set up a SEP plan for a given year by the due date, including extensions, for your business’s income tax return for that year. For eligible employers, this is done using IRS Form 5305-SEP, “Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement.” The agreement is considered adopted when the form is completed, SEP IRAs are set up for all eligible employees and these employees have been provided with certain required information, including copies of the form. Form 5305-SEP doesn’t need to be filed with the IRS.
As the employer, you receive a current income tax deduction for contributions made on behalf of your employees. Employees generally aren’t taxed on traditional SEP plan contributions when they’re made, but distributions are taxed when they occur, typically at retirement.
Employers with SEP plans may allow employees to have SEP plan contributions made to a Roth IRA (Roth SEP) on an after-tax basis. Contributions are taxed in the year made, but qualified Roth withdrawals may be tax‑free. This is optional and relatively new, and not all plans offer it.
For 2026, the maximum deductible contribution you can make to a SEP-IRA — and that can be excluded from employees’ income — is the lesser of: 1) 25% of compensation, or 2) $72,000 per employee. If a business owner doesn’t receive a W-2 from the business (for instance, an unincorporated sole proprietor), the calculation for the contribution to be made on the owner’s behalf varies slightly.
Your employees can’t contribute, but they do control their individual SEP IRAs, including choosing investments (from available options).
Additional Considerations
There are other factors to consider when establishing a SEP plan. Essentially, all regular employees who meet eligibility requirements must be included in the plan, and contributions can’t favor highly compensated employees.
Additionally, SEP plans generally don’t require the detailed records that many other retirement plans, such as 401(k) plans, must maintain. There are also no annual reports to file with the IRS, and much of the required recordkeeping can be handled by the SEP-IRA trustee — such as a bank or brokerage firm.
Evaluate Your Options
For certain businesses with 100 or fewer employees, Savings Incentive Match Plans for Employees (SIMPLEs) may be an option:
SIMPLE IRA. The employer establishes a SIMPLE IRA for each eligible employee and makes the required matching or 2% nonelective contribution. SIMPLEs are generally subject to fewer and simpler requirements than 401(k)s.
SIMPLE 401(k). This is a SIMPLE structured as a 401(k). If certain rules are met, it isn’t subject to the otherwise complex nondiscrimination rules that normally apply to 401(k)s.
For 2026, employee elective deferrals to SIMPLE IRAs or SIMPLE 401(k)s are generally limited to $17,000. Employees age 50 and older may also make additional catch-up contributions.
Seeking Guidance
Choosing the right retirement plan depends on your business size, cash flow and long-term goals. Contact the office to discuss your options and determine which best supports your needs.
Revisit Your Emergency Fund Goals
An emergency fund is key to long-term financial security. Over time, changes in expenses, income, family needs and financial priorities can affect how much emergency savings you need. Regularly reviewing your reserves can help ensure they’re sufficient to support your lifestyle and broader financial strategy.
How Much Is Enough?
Financial professionals have long recommended maintaining three to six months’ worth of living expenses in an easily accessible account. However, the right amount depends on a household’s overall financial picture.
Start by recalculating your emergency savings baseline. Focus on essential expenses — the costs required to maintain your household, such as housing, utilities, food, insurance, transportation and health care. Then compare that total to your current savings. If the gap has widened, a disciplined plan to gradually build up your fund can help restore peace of mind without disrupting your broader financial strategy.
For households with stable employment, multiple income sources or significant nonretirement investment assets, three months of reserves may provide sufficient protection. Others may benefit from maintaining six months or more. Individuals with variable income, business owners, single-income households and those approaching retirement often choose to maintain larger reserves for additional flexibility.
The goal isn’t to accumulate the largest possible cash reserve. Instead, it’s to maintain an appropriate level of liquidity that supports both financial stability and long-term financial goals.
Put Cash to Work
It’s also worth reviewing where your emergency savings are held. Are you keeping substantial cash balances in traditional savings accounts that earn minimal interest? Alternatives such as high‑yield savings accounts, money market accounts or short‑term Treasury securities may offer better returns while maintaining a high degree of liquidity and safety.
For those who’ve moved their emergency savings into higher‑yielding accounts, tax efficiency is an important consideration. Interest income from savings and money market accounts is generally taxable, which can erode your net return over time. Depending on your situation, there may be opportunities to position reserves more tax‑efficiently without sacrificing accessibility.
Stay Prepared
An emergency fund is designed to provide stability and flexibility during periods of uncertainty. Regular reviews can help ensure your savings strategy continues to support your lifestyle and long-term financial goals.
Backup Withholding: What Businesses Should Know
In most cases, you aren’t required to withhold taxes from payments to independent contractors. However, there are situations in which the “backup withholding” rules apply. Backup withholding is most commonly required when a contractor fails to provide a correct Social Security number or Employer Identification Number, or doesn’t properly complete Form W-9, “Request for Taxpayer Identification Number and Certification.”
When required, you must withhold 24% from payments to the contractor and remit those funds to the IRS using Form 945, “Annual Return of Withheld Federal Income Tax.” The withheld amount must also be reported on the appropriate Form 1099.
Contact the office if you’re unsure whether backup withholding applies or need help navigating the requirements.
Can You Deduct Elder Care Costs?
If your parent or another elderly family member is moving into a nursing home there may be tax implications. For example, long-term care expenses may qualify as an itemized deduction if they, along with other medical expenses, exceed 7.5% of adjusted gross income. (Only the amount over 7.5% is deductible.) As long as your relative is staying in the nursing home for medical (not just custodial) care or is chronically ill, payments to the facility normally qualify.
If you claim your relative as a dependent, you can usually include medical expenses you incur for your relative along with your own to calculate your tax-deductible amount. For more details, limits and related tax breaks, contact the office.
IRS Eases Partnership Sale Reporting Rules
Final regulations released by the IRS stipulate that partnerships no longer need to provide detailed gain and loss information to selling partners by January 31. This deadline had become a contentious issue.
The tax code requires that any portion of a partnership’s sale proceeds attributable to the partner’s share of unrealized receivables and inventory items be reported as ordinary income. Other sale proceeds are generally taxed as capital gains. But partnerships complained that the reporting deadline was hard to meet.
Now, partnerships can provide such information to partners according to their natural end-of-year tax compliance cycle, on or with Schedule K-1.
Creating a More Effective Budget in QuickBooks Online
Drafting a budget can be challenging. It’s not easy to estimate future income, expenses and other factors that may change over time. Even so, a well-prepared budget remains one of the most valuable tools for setting financial goals, allocating resources effectively, and measuring progress throughout the year.
QuickBooks Online aims to make budgeting easier with built-in tools that can help you create, manage and update budgets as your business evolves. By automating many routine steps, it reduces the need for manual spreadsheets. This gives you more time to focus on planning, analysis and your overall financial strategy.
Using the Budget Framework
To get to QuickBooks Online’s budgeting tools, hover your mouse over Reports in the toolbar on the left, then click Financial Planning | Budgets. Click Create budget in the upper-right corner. For Budget type, click the button in front of Profit and loss. This is the simplest and most commonly used option. You’ll plan your budget around anticipated income and expenses over a specific period.
Select the Period you want by clicking the down arrow next to that field. For Budget format, select Consolidated. This means your budget will address income and expenses for your business as a whole rather than creating individual budgets based on location, class, department or customer.
If you’ve been using QuickBooks for a while, it will already hold your actual income and expense data. You can opt to Pre-fill data from a past period to use as a model. If you decide to do this, select the period you want from the drop-down list. You can also create Custom budgets or Import budgets.
To create a budget from scratch, click Custom budgets. When you’re finished here, click Next.
The page that opens next might look familiar if you’ve previously worked with a budget. Each row displays an account from your business’s Chart of Accounts. Columns contain individual time blocks. The default is Monthly, but you can change this to Yearly or Quarterly (upper right of the page). You can also change the budget name by clicking the pencil icon in the upper-left corner.
There are two ways to enter numbers if your monthly number is going to remain the same all year: 1) You can enter an annual total for the line item in the Budget totals column and let QuickBooks Online divide it evenly into monthly totals, or, 2) you can enter it in the first column and click the icon to repeat it for the other months in that row. If an amount will vary from month to month, you can manually enter the appropriate number in each column for the budget line item.
Make sure that Autosave is on, so you don’t lose any work. Click the gear icon in the upper-right corner and make sure Autosave budget is checked. But always Save manually when you’ve finished a work session (lower-right corner).
10 Budget Tips
Developing a budget takes time, and it’s common to make adjustments as new information becomes available. The goal is to create a realistic plan based on the best financial information and business insights you have today.
As you build or refine your budget, consider these 10 tips to help make it a practical and effective tool for managing your business finances.
- Take a conservative approach. To help minimize the need for significant reallocations, use reasonable and conservative income estimates and ensure your budget includes adequate funding for expected expenses and essential purchases.
- Consider your sales cycle. If your revenue and expenses fluctuate throughout the year — such as in a seasonal business — adjust your budget to reflect those patterns rather than allocating the same amounts to every period.
- Don’t overcomplicate your budget. Rather than tracking every minor office supply or small purchase separately, consider grouping related expenses into broader categories. This approach can simplify budgeting, improve reporting, and make your financial data easier to analyze and manage.
- Plan for unexpected expenses. Including a cushion in your budget can help your business manage unanticipated costs without disrupting operations. Consider building this flexibility into an appropriate expense category as part of your overall budgeting strategy.
- Prioritize essential expenses. When developing your budget, focus first on the costs required to operate and support your business. Once core needs have been addressed, you can evaluate additional expenditures and opportunities based on available resources.
- Work on your debt with extra dollars. If your projected income exceeds your expenses, consider using those funds to pay down outstanding debt. Debt costs money.
- Get input from employees. If you have people working for you, bring them into the process, especially if they have more knowledge than you in specific areas.
- Learn from QuickBooks Online’s budget reports. QuickBooks Online offers reports specifically designed to address budget issues: Budget Overview and Budget vs. Actuals. Review them at least once a month.
- Look for opportunities to improve cost efficiency. If certain expenses are higher than expected, consider evaluating alternative vendors or solutions that offer comparable quality and value at a lower cost.
- Measure your progress. Ongoing monitoring and adjustments can help keep your financial plans aligned with business goals while providing valuable insights for future budgeting.
Keep Your Business on Track
While budgeting isn’t required, it can provide valuable insight into your business’s financial position and support more informed decisions. If you need assistance creating or managing budgets in QuickBooks Online or would like guidance on any of its budgeting features, contact the office.
Upcoming Tax Due Dates
July 15
Employers: Deposit Social Security, Medicare and withheld income taxes for June if the monthly deposit rule applies.
Employers: Deposit nonpayroll withheld income tax for June if the monthly deposit rule applies.
July 31
Employers: File a 2025 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.
Employers: Report Social Security and Medicare taxes and income tax withholding for the second quarter of 2026 (Form 941) and pay any tax due if all of the associated taxes due weren’t deposited on time and in full.
August 10
Individuals: Report July tip income of $20 or more to employers (Form 4070).
Employers: Report Social Security and Medicare taxes and income tax withholding for the second quarter 2026 (Form 941), if all associated taxes due were deposited on time and in full.
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
