DON’T-MISS Deductions – Government Activity
Amee Abel
UNCLE SAM IS VERY GOOD TO HOME-BASED WORKERS THESE DAYS. WHETHER YOU’VE launched a business out of a spare bedroom or spend your days visiting client sites, using your home as a professional base of operation affords numerous tax perks and deductibles-some of which are additions to the 1999 tax code.
To learn how your workstyle can earn you the maximum tax savings, we Consulted Maggie Doedtman, H&R Block’s sole proprietor tax research specialist. We also scoured the Web to compile a list of tax tips and resources you won’t want to miss. Here you’ll learn what’s deductible–and what’s not–and how to trim your tax bill to the bone (and be the envy of the paycheck crowd) come April 15.
On the Record Cutting your tax bill is a year-round job, says Doedtman. Planning and recordkeeping are key to minimizing the amount you owe. Doedtman recommends keeping a business diary in which you jot down the particulars of business trips and lunch and dinner meetings: “In order to claim a deduction, you have to remember it.”
This Is Your Office? The big news for 1999 returns is that the home office deduction has been expanded to include any space in the home that’s used exclusively and regularly for managing your business. So you needn’t take up an extra room for office space–you can claim something as simple as a desk or countertop, as long as it’s used exclusively and regularly for the business. This change means that those previously excluded from claiming a home office–such as consultants, sales-people, and even doctors who use a home office to manage a practice–can now claim that space.
However, Doedtman cautions that although the rules have relaxed, you must be scrupulous in your exclusive and regular use of the space. The IRS holds home businesses to a higher standard than their office-based counterparts, she says, and tends to subject them to closer scrutiny. In fact, it’s not above the IRS to send agents to question neighbors about any nonwork-related activities in your home office.
Home Office Perks When you file Schedule C (Profit or Loss from Business), all deductions immediately go to offset your income. And when you attach Form 8829 (Expenses for Business Use of Your Home), you can deduct expenses that are sure to make those who work for a traditional company envious.
For example, when a typical employee rents an apartment, every penny of his rent comes from after-tax dollars. But when a home business owner does the same, he can deduct a portion of his rent–as well as the cost of utilities, insurance, and repairs–from the business’s income. Homeowners can also deduct the depreciation in value of their home.
To determine how much you can claim as a business expense, calculate your home office percentage by comparing your office space with the total size of your home or apartment. To get the percentage, you can either count rooms or measure square footage. Then, use that number to figure the dollar value of each deduction. The dollar value of any given deduction (electricity, heat, insurance, garbage pickup, and so on) is the total amount you’ve paid for utilities during the year, multiplied by your home office percentage. This equals the amount you can claim as a business expense.
Not only does a home office deduction put you ahead, the tax break also makes your business more competitive by reducing your income tax burden and decreasing your self-employment tax, which pays for Social Security and Medicare. Remember that the 15.3 percent tax rate applies only to the first $72,600 of self-employment income in 1999. Above that, only the 2.9 percent Medicare portion of the tax applies.
Once you’ve claimed a home office, you can also claim travel expenses. Because your home office is within walking distance, you can include your first business-related trip of the day–say, to and from a client’s office–in your auto mileage claim. Without a home office, you can’t claim the mileage.
How to File Home-based workers shouldn’t file 1040EZ forms–as a result, you need expert assistance if you decide to prepare your own taxes. Help can be found in a number of places. The IRS has always tried to provide all the information you need, and its site provides thorough information in downloadable PDF forms and instructions, as well as online and offline help.
And many of the major tax preparation software packages, such as Kiplinger TaxCut ($15; 800-235-4060, www.taxcut.com) and Intuit TurboTax ($30, or MacinTax $30; 800-446-8848, www.intuit.com), make filing simple. These annually updated programs are brimming with up-to-date information and advice.
Moreover, the past two years have seen a blossoming of online tax preparation sites, such as www.taxattack.com and e1040. com (in addition to both the Kiplinger and Intuit sites, which also offer online tax preparation). As with tax preparation software, these sites guide you through pages of tax-related questions, then help you fill out the appropriate IRS forms. Many also submit your finished return to the IRS for you.
Although these services aren’t free, the fee for online tax preparation is often lower than the cost of discrete software or visiting an accountant or tax preparer. Some online services, however, offer live help from a C.P.A., who will review your return before submitting it.
RELATED ARTICLE: What’s Deductible
Hey. Uncle Sam’s not such a bad guy. Here’s a summary of legitimate home office tax deductions
BUSINESS EQUIPMENT The Section 179 deduction (also called listed property deductions) has been increased to $19,000 for 1999. Section 179 lets you deduct the entire purchase price of business equipment the year you put it into service. So if you were worried that you might have purchased that 800MHz PC in haste, relax. This deduction also applies to any listed property used for business more than 50 percent of the time.
The term “listed property” is IRS-speak for items that are generally used for entertainment or recreation, but may be used for business as well–such as computers, cell phones, cars, and video cameras. The total limit on Section 179 deductions will continue to increase through 2003, when it tops off at $25,000.
FAMILY COMPUTER Don’t despair about claiming your family’s only computer because it can’t meet the exclusivity requirement. Instead, keep a record of your computer usage, logging all business hours. You can deduct the cost, providing you can prove that at least 50 percent of its use is for business. Just be sure to place the computer in an area other than your home office (otherwise, the computer’s non business use will violate your home office’s requirement of exclusive business use).
COMPANY PHONE The easiest way to deduct your phone expenses is to have a separate business phone line. This also simplifies bookkeeping, because you know that all the calls on that phone are business-related. If, however, you choose to have only one line for business and personal calls, you can still deduct any long-distance business phone calls and the cost of adding any special services, such as call waiting, to your phone line.
ROAD TRIPS There’s a new hiccup in the standard auto mileage deduction. Because of 1999’s low gas prices, the IRS lowered the mileage deduction, effective April 1, 1999, from 32.5 cents to 31 cents per mile. However, as gas prices have crept back up, so has the standard mileage deduction–to 32.5 cents per mile in 2000. Be sure your 1999 tax return reflects the two rates appropriately.
ALL THAT TRASH If you pay for garbage collection, remember to include a business percentage of the annual rubbish removal costs on your tax return. This is a frequently overlooked utility. If your home business’s activities created a significant jump in the cost of your trash removal–and you have the documents to prove it–you can deduct the entire increase. But be prepared to prove your claim with receipts from before and after.
TAX PREPARATION As a sole proprietor, your tax return is a bit more complicated than the average employed person’s. As such, you can deduct the cost of preparing your business taxes. To do this, ask your tax preparer to send you an itemized bill. The cost of preparing your Schedule C, Form 8829, and other business-related papers is a legitimate deduction.
HEALTH INSURANCE Another piece of good news for home workers is the increasing deductibility of health insurance payments. This year you’ll be able to deduct 60 percent of your health insurance payments for yourself, your spouse, and your dependents. If you itemize personal deductions, the remaining 40 percent can be itemized on Schedule A. The deductible percentage will continue to rise, reaching 100 percent in 2007.
If you don’t want to wait until then for 100 percent deductibility–and if your business supplies health insurance to its employees–you may be able to take advantage of a perfectly allowable tax two-step.
According to H&R Block specialist Maggie Doedtman, it works this way: Assuming your spouse is a legitimate employee of your company, you let your spouse be the insured person on your health insurance. Then, your spouse includes you under his or her coverage. Because businesses can legitimately deduct the cost of health insurance for its employees, your entire health insurance payments are deductible. Remember, this works only for businesses that file Schedule C. This is a tricky maneuver, however, and you should consult a tax expert if you want to pursue this option.
RELATED ARTICLE: What’s Not
Every year, thousands of sole proprietors attempt to claim tax breaks that the IRS simply doesn’t allow. Here’s Doedtman’s list of the most commonly disallowed home office deductions
CHARITABLE CONTRIBUTIONS Although the IRS doesn’t doubt your kindly intentions, unless your business is incorporated, it can’t make a charitable contribution. You can, however, put those deductions where they belong–on your Schedule A. If your good deed took the form of buying advertising in the high school yearbook or the rotary club’s event program, however, you can deduct that as a legitimate business expense.
UNPAID DEBTS When your business uses cash-based accounting (you record the money when it comes in), and someone doesn’t pay their bill, that’s bad news, not a bad debt. From an accounting standpoint, if you didn’t collect the cash, your books reflect less income. So you can’t deduct the money owed to you from your total income.
APPEARANCES Even if you have clients coming to your house, you won’t make a case with the IRS for deducting landscaping expenses. So plant trees to feed your soul and mow the lawn to keep the neighbors civil, but don’t expect to subtract the cost from your income.
PERSONAL CALLS Although business phone use is deductible, the IRS’s rule of thumb is that a home’s first phone line is for personal use. The IRS will disallow any business deductions made for the basic service charge on your household’s first phone line.
RELATED ARTICLE: Online Resources
If we’ve whetted your appetite for more tax information, your next stop should be these sites
WWW.IRS.GOV Everything you’ve always wanted to know about taxes is available straight from the horse’s mouth at the IRS’s own Web site. To make up for the dry subject matter, the IRS has designed an attractive and functional site.
WWW.TAXPROPHET.COM The Tax Prophet is attorney Robert L. Sommers, who provides articles on all aspects of the tax law. He offers Tax Class, where articles of increasing complexity lead you through topics such as the difference between an independent contractor and an employee, and reprints of questions and answers from his bimonthly column in the San Francisco Examiner.
WWW.SMBIZ.COM Small Business Taxes & Management provides a News and Tip of the Day feature that has useful advice for tax filers. Recent tips include the reminder that incomplete receipts are useless as proof of deductions. The advice: If necessary, write the missing information yourself, but be sure each receipt includes a description of the merchandise purchased or the service provided, the date, and the name of the vendor. If you get a receipt that’s missing some of the information, add it yourself.
WWW.UNCLEFED.COM Uncle Fed’s Tax Board offers downloadable tax forms and tax preparation assistance. The site also includes a section on audit-proofing your return. The section guides you in daily recordkeeping to make your return impervious to IRS scrutiny. And an excerpt of the IRS guidelines to its agents on selecting audit targets is also available.
WWW.1040.COM This is both the name and address of a site that promises “tax information for everyone.” The site includes tax news, federal and state tax forms, and filing information. Sponsored by Drake Software, a maker of tax preparation applications for C.P.A.’s, the site can also help you find a local tax preparer.
WWW.TURBOTAX.COM and WWW.TAXCUT.COM Although both sites heavily promote their respective software applications, they also provide a wealth of tax advice. The TurboTax site includes a quick tax estimator and a tax calendar that helps you set monthly and quarterly tax-planning goals. The TaxCut site includes tax tips organized by the applicable form.
WWW.AICPA.ORG The American Institute of Certified Public Accountants site includes a glossary of terms, acronyms, and abbreviations to help you find your way around the complicated and confusing tax language. It’s also a good source for information on pending tax legislation.
Contributing editor AMEE ABEL covers business topics and home networking from her home office in Keene, N.H.
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