Home Office Success Stories - December 2001

It’s December, so what do you think I’m doing? Tax planning. Before you send your condolences regarding my apparently AWOL neurons, consider this: While December is a terrible month to do any last minute planning to offset a potential tax bite, for many it’s the equivalent of the Last Chance for Gas sign before heading into a long stretch of barren highway that is the time between now and April 15. Sure, such planning should be done all year long. But why plan when you can scramble? (Oh, my CPA loves me). A little primer on home office and taxes...

Whoever said running a home-based business was bliss must have a calendar that skips the month of April. Where our corporate-employed counterparts have employers who withhold taxes from their paychecks, at-home entrepreneurs and the otherwise self-employed have to stash cash for Uncle Sam. What's more, at least four times a year - upward of 12, if we're incorporated or otherwise earning significant coin - we have to pay estimated taxes or payroll taxes.

Seem bleak? Well, a message to the uninitiated SOHO'er: Grab hold of your accountant's desk, because here's where it gets really taxing. Not only are we required to stash cash and pay our own tax bill, we actually pay more than our full-time-employed counterparts in Corporate America. You see, the Social Security and Medicare tax of 15.3% of a worker's income is split by the employer and the employee. Meaning W-2ers out there pay a relatively meager 7.65% of their wages in the taxes. Meanwhile, the self-employed - or 1099ers, as I call myself - are employer and employee.

Said another way, if you and a buddy each make $50,000 a year, he just got a $3,825 raise (give or take) that you missed out on. Some have dubbed it the "Self Employment Tax."

Actually, recent times have been better for the home-based worker - thanks to some sweeping tax reforms back in 1997. One was a loosening of the IRS's "focal point" rule. This former mandate required that someone claiming a home-office deduction perform their primary income-earning tasks from the home office - like a freelance editor poring over manuscripts or a graphic artist plying the Mac from the home office. Under the 1997 changes, if a business owner engages in significant administrative or managerial functions from the home office, that office likely is deductible.

Still, the space has to be used "exclusively and regularly" as a home office. The space can't double as a kids' playroom, a bedroom or a laundry room after hours. And that corner of the den where your desk is perched? Just make sure it’s cordoned off with plants or a screen if you hope to get a deduction to fly.

Whether you're incorporated, or filing a "Schedule C" on your personal income tax return, working from home affords deductions to help stave off the tax bite. As much as we lament taxes, we can make them less painful. Here's a few tips to get you through tax season:

• The office deduction counts toward your mortgage interest or rent payments, as well as other expenses, like utilities, homeowners' insurance, security systems and maintenance, especially if you entertain coworkers, clients or customers at your home office. It is tabulated at the percentage that the office makes up of the entire home. For example, in a 2,000-square-foot home, a 300-square-foot office would allow deductions of 15%. That 15% is applied against mortgage interest or rent payments, property taxes, insurance - and some utilities and general upkeep. To learn more on your own, hit the IRS Web site (www.irs.gov) and download Publication 587 on “Business Use of Your Home.” Use IRS Form 8829 to compute your deductible expenses for business use of the home.



• Equip to the (legitimate) hilt. Need a computer, fax machine, copier, filing cabinet, new phones, cellular, or furniture? Bona fide business tools become deductions - if you save receipts and then only use the products for business purposes. A phone or fax line used exclusively for business is deductible; only business toll calls on a personal line are deductible.



• Keep and compile every business-related receipt (from office expenses to meals and entertainment), tolls and miles logged during the year. Subscribe to business publications and any other periodicals you need to run your shop. Deductions can add up quickly.



• Play Santa. Giving holiday gifts this year? Gifts for clients or prospects, and the cost of mailing, may be deductible business expenses.



• Travel much? Legitimate business travel expenses can be deducted. Can your spouse travel with you on the business's expense (or deduction)? Typically not, unless the spouse historically has lent a significant effort to the business or is a bona fide employee of the company.



• Fund the plan. If you have an individual retirement account, you can make contributions up through April 15 for the previous tax year. Whether money is invested tax deferred or tax free, talk with a financial planner about setting up a savings program.



• Note: Even though home office deductions may be allowed, some accountants advise against taking the deduction. One reason is the loss of value to the home at resale. The deduction reduces the cost basis on the residence - therefore increasing the capital gains liability when a home is sold. And despite the very public thrashing of the IRS by Congress 1998, some accountants remain concerned about raising a red flag with the IRS by deducting the home office with Form 8829. Just remember: Taking the home office deduction is not required to run a home business.

To be fair, many accountants say always take your due - especially with a bona fide home-office deduction. Central to this whole annually taxing episode is to hire a qualified tax advisor - whether it's an accountant, a CPA, an enrolled agent or a tax attorney – to hold your hand while you hold their desk. Taxes are just too taxing to experience alone.

Keep what's yours. Enjoy the Holidays. And Keep Goin’ SOHO!

Jeff Zbar, the ChiefHomeOfficer.com, is a speaker, writer and expert on alternative officing. He is the author of Teleworking & Telecommuting: Strategies for Remote Workers and Their Managers (Made E-Z Products, 2002); Safe@Home: Seven Keys to Home Office Security (FirstPublish 2001) and Your Profitable Home Business (on CD-ROM from Made E-Z Products). Visit his Web site to subscribe to Home Office Success Stories, his free electronic magazine on home business and teleworking.