Home Sweet Business: Qualifying For The Home Office Deduction
By Dan Ross
Approximately 1.6 million home owners claim a home office deduction each year, according to the Internal Revenue Service, and a single-family home, condo, mobile home, manufactured home, boat or apartment can qualify.
"Just about anyplace with sleeping and cooking facilities can qualify for the home office deduction," according to Nolo.com, Berkeley, CA-based legal self-help publisher.
Along with ordinary business expenses for supplies and equipment you can also deduct part of your rent or take a depreciation deduction to the extent that a portion of your home is used for business purposes.
To qualify for the deductions, the IRS requires that you pass three tests:
# Your home must be your principal place of business. If you work from two locations, in order to take the deduction, the home must be the most important location, generally, the one where you generate revenue, but not always. If, you compare the two locations and it's not clear from which location you generate the most income, also consider time spent at either location. You must spend most of the time in the home for it to be the principal place of business under this consideration. If after you look at revenues and time and you still aren't clear if your home is the primary place of business, you probably shouldn't take the deduction, according to Paul and Sarah Edwards, work-at-home gurus and authors of "Working From Home" (Jeremy P. Tarcher/Putnam, $18.95).
There are two exceptions to this rule.
New for 1999, if your home office is not your principal place of business, you can take the home-office deduction if, for part of your business, you see clients, patients, or customers face-to-face in your home or use the space for administrative duties, paperwork activities and other related activities crucial to your business or work.
"A Dr. Soliman took this to court after he was using his home only for paperwork but did most of his work at the hospital. The Supreme court ruled against him, but effective Jan. 1, 1999, Congress backed off," said Bruce Hahn, president of the Arlington, VA-based American Homeowners Foundation.
Also, if your home isn't your principal place of business but you use some free-standing structure on your property, exclusively and regularly for business, you can claim the home-office deduction for that space. A barn, greenhouse, workshop, studio, detached garage, any freestanding structure is eligible.
# Your home business must also occupy a clear and indentifiable space in your home. Generally, that means it must be in a location apart from the rest of your home, say, an addition constructed for your office, a converted bedroom, attic or basement,but also space in an alcove, nook or say, large walk-in closet space in a larger room.
# You must use your home business space exclusively and regularly for your business. You can't use your business space, say, to watch TV with the kids or to play computer games.
"You can't have the guys over to watch the game and have a few beers in the office," said Hahn
Since 1989 Dan the roommate man has helped 1000's of people find rooms, apartments or roommates. Need help in finding a room or roommate? Contact him at 800-487-8050 or http://www.roommateexpress.com
Are You An Innocent Victim of These Popular Tax Myths?
By Karin Workman
Misconceptions, misinterpretations and just plain “untruths” are floating about income taxes. Believing them could be costing thousands of tax dollars!
Myth: A Professional Tax Preparer knows all there is to know about taxes so you don't have to know anything them.
Truth: Tax Preparer's/CPA's/Accountants are not uniformly informed about ALL tax laws. Most are able to file a personal income tax and know all the laws and how to apply them to personal income tax.
There are thousands of excellent, hard-working accountants doing a great job. And if you use a tax professional, maybe they have done everything possible to reduce your taxes. But many professional tax preparers are just tax preparers.
They may know how to prepare a tax return in their sleep. They know what numbers go on which form. But that's about all they know.
A good tax preparer is not trained in tax reduction strategies.
The only way you are assured to get the tax deductions you are entitled to, as a Home-Based Business Owner, is to become informed yourself.
Myth: You must "itemize" in order to take Home-Based Business expenses.
Truth: Many people misunderstand the terminology here.
When you "itemize" your income tax you file Form A&B and take such things as medical, home mortgage interest etc. You will only "itemize" if the total of Form A is over the standard deduction (for 2003 taxes…$4,700 single, $9,500 married)
Some people call this filing "long form."
All taxpayers have the opportunity to itemize if it is to their advantage.
Whether you "itemize" or not has NO bearing on your Business.
Myth: You're not making a profit so there is no advantage to filing business income taxes.
Truth: This is so not true! There's many tax advantages to filing a Home-Business tax return and especially so if you are not making a profit. If you also work a job, be it part-time or full time, in addition to your Home-Based business it is especially beneficial to you to file a business tax return.
Expenses incurred in your business can be taken against your job income thus reducing your taxable dollar, which decreases your tax liability.
Myth: Because you work a full-time job your Internet Marketing Business is just a hobby.
Truth: Only another Internet Marketer can truly understand the hours and money spent on what someone else would call a "hobby"!
The rules clearly state you have a business if you meet 8 rules. Four of the most important rules to meet are:
1. Expertise of the taxpayer or his/her advisors. That would mean your expertise in Internet Marketing or those who advise you. If you're learning and actively applying what you learn to your Internet Marketing activities and have a good "handle" on this…you qualify.
2. Time and Effort the Taxpayer puts into ‘running the business’. They just want to make sure you're running a real business, not just engaging in a hobby. How much “time and effort” is enough? The United States Federal Tax Court has ruled that “45 minutes a day, 4 to 5 days a week” qualifies.
I can't see anyone who is in Internet Marketing with a profit motive not qualifying here!
3. The Manner in Which the Taxpayer Carries On the Business Activity. This one is common sense. Do you conduct your business mostly on the telephone, over the Internet and in-home presentations (these are good), or mostly at the golf course, during lunches and at the pub (not so good). Just treat your business like a business.
4. Is the Primary Purpose of your activity to ‘Produce a Profit,” or to ‘Produce Tax Write-offs’? The best way to Pass the profit-motive test, is to have a Business Plan, and That Business Plan should include a table of Income and Expense projections, clearly showing profitability at some point in the future. Note that you are not required to actually produce a profit in order to qualify for home-business tax deductions -- just to show that you have the intent to produce a profit.
If you are doing all this then there is no reason for your business to be considered a "hobby".
Myth: You must make a profit within 5 years to be considered a "business" and file Home-Business taxes.
Truth: That's a generalization. Yes, the government would like to see you make a profit within 5 years but you are not penalized for not doing so. If you are following the above 4 rules and conducting yourself as a business you have nothing to worry about. You are a business and some businesses are not profitable for a number of years.
Myth: Learning how to reduce you taxes is hard and complicated.
Truth: Average Small Business Owners have plenty of tax reduction strategies at their disposal. You just have to know what they are and how to use them.
Once you learn what deductions are allowed you will know what figures your Tax Preparer/Accountant needs and you can configure your accounting accordingly.
Myth: Accounting and tax documentation for the Home-Business is not for the do-it-yourselfer.
Truth: All Small Business Owners can easily keep their own books using any number of software programs. It is not necessary to have an accountant.
No, you will not have to learn accounting. You will just need to be able to "categorize" and record expenses and sales.
Documentation for the government is very easy if you use a pocket calendar and keep your receipts.
In just 5-10 minutes a day you can have records that will withstand any government scrutiny.
About The Author
Karin Workman is a 30-year veteran Home-Based Business Owner who specializes in Tax Preparation for Home-Based Businesses. Karin also wrote the Hot New Ecourse: "Reap the Rewards!" Designed to help you save tax dollars and put more money into YOUR pocket. The course is Free exclusively at: http://reaptherewards.businessoppsunlimited.com
Tax Audits: What Signs Make You More Likely to be Audited by the IRS?
By B. Williams
It's a major fear for most Americans: A notice from the Internal Revenue Service (IRS) summoning you for an audit.
What is it about these three letters that strikes a cord of fear in Americans' hearts? Learning the signs that could put your tax return at the top of the list for an audit, and avoiding them if possible, may put your mind at ease.
Statistically speaking, your chances of actually being audited aren't that high-according to IRS data, one in 150 individual taxpayers were audited in 2003. This number had gone down in recent years-about one of every 79 tax returns was audited in 1998-but then, in 2004, individual taxpayer audits exceeded 1 million for the first time since 1999.
Also in 2004, the IRS gathered a record $43.1 billion in enforcement revenue, a 15 percent increase from 2003. Now in 2005, the IRS plans to add more enforcement to their team, meaning that more tax audits could potentially be performed.
What adds to most people's fear of being audited is that of the unknown: Very few people know just how the IRS chooses which tax returns to audit.
"That's a very closely guarded secret that not many people in the IRS know," said Bernard S. Kent, a partner with the human resource services group at PriceWaterhouseCoopers.
Still, there are some signs that will put your tax return at the top of the "to audit" pile. So take notice of -- and by all means avoid if they're not legitimate -- these red flags that increase your chances of catching the tax examiner's eye.
A computer program called the Discriminant Index Function, or DIF, is the first way your tax return could be marked for an audit. It looks most closely at the following items:
* Higher incomes: If your income is more than $100,000, your chances of being audited increase to one in 20. Says Eric Tyson, co-author of "Taxes 2005 for Dummies," "Higher income earners are more likely to be audited because there is more tax money at stake."
* High incomes compared to the previous year
* Unreported income (investment returns, etc.)
* Income other than basic wages (contract payments, etc.)
* Home-based business: Particular attention is given to returns that claim home businesses in addition to a salary income or excessively high deductions that don't match with the business (for instance, expensive business meals for a virtual administrative assistant.) You should also be careful with how you define your home office. "The room has to be used exclusively for business purposes," said Kent. "You cannot just have a desk in your living room where you have a television set."
* Large business meal and entertainment deductions or excessive business auto use
* Low income with large business deductions: Did you report earning $40,000 and write off a $50,000 car for business? Chances are a tax examiner will find your return warrants a closer look.
* Non-Cash Charitable Deductions
* Hobby Losses: Filing a Schedule C to report income or loss from a sole proprietorship that is not really a business but a hobby is one of the highest risk moves you can make.
* Offshore credit cards
* Large casualty losses: The rules for claiming a casualty loss are very specific, so be sure your loss qualifies before claiming it.
* Having several dependents.
Tax returns that claim the earned income tax credit-a break for those with low-incomes-are also scrutinized more closely by the IRS. That's because its requirements are complex and many honest mistakes are made by those who think they qualify, along with those who intentionally try to increase the credit's payout.
If You Have Legit Deductions, Take Them
This isn't to say that you should be afraid to make honest deductions on your tax return or shy away from credits for which you qualify in order to avoid the IRS. According to Robert G. Nath, author of "The Unofficial Guide to Dealing with the IRS," As long as your deductions and expenses are legitimate and you have documentation, they will be allowed."
In fact, most Americans overpay on their taxes, which is why we highly recommend reading Lower Your Taxes - Big Time: Wealth-Building, Tax-Reduction Secrets from an IRS Insider as soon as possible in 2005 (or you will likely end up paying the government hundreds or even thousands of dollars in taxes that should have been yours to keep.)
Written by a former IRS tax attorney and senior tax law specialist, Sandy Botkin, CPA, Esq., Lower Your Taxes - Big Time is one of the smartest under-twenty-dollar investments anyone could possibly make.
And in the event that you get the dreaded IRS letter in the mail that your tax return is being audited-don't despair. "Just because you get a correspondence audit letter, there's no need to panic," says Nath. "In fact, if you get a letter instead of a call, that indicates the IRS views the inquiry as not particularly earth shattering."
For more money-saving tips in 2005, don't miss these past SixWise.com articles:
* Top 10 Ways NOT to Throw Your Money Away in 2005
* Stop Overpaying the Government Thousands of Dollars for Good
From the FREE SixWise.com e-newsletter, the Web's #1 most read newsletter with original articles in all 6 areas of life leading to complete wellness.
