Taxes | Home Office Warrior

Seven Tax Savings Tips for Home-Based Indies (Independents)

Mar 17, 2008

June Walker provided this great guest post. And how timely is this topic? With tax season just around the corner, I ask June to give us a few tax savings tips. I am hoping I can convince her to be a regular contributor on Home Office Warrior.

Seven Tax Saving Tips for Home-Based Indies

All you self-employed home-office-workers, whether your income skyrockets in the 100s of thousands of dollars or you’re closer to $500 per year, Uncle Sam treats you all the same. That’s right, amount of income earned by an indie who works from home carries no weight with the IRS. You all must follow the same rules.

Here are seven ways to simplify complex IRS rules to fit your work-at-home style.

1. Use two offices. Forget the old husband’s tale that home office is an audit red flag. The IRS has lightened up on this. Even if you work out of two or three places, if used exclusively for your work they are all legitimate deductions. Yes, both your home office and the spare room at your country place where you do your three-hour morning blogging routine every weekend are deductible business expenses.

2. Work at home to increase your business transportation deduction. If you do most of your work outside your home office you may still deduct costs for the area of your home used exclusively and regularly for your business, no matter how small the area. And by having two work places you’ll increase your deduction for auto use or public transportation costs.

Here’s why: The IRS does not allow a deduction for commuting from home to work and back. But it does allow a deduction for getting from one workplace to another. If you work in your home office and then drive to your other workplace you are now driving “from one workplace to another.” You’ve increased your business miles and the amount of your auto deduction, or made your subway trip a business expense.

3. Careful, no office sharing allowed. Keep in mind the all-important IRS exclusive use rule: that your office must be yours and yours only. If you’re the writer for Clyde Client and your spouse handles the graphic design side of Clyde’s website and both you and your spouse use the same office – sorry, no home office deduction.

The way around that: make one spouse the employee of the other. By the way – there are a whole lot more benefits to hiring your spouse.

4. Hire your spouse. Even if your honey only helps you out with printer jams or errand running or fact checking, pay him for it. Putting him on your payroll opens up a vast array of deductions. You can provide generous employee benefits and deduct the costs of those benefits from your self-employed income. What kind of benefits? Well, for one thing, you can give him a medical plan that covers his family – that’s you and the kids. That would make your doctor bill a deductible business expense.

5. What’s a business relationship? Are you allowed to deduct a gift basket of fruit to Grandma? Of course you are — if Gram has some connection to your business. Did she show you how to hook up your scanner? Make curtains for your office?

You’re an indie business and even though you may have a personal relationship with someone, that does not rule out also having a business relationship. This is particularly pertinent in gift-giving. Of course, if you bought your client a basket of fruit as a birthday present you would treat it as a business gift deduction. But what about the friends with whom you have a business connection? If dinner at a friend’s house was planned so that she could help you with your promotion brochure, then the chocolate you arrived with is a business gift.

6. Deduct your laundry and dry-cleaning. Spill ink or red wine on your white silk blouse while attending an awards event? Dry cleaning and laundry while on a business trip are deductible expenses. You may also deduct the costs of the first dry cleaning bill after you return home. But don’t get too creative and save all your winter’s dirty clothes for cleaning the day after you return from a 3-day writers’ workshop.

7. Discuss these ideas with your tax pro before incorporating them into your business. That’s the most important tip of all. If your tax pro isn’t aware of them … time to get a new pro!

For more info on how to simplify your tax and financial life, and save you money check out my book, Self-employed Tax Solutions.

June Walker, tax and financial advisor to solo entrepreneurs worldwide since 1979, is an advocate of simplicity, order and ease in understanding a tax system that is complex, confusing and often unfair to independent professionals.

June lives in Santa Fe, New Mexico. She presents seminars throughout the country and has written for and been an expert commentator on talk shows and for publications including BusinessWeek magazine and Entrepreneur. She is the author of two books including Self-employed Tax Solutions.

To learn more and to receive a complimentary List of Typical and Unusual Self-Employed Business Expenses please visit June Walker Online or her blog, June Walker.

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You and Your IRS

Mar 03, 2008

Well, at least in theory that is how it is suppose to work. All kidding aside, April 15th is right around the corner and one of the best online tools available is actually the Web site of the IRS.

The site is packed full of information. Everything from online tools to file your taxes electronically, to 1040 Central. While I don’t do my own taxes, and neither should you. The IRS site is a great tool you should have in your favorites or bookmarks.

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Tax & Financial Information for the Self-employed

Feb 17, 2008

With April 15th fast approaching and all the talk lately about taxes and the home office business owner, I thought I would share a blog I recently ran into.

June Walker: Tax & Financial Advisor to the Self-employed since 1979 is published by June Walker.

Here is the description of June’s Blog:

Tax and financial information for all self-employeds — independent, sole proprietor, 1099, sub-contractor, indie. Tax law and regulations have a profound impact on all indies. June Walker. a practicing accountant, posts simple and easy-to-understand answers to complex tax questions asked by her website visitors. You will learn that tax savvy and recordkeeping know-how can save you time, stress, anxiety, and money — as well as form the foundation of successful self-employment.

Take a look at this blog. It is packed full of information.

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Home Office Tax Deduction

Feb 03, 2008

This is a great post from Chuck Newton. In fact, I decided why try to add to it or take from it. I am including Chucks entire post below. Great job Chuck breaking down the home office tax deduction for us.

There are two ways to show the IRS that a home office qualifies for tax deductions on your tax return. You must show on your tax return that you use your home office exclusively meaning it is your ‘principal place of business (as it is in my case), or regularly, meaning it is the place where you meet with your clients in the normal course of your business.

In order for the home office to qualify as your principal place of business you must spend most of your working hours in your home office and most of your taxable business income must come from activities in your home office.‘ If it comes into dispute, you must be able to show the IRS that your home office is your most important place of doing business or that you spend more time working in your home office than anywhere else.’ If your home office is a structure not attached to your home, such as a stand-alone garage, chances are you can take the tax deduction on your tax return with ease if you satisfy the exclusive use tax test and regular basis tax test discussed earlier. A detached structure does not have to qualify as a principal place of business or a place for meeting patients, clients, or customers.

If your home office qualifies for a deduction, you can deduct on your tax return real estate tax, mortgage interest, utilities, operating expenses, and depreciation. You cannot deduct on your tax return the total that you incur for all of the above expenses.’ You must allocate the expenses to business and personal use on your tax
‘ ‘ return using one of two methods.’ The first is to calculate the percent of the square footage of your home office of you entire house.’ Then you deduct the resulting percentage to your tax deductible expenses.’ Alternatively, if all of the rooms in your house are about the same size you may base your deduction percentage on a comparison of those rooms used in your home office.’ So, if your house has 5 rooms and you use 1 room for a home office, you can deduct 20% of your total expenses from your taxes.

Also your deductions on your tax return for utilities, maintenance, and insurance costs, depreciation, or rent, may not exceed the net income derived from your home office after mortgage interest, real estate tax, and casualty losses are subtracted. If you have no income for the tax year no tax deduction is allowed on your tax return. You may carry forward to future tax years any tax deductible expenses disallowed in the current tax year.

Source for Post Chuck Newton.

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Taking the Home Office Deduction?

Jan 23, 2008

There has been a lot of talk lately about whether we should take the home office deduction. I can tell you my position. My accountant advises me to take it. My home office clearly qualifies and she says we should take it. However, there have been those posting about this from both sides.

Here is a small sampling of what is being said:

This is from the Taxes Information Blog.

Plenty of people find themselves shaking in their boots when they consider whether or not to add that tax deduction of their home office to their tax return. After all, isn’t it an instant invitation to the Internal Revenue System to perform an audit?

Although this is commonly thought, it is not the case. If you know what you are doing with the deduction, then you can most definitely take advantage of it. The key is to be careful about what actually qualifies as a tax deduction.

Only use deductions that are strictly related to your business expenses. For example, if you are using your home phone for your business line, the IRS knows full well that you are probably getting calls that are personal as well. Instead, get a dedicated line for your business and claim that cost.

The fact is, few home offices cause an audit on the tax return in and of itself. Making unbelievable deductions can be a cause, though!

This is from Web Worker Daily.

The Wall Street Journal reports that most people eligible for this potentially lucrative deduction probably don’t take it:

“It is questionable whether most taxpayers who are eligible to take the deduction actually do so,” IRS National Taxpayer Advocate Nina Olson said in a report to Congress last week. She urged lawmakers to offer taxpayers a simpler, optional method of calculating the home-office deduction.

Why don’t more people deduct home office expenses? The WSJ identifies a number of reasons: the law is quite complex, requires extensive record-keeping, and is perceived to raise a person’s risk of being audited.

What might be the ultimate barrier for many home-based web workers, however, is the law’s requirement that, in order to deduct expenses for your home office, you use that part of the home exclusively as your principal place of business. Very few people use their home office only for work, even if it is their main place of business.

This law hasn’t kept up with the reality of work today. If you set up a comfortable home office with a nice computer, filing system, and workspace, you’ll probably do your personal work there — paying bills, for example. You might play games on the computer or use it for socializing too.

The law could allow a proration of time based on how the office is used; for example, allowing you to deduct 80% of costs if you spend 80% of the time in your office working. While this would add to the record-keeping burden, it would have the great benefit of allowing home-based businesses the opportunity to deduct actual expenses, just like other businesses can.

And this is from The Consumerist.

A home office can be a significant deduction and well worth it if you qualify—but don’t try to bend the rules. Either you qualify or you don’t. Wise Bread has a good post about home office deductions, including who qualifies for a home office deduction and also what expenses are deductible.

Before you decide to take it or leave it behind, discuss it with your accountant or CPA. I don’t do my own taxes and rely on a professional for such advice and you should too.

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