Be sure tax deductions for home offices are legit


December 12, 1993|By JANE BRYANT QUINN | JANE BRYANT QUINN,1993, Washington Post Writers Group

NEW YORK -- Are you running a business from home? You may not be deducting all the expenses you're entitled to.

On the other hand, you may be overdeducting. There's a lot of tax cheating going on among people who are indulging in what are essentially hobbies or diversions, not true businesses. You can't spend two weeks in a Honolulu resort, call on a customer while you're there, then write off the vacation as a business expense. It's morally and legally wrong. And you might get caught.

But by all means, write off every dime that's legitimate -- keeping good records to substantiate your costs. The general rules:

* You can write off some of your home expenses if you use a portion of your house regularly and exclusively for business and it's your principal place of work. Your "office" can be part of your den rather than a separate room, but you have to maintain it as a permanent work space.

* To establish the size of your basic write-off, figure out the percentage of your home that you use for an office, measuring in square feet. Say it's 10 percent. You can then deduct up to 10 percent of your mortgage interest, real estate taxes, rent, homeowners insurance, utilities and building upkeep, like painting the outside of the house. You get a depreciation deduction for the space allocated to your office. If you sell products, you can write off the cost of any space used exclusively for storing inventory. There are rules for licensed day care businesses.

Remember: You can't write off more of your home expenses than you produce in home-business income -- a mistake that the IRS often finds. If you're a writer but sold nothing last year, you get zero deductions for your home-office expenses. (But hang on to your expense records; you can deduct them next year, if you finally get an article sold or a book advance.)

* You also have other business expenses, like equipment, supplies, inventory, business insurance, accounting services, travel, maybe an employee. You can write off these costs even if they exceed the business income that you earn -- giving you a net business loss. That loss may shelter other income reported on your tax return -- for example, a spouse's earnings.

* You can save taxes by putting up to $2,000 of your earnings into an Individual Retirement Account (and more, if you start a Keogh account or a Simplified Employee Pension).

* Phones have their own rules. You can't write off the rental cost of the first line coming into your house. But you may deduct business long-distance calls and, probably, optional services that are work-related, like call waiting. You can write off the full costs of a second phone or fax line used exclusively for business.

* When you drive on business, the IRS allows you 28 cents a mile.

* New this year, you can write off up to $17,500 in equipment purchases (but not more than the business income you earned). Last year, the limit was $10,000.

Be warned: At some point, the IRS may ask you to prove that you're running a real business. Normally, that means showing a profit in three of the first five years (or at least proving a genuine attempt to earn a profit). If you can't, your "business" is merely a hobby. Hobby income is taxable, you can't write off losses and there are limits on your expense deductions. Can you get away with closing a losing business after three years and starting a new one that also shows an annual tax-deductible loss? "Probably not, if you're audited," says Sidney Kess, a lawyer and accountant.

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