Write it off right: Gail Penha is a home-based business owner who takes the proper deductions - Tax Strategies - Gap Enterprises Natural Solutions, Ellicot City, Maryland

Black Enterprise, July, 2003 by Lee Anna Jackson

Gail Penha, owner of Gap Enterprises Natural Solutions in Ellicot City, Maryland (www.gapnaturalsolutions.com), has been importing hair, facial, and body-care products made from minerals and plant extracts from the Dead Sea in Israel and selling them from her home since July 2001. Although she has received many advertisements and direct mail pieces that offer to help small business owners get large income tax refunds, Penha has always opted to use a professional accountant to make sure she reaps the full benefit of the tax laws.

"My largest deduction came from merchant charges because I accept credit cards for sales," says Penha, 44. "I also claimed advertising that first year." (Something she wouldn't have known to do if she had tried to do the taxes herself.) At press time, Penha was working with her accountant to file an extension for her 2002 returns. She estimates that Gap Enterprises grossed $100,000 last year, and already she's thinking about the deductions she will be able to take next year when she expects her young business to be in the black. Penha wonders how the cost of offering free shipping--as a way to keep up with her competitors--will affect next year's taxes.

Over the past few years, the Internal Revenue Service (www.irs.gov) has made it easier for taxpayers to take the proper home-office deduction by having them file Form 8829, Expenses for Business Use of Your Home. This way, filers can avoid fines and late penalties. For starters, "Whether they own their home or are using an apartment as a primary office space to run a legitimate business, it is necessary for people to calculate the square footage that they're using compared to the entire square footage of the home," says Constantine Hudson, a certified public accountant with Hudson & Simister. "By doing so, they'll arrive at the proper percentage of the home they can deduct." Once you have made this calculation, you can deduct any direct and some indirect expenses related to the business use of your home.

Hudson also advises that even if you're working a full-time job, you can still be eligible for the same deductions for your home-based business. You qualify "as long as it's a legitimate business operated with the intention to develop it into an income-producing business," Hudson explains. "It could be that a person is working for someone else and trying to build adequate income from their own business before giving up full-time employment," she says.

The Website FindLaw (www.Findlaw.com) compiled these factors that the IRS uses to determine if a home office can be deducted:

* Exclusive use: Make sure the space is not used for any nonbusiness purposes, like serving as a part-time guestroom or a place for kids to play computer games and check e-mail.

* Regular use: You must use the home office on a continuous basis, not just occasionally, although there are some exceptions for seasonal industries such as construction.

* Place of business: The space must be either your principal place of business or the place you regularly meet with customers. If you conduct the most important activities for the business (including administrative functions) in your home office and spend most of your time there, you may qualify for a deduction. Taking the home-office deduction doesn't require that you only work at home, as with a plumber or salesperson.

* Separate structure: If you have a separate structure that is used exclusively for your business, such as a house painter's shed, expenses related to that structure may be deductible even if you don't have a home office.

Since IRS rules are not crystal clear and each home setup is different, seek a tax professional by getting a recommendation from someone you trust or by using Websites such as FindLaw to locate a tax attorney in your area. (To find out more about home-based business deductions, see "Give Me a [Tax] Break" www.blackenterprise.com/ExclusivesekOpen.asp?id=166.) Take the deduction, but make sure you're entitled to it and make sure it's done right.