DON'T-MISS Deductions - Government Activity

Home Office Computing, March, 2000 by Amee Abel

UNCLE SAM IS VERY GOOD TO HOME-BASED WORKERS THESE DAYS. WHETHER YOU'VE launched a business out of a spare bedroom or spend your days visiting client sites, using your home as a professional base of operation affords numerous tax perks and deductibles-some of which are additions to the 1999 tax code.

To learn how your workstyle can earn you the maximum tax savings, we Consulted Maggie Doedtman, H&R Block's sole proprietor tax research specialist. We also scoured the Web to compile a list of tax tips and resources you won't want to miss. Here you'll learn what's deductible--and what's not--and how to trim your tax bill to the bone (and be the envy of the paycheck crowd) come April 15.

On the Record Cutting your tax bill is a year-round job, says Doedtman. Planning and recordkeeping are key to minimizing the amount you owe. Doedtman recommends keeping a business diary in which you jot down the particulars of business trips and lunch and dinner meetings: "In order to claim a deduction, you have to remember it."

This Is Your Office? The big news for 1999 returns is that the home office deduction has been expanded to include any space in the home that's used exclusively and regularly for managing your business. So you needn't take up an extra room for office space--you can claim something as simple as a desk or countertop, as long as it's used exclusively and regularly for the business. This change means that those previously excluded from claiming a home office--such as consultants, sales-people, and even doctors who use a home office to manage a practice--can now claim that space.

However, Doedtman cautions that although the rules have relaxed, you must be scrupulous in your exclusive and regular use of the space. The IRS holds home businesses to a higher standard than their office-based counterparts, she says, and tends to subject them to closer scrutiny. In fact, it's not above the IRS to send agents to question neighbors about any nonwork-related activities in your home office.

Home Office Perks When you file Schedule C (Profit or Loss from Business), all deductions immediately go to offset your income. And when you attach Form 8829 (Expenses for Business Use of Your Home), you can deduct expenses that are sure to make those who work for a traditional company envious.

For example, when a typical employee rents an apartment, every penny of his rent comes from after-tax dollars. But when a home business owner does the same, he can deduct a portion of his rent--as well as the cost of utilities, insurance, and repairs--from the business's income. Homeowners can also deduct the depreciation in value of their home.

To determine how much you can claim as a business expense, calculate your home office percentage by comparing your office space with the total size of your home or apartment. To get the percentage, you can either count rooms or measure square footage. Then, use that number to figure the dollar value of each deduction. The dollar value of any given deduction (electricity, heat, insurance, garbage pickup, and so on) is the total amount you've paid for utilities during the year, multiplied by your home office percentage. This equals the amount you can claim as a business expense.

Not only does a home office deduction put you ahead, the tax break also makes your business more competitive by reducing your income tax burden and decreasing your self-employment tax, which pays for Social Security and Medicare. Remember that the 15.3 percent tax rate applies only to the first $72,600 of self-employment income in 1999. Above that, only the 2.9 percent Medicare portion of the tax applies.

Once you've claimed a home office, you can also claim travel expenses. Because your home office is within walking distance, you can include your first business-related trip of the day--say, to and from a client's office--in your auto mileage claim. Without a home office, you can't claim the mileage.

How to File Home-based workers shouldn't file 1040EZ forms--as a result, you need expert assistance if you decide to prepare your own taxes. Help can be found in a number of places. The IRS has always tried to provide all the information you need, and its site provides thorough information in downloadable PDF forms and instructions, as well as online and offline help.

And many of the major tax preparation software packages, such as Kiplinger TaxCut ($15; 800-235-4060, www.taxcut.com) and Intuit TurboTax ($30, or MacinTax $30; 800-446-8848, www.intuit.com), make filing simple. These annually updated programs are brimming with up-to-date information and advice.

Moreover, the past two years have seen a blossoming of online tax preparation sites, such as www.taxattack.com and e1040. com (in addition to both the Kiplinger and Intuit sites, which also offer online tax preparation). As with tax preparation software, these sites guide you through pages of tax-related questions, then help you fill out the appropriate IRS forms. Many also submit your finished return to the IRS for you.