Five tax pros share their insights - advice for home-based businesses - Finance - Column

Home Office Computing, March, 1994 by Linda Stern

Even if they qualify, because they've heard so much about the red flag it waves in front of wild-eyed IRS auditors. But if you qualify, you qualify, so take it all.

Remember all the little things. Every cup of coffee you buy for a client, every stamp You stick on a letter, every mile you drive for business purposes brings some tax savings. Keep good records and you'll be surprised at the true year-end tallies. Mail a complete return. Failure to check off all the pertinent boxes-- such as your filing status, number of dependents, and the like-- will hold up your return. So will forgetting to sign on the dotted line, something a surprising number of taxpayers do every year. To protect you, most tax-prep software packages won't print out the forms until every box is checked and each necessary form filed. But they still can't make you sign it.

Ruth Lancaster As manager of tax training at H&R Block in Kansas City, Missouri, she helps prepare the preparers who assist more than 18 million taxpayers each year.

Be dependable about dependents. You must include Social Security numbers for children over the age of one whom you claim as dependents. Fail to do this, and it could hold up your return.

Never treat your state return the same as your federal. Just because an expense is not deductible at the federal level doesn't mean it's not deductible against your state taxable income. And if you do best filing a married joint return on your federal taxes, it doesn't mean the same holds true on your state paperwork. Sorry, but the best answer is the long one--read the directions that go with your state forms closely, and if more than one filing status applies to you, figure it out to see which one is best.

Use all the credits you're entitled to. Starting with tax year 1994, the earned-income credit--for people who work but don't make much money--is vastly expanded. You can earn more and still qualify, receive a bigger credit, and for the first time ever, qualify under certain circumstances even if you don't have children to support. This credit is worth looking into if you spend the better part of the year sinking money into a new business and not taking much out. And yes, people who work at home do qualify for the child-care credit.

Niel Rothfeder This Wurtsboro, New York, accountant has been doing returns for 12 years and represents clients before the IRS when things go awry.

Include proper federal forms. You can't take a mileage deduction for your car if you haven't used Form 4562, Depreciation and Amortization. Others to complete are Form 8829, the home-office form, and Schedule SE, the self-employment tax form.

Add in other auto write-offs. Most people know they can get 28 cents a mile for the business miles they put on their car. But even if you take that deduction, you can still write off parking and tolls.

Take the right amount for your phone. You aren't allowed to deduct any portion of your basic personal phone service if it doubles as a business phone. But if you add extras for your business, like call waiting, phone mail, or a second line, you're allowed to deduct that.

Seek timely professional advice. If you use your tax preparer as a clerk, you are probably missing a lot of good advice about how to cut your tax bill next year. Wait until tax season is over--summer or early fall--when your tax pro will appreciate a call and have some time to spend.

Don't speak for yourself. If you get audited, don't go alone-- bring a pro. Even better, just send the pro and don't go yourself. Auditors are trained to make you talk and may discover some problem on your return they weren't looking for until you started chatting. "Even if they look at you and ask a question, have your accountant, attorney, or enrolled agent answer for you," he warns.

Stuart Kessler Our New York CPA calls himself a "Fossil"--he's been handling tax returns for clients since the days of pencils and erasers.

Remember state taxes. If you received a refund on your state taxes last April, you have to declare that as income this April (that's assuming you deducted it the previous year on your Schedule A). Similarly, if you paid state taxes last year, that amount is deductible against your income this year. Also, don't forget to deduct estimated payments you made on your state taxes.

Don't suffer more self-employed pain than necessary. Yes, the self-employment tax takes 12.4 percent of your net business income up to $57,600 in 1993 for Social Security and 2.9 percent of your net business income up to $135,000 for Medicare. But you can deduct half of your total tax for these programs on your 1040.

Carry over deductions. You aren't allowed to use either the home- office deduction or the so-called Section 179 equipment write-offs to create a loss in your business. But you can bring your business income down to zero and carry over the remaining deductions until next year. Don't forget to take those carryovers next year!

Keep abreast of new developments. Last year Congress gave back six months of health-insurance deductions (the last half of 1992) to self-employed taxpayers and increased the amount of equipment smallbusiness owners could write off in a year from $10,000 to $17,500. Fail to keep up with changes at your own economic peril.