Tax tips 1993: damage control - tips on tax preparation for home workers - finance - Tutorial

Home Office Computing, April, 1993 by Linda Stern

The IRS Need Not Be Your Grim Reaper

By now it's all over except the crying. And the broken pencils, the slippery 1099 forms, the feverish trips to the local IRS forms distribution center and post office. By the time you read this there is little you can do to change the past. The 1992 tax year is over, and it's too late for all of the midyear tax reduction tricks of the trade. (With one notable exception, which I'll get to in a minute.)

But it's not too late to muster every memory cell in 1993 to ensure that you take every deduction coming to you, that you make the tax-preparation period as painless as possible, and that you do what you can to audit-proof your file. Here are some suggestions and reminders that we hope will produce many happy returns.

BUT FIRST, YOU CAN CHANGE THE PAST

When it comes to making your tax picture better, the Internal Revenue Service gives you one time machine in which to travel back to 1992. You have until April 15 (if you're on a calendar year and that's your filing deadline) to make 1992 contributions to your Keogh or SEP-IRA retirement accounts. If you don't already have one of these accounts, you have until April 15 to open a SEP-IRA (Keoghs must be established before the tax year's end, including extensions).

If you stop reading here, drop the magazine, run to the bank, make your retirement deposit, and never finish the rest of this column, it will have been worthwhile. Retirement accounts are absolutely the best financial break we self-employed workers get. Every $100 you contribute to your IRA or Keogh can save you as much as $38 or $40 right now if you are in a top tax bracket and live in a high-tax state. And the money will compound tax-free until you need it.

You are allowed to shelter 15 percent of your business income a year in either of these accounts, and certain types of Keoghs allow you put away 10 percent more. Both of those figures based on your net business income minus your retirement contribution. plus half your self-employment tax. That's a complicated circular which leads to a more complicated calculation that ultimately gets simple and lets you set aside as much as 13.0434 percent of your business net in an IRA or 20 percent (or $30,000, whichever is smaller) in a Keogh.

OTHER DEDUCTIONS, OTHER DOLLARS

Use these strategies to make sure you don't miss out on other tax savings.

Use Fomt 8829 to take your home-office write-off. The form (which feeds into the self-employed's Schedule C) will walk you through every calculation to ensure that you maximize your legitimate deduction. This will include the costs of fixing up your office, a share of the household utilities, some mortgage interest, and depreciation on the portion of your home that houses your office. Some of these deductions are available elsewhere-mortgage interest, for example, can be taken on your Schedule A list of personal deductions. But they're worth more on the Form 8829 as they will offset the 15.3 percent self-employment tax as well as your regular income taxes. Note that the Supreme Court earlier this year ruled that you may not take the home-office deduction if you spend the majority of your workdays elsewhere; this might mean that you'd want to file an amended tax return for earlier years. Ask your accountant.

Write off as much equipment as possible, as quickly as possible. Section 179 of the tax code enables small-business owners to deduct immediately (rather than depreciate over time) up to $10,000 worth of equipment annually. This doesn't have to be high-tech computer equipment; it can include your desk, lamp, curtains, and office wall posters (as long as they're used in legitimate office space). Section 179 has its own little section on the depreciation Form 4562. Note that if your business lost money last year, you can't use Section 179, but you can carry forward any deductions and try to deduct them again next year.

Take a broad view of your business expenses. You probably remembered to deduct the costs of stationery or your Federal Express bills. But if you've bought holiday gifts for clients ($25 limit per person), found new customers by dialing into online services, taken trips to survey the competition, hired help to clean your office, or subscribed to technical journals and magazines that help you run your home office better, these are all legitimately deductible expenses on Schedule C.

Deduct the wear and tear on your car. If you haven't kept complete records about all of your car expenses for the, year, deduct your mileage, at a rate of 28 cents per mile for each business mile driven in 1992. (Hint for 1993: Many people combine business and personal trips to maximize mileage deductions during the year.)

Remember the child-care credit. Just because you work at home doesn't mean you cannot pay someone to keep your kids out of your haft. Record how much you've paid and your care-giver's Social Security number, then declare the expense. You'll get a credit for this.

Be careful about expense reimbursements. Sometimes you take a trip for a client, put the airline tickets on your credit card, and the client pays you back. At the end of the year, when your client sends you (and the IRS) a 1099 form stating how much he's paid you, he includes the cost of those tickets in the total. But you haven't listed them as a business expense! Take care to ensure parity, or you'll end up paying tax on income that was never really yours to spend.