Second of two articles on the tax advantages of home ownership.
There are tighter rules for deducting home-office expenses undertax reform, but many writeoffs still are available.
"Running a business from your home - full time or part time -still can generate thousands of dollars in tax breaks," saidaccountant Frank Pipal, of Pipal-Webber Ltd., 3338 N. Southport.
"Employees can deduct expenses on taxes if they exclusively andregularly used their home office as the principal place of business,or to meet with clients for business reasons."
Such deductible expenses include part of the homeowners'mortgage interest payments, real estate taxes, depreciation,utilities, insurance, repairs and maintenance.
However, you have to calculate the business percentage of homeuse. For example, let's assume you use a 10-by-12-foot room (120square feet) in your home for business, and your house contains atotal of 1,200 square feet. You are using one-tenth of your home'sarea for business, so you would be allowed to deduct 10 percent ofyour home-operating expenses.
Tax experts warn that the home office must be set up for theconvenience of the employer, not the employee.
Let's say an insurance salesman employed by a New Jersey companyis required to work out of an office in Chicago.
If he decides to use his house as an office, he can write off asmiscellaneous deductions expenses that exceed 2 percent of thetaxpayer's adjusted gross income, Pipal said. (For those who havebecome intimately familiar with their 1040 form this week, that'sline 30.)
"AGI is income before exemptions and itemized deductions. Anyhome-office expenses plus miscellaneous expenses that are in excessof 2 percent of AGI are deductible."
These expenses would be reported on Form 2106 - EmployeeBusiness Expenses.
However, for a self-employed person, the expenses are reportedon Sechedule C - Profit (or Loss) From Business or Profession - andare not subject to the 2 percent AGI rule.
Another limitation under tax reform is that the deductionscannot exceed the net income generated by the home-office activitythat year. But any deductions not used because of this limitationcan be carried forward and deducted against future home-earnedincome.
People who operate a sole proprietorship business or a privatecorporation out of the home also are eligible for writeoffs.
For these home-office users, the expenses are listed as businessdeductions, as opposed to miscellaneous itemized deductions taken byemployees, Pipal said. Again, deductions can't exceed the income ofthe business, but in a sole proprietorship, they can be carriedforward.
Tax experts give the following suggestions for handling thehome-office writeoffs: Home hobby tax breaks. An expensive hobby, such as photography, canbe a profitable home-based business. Expenses of operating the photobusiness would be fully deductible against the business's income.
"Your at-home business need not generate a major source of yourincome," said tax-law specialist Paul N. Strassels.
"The courts have consistently held that taxpayers can beinvolved in many different trades and businesses at the same time,each separate and distinct from the others," said Strassels, authorof Money Matters, (Addison-Wesley, Reading, Mass., $16.95). Depreciation writeoffs. You can depreciate that portion of yourhome that serves as an office. To determine the percentage ofbusiness use, divide the number of square feet in the office by thetotal square footage of the house.
Remember, the depreciation system you use depends on when youbought your home - not when you started using it for business.
"If you bought it in 1982, but didn't start your business until1987, you would use the 15-year accelerated depreciation that was ineffect in 1982," Pipal said.
"If you bought it in 1987, you'd have to use straight-linedepreciation over 27.5 years," he said. Selling a home. Beware of complications if you sell a house whileoperating a business out of it.
If you use part of your home for business, and later decide tosell the home, you must adjust the tax basis of the house for anydepreciation taken in connection with the business use.
"You won't be able to defer tax on the gain on that portion ofthe house that was being used for business purposes," Strassels said.
"In the year you sell, make certain you don't qualify for ahome-office deduction by purposely using it for personal purposes.By violating the exclusively-for-business-use requirement, you'll beable to defer taxes on all your house-sale profits," Strasselsadvised. Transportation expenses. If you're an employee who keeps an officein your home, you can convert nondeductible personal commutingexpenses into tax-deductible local business transportation expenses.
Under this deduction, the first trip of the day from home tooffice is nondeductible, as is the last trip of the day from officeto home. All business-related driving in between is tax deductible,either at your costs or at the IRS standard mileage rate of 22.5cents per mile.
"The trick is to make your first and last business stops of theday in your at-home office. It doesn't matter if the officequalifies for tax-deduction purposes or not," Strassels said. Phone calls. Even if you have a separate business telephone anddon't use your home office on an exclusive basis, phone expenses aretax deductible as an unreimbursed employee business expense. If youdon't have a separate phone line, any long-distance charges you incurfor business are deductible.
