self-employed expensing question

im a computer programmer. in march of 2006 i became a 1099 independant contractor and moved cross-country (to new orleans!) for a client; in november i became a single-member LLC (disregarded entity to the IRS; filing as a sole prop). i have two clients, one that i work for from home, the other that i work for onsite. my home is a house i bought after arriving here. i use quicken for my income & expenses, which is pretty straight-forward. i plan to hire an accountant for an hour or two, but i wanted to do some research first before going in. im mainly curious about expenses. i save all of my business-related reciepts and log them -- gas & car costs, work meals, office supplies, etc. i believe i understand how they work. but what im not clear on, is if and how much i can expense:

- monthly cell phone - monthly internet - monthly mortage (note + interest + insurance + taxs) - monthly utilities (elec, water, security) - home repairs

...all of which are used for personal use as well. my home-office is only 1/4 of my study, which is about 1/6 of my house. my home-office's two computers are also for personal use when im not working. this is my confusion -- it seemed from the IRS site that a home-office must be used

*only* for work, not for personal, in order to claim it. which seemed odd to me... can anyone give me a primer, tips, etc?

thanks, matt

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Reply to
matt
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Actually, if your home office is used for personal use, you can't claim the home office deductions. And while that may seem odd to you, the folks elected by people like you and me (commonly known as Congress) came up with that. If you have a qualifying home office (used regularly and

*exclusively* for business) then 1/6th of the common household expenses, utilities (power, water, gas, security, and the internet), home repairs, home insurance, the mortgage interest (but not the principal amount), and property taxes can be taken against your business income. Your cell phone you'll have to take a prorated amount based on your usage of business calls -v- personal calls, and yes, the IRS will make you get detailed bills from the phone company to prove it out if you don't keep records). If I were you, I'd find some way to pull your personal computer into another location so the office space qualifies. You'll also find that you may not have a good grasp on some of the other expenses. While most are cut and dry, deductions for your vehicle usage, meals and entertainment, and purchases of equipment and furniture are quite another matter, as they carry significantly different rules for deductibility and documentation.

-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net

Reply to
Paul Thomas, CPA

The IRS requirement for a home office is that it be used "regularly and exclusively" for business. That means that you must use it on a regular basis for business and that nothing of a personal nature is conducted there. It can be a room or a portion of a room, but if it is not dedicated solely for business use, you can't claim it as a deduction. If you meet these requirements, you calculate the square footage of the region and the percentage of entire house that this represents. Then you prorate all your expenses for the house as a whole: mortgage interest, real estate taxes, utilities, etc. For cell phone and internet charges, if you keep track of the percent business use, you can prorate your expenses for these also. However, the IRS may take the position that the internet or cell phone is primarily for personal use, that there is no incremental cost for also using them for business, and may disallow these deductions. Dennis

Reply to
bono9763

wrote

Actually, if your home office is used for personal use, you can't claim the home office deductions. And while that may seem odd to you, the folks elected by people like you and me (commonly known as Congress) came up with that. If you have a qualifying home office (used regularly and

*exclusively* for business) then 1/6th of the common household expenses, utilities (power, water, gas, security, and the internet), home repairs, home insurance, the mortgage interest (but not the principal amount), and property taxes can be taken against your business income. Your cell phone you'll have to take a prorated amount based on your usage of business calls -v- personal calls, and yes, the IRS will make you get detailed bills from the phone company to prove it out if you don't keep records). If I were you, I'd find some way to pull your personal computer into another location so the office space qualifies. You'll also find that you may not have a good grasp on some of the other expenses. While most are cut and dry, deductions for your vehicle usage, meals and entertainment, and purchases of equipment and furniture are quite another matter, as they carry significantly different rules for deductibility and documentation.

-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net

Reply to
Paul Thomas, CPA

The IRS requirement for a home office is that it be used "regularly and exclusively" for business. That means that you must use it on a regular basis for business and that nothing of a personal nature is conducted there. It can be a room or a portion of a room, but if it is not dedicated solely for business use, you can't claim it as a deduction. If you meet these requirements, you calculate the square footage of the region and the percentage of entire house that this represents. Then you prorate all your expenses for the house as a whole: mortgage interest, real estate taxes, utilities, etc. For cell phone and internet charges, if you keep track of the percent business use, you can prorate your expenses for these also. However, the IRS may take the position that the internet or cell phone is primarily for personal use, that there is no incremental cost for also using them for business, and may disallow these deductions. Dennis

Reply to
bono9763

Both you and Paul seem to have left out Depreciation Expense. If you do claim Home Office Deduction, when you sell this property you will have to recapture the allowed or allowable depreciation, so best to take it now if you have an ofice in the home. See Pub 587.

__ Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH

Reply to
Arthur Kamlet

Isn't it true that even if you don't claim any home office deduction, you will have to recapture the depreciation (because it was allowable)?

Steve

Reply to
Steve Pope

If you don't claim to have a home office, there's no deduction or depreciation allowable. If you claim a home office and take deductions but not depreciation, you get hit for the allowable depreciation anyway. Seth

Reply to
Seth Breidbart

I think you mean that if you don't claim a home office, it would be difficult for them to prove that you actually had one. But if you actually had one and could have claimed it and didn't, technically you are required to recapture the depreciation that you could have claimed. Stu

Reply to
Stuart A. Bronstein

Based on the discussions I have read here it seems to be hard to prove that the area claimed as a home office was used ONLY for business purposes, not even 1% use allowed for personal activities. Therefore it would seem that if the home office deduction is NOT claimed it would be exceedingly difficult to prove that now personal activity took place in that space. I am not suggesting that anyone "hide" their home office, but I doubt there is any home office in which some personal activities do not take place. Put another way, the IRS has made it so difficult to claim the home office deduction, I don't see how they could claim a home office exists and is used 100% for business activities if the home owner has not claimed that to be the case.

Not having a space devoted 100% to business activities seems to be the default condition.

Disclaimer - I do not take the home office deduction for the space I use for my home-based consulting business since I also use the space for personal activities.

-- Vic Roberts Replace xxx with vdr in e-mail address.

Reply to
Victor Roberts

The day the IRS successfully asserts on audit that a taxpayer failed to take a home office deduction (not just depreciation but the entire deduction) when he was entitled to do so is the day I buy drinks for regular posters to this group at the Penny Lane Pub in Richmond VA.

Reply to
Bill Brown

Can you provide an example of what constitutes for this purpose "claiming a home office", with no depreciation taken?

Steve

Reply to
Steve Pope

It means exactly what it says. Someone deducts the cost of a home office but doesn't include any deduction for rent or depreciation. Happens all the time.

Reply to
Phil Marti

That would be deducting all the eligible home office expenses (a percentage of insurance, maintenance, utilitiles, property taxes, mortgage interest, etc) EXCEPT depreciation on Schedule C.

Failing to do that means the tax payer pays not only more income tax but more self-employment tax as well. A taxpayer in the 15% bracket could pay almost 30% of the foregone depreciation in extra taxes.

Later, when selling the house, the taxpayer would pay a MAXIMUM of 25% in taxes on the recaptured depreciation. Taking depreciation on a qualified home office seems like a no-brainer to me but since the question keeps coming up it is clear that some people have some goal in mind other than maximizing their own after-tax dollar wealth.

By the way, the income tax hit for failing to deduct depreciation can be cured by a change in accounting method in the year of sale to deduct all the previously undeducted depreciation. There is no cure for failing to reduce SE tax.

Reply to
Bill Brown

Actually, impossible rather than merely difficult. (Prove that on April 16th I didn't relax with a glass of scotch and a good book and enjoy the fact that I was sitting in my spare bedroom with no work to do.)

What I'm not sure of (and doesn't matter in reality) is whether a home office is something that has to be claimed in order to exist. If so, depreciation isn't allowable if it isn't claimed, even if it could have been. Seth

Reply to
Seth Breidbart

Do you mean that ordinary and necessary business expenses are not deductible if you have a home office but it doesn't qualify for the home office deduction? I doubt that's the case. Stu

Reply to
Stuart A. Bronstein

Sure, my point here is that there's no line on Schedule C called "home office deduction". If TP is a homeowner and files a Sched C and does not include any depreciation for a fraction of his home on the Sched C, then I *think* the TP's position must be that whatever expenses are on his schedule C have some justification other than a "home office" that meets the regular/exclusive/priciple place of business definition. Similarly if TP is a renter and doesn't deduct a fraction of their rent.

Steve

Reply to
Steve Pope

If the TP doesn't have a qualified home office then the TP cannot deduct a fraction of utilities, casualty insurance, maintenance, etc. Other expenses (office supplies, for example) are deductible whether the TP has a qualified home office or not.

Reply to
Bill Brown

(balance snipped.)

My only question is, what brand of Scotch?

Scotch ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

Brand? What is this "brand" of which you speak?

Macallan cask strength.

Seth

Moderator: Keep the Scotch and the Drambuie in a refrigerator so you won't need ice. If two double Rusty Nails doesn't relax relax you, you may need Valium. LoL

Reply to
Seth Breidbart

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