From: "Paul S. Penrod" <furballs@netcom.com>
Date: Wed, 21 Aug 1996 15:29:05 +0800
To: "Timothy C. May" <tcmay@got.net>
Subject: Re: Taxes on Internet access prediction
In-Reply-To: <ae3f4d89020210046ca3@[205.199.118.202]>
Message-ID: <Pine.3.89.9608202145.A13012-0100000@netcom>
MIME-Version: 1.0
Content-Type: text/plain




On Tue, 20 Aug 1996, Timothy C. May wrote:

> At 5:54 PM 8/20/96, Mike McNally wrote:
> 
> >Sure, but clearly that's not exclusively the case.  (Amazingly enough
> >to some might be the fact that my for-work e-mail volume far exceeds
> >my not-for-work volume.)  Hopefully I haven't brought too much shame
> >to my employer.
> >
> >In any case, with the IRS it's often less a matter of common sense
> >than what they happen to decide is The Law.  Witness the changes in
> >laws about what constitutes a "home office".  Currently, if you're
> >(let's say) a freelance plumber who maintains a legitimate office
> ...
> 
> Caveat: I'm not a defender of income taxes, of course. Nor am I a defender
> of the IRS.
> 
> However, on the "home office" situation, most of the examples I encounter,
> in talking to friends, are clearly scams to save a thousand bucks (or less)
> on their tax returns. Most of my friends who try to deduct a room in their
> house because they've put their computer there are clearly not using "20%"
> or "25%" or whatever of their house as a business.
> 
> For those who really do actually use a room in their home for building
> things, for meeting with clients, for operating a home business of some
> sort, then I think the IRS will have no problems allowing it. (If the
> subject even comes up, in an audit. There are some reports that attempting
> to declare a home office increases ones chances of being audited....)
> 
> As the saying goes, consult a competent expert. A few books detail the
> expected amount of work that must be done in a "home office," and whether
> one is likely to qualify.

As one who has regularly maintained a home office for many years, there 
are a couple of points on the above issue that should be made.

First, the stories about increased audits are true. This is one of the 
"red flag" items on Schedule C that the IRS looks for. If the types and 
amount of deductions taken for the space utilized evens smells like there 
is possible overlap with the interest deduction for the mortgage, it gets 
kicked out for review. This does not mean you get a letter or a phone 
call, but none the less, the more interest there is in the return the 
greater the chances for a tango downtown.

Schedule C has been a target for many years(especially since HB 1706) 
went to law concerning contract employee status vs consulting and the 
famous 20 point list et al. I had a 3 hour conversation with a regional 
supervisor of the IRS about this list and the impossiblity of any 
business (even one the size of IBM) and/or person qualifying as a 
contractor/consultant on all 20 points. He informed my unoffically that 
the litmus test centers around a majority of the conditions being 
satisfied of which one of the important ones is a home office, else a 
consultant is (for tax purposes) a contract employee and gets raped in 
both directions. You can't deduct for business expenses because you are 
technically an employee of the client, plus you have to pay the higher 
rate of self employment (15.16% or some such non-sense). Fun...

For the plumber that works "offsite" as well as the consultant, the home 
office is a legitimate deduction so long as they can prove that they set 
their own schedule and hours, have more than one "client", and generally 
operate as a "business". This usually means registering the business 
address at the residence, business license, checks, etc. and setting 
aside the workspace necessary to accomplish the adminstrative tasks to 
keep the business running. Taking a picture of the office helps alot, if 
there are questions about the legitimacy.

As for the closet consultant who looks for a cheap fast deduction, I have 
zero sympathy if they get caught. If it isn't legitmate, it isn't worth 
the risk. It will catch up with you. Fascist state or not, these are the 
rules of the game: Declare everything. Deductions are negotiable.

 > 
> As one data point, I have derived nearly all of my income over the past 10
> years from investments. And yet the "work" needed to be done on my computer
> is such a tiny fraction of my overall use of it that I don't even try to
> write off my various computers as "investment expenses." Your mileage may
> vary.
> 
> And I certainly have not tried to write off a room in my house as a home
> office. (As it happens, I need few of the "office" resources, so I have my
> PowerMac and 17" monitor sitting beside my recliner in the family room of
> my house, where I can lie back, log in, and bliss out in cyberspace.)
> 
> --Tim May

Again the deduction and the risk involved in taking it depends on the 
situation. If you are investing and/or running the numbers on the market, 
then there may not be enough there to make it worth your while. I have a 
client of mine who grosses 7+ figures - net from his commodities, and all 
he does is take the losses and never expenses anything else. There is no 
need to, as it's such a small part of his income as to make it ridiculous.