 | Larry Sell
is a partner of Regier Carr & Monroe, L.L.P., a regional accounting firm with offices in Wichita, Tulsa and Tucson. The firm was founded in Wichita in 1948 and Larry joined the firm in 1976. He is currently the partner in charge of the Wichita office and serves clients in the tax consulting and small business consulting areas.
Larry graduated from Wichita State University in 1974 and currently lives in the Andover area with his wife Michelle and daughter Angelica.
Larry can be reached at Regier Carr & Monroe, L.L.P., Suite 100, 300 West Douglas, Wichita, Kansas 67202, by phone at (316) 264-2335 or (800) 798-2305, by fax at (316) 264-1489 or by e-mail at larry.sell@rcmcpa.com. The firm also has a web site at www.rcmllp.com that offers helpful information. |
Taxes & Accounting
2002-01-01 13:32:00
Home office deductions... can you or can’t you?
Question: I have a business and operate it from my home. I am wondering about deductions. How much of my mortgage payment can I write off? What auto expenses can I deduct? What is considered business travel? How about entertainment expenses and my country club dues?
Answer: As in any business you are allowed to deduct ordinary and necessary business expenses. However, when you operate a business from the home you must allocate appropriate household expenses between your personal residence and your "business office". The business office must be a specific area of your home that is used regularly and exclusively for your business. In addition, the office in your home must be your principal place of business. By dividing your home's total square feet by the business office square feet you will determine a percentage of the home that is used for business. That percentage will be applied to utilities, insurance, real estate tax, mortgage interest, PMI insurance, security costs, etc., and your home's tax basis for calculation of depreciation. There are special rules that apply to day care providers. The IRS requires that Form 8829 be completed for home office expenses and this form will walk you through the calculations. A couple of words of caution are in order. First, you will note that the net home office expense will be limited to your net income of the business. In other words, your home office will not produce or increase a net operating loss. Secondly, once you have converted a portion of your home to a business office, you may incur a taxable gain when you sell your home. I recommend you review 'IRS Publication 587 Business Use of Your Home' for more detailed information. Automobile expenses are generally deductible based on the percentage of business use. That percentage is determined by dividing your total miles by your business miles. Business miles are miles driven exclusively for business. You can elect to use actual expenses or a standard mileage rate. The standard mileage rate for year 2001 is 34.5 cents per mile and increases to 36.5 cents per mile for year 2002. Using the actual expenses would include costs of gasoline, oil, repairs, insurance, license plates, property tax, interest expense and depreciation expense. Deductible travel expenses include those ordinary and necessary expenses you have when you travel away from home on business. The type of expense you can deduct depends on the facts and your circumstances. When you travel away from home on business, you should keep records of all the expenses you have. You can use a log, diary, notebook, or any other written record to keep track of your expenses. You must be able to substantiate the following travel and entertainment expenses for them to be deductible: amount, time and place, and business purpose.You can deduct entertainment expenses only if they are both ordinary and necessary and meet either a directly related test or an associated test. To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:1) The main purpose of the combined business and entertainment was the active conduct of business, 2) You did engage in business with the person during the entertainment period, and3) You had more than a general expectation of getting income or some other specific business benefit at some future time. To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment:1) Is associated with your trade or business, and 2) Directly precedes or follows a substantial business discussion. The amount you can deduct for entertainment expenses may be limited. Generally, you can deduct only 50% of your entertainment expensesEntertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips.Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. A meal expense includes the cost of food, beverages, taxes, and tips for the meal. To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided.You cannot deduct dues (including initiation fees) for membership in any club organized for business, pleasure, recreation, or other social purpose. This rule applies to any membership organization if one of its principal purposes is to conduct entertainment activities for members or their guests, or to provide members or their guests with access to entertainment facilities.I recommend you review 'IRS Publication 463, Travel, Entertainment, Gift and Car expenses' for more detailed information. I also recommend you consult with a qualified individual to advise you based on your unique set of facts and circumstances.
