Tuesday, April 29, 2008

This just in....

Yesterday, the Federal Government announced that rebate payments would be going out as soon as today.

Predictably, I got this email today (including spelling and grammar errors):

Over 130 million Americans will receive refunds as
part of President Bush program to jumpstart the economy.

Our records indicate that you are qualified to receive the
2008 Economic Stimulus Refund.

The fastest and easiest way to receive your refund is by
direct deposit to your checking/savings account.

Please click on the link and fill out the form and submit
before May 01th, 2008 to ensure that your refund will be
processed as soon as possible.

Submitting your form on May 01th, 2008 or later means that
your refund will be delayed due to the volume of requests we
anticipate for the Economic Stimulus Refund.

To access Economic Stimulus Refund, please click here.

And here I thought that the payment would be made in the same manner as my tax refund. Foolish me.

Monday, April 28, 2008

The siren call of the Home Office Deduction...

As tax season approaches, prognosticators start to write on 'hidden' or 'secret' (or some other descriptive term) tax deductions, telling taxpayers not to 'miss out' on these 'tax saving' devices. One deduction which almost always seems to make the list is the infamous Home Office deduction.

In fact the myth of the missing home office deduction has become so prevelant that the House Committee on Small Business recently jumped on the bandwagon. But is it really a good idea? And does it deserve the hype it continually gets?


Now that's a daring comment, because most tax writers, and many tax practitioners would disagree with me. But hear me out.

First, The Rules:

In order to deduct a home office, you must observe some rules, which the House Committee recently called 'inordinately complex'. Here they are, courtesy of IRS Publication 587 and their 'tax tips':
  1. The 'office' area must be exclusively used as a home office. This is the sticking point for a lot of people. Frequently, people will convert a portion of a larger room (say, a den) to an 'office' area, and wonder if they can claim a home office. The quick answer? No. The key here is the phrase 'separately identifiable space'. If all you've done is stick a desk in the corner, it's not enough to qualify for a home office deduction.
  2. The area must be the principal place of business for your business. Ok, so it sounds wordy. But it's actually pretty straightforward, because all you have to do is answer one simple question: When someone at a cocktail party asks you where your office is, what do you say? If you say "I have an office at my home," then your home office is most likely your 'principal place of business'. But if you say "I'm in the Smith-Jones building" and never mention the home office, then your home office fails this test. It's that simple.
  3. The area must be the place in your home where you regularly meet with or deal with patients, clients, or customers only. Again, pretty straightforward if you think about it. Say Suzie Client comes over. You show her into the office in the back. So far so good. But then Bill Buddy comes over, and he stops there as well. Now you might have a problem. If Bill comes there because you're there, and the two of you immediately repair to the den, it's not as much of a problem as if you and Bill hang out drinking for a few hours. At that point, you've probably blown the deduction (though a one-time event isn't as bad as doing that every Saturday).
  4. The area must be used for a trade or business. This one almost seems to belong in the 'huh?' category - as in 'can it be more obvious?' After all, this is a home office we're talking about. But realize that this little provision means that you can't claim a home office for using that third bedroom to do your stock trades unless you are a legitimate trader.
That's it. Sure, you have to calculate just how much of your home is an office, but by comparison, that's pretty straightforward. If you can meet the requirements above, you're eligible to claim a home office deduction, which means deducting part of your mortgage/rent, utilities and other expenses. Even better, it means that you just might be able to write off more of the mileage on your new Hummer.

But the real question here is: Do you want to?

Tomorrow: Why taking the home office deduction is a bad idea.

Saturday, April 19, 2008

The Myth of 'But my buddy told me...' PART I

All too frequently, I find myself having to explain to a client that the deduction they want to claim is, in fact, not a deduction at all. Often, this explanation is prefaced by the client telling me "my buddy/friend/co-worker/cousin/neighbor/trusted-adviser told me that I could write off..."

Case in point: the lovely Unreimbursed Employee Business Expense (or UEBE, for short).

The purpose of the UEBE is to allow employees to deduct job-related expenses that are not reimbursed by their employer. The actual result is that all too often employees try to deduct expenses that don't qualify. Legitimate expenses here include Union Dues, Trade Publications, Education Expenses and Meal and Entertainment Expenses. There's also the ability in most tax software to add 'other' expenses.

The problem is that people liberally define terms. Take 'business and trade publications'. It's one thing to subscribe to the Journal of Accountancy if you're a CPA - after all, it's not exactly a person's first choice (or even their eighth choice) in the doctor's office. It's quite another to - as one client of mine tried - deduct your People subscription because, as she put it "I need to be informed when I talk to my customers". She was a hairdresser. I've seen people try to justify deductions of Newsweek, Time, the local newspaper, US, and numerous other publications as 'business' or 'trade' related (one actor claimed that his deduction for Entertainment Weekly was a necessary expense, because he had to know what was going on in his business). Even your subscription to Money doesn't fall here (at best, it's a deduction under investment expenses).

And then there are the 'grey-area' things. Take flight attendants, for example. They love to deduct everything even remotely related to their job, because they feel they make so little money anyway. Some of their expenses - such as uniforms and union dues - are explicitly permitted, while others - such as luggage, the cost of trip trades, tips to drivers who pick them up at the hotel - fall under the 'ordinary and necessary' guide lines. Some, such as wristwatches, are explicitly prohibited. But others - such as nylons/support hose, shoes, makeup, manicures/pedicures, and the cost of hairstyles/cuts - fall into that 'grey area'. Sure, you can make an argument that they are ' common and accepted in your trade, business, or profession' and 'appropriate and helpful to your business,' both of which must be met to have a deductible expense. In fact, I've had several flight attendants tell me that they are required to wear makeup on the job. But...does it make the make up a deductible expense?

Sadly, no. What makes this difficult to comprehend for most people is that the IRS gives little comprehensive guidance as to what can and cannot be deducted by profession, so most people are left to interpret on their own what is a true expense. Hence the myth of 'my buddy told me...'

The IRS disallows as a deduction work clothing that is 1) not required by the employer and 2) suitable for everyday wear. As a result, an attorney cannot deduct the cost of a suit, even though it's foolish to show up in court with anything less (pro se litigants excepted). And since makeup, manicures/pedicures, and hairstyles and cuts are definitely 'suitable for everyday wear' (and since the impact of the mani/pedi and haircut last more than a day) they are non-deductible. The tougher argument is for nylons or shoes - flight attendants argue over these items as well, claiming that they don't wear the nylons/shoes elsewhere. However, this is a loser too, since the IRS specifically says that '[t]he clothing must not be suitable for taking the place of your regular clothing.' So even though you only wear those shoes on the plane, if there's any way they could be worn off the plane, you can't deduct them. Just because you choose not to wear them elsewhere is irrelevant. You could, so it's not a deduction.

So is the UEBE ever useful? And when? That's Part II.

Friday, April 18, 2008

Recovering from Tax Season

As the post-tax-season recovery begins, it bears taking some time to review the last 10 weeks....
  1. This was easily my busiest tax season: 270 tax returns, and counting, as a few are still outstanding via extension. Most should be wrapped up in the next two weeks, though some will take longer.
  2. Considering that tax season is roughly 10 weeks long, that translates to 27 returns a week, or about 4.5 returns a day. The busiest days were February 18th and April 14th when I saw 8 clients. Most days averaged 5-6.
  3. Typically, the early part of the season was slow; surprisingly, so was the late part. I actually had time open on April 15th.
  4. 17 years in, I'm still amazed to see how seriously people take the advice of a friend on tax issues, and discount what I'm telling them as true.
In the coming weeks, I'll discuss some of the more interesting myths of this tax season, and what kind of deductions are available to certain professions. Stay tuned.