Buenos dias, mis amigos. Raoul has received two interesting questions from Junior Tax Buddies. One: If kamikaze pilots were on suicide missions, why were they wearing helmets and life vests? And, two: Can you explain the deduction for "business use of home"?
Well! Since question one deals with World War II, and since we now buy cars from the same people who built those airplanes, let's skip it. However, question two relates to World War III, which is going on right now and concerns us all -- the Tax War!
Expenses for Business Use of Your Home: Internal Revenue Code Section 280A(c) (1) (A)
Listen to Raoul. In the combined one-hundred plus years' experience of The Taxmen, there has rarely been an issue that has changed as much and confused so many people as this one. In addition, this deduction ranks near the top in instilling fear into the hearts of taxpaying stiffs. How many of you have heard your accountants say, "Don't even think about it; you'll get audited for sure!"
But Raoul does not think you should be afraid of it, that is, of course, as long as you are familiar with the parameters and nuances of the law. On your own, we all know there is a real fat chance of that -- about as much of a chance as Raoul has of becoming the first Jewish/Mexican King of England. But you have an edge, because your friend Raoul is gonna explain it to you.
The "Home Office Deduction" has evolved full-circle over the past twenty-five years. Back in the seventies (now the hot new radio format), almost everyone could deduct an office-in-home. Basically, all you needed was a desk and a lava lamp. Teachers, accountants, hula-hoop repairmen, lawyers, bookies, astronauts, you name it -- even air talent for show preparation. So naturally, when everyone is doing something, the IRS figures it's an abuse, and they shut it down. Suffice it to say that as of now, you must meet an extremely defined profile to qualify.
The current IRS interpretation is now based on the 1993 Supreme Court case of "Soliman." What?! You missed that one? Okay, here's what it's all about. The two major criteria that have surfaced are now 1) Relative Importance and 2) Time Spent. Are you ready for a surprise? Here are a few recent IRS examples.
Sharon, a self-employed plumber, spends forty hours a week unclogging other people's toilets. Yechh. An additional ten hours is spent in her home office, where she also has a full-time employee. The IRS concludes that the "relative importance" of the work done while leaning over the customers' bowls far outweigh the essential functions performed at home; and she is not entitled to claim the deduction for home office. Instead, the IRS says, "Bite it, Sharon" and slips her the business end of a toilet plunger... and more.
Lance, a Home Economics teacher, spends twenty-five hours a week at school and about thirty-five hours per week in his home-office. Based on these facts, the IRS would deny Lance's deduction. The hours are not relative because the functions he performs at home are less important than his activities at school. Lance, meet Sharon.
Now, if you think something here stinks worse than Sharon after a hard day on the job, you are not alone. I'm sure that most of you would feel that both Sharon and Lance have a reasonable position. Unfortunately, as an IRS agent once said to Raoul, "Who says it has to be fair?"
Where the relative importance of the functions performed at home and away are equal, the IRS will apply the time test. In other words, where is the most time spent? Raoul could go on and on with more examples, but I think what you are really asking is, "Hey, Raoul, what about us?" Well, you came to the right place.
Even though Sharon is self employed, her income is not generated from home. Sure, she has some equipment laying around; but you can't compare a roto-rooter and a set of wrenches with a high tech digital hook-tape studio like Don Harris (King of the Hookers) has in his swankienda. So for you production studio types, as long as you are producing income from that spare bedroom, you satisfy a significant part of the equation -- significant, but not necessarily all, and Raoul has to talk out of both sides of his face again.
Oh! If you are moonlighting in the station's production facility, I think you better talk to Raoul privately.
Next, how about the record promotion animal who works at home on reports and conference calls, but spends most of his time whoring around radio stations and concert venues? Well, if there is a letter from the label attached to his tax return that says, "...is required to maintain in his residence, a principle office for the conduct of regular daily business, storage of product, etc., within his market area...." Anyone miss the "key" word? An employer "requirement" goes a long way, especially if they have no other facility within the market. But, strangely enough, it is not the whole enchilada. Raoul really hates to sound wishy-washy, but when I said this thing was complicated, I meant it.
The important thing to remember is not to be intimidated from giving yourself the benefit of the doubt. To some extent the IRS uses fear as a tactic. The tax laws are extremely subjective, and not always black or white. Get some comprehensive advice, because almost every situation is unique. Consult your tax advisor, not your dry cleaner or the Psychic Friends Network. Remember, Davy Crockett said, "Be sure you're right, then go ahead". But Raoul said, "Remember the Alamo!"
Next month, among other items, we'll discuss the actual process of calculating the Home-Office Deduction. That's right, readers. We will transcend the subjective and theoretical for a journey into the reality of form 8829. And it's a real pisser!
Incidently, Sharon and Lance have met, are living together, and plan to open an adult video store in Pismo Beach. Cash only. Adios y hasta la vista!