Hola, RAPpers; and buenos ides de Marzo. This is the time of year when Raoul and The Taxmen are in the early stages of our spring offensive/Taxman tour. So far this tax season, we have taken the tour to Houston, Oklahoma City, Orlando, Jacksonville, New Orleans, Atlanta, San Antonio, Austin, Raleigh, Tampa, and Miami; resplendent in our satin tour jackets, and defending the tax rights of our amigos. Travelers in airports all over the country are asking themselves, "Who are those guys?" I guess we look something in between a geriatric heavy metal band and participants at a Jewish VFW convention. We like to keep them guessing. In fact, today Raoul is off to Phoenix and Hollywood. Like I tell Mrs. Raoul, while the snow is piling up in the Philadelphia area, "Chiquita, I'm only doing it for the money!"
As you recall, last month I promised that we would talk about the actual procedure of calculating the Office-in-Home deduction. We spoke about the conceptual, as confusing and vague as it is; so now, the mechanics. It's impossible for Raoul to go through the entire procedure, but I think I can give you the benefit of my experience and help clarify some of the more confusing aspects.
The form you will need is an 8829, and no, I haven't any idea where they come up with these numbers. Some of you will find it in your annual IRS Souvenir Book if you've taken the deduction in the past. The rest of you will have to boogie on down to your local IRS office to pick up a copy. And don't forget Raoul's standing instructions: 1) wear a disguise, and 2) never mention my name.
Part I of the form asks you to present your evaluation of the area used for business. Although lines 1 and 2 ask for area/square footage, look at the instructions. You are not locked into this method. For instance, perhaps a room count would work better for you. Also, never include the garage, or a patio type room that is not available all year in the total space computation. It will dilute your business percentage. Only full-time living space. In addition to the actual room you use for your studio/office, don't forget the associated closet or crapper. And, hey, remember that you may have some other areas in the house devoted to sound and/or electronic equipment.
Part II asks for the actual expenses incurred to operate your facility. It has two columns: A) Direct expenses, and B) Indirect expenses. Raoul never uses column A. I think that it just complicates the form and increases the possibilities for error. Anything you can put in column A could easily be expressed on a line of your schedule C, such as repairs to studio or equipment, insurance on your equipment, etc..
Tax Tip: Some of you gringos may ask, "Hey, Raoul, why should I put my mortgage interest and real estate taxes down here when they are already deductible as Itemized Deductions on Schedule A?" Well, dummy, because this way, the percentage applicable to the studio will also reduce your self-employment and/or medicare tax!
When assembling repairs and maintenance, do a thorough job with your checks and credit card items. Roofs count, as do AC/heat work, exterior paint, gutters. But, I suggest you pass on the pool service and ChemLawn. Did you notice yet that there is no line item for rent? It could be an oversight or, more likely, a clever omission by the Federales. Although, they do mention it in the directions for line 20, Other Expenses.
Part III is where you calculate the depreciation on your residence and does not apply if you rent. When calculating the basis, don't forget all of your improvements over the years which will increase your deduction. In allocating a portion to land, it is Raoul's position that townhomes, condos, and other attached units have no separate value to the land. It is a physical impossibility. With a single home, twenty percent for land is usually reasonable, and they won't bust your chops if questioned.
Finally, back up to Part II. In between lines 26 and 33, there are references to Casualty Losses. If any of that applies to you, you should definitely not be doing this yourself.
And the last important point: remember that there is a carryover element to the Office-in-Home deduction. If you are just starting out your business and are limited by a loss, you can carry a portion of your deduction over to the next year.
Bueno suerte, and let me know how you make out. Raoul and the Taxmen are interested in your faxed comments.
Raoul's Junior Tax Buddy Department
JTB Paul Bahr, Production Director of WWCT-FM (Rock 106) in Peoria asks, "Hey, Raoul, I recently went through a job search...and found one. When I went through this search, I had some expenses, i.e. a 'useless' head hunter, printing of resumes, postage, cassettes/labels, and, eventually, moving expenses. How much, if any, can I write off?"
Thanks, Paully, for bringing attention to a situation that most people in the industry will deal with sooner or later. In fact, relocation will be the subject in a future issue when Raoul will address it in detail. But in the meantime, try this for size.
Yes, yes, yes, yes, and yes. All of the items that JTB Bahr asked about are deductible, either in whole or part. The complication arises due to the fact that, in some circumstances, these deductions are subject to some limitations based on income or filing status. But generally, your moving expenses are deductible as an adjustment to arrive at Adjusted Gross Income; and, the other items usually wind up as Sch. A Miscellaneous Itemized Deductions, or as expenses on your Sch. C.
Thanks for being a player, Paul. And to all of you RAPpers out there, don't forget: an IRS agent could be somebody's mother.