How to Deduct a Home Office

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NEW YORK -- One of the most tempting but also terrifying small business tax deductions is for a home office _ deducting the cost of operating out of your home can help you save on taxes, but complying with IRS regulations can be a little daunting.

Accountants say the good news is that the deduction, which used to be considered a fast way to an audit by the IRS, doesn't raise red flags with the government as it did in the past. Still, business owners often make mistakes trying to claim the deduction that can grab the attention of the tax authorities _ something every taxpayer wants to avoid.

Stephen Fishman, an attorney and author of "Home Business Tax Deductions" said a common error company owners make is to try to deduct space in their homes that has both business and personal uses. That won't fly with the IRS.

"You have to use the space in your home exclusively for business," Fishman said.

An office with PCs and a fax machine isn't the only way to take advantage of the deduction for using your home for business. If you manufacture goods or store inventory in your home, the space you use for that can also be deducted. The same applies if you run a business like a day care center or nail salon in your home.

You don't necessarily have to have a separate room for your office or business space, but taking the deduction is less complicated if a room is indeed set aside for business purposes. For example, it might be hard to convince the IRS that the home office in part of your family room is never used by your children to do their school work or play computer games.

Whatever the space is, it must be regularly used for your business. It doesn't have to be your only place of business, however.

An owner with a home business can deduct the expenses used to maintain the business space _ the portion of utilities, mortgage interest or rent, insurance, repairs and maintenance and other expenditures that can be attributed to that space. One of the big pluses of a home business deduction is that you can also depreciate the portion of a residence used for business; normally, a residence cannot be depreciated.

To determine how much of their expenses they can deduct, most owners divide the total square footage of the home by the square footage allotted to the business. For example, if 5 percent of a house was used for a business, and the owner had $5,000 in expenses for the entire house, then $250 could be deducted.

But square footage is another way owners can run into trouble with the government _ for example, if it appears to the IRS employees examining your return that your home business space is too big for the kind of business you operate, they may question the size of your deduction.

If you're thinking of claiming the deduction, you need to get yourself educated about the IRS' requirements. The first thing you should probably do is download and carefully read IRS Publication 857, Business Use of Your Home, from the IRS Web site, http://www.irs.gov. There are also several small business and home business tax guides available in bookstores that can give you a grounding about the deduction.

Also take a look at the IRS form you'll need to file, 8829, Expenses for Business Use of Your Home, and its accompanying instructions. They can also be downloaded from the IRS Web site.

It's probably a good idea not to try to claim the deduction without consulting a tax professional. Jeffrey Chazen, a tax partner at the accounting and consulting firm Richard A. Eisner & Co. LLP in New York, noted, "there are little quirks you have to look out for" with a home business deduction.

For example, he noted, if you've been depreciating the space for your home office but now sell your home, you'll have to "recapture" the depreciation, or adjust the profit you made on your house to account for the tax break you already received.

Another, important quirk: Your deduction cannot be larger than the net profit you make. But you can use the excess to offset profits in succeeding years.

Chazen suggests that now, as you're preparing your 2006 tax return, isn't the time to be thinking about the home business deduction for last year. If your business space didn't already meet the requirements for the deduction, you can't shoehorn it in after the fact.

You can, however, start working now so you can claim the deduction for the 2007 tax year.

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The Web 2.0 Nonsense

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After listening to people (mostly geeks) wax rhapsodic about the wonders of “Web 2.0? for, oh, almost two years now… I decided to go deep and see what the fuss was about.

The reality?

Nothing much to see here. Move along. We’re just tearing down the set, getting ready for the next act.

Web 3.0 and 4.0 are getting dressed and ready to take the stage.

2.0 (or “The Tooster”, as his friends call him) is pretty much history. The term was really just a glib marketing gimmick meant to separate “today’s” Web from the bad old “bubble” Web circa 1999 and 2000. The mainstream media — clueless, as always — decided the bursting of that bubble signalled the death-blow to this “Internet-nonsense fad”, and promptly found other things to be ignorant about.

(The scariest example of just how out-of-touch mainstream culture is toward the Web is the fact almost NONE of the federal government is wired in any significant way — not the FBI, not the Supreme Court, not the politicans. True to form, just as The Tooster is fading away, those in charge are finally beginning to upgrade to DSL.)

The term “Web 2.0? is useful only as shorthand when you want to refer to the notion that — yet again — technology is changing fast. (Imagine that.) The implied secondary notion is that — yet again — these changes will affect us all in profound ways. (Ooooh, don’t be scared.)

And — yet again — the reality simply doesn’t live up to the hype.

I’ve coined a phrase that, for me, helps explain why the “experts” get so preoccupied with announcing the latest revolutionary upheaval in human development through technology.

The term is “Paleo-Tech”… and it means, simply, “ancient technology”. We are (according to Professor Carlton) in the Paleo-Tech Age, which mimics the Paleolithic age, when Man (with a capital “M”) was just beginning to use technology.

Back then, it was fire and stone and metals… and for the next ten thousand years or so, we played around with better ways to cook, melt, forge and build stuff.

Today, it’s Java script, XML and the “semantic Web”… and because the development of new technologies is so super-condensed, by the time most people catch on, it’s already ancient history.

Thus, we are living in a time when all newly-developed technology is instantly on the way out. Almost, anyway.

Paleo-Tech. It’s driving Hollywood nuts, because no matter how much they try to make the technology in their scripts brand-spanking-new, they risk looking like dorks by the time the movie comes out six months later. (I recently saw a two-year old flick that might as well have been made last century, because the meant-to-be-hip cell phones used were embarrassingly out-of-style.)

But this is what I find interesting: Entrepreneurs are almost always on the cutting edge of the newest and flashiest tech. (The military drives most of the coolest advances, but they’re trying to kill people, not earn an honest living.)

And this creates an ongoing “situation” that requires the direct intervention of grizzled old veterans like me.

The situation is this: People are easily dazzled by shiny new objects. And lots of the new online technology is VERY pretty and seductive.

But here’s the mantra I want you to repeat, often: Technology doesn’t sell stuff. Salesmanship sells stuff.

I’ve seen a LOT of sci-fi quality technology in my career. I started my advertising career in Silicon Valley back when the Internet was just a twinkle in Al Gore’s eye… I had inside connections with the Stanford Artificial Intelligence labs… played the very FIRST online games ever invented… began working on a PC (sorry, Woz) back when I had to load DOS on a 5-1/4? floppy each time I booted up… wrote one of the very first online ads… and on and on.

I also worked on some of the very first modern infomercials, helped clients create prototypes that begat e-books, had one of the first ad-related podcasts posted to iTunes, participated in the earliest e-mail blasts ever done, and have tended this blog for a very, very long time (making good use of functions like RSS and tags before most marketers had even heard of them).

The Tooster and his application-drunk buddies 3.0 and 4.0 don’t scare me even a tiny bit.

I will make full use of every blip of technology I discover… and learn the stuff I need to learn, and pay other people to stoke the fires of the crap I suspect will soon blend into the woodwork.

Because every bit of tech that matters to entrepreneurs is just another way to communicate with other humans. From smoke signals to cuneiform tablets to the Guttenberg press to radio and TV and now the ever-wondrous Web… it’s still just one creature with a cerebral cortex talking to another one.

It’s fun. It’s like living out a sci-fi fantasy.

But the foundations are still the same as they were back when our ancestors were incinerating each other trying to find new uses for fire.

Humans want to get the basics of suvival settled… so they can use new technology to entertain themselves, kill each other… and buy shit.

As a business owner or entrepreneur… you want to sell shit for other people to buy. So you need to separate out the hyped tech that is mostly about entertainment (and for God’s sake, keep your hands off the evil lethal stuff).

And learn the simple secrets of using all new technology as a way to channel your salesmanship.

The technology, all by itself, will not magically generate profits for you. (In the still-current Paleo-Tech Age model, the only people who are supposed to get rich from new tech are the creators and share-holders. As Google proved with its profit-murdering “slap” at sites trying to use pay-per-click to build lists, entrepreneurs are seen as suspicious usurpers of technology, and must be thwarted whenever possible.)

I know people who are ecstatic about getting massive numbers of hits for their funny video on YouTube… who spend days figuring out how to use Slingbox to catch TV shows on their cell phones while they travel… and who prefer texting to talking.

Not that there’s anything wrong with any of that.

But a million hits for your video of Farquar falling off his skateboard won’t put a nickel into your pocket.

And why are you still wasting so much time watching TV? There’s a brave new world spinning out there, wondering when you’re gonna show up.

If you’re gonna be an effective entrepreneur, you gotta brush the stars out of your eyes and see all the technology tumbling down the chute ONLY in terms of how you can use it in conjunction with your salesmanship skills.

I’ll post more on this soon.

It’s fun, I gotta admit. I LOVE all the new tech gadgetry. The X-Box bored me, mostly (it really was just a small step up from playing Pac-Man drunk in a loud bar), but I’m excited about the Wii’s potential for truly gnarly gaming.

And all the career adventures I’d craved in my youth are now available again, thanks to technology advancing faster than The Man can censor it. (I can now have my own pirate radio station, publish and distribute my own books, and produce any type of late-night-quality TV show I like… all from my cluttered little office, digitally, online. I get shivers just considering all the possibilities.)

I’ve got some pretty valuable insights to share with you, too.

But I’m tired. I wanna surf the Web a bit, buy some more oldies on iTunes, enjoy a microbrew (another modern invention courtesy of the harnessing of fire long ago), and get a good night’s sleep on my Tempurpedic. (Space-age sleeping technology!)

Let’s pick this up later.

Stay frosty.

John Carlton, http://www.marketingrebelrant.com/

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