Monday Magazine                       You Want to Take Business Deductions? - By Eva Rosenberg                              April 27 - May 03, 1998.

You Want to Take Business Deductions?
It'll Cost You!

Sayz Eva Rosenberg, MBA, EA

Moderator, HelpDesk, WebReview.

Hallelujah! So you finally gained your independence and you're out working on your own. Isn't it better than having a boss? Now, you're responsible for everything!

But at least you can deduct all those business expenses that you never could before. Or can you? Honey, if you're self-employed, to the IRS, you are audit bait. So, if want to play the game, follow the rules. Ensure that you will win!

Expenses - or, It Went That Away! Being self-employed, you may take deductions for all your business expenses - but only if you can prove you paid for them. So record keeping is critical.

It helps to know what business expenses qualify.

Meals and Entertainment

Don't waste much energy building up expenses in this area unless you're prepared to do it right. This area is always a target of audits and is one of the most abused of all expenses. Make sure that each receipt (or notation in your appointment book or business diary) has ALL FIVE of the following components:

Who - Name and company
(spouses' and dates' meals may not necessarily be deductible).

Business purpose of meal/program - was this to sell, buy or learn?

Business relationship - was this a potential client, a source of information or contacts, a supplier? Why is this business? NOTE: Contrary to what the IRS might like to have you believe, even if you don't sell anything to a potential client or prospect, you ARE entitled to the deduction. Even the best salesfolk rarely have a 100 percent close rate! Time? Either during a business meeting or right before or after a business function is acceptable, as are expenses incurred during a business event (a week-long trade show, for example).

Place - make sure the receipt shows the name and address of the entertainment facility or restaurant. The IRS is used to people dummying these up, so annotate all receipts properly if the address is not pre-printed on them - preferably, at the end of each day or when preparing your weekly (YES, WEEKLY) bookkeeping.

Cash Expenses With No Receipt Available

Have you ever tried to get a receipt out of a pay phone or parking meter - or even a valet, for tips? They're not very cooperative, are they? So how do you prove you spent that money? And is it worth the bother?

Some parts of the country have toll roads. In other areas, you can't park without paying costly lot fees or feeding meters. Adding up all these costs, you might be spending over $1,000 per year on parking meters (only $4 per day). Add in payphones (if you're not carrying around that pesky cell-phone) and tips, and you've found about $2,000 or more in legitimate business expenses. OK, it's worth it!

Proving it? Easy, just keep a diary or appointment book. Write in the amounts spent each day - then add them up at the end of the year (or sooner, if possible).

Auto Expenses

For 1997, the standard mileage deduction was 31.50 cents per mile. In order to use this option, you need records to prove your total business mileage for the year. Go back through your appointment book and write in the miles you drove each day and add it up. Better yet, keep a separate calendar with just the mileage on it. In an audit, you'd have to turn over your appointment book - and there may be sensitive information you don't really want anyone else to see.

If you've just bought an expensive car, you may prefer to use actual expenses. (You can't switch back and forth each year at will, so talk to a Tax Pro before you make the choice.) In this case, in addition to the business miles, you'll need proof of your total miles driven. (Two repair receipts with mileage on them, about six months apart, will work if you have nothing else.) Under this option, you'll be deducting only the business percentage of all your expenses and depreciation. So, if you drove your car for 12,157 miles and only 8361 were business - you will use 68.78% of the following expenses:

Gasoline, repairs and maintenance, car washes, auto license or registration, interest on the car loan (this last is not deductible if you are an employee) and depreciation (subject to the annual limit).

It's early in the year, prepare for 1998 while you're getting caught up on 1997.

Office in Home Deduction

Taking this deduction can be like waving a red flag in front of a bull - if you can avoid it, don't use it. Especially if you own your home and expect to sell it in the next couple of years. (Speak to a good tax professional and DON'T argue fairness!) Using Form 8829 will increase your chances of being audited. (Not using Form 8829 while taking rent and/or utility deductions can almost guarantee an audit if your business address is your home address.)

Essentially, to qualify to deduct office in home expenses, you must be meeting with clients, customers, or business associates in your home. Or you must maintain storage for inventory in your home. Or the majority of your work must be done at home. In 1998, some of the provisions have been eased up - a little - but only if this your primary business location. In other words, a consultant who does all the work in a company's facilities does not qualify. This area will be litigated for a long time to come!

There are lots more legitimate expenses, but we're limited on space and time. Make a tax planning appointment with your Tax Professional BEFORE you come in ready to do your taxes. Don't worry, paying for that extra appointment will more than pay for itself.

Moral of the Story: Know thyself. And make sure you cover your behind so that the IRS agrees with your records.

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WEB RESOURCES:

The Official IRS Site
Government-run source for forms and information. http://www.irs.ustreas.gov/

The Digital Daily
A surprisingly cool news page from the IRS. http://www.irs.ustreas.gov/prod/cover.html

1040.com
One stop source for tax information and forms. http://www.1040.com

Tax Bytes
Columns by Enrolled Agent Eva Rosenberg on the WWW at Tripod.com

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Deadlines:
March 15 - S-Corp Election Decision
March 15 - Corporate Tax Returns Due
April 15 - Personal Income Tax Returns Due
April 15 - Partnership, Trust and Gift Tax Returns Due
April 15 - First Quarterly Estimated Tax Payment Due

Need extensions? Use Form 4868 for Personal and Gift Taxes, Form 8736 for Partnerships and Trusts, or Form 7004 for Corporations.

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