TaxCoach Briefs:    July 17, 2008

Volume 3, Number 29

• Spotlight on Strategy: The "Footie Pajama Commute"
• Member Event: Take Me Out to the Ball Game
• Member Q & A: Comparative Analysis

***** Attention TaxCoach Members *****: The July Lineup goes out early next week. Make sure we have your correct address in the system so you don't miss an issue!

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TAX STRATEGIES FOR MEDICAL EXPENSES
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Are you showing self-employed clients how to use a Section 105 Plan to deduct family medical costs as business expenses? If not, they may be losing thousands in taxes. And you may be losing even more in referrals! TaxCoach includes template plan documents, forms, and even a 'due diligence' kit with IRS guidance. Click here for your $1 trial.

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SPOTLIGHT ON STRATEGY (EAL)
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THE "FOOTIE PAJAMA COMMUTE" (Part 1 of 2)

Home office expenses are some of the most misunderstood deductions in the entire Tax Code. Many clients, and even some tax pros, still see them as an audit flag. But the Supreme Court liberalized the rules in 1994, and Congress loosened them even further in 1999. Today, home offices can save clients thousands in tax -- and, more importantly, make you a hero if you're the one who delivers those savings to your clients.

Several of you have recently asked about these issues, so I wanted to review them here for everyone's benefit.

First, the basics. Your home office expenses are a deductible trade or business expense if:

1. The home office is your "principal place of business,"
2. You use it to meet clients, patients, or prospects in the normal course of your trade or business, or
3. It's a separate structure not attached to your dwelling unit.

Numbers 2 and 3 are fairly straightforward. But how does a home office qualify as a "principal place of business"? The IRS says it does if:

1. You use it exclusively and regularly (10-12 hours/week) for administrative or management activities of your trade or business; and
2. You have no other fixed location where you conduct substantial administrative or management activities of your trade or business (See IRS Publication 587; Business Use of Your Home).

The operative phrase here is "administrative or management activities." Your home office can be your principal place of business, even if you have an outside office, so long as you don't use the outside office more than occasionally for administrative or management activities.

(I discussed that issue frequently when I was building my personal service practice with real estate agents. Many of them wondered how they can legitimately deduct home office expenses if their broker gives them a desk to use at the agency. The answer, of course, is that they can do so as long as they confine their use of the desk to prospecting, service, and client activities, rather than "administrative or management activities.")

So what's the "footie pajama commute"?

Don't look for it under "home office expenses." Instead, look for it under "car and truck expenses." Much of the real value of the home office comes from what it lets you do with car & truck expenses, not just office expenses.

There are three categories of miles: business miles (generally deductible), commuting miles (rarely deductible) and personal miles (deductible only for medical, charitable, and moving purposes).

Generally, your first trip of the day from home to a business location and your last trip of the day from a business location back home are considered nondeductible commuting. Everything in between is deductible business mileage. (There are limited exceptions for temporary business locations -- but stopping at the post office every morning on your way to work does not transform the rest of your daily commute into deductible business miles.)

Let's say you're a real estate agent, and you're contemplating your drive to your agency. If that's your first trip of the day, it's a nondeductible commute. But if your first "trip" of the day is from your bed to your home office (in footie pajamas, bedroom slippers, or bare feet), then your next trip -- the one from home to the agency -- becomes deductible business mileage. (See Rev. Rul. 99-7.)

Now you know how to qualify clients for home office deductions they may not have known they could take. Next week, we'll discuss how to calculate those deductions for maximum savings.

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MEMBER EVENT (EAL)
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TAKE ME OUT TO THE BALL GAME

Wednesday, July 23, Keith and I are leaving the office early (but not closing it, now that we have Catherine on board to handle Member Services) to watch the Reds play the Padres at Great American Ball Park here in Cincinnati. It's another Business Day Special, with the first pitch at 12:35 PM. And we're inviting all of you to join us. We'll even spring for the tickets! (Beer and hot dogs are on you.)

Since our last "Take Me Out to the Ball Game" trip in May, the Reds have improved from .414 on the season to .479. That puts them a full game and a half ahead of last place in their division! Junior has hit his 600th homer, plus five more.

The Padres, in contrast, have racked up just 37 victories against 58 losses on the season, for a .389 record and sole possession of last place in their division. That means they'll probably kick the Reds' butts.

No matter. If you believe that the worst day at the ballpark beats the best day at the office, we'd love to have you join us. RSVP at 513/321-2820 or support@taxcoachsoftware.com by Monday, July 21, to guarantee a seat. (And don't tell me you're too far away -- All-Star Randall Klein is joining us all the way from Houston. Cincinnati in July should make him feel downright chilly!)

We'll look forward to seeing you at the ball game!

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MEMBER Q & A (EAL)
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Q: Can I use TaxCoach to run a comparative anaylsis of tax saving ideas? A client asked me for advice on when to take SS and whether to pay off his mortgage early.

I can use my tax prep program to run various "What If" plans for up to 10 years. I'm thinking it may be best to use TaxCoach for a single plan, then run the numbers through the tax planner. Then repeat the process for the number of scenarios. Any ideas?

A: Your approach is right on the money. I would recommend running a TaxCoach plan for general tax-planning recommendations, then provide additional reports such as these:

1. The Social Security Administration offers an online calculator identifying how long your client has to live to justify taking benefits at earlier than normal retirement age..
2. I’d use your tax-prep program to illustrate the tax implications of paying off the mortgage. But right off the bat, I’d guess that it makes little sense to withdraw that much money from the profit-sharing plan, which very well may throw him into a higher tax bracket that year.

TaxCoach doesn’t offer the sort of “spreadsheet” analysis your tax-prep program offers, and we deliberately chose not to include that capability for 2 reasons:

1. Most members have it through their tax-prep software, and
2. It would require a huge additional amount of data gathering and entry to “load” TaxCoach with enough information to make meaningful estimates at that level of detail.

We kept TaxCoach focused on the plain-English concepts and strategies, for educating the client. Thanks for writing.

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We're happy to answer your questions on TaxCoach content, features, marketing, or general taxation. While we give first priority to our TaxCoach All-Stars, we work to answer all questions. For best response, email support@taxcoachsoftware.com. If we can't answer immediately, or we think the answer will be useful to all of our members, we'll publish it (anonymously) here in the 'Member Q & A' section of TaxCoach Briefs.

Regards,

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