TaxCoach Briefs:    July 24, 2008

Volume 3, Number 30

• Spotlight on Strategy: Home Office, Part Deux
• New Content: Tax Planning for College Financial Aid
• TaxCoach Recommends: Greater Results in 30 Days
• Member Event: Look Ma! Taxes Are Fun!
• Member Q & A: "Administrative and Management Activities"

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SPOTLIGHT ON STRATEGY (EAL)
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HOME OFFICE DEDUCTIONS, PART DEUX

Last week, we started our discussion of home offices by outlining how clients qualify, and highlighted the concept of the "footie pajama" strategy for converting nondeductible commuting miles into deductible business miles. This week, I want to follow up by discussing how to maximize the actual home office deduction.

To calculate your actual deduction:

1. Determine the business use percentage ("BUP") of your home. You can divide the square footage by the number of rooms if they're roughly equal in size, or calculate the exact percentage of square footage the office occupies. You can exclude common areas like foyers, hallways, stairways, and bathrooms from the total square footage, which will boost your BUP.

2. Once you've determined your BUP, you'll deduct that portion of your property taxes, mortgage interest, qualified mortgage insurance premiums, and casualty losses. (Deducting those expenses from your business return may actually save more than deducting them on Schedule A. Why? You'll avoid the phaseout of itemized deductions for incomes above $159,950. You'll avoid losing that portion of property tax deductions to the alternative minimum tax. And you'll avoid self-employment tax on your deductible home-office expenses if your business income is subject to self-employment tax.)

3. You'll also deduct the BUP of your utilities and services, repairs, homeowners' insurance, HOA fees, and security system as "indirect" expenses (so-called because they're attributable to the entire home, rather than the office itself). IF BUP for specific expenses differs from BUP for the home itself (such as high electric bills for home office equipment), deduct the excess as "direct" expenses.

4. Finally, you'll depreciate the BUP of your home's basis (excluding land) over 39 years.

As for where to deduct home office expenses:

• If you're an employee using using your home office for the convenience of your employer, report them on Form 2106.

• If you're self-employed, using your home office for a business taxed as a proprietorship, report them on Form 8829 and carry the total to Schedule C.

• If you're a partner in a business taxed as a partnership, report them as "Unreimbursed Partnership Expenses" on Schedule E (if you're required to pay those expenses under the partnership agreement). Alternatively, you can treat them as an accountable expense reimbursement directly on Form 1065.

• If your business is taxed as a corporation, treat them as an accountable expense reimbursement from the corporation to you and report them directly on Form 1120, 1120A, or 1120S. (See Code Section 280A for more information -- this is an oft-debated area.)

You can use home office expenses to shelter profits, but not below zero. if home office expenses exceed your net business income, carry forward excess losses to future years.

When you sell your home, you'll have to report any depreciation you claimed or could have claimed after May 6, 1997 as "unrecaptured Section 1250 gain." And claiming the depreciation deductions for your home office will not affect the $250,000 or $500,000 exclusion for gain for sale of your primary residence unless the space is a "separate dwelling unit."

As I said last week, clients sometimes fear home office expenses as an audit flag. You'll establish and reinforce your value if you give those clients the confidence to deduct them.

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NEW CONTENT (EAL)
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TAX STRATEGIES FOR FINANCIAL AID

Traditional tax planning seeks to minimize tax – period. But some tax strategies actually hurt your clients when it comes time to apply for need-based college financial aid. So it’s important they know how their tax choices affect the Free Application for Federal Student Aid (“FAFSA”) that schools use to assess financial need.

Several new subscribers have asked about these issues, so we've added a new module alerting your clients to these challenges. The module starts by outlining how the "federal methodology" and "institutional methodology" work to calculate "expected family contribution," then identify how specific income sources and deductions affect that process.

The new module won't make you an expert college planner. But it will identify land mines for your client to avoid -- and doing that will raise your profile and boost your value in your client's eyes.

You'll find the new module in the "Family, Home, and Job" section of the TaxCoach planning reports, immediately after "Tax Strategies for College Savings" and "Tax Strategies for College Students." The system's artificial intelligence automatically includes the new module for those clients indicating they are "saving for college" or "paying college tuition." You can also add it manually from the "Reports" screen.

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TAXCOACH RECOMMENDS (EAL)
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GREATER RESULTS IN 30 DAYS

Tuesday, July 29, at 4PM EST, we'll be hosting Ralf's Reinberg's new teleseminar, "Greater Results in 30 Days." Many of our members have profited from Ralf's teleseminars and marketing programs, and I'm looking forward to this addition to the series. Here's a brief peek at the agenda:

• Get greater results from your practice in 30 days -- not by accident
• Proven advice to set your firm apart from the competition
• Earn the right to charge hundreds more per hour
• Secrets to increasing your fees while enhancing your perceived value

Click here to reserve your seat.

Hurry, because this is a free seminar. Limited phone lines are available. Phone # and access code for this special teleconference will be given out to registered attendees only! If this teleconference fills up, you'll be notified and added to the waiting list.

Thank you for all your information and the example you set for us to aspire to. I wish I'd known about you before I signed up with a national company last year. I believe I would have been much better off financially (spending less and earning more) and personally better (control of what is going on in my firm as well as with my clients).

Mike Lawrence, CPA

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MEMBER EVENT (KAV)
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LOOK MA! TAXES ARE FUN!

Yesterday, Ed and I left the office early to join five local subscribers, plus All-Stars member Randall Klein from Houston, to watch our beloved Cincinnati Reds beat up on the lowly San Diego Padres. The final score was 9-5 -- but it was the closest 9-5 game we've ever seen! Reds closer Francisco Cordero came in to finish the ninth inning with two men already out -- but still managed to load the bases, walk in a run, and bring the tying run to the plate!

San Diego was actually leading, 3-2, until the sixth inning, when Reds third-baseman Edwin Encarnacion hit a two-run homer that landed just two rows behind us in left field. Official MLB video even captured us standing in our seats -- look, Ma, a bunch of us tax guys are on SportsCenter! Click here for a still shot.

Our next "Take me Out to the Ball Game" will be Thursday, September 4. Call Catherine at 513/321-2820 or email support@taxcoachsoftware.com by Tuesday, August 26, to guarantee a seat. We have a tentative out-of-state visitor for this one, too, in All-Stars member Greg Sparks from Detroit. So why don't you join us!

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MEMBER Q & A (EAL)
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This week's question comes in response to our discussion of qualifying home office activities from last week:

Q: Please cite an example or two of "administrative or management activities" a real estate agent would be doing in their "home office."

A: I would cite keeping the books, managing the client/prospect database, managing correspondence, and the like. Yes, they can certainly do it at the agency – but doing it at home is clearly permitted under the language cited in IRS Publication 587.

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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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