Waynes World - April 2007

FINAL RULE REGARDING HOS "SUPPORTING
DOCUMENTS" STILL ON HOLD, AND...

HOME-BASED BUSINESS
TAX DEDUCTIONS
By Wayne Schooling

OWNER OPERATOR HOME BUSINESS
If you are among the many thousands of Independent Contractors who operate a part-time or full-time business from your home, don’t forget to claim your numerous home-business tax deductions to reduce your income taxes. If you are self-employed, such as an owner operator, to qualify for the Internal Revenue Code 280A home-business tax deductions, your residence must be used either (1) to meet with clients and customers or (2) as your primary business location for administrative activity if you have no other fixed business location.

In 1999, Congress changed the tax law to allow self-employeds working from home to deduct business expenses if their “primary business location” is their residence. This tax law change was the result of the 1993 U.S. Supreme Court decision that denied anesthesiologist Dr. Nader Soliman (113 Sup. Ct. 701) any home-based business tax deductions although he worked many hours at his condominium reading professional medical journals and handling administrative details. Because he spent most of his work time at different hospitals, the court denied his home-business deductions. But today, however, he is entitled to deduct his home office expenses because his condo is his primary business location.

If you operate a business (not a hobby) from your home and you meet the “primary business location” test, then parts of your home operating costs are tax-deductible. The next test requires that you have an “exclusive business area” which is not also used for personal or family purposes. Part of a room can qualify, but it can’t be shared use. That is, if you have your desk, filing cabinet and business supplies in one part of the family room, that area can qualify. However, using your kitchen table as your desk or occasionally entertaining clients in the living room doesn’t qualify those rooms.

Your home business tax deductions are determined by the percentage of your home’s square footage that is used for the business area. For example, suppose you own or rent a 1,500 square foot house or condo and use 500 square feet for the “business area” where you keep your supplies and have your office. Since 33% of your residence is used for your business, you can deduct 33% of the household expenses that qualify as business tax deductions. If you are a renter, 33% of your rent would be deductible, and if you are a homeowner, 33% of the applicable home expenses such as utilities, repairs, insurance, mortgage interest and property taxes can be deducted on your business tax return (using the numbers from the example above).

Some expenses are fully deductible (100%), such as a business telephone line (if you also have a personal telephone line), business computer broadband fees, and painting or improvement costs for the business area. Here is a tip. If you inquire about having a new business line put in and the telephone company asks for a large deposit, ask them if they can upgrade your personal line to a business line. I think you will find this the least expensive way to go.

If you purchased business equipment and placed it in service in 2006, such as a new business computer and/or software, 100% of that equipment cost is deductible, up to a maximum deduction of $108,000. Higher equipment expense limits apply in an “Enterprise Zone” such as $208,000 in the Gulf Opportunity Zone. No deduction is available for personal assets converted to business use, such as a home computer bought in 2004 but converted to business use in 2006. However, this scenario can be avoided if you do a simple and legal lease back agreement to your company.

If you qualify for the home business use tax deduction, and you start your work day from your home office, when you use your automobile to visit customers or other work locations, your business mileage becomes tax deductible the minute you drive away from your home. For 2006, the business deduction is 44.5 cents per mile, but you must keep a daily log of business miles.

One thing to remember is that your home business expense deductions cannot create a tax loss. That means your home business deductions, when subtracted from your home business profit, cannot create a tax loss against your other ordinary taxable income. But used home business losses can be carried forward to future years.

Whether you are a homeowner or a renter, if you operate a business from your residence, you can deduct all applicable expenses to reduce your income taxes. Just remember, as long as the item in question is “business related” you can deduct it.

FINAL HOS RULING STILL ON HOLD
A long-awaited final rule amending the federal hours-of-service record keeping and log auditing requirements is still on hold while the FMCSA further researches its impact. The agency did not know when the final “supporting documents” rule would actually be published, but a timeline was stated as being “in the next couple of weeks.”

The White House cleared the rule for publication almost four months ago, but the FMCSA delayed its implementation so their agents could be trained. In the meantime, the agency discovered that it’s “paperwork burden” analysis was flawed because they relied on incomplete data from 1982 when determining the time and expense required to collect and manage the supporting documents. The final rule is expected to clarify which documents (such as fuel and toll receipts and bills of lading) motor carriers and drivers must maintain, and how those documents are to be used to verify drivers’ daily logs. Stay tuned!