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Discussion Starter · #1 ·
This is my first year in the e-book business.  For those who have been doing this for a while, how do you report your working space at tax time?  Can you claim your office area as a write-off?  I believe you can if you have a designated working area used to earn income.
 

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You have to use the space exclusively for work purposes, as well as all the stuff in it. There are formulas for deducting utilities, as I recall. Also, I think you have to own, but don't quote me on that. The computer also has to be used only for work to deduct for it (depreciation, not cost in year purchased).

And you're quite a bit more likely to get audited, too.
 

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Discussion Starter · #3 ·
I read the IRS document. There is an awesome loop hole. The exclusivity rule does not apply if that space is used to store samples. :)
 

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As an Enrolled Agent I would STRONGLY recommend a consultation with a reputable tax professional in your area. Preferably one who has experience in your situation: a self-employed individual with a possible office-in-home deduction. They can clearly explain to you the nuances of the rules and the record keeping required.

For example, the 'loophole' you describe, Patrick is perhaps not as large as you're hoping. While it is true that the 'exclusive' part of the rule doesn't apply to areas used for sample storage, that doesn't mean you can have a 10 by 10 office space with a box of your books in the corner and claim that whole space. You could, potentially, claim the 3 square feet that your box sits on. Or if you store them in a closet with other things, you could, arguably, claim the square footage of the closet. But to claim the whole 10x10 office space you must satisfy the regular and exclusive criteria -- and in most cases 'exclusive' is defined very narrowly. Theoretically a game on your PC or personal photo albums on the shelves could disqualify it.

The most important thing is to operate in a 'business like' manner about which, again, a qualified tax professional can advise you.

For tax professionals in your area try www.natptax.com or www.naea.org.
 

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Patrick Skelton said:
This is my first year in the e-book business. For those who have been doing this for a while, how do you report your working space at tax time? Can you claim your office area as a write-off? I believe you can if you have a designated working area used to earn income.
What country? after all, this is an international site and you don't want to be getting advice that isn't correct for your country's tax rules.
 

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Well, since Patrick's avatar indicates he's in Columbus, OH, I assumed he was asking about US tax law. ::)

But Krista has a good point: if you're outside the US, yeah, the rules are probably different. :eek:

Recommendation is the same, however:  seek a qualified professional who can advise you based on the law where you live. :)
 

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Another thing to consider is what happens if you sell the house you had been claiming had an office in the home for a number of years.  I'm not sure of the details, but I believe any depreciation on the office could affect the basis cost of the home when it came time to figure any capital gains on the house, always assuming that the market has improved to the point where you might have some.  Would it cause problems with claiming the capital gains exemption for a primary residence?  It's complex and likely to be more complex as time goes on.  Be sure to consider the future implications, not just what is happening with your return this year.  You need to consult with someone who truly knows the tax code.  I've decided that unless I start selling a lot more than I am selling now that it's not worth it because of all the hoops you need to jump through to keep the correct records and the increased chances of an audit.  Even if you get through an audit without any penalties or problems the emotional strain and the time involved aren't worth it to maybe save a couple bucks on the taxes.  Whatever you decide, be sure you get good advice and understand all the implications of what you are doing.

 

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Discussion Starter · #8 ·
Thanks, all!  I will probably seek help from a CPA. My office area is also used for music production. What's the worse that can happen with an audit, anyway?  They tell you to hand over the rest of the money? Big deal. It's worth trying, I say.
 

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Discussion Starter · #10 ·
Honestly, I'm not trying to pull anything shady. I'm very honest with my taxes every year. I feel my office area would qualify for the exemption (I only use it for business purposes now). 
 

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Patrick Skelton said:
Thanks, all! I will probably seek help from a CPA. My office area is also used for music production. What's the worse that can happen with an audit, anyway? They tell you to hand over the rest of the money? Big deal. It's worth trying, I say.
It is worth trying. We should never pay taxes we don't legitimately owe out of fear of the IRS. That is wrong on so many levels. That agency is power drunk and loving it.

That said, however, the worst that can happen is bad, very bad. In the extreme, people have had their homes & businesses seized for failure to file and/or pay accurately, but that's the extreme. In the non-extreme, it's all about ridiculous penalties which accrue interest at rates ordinary creditors could never legally charge. I was about a month late filing my biz taxes last year and had to pay over $500 in fines just for being late--I didn't even owe any tax!

--Maria
 

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I've been doing this for years because I owned my own side business for a while. If I remember correctly, start with lines 21 through 27 on your schedule A deductions, and you'll have to file a form 2106. If you have an office in the house, it must be a seperate room, then you can deduct the percentage of your mortgage that's comparable to the percentage of space that room occupies in your house (i.e., the bigger room you use in your haome as the office, the more you deduct.) If the office is 300 square feet, and your house is 3000 square feet, you deduct 10% of your mortgage. You deduct supplies related to your side business, computers you bought specifically for work, your IP provider payments (only the percentage that applies to the internet, not your TV) Phone bills are iffy, you really need to use the phone predominantly for work if you're going to deduct it. If you drive to the library to do research, keep the milleage and deduct that. If you drive to the book store, same thing. Keep the receipts for any reference books you buy. Etc...

If you're incorporated or an LLC then you'll file a return on the business, and there's a line on the 1040 where you claim your distributions and a form you fill out on which you tally up your expenses. You'll have to do a little spread sheet showing revenue and expenses. We just used Microsoft Word to do ours on and attached it and never had a problem.

I'd go to IRS.gov and look at the instructions. The instructions are pretty clear, regardless of what people say. Once you read through the stuff and do this yourself a couple times, it's easy. It's just the fear of the unknown. You're a writer, you'll figure out what the words mean. I did this for five or six years myself, then handed it over to a CPA one year and he did exactly the same thing I did.
 

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Just some clarifications. . . .:)

I've been doing this for years because I owned my own side business for a while. If I remember correctly, start with lines 21 through 27 on your schedule A deductions, and you'll have to file a form 2106.
This is the appropriate way to claim business expenses if you are paid on a W-2. I'm guessing most of the authors here would be considered self-employed so wouldn't use the 2106 for those expenses.
If you have an office in the house, it must be a seperate room, then you can deduct the percentage of your mortgage that's comparable to the percentage of space that room occupies in your house (i.e., the bigger room you use in your haome as the office, the more you deduct.) If the office is 300 square feet, and your house is 3000 square feet, you deduct 10% of your mortgage.
Not exactly. . . it must be a clearly marked area but does not have to be a whole separate room. And to address something someone else said, you do not have to own the home -- the deduction is potentially available for a rented home as well. In addition to your mortgage interest/property taxes or rent, you can deduct the percentage of your power and heat.
Phone bills are iffy, you really need to use the phone predominantly for work if you're going to deduct it.
In fact you can pretty much never deduct the cost of the first line into your home as it's considered a normal personal expense even if you use it a lot for business. You can, generally, deduct the cost of extra services that you pay for because you have the business -- like a second line or an answering service. And of course any separately billed long distance business calls.
If you're incorporated or an LLC then you'll file a return on the business, and there's a line on the 1040 where you claim your distributions and a form you fill out on which you tally up your expenses. You'll have to do a little spread sheet showing revenue and expenses. We just used Microsoft Word to do ours on and attached it and never had a problem.
Not exactly. An LLC may be a single-member LLC which would be treated the same as any other sole proprietor -- you file a Schedule C, which details income and expenses, along with your 1040 form. If you are incorporated, that's a different thing and reporting requirements depend on what type of corporation you have. This DEFINITELY calls for a professional consult! :)
I'd go to IRS.gov and look at the instructions. The instructions are pretty clear, regardless of what people say. Once you read through the stuff and do this yourself a couple times, it's easy. It's just the fear of the unknown. You're a writer, you'll figure out what the words mean. I did this for five or six years myself, then handed it over to a CPA one year and he did exactly the same thing I did.
I agree that it is a good idea for anyone to be familiar with the instructions for the forms they file. I also know, as someone who does taxes for a lot of very smart people, that it's often not something even extremely bright people want to deal with every year. I have a lot of clients who absolutely could do their own return. . . but they realize that, in the same way they wouldn't change the oil in their car on their own, they don't want to prepare their own return. They're perfectly willing to keep the records that are needed, but as to the actual preparation, they'd rather spend the two or 3 Saturdays it would take playing with their kids and not being yelled at by their spouses. ::)

If you've got the time to study up and figure it all out, that's great. Still, in most cases I would advise people to have at least ONE consultation with an experienced tax professional, especially if you are going to be reporting a new 'category' of income in a given year. . . (e.g. you suddenly have income as an author! :D) The money it will cost you is well worth it; it may even pay for itself if it helps you to NOT miss out on some benefit to which you may be entitled. The laws are complex; ask lots of questions and, by all means, UNDERSTAND the basics.

And if you are able to do it yourself -- well, hey, you might be able to pick up some extra money during tax season doing it for other folks too! ::) If not, just be sure you find someone you are comfortable working with -- it's YOUR tax return; while you may be relying on advice from a professional, you are ultimately responsible.

To summarize: if you've not done this before, it's a good idea to do research and/or consult a tax professional in your area who has experience with your type of situation. The commentary above is meant to be general information and not specific advice. Further, if you're going to consult a professional, I'd strongly suggest you reach out to them NOW rather than waiting until next March when they may be too busy to be willing to take on new clients. But this summer and fall they'll have time to sit down and talk with you, let you ask questions, and you'll get a good feel for whether it's a person you'll be able to work with long term -- a Very Important consideration. :eek:
 
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Listen to Ann.  People will offer all sorts of "advice" that, 80% of the time, has not grounds in reality and has only worked because that person never got audited.  So just listen to Ann.  She's an actual professional.  :eek:

 
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