Wednesday, January 31, 2007

It's tax time so ... beware of bad advice from the real-life Sammy Segar CPA

Does your tax professional know enough about self-employed taxes? Or is he another Sammy Segar CPA?

, have met Sammy, who knows a lot about stock options and pensions, but nothing about the tax situations that face indies. Sammy is a fictional character but, as they say in the TV dramas, he is “based on a true story.” Sammy got his education back in the days when everybody worked for big companies and only the occasional wacko went into business for herself.

A tax time article shows once again, as if more proof were needed, that many accountants don’t understand the self-employed life, or as we call it in New Mexico, La Vida Autonoma.

The article, published early in 2006, was a New York Times YourMoney column called Depreciation Appreciation 101: The Ins and Outs of Deducting for a Home Office. You’ve learned by now to check the information on the Internet, because not all web columnists and bloggers know what they’re talking about, and some of them are subsidized. But this article was in the New York Times – which goes to show that even the big guys get it wrong.

What part of home office don’t they understand?
On the weekend it was published, a number of my clients and my website visitors forwarded the column to me. My clients and readers know very well my approach to self-employed taxes: Learn the rules and take every tax deduction that you have coming to you.

Some were concerned that they messed up in taking my advice to deduct home-office expenses. I told them to disregard the article and I explained the mistakes and misconceptions in it. However, as much as I would like it to be otherwise, the Times has a lot more readers than I do. So a lot of indies who read that column are now cheating themselves by not deducting home-office expense. I want you to help me get the word out.

The Times columnist, Damon Darlin, apparently looked up Traditional Out-of-Touch Accountants in the Yellow Pages and wrote down their views without asking them if they had ever met a self-employed person.

Darlin also lacks a grasp of his subject – whether the subject be home-office expenses or self-employed workers.

He confuses home-office expenses with other home business deductions such as telephone service and office equipment.

If you have a valid home-office as defined by the IRS, Darlin wrote, “you can write off… all the office equipment and furniture stuffed into it.” But the deduction of office equipment and furniture has nothing to do with a home-office deduction. If you use a computer only for business it qualifies as a business deduction, even if it sits on your kitchen counter. If you have a printer perched on your home-office desk it does not qualify as 100% business use if your kid borrows it to print his homework. An ergonomic desk chair used only when you’re working at your business computer qualifies for a business furniture equipment deduction even though it, too, sits in your kitchen. Darlin incorrectly tells his readers that where business equipment is located in the home is relevant to a deduction. It is not.

Darlin also confuses employees with the self-employed. For example, he writes:

“Given how complicated it is, many people might ask whether it is worth the bother to deduct a home-office on Schedule C … Would it be easier to just write off most of the expenses as nonreimbursable business expenses on Schedule A?”

This is wrong. Taxpayers can’t choose the form on which they deduct home-office expenses. If you are an employee the expense is deducted on Schedule A. For a self-employed sole proprietor the expenses must be deducted on Schedule C.

For those of you unfamiliar with the many pages of a tax return, it’s like saying, oh, I think I’ll deduct my medical expenses as alimony payments.

In addition to the errors there are bogus warnings used to alarm legitimate home workers.

In the words of one alleged tax expert, “the home office deduction might be best avoided.” The experts give a variety of reasons, including the persistent old husbands’ tale that it’s supposed to trigger a tax audit. Then there’s the “it’s too much work” reason capped by the warning about being “socked” with capital gains tax when you sell your home.

Darlin is correct to advise that if the house is sold, the homeowners who deducted office-in-the-home might have to pay a capital gains tax. But the amount of tax due depends on circumstances. The homeowner will almost always save more money in the home-office deduction than has to be paid in capital gains.

Darlin leaves out that important comparison. And, as readers of
SELF-EMPLOYED TAX SOLUTIONS know, other substantial tax benefits accrue to taking office-in-the-home – which also go unmentioned in the Times column.

The IRS liberalized the rules on home-office deduction some years back because organizations of self-employed people lobbied and pressured for it – so that they could get a break in a tax system that is designed not for them but for employees and corporations. The Sammy Segar response, so well documented in the Times piece, is that indies who work extensively at home should turn their backs on this hard-won deduction. The real reason: The Sammy Segars don’t take indies seriously. Would they recommend that Intel forgo a warehouse or office building deduction
because it might trigger an audit or because capital gains might have to be paid upon sale of the building? They’d be cashing in their Intel chips if they did.I'll give you another example of a Clueless Professional Accountant (CPA) next week. Until then and until the Sammy Segars get it together, stay on your toes. Check out advice you get. If you’re unsure email your question to me.

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