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Alice Bredin

If you haven’t begun preparation of your home business tax return for 1998, let me be the first to officially declare you “last minute.” Corporate tax returns are due on March 15 and although unincorporated businesses have another month, you should still be well on your way at this point.

I am sympathetic to home-based business owners who fall behind on tax preparation. In most home offices, all available energy is usually devoted to keeping the business running smoothly. Tax time requires sorting through paperwork, meeting with accountants and other time-consuming tasks. The only thing worse than working on taxes is not working on them. A shoddily prepared return opens you up to mistakes, audits and penalties.

This year, the greatest area of confusion for home-based workers is likely to be the home office deduction. You may or may not be eligible for this write-off, depending on your profession and the manner in which you use your dwelling for work. To ensure you take the deductions coming to you and don’t misinterpret tax guidelines, I recommend consulting with a tax professional before filing your 1998 return.

To prepare for that meeting, here is a list of questions to ask yourself:

? Are you eligible for the home office deduction? The guidelines that govern this deduction can be complicated. Generally speaking, the part of a home claimed as an office must be used regularly for business and only for business. This means the room where the office is located cannot be used for personal purposes, even during off-business hours. Telecommuters can claim the deduction if they work at home for the convenience of their employer. If the employer does not provide space for the employee to work outside of the home, it is usually fair to claim this deduction.

? Does your office fit the current Internal Revenue Service definition of primary place of business? Under IRS guidelines for 1998, home-based business owners who earn their income outside of the home such as plumbers and house cleaners cannot claim a home office deduction, even if their home office is used for administrative work related to business.

The IRS does not consider these business owners’ homes as their primary place of business because they earn their income at the homes and offices of clients. Next year, the definition of a primary place of business will expand. In 1999 home offices used for administrative work will be included, assuming no other location exists for these activities, such as a commercial office.

? Have you considered the home office deduction trade-off? If you are looking to sell your home within two years of the period during which it held a home office, speak with your accountant about the best strategy for the home office deduction. If you sell your home within this two-year period, you may have to pay capital gains taxes on the portion you claimed as office space.

? Is your auto mileage deductible? Business travel can be deducted at 32.5 cents per mile for 1998. Home-based workers who travel to meet clients, customers and other business partners can deduct the cost of transportation to these meetings because the travel is business-related.

? What other business-related expenses have you generated this year? As a business owner, you may be eligible for other deductions. For example, you may be able to expense, rather than depreciate, up to $18,500 of the cost of business assets purchased in 1998. Good news in the coming years: This amount is slated to gradually increase over the next few years to $25,000 in 2003.

Another potential deduction is health insurance. The health insurance deduction rate for the self-employed has gone up to 45 percent. Like equipment deductions, this deduction should grow larger over the next few years and is expected to be 100 percent by 2003.

Manage your mess

A corporate attorney I have known for years recently started working from home three days a week. The decision was prompted by a desire to cut overhead in her practice. Six months into her arrangement, she is struggling.

During a recent phone call she described her home office set up to me, and I completely understand why she is having trouble. Her desk is in a corner of her living room and her office has grown organically. Stacks of papers overflow from her limited file space, books are piled on top of overflowing shelves, and her small desk is better suited to personal bill paying than running a business. She needs an assistant, but feels her “office” is too small and disorganized to accommodate anyone else. She needs an office overhaul.

My friend’s literal and figurative home office mess is common in first-time home offices. The time is never right to organize the office if you are busy. And the solutions to office chaos are not always apparent.

Fortunately, it is never too late to add some order to your home office. The best way to start is to observe your patterns for one week to identify chinks in your setup. Small changes are often enough to make a big difference. Regardless of the changes you decide to make, keep in mind the following office design tips for increasing productivity and reducing distraction:

? Avoid busy areas. A home office should be in a quiet area of the house. If workspace choices are limited and you must place your workspace in a busy area, try to ward off diversions by placing screens, plants or other barriers between you and the source of activity.

? Invest in what you need. Supplies that increase your productivity are a good investment. Limited file-cabinet space, the wrong desk or a lack of shelving can hinder your performance. To determine what would make your office run more smoothly, analyze your daily habits. For example, if you constantly move to the kitchen table to lay out papers, you might need a larger desk.

? Clear pre-office clutter. After you decide on a space for your office, remove any items that are not work-related. These might include exercise equipment, storage boxes and children’s toys. Keep personal items out of your workspace and encourage your family to do the same.

? Be a minimalist. Move items that you do not use on a daily basis out of sight. This may include rolls of tape, stacks of envelopes or extra pens. Start a supply cupboard. If the layout of your home mandates that this closet be far away from your work area, keep a small stash of these items close to your desk for convenience.

? Use the space you have. Letter trays and extra shelving can be mounted above your work area. Extra space under your desk can be used for a box or cabinet filled with frequently used files. If you have multiple pieces of office equipment taking up valuable desktop real estate such as a fax, phone and printer consider investing in a single piece of space-saving equipment that can fax, copy, print and serve as a telephone.

? Have a “safety” trash can. Many people bury themselves in clutter because they are afraid to throw anything away. As an alternative, set up a trash can for papers only no orange peels or candy wrappers allowed and empty it once every two weeks or longer. If you haven’t needed these papers during this period, chances are you can safely discard them. One word of caution for security reasons you may want to shred papers before moving them out of your home.

Alice Bredin is author of the “Virtual Office Survival Handbook” (John Wiley & Sons) and a nationally syndicated columnist.

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