ASK LORRAINE BUG
Question: My husband and I are thinking about starting up a management consulting business. Since we spend most of our time in our clients' offices, we thought it would save overhead to base our business at home. Are there any other advantages that we should consider?
Answer: You're in luck! The tax rules are changing for businesses like yours where the main office is in your home and you conduct a portion of your work outside of your office.
The Taxpayer Relief Act of 1997 (which was signed into law last August) will expand deductions for maintaining a home office. This could change the way many professionals do business; not just consultants, but accountants, plumbers, decorators, health care workers and real estate agents who are currently not eligible for the deduction.
To fully appreciate the impact of this change, the Small Business Administration projects that this new law could save small-business owners who qualify about $2.3 billion over the next 10 years.
However, until this law takes effect, you are not eligible for a deduction unless all of your business is performed in your home. In your case, you would have to do your research and analysis, as well as set up meetings and interviews with your clients, at your home. (If you owned a television repair service, you would have to fix the TVs at your home and not at the customer's home.)
Commencing Jan. 1, 1999, the new tax rule broadens the definition of "principal place of business." Here's how it pans out:
The business owner (or taxpayer) who uses his home office for both administrative and management functions may conduct minimal paperwork at another location, but no substantial administration and management activities may be conducted outside of the home office.
This change represents true recognition by Congress that businesses in general, and small-business owners in particular, need someplace to store files, open mail, and conduct general operational functions. Tax specialists are also claiming that business owners who qualify for the deduction can also deduct the cost of traveling between the client's office and the home office.
As always, meticulous record keeping is critical in case of an IRS audit. So I strongly recommend that you and your husband visit with a tax accountant or attorney to make sure you meet all the necessary requirements to take advantage of this new tax rule.
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