MrScottB

Hi,

While my family and I are weighing up a relocation move to the US from the UK with my company via an E2, I am trying to understand business expense tax deduction.

In the UK, I work from home in a dedicated room/office and claim the square footage of this room as a taxable expense i.e. 5 rooms, 1 used as an office = 1/5 of the rent; 20% of this 1/5 is reduced against my tax.

As my position will be the same in the US, can anyone advise if the process is the same or different, with examples ? i.e. is it the same as the UK method and I save the rate based upon the tax band I am playing in the US ?

Also, this is method the same for food while traveling i.e. do I claim the sales tax back of the whole amount against my tax ?

Thanks!

Michael

Generally you just write everything off including sales tax. Since it is a business expense, Schedule C is used to enter income and deductions to calculate taxable income unlike personal deductions (mortgage interest, state income tax, car license fee, charity, etc.) which are deductions against income but have some restrictions. If you own the home instead of renting, there can be a conflict with personal deduction for office space write off since mortgage interest against the whole house could have already been written off as a personal deduction. I doubt it is quite as easy as saying it is 1 of 5 rooms and therefore can deduct 1/5th of the rent since the master bedroom and living room could be 60% or more of the square footage of a house and may be the similar for writing off utilities. Car expenses can either be written off at a per mile basis (about $0.55 per mile) or a percentage of all car expenses (payment, maintenance, insurance, etc.) based on the miles driven for business (normally a log is kept) as compared to the total miles driven during the year. Usually capital equipment to a certain amount (computers, printers, etc.) can usually be fully written off in that year but if the capital equipment is a large amount, it may have to be depreciated over several years. For example if you purchased a car solely for business with cash, you may not be able to write that cost of as an expense in one year but may have to write it off over 3-5 years.

http://www.irs.gov/uac/Schedule-C-(F...-From-Business

Most people will use a tax preparation program which prompts you about expenses which fills in forms and calculates income.

Since the 2012 tax season is over, the 2012 edition of Turbo tax for Home and Business is discounted by about 75% to $25 and you may want to purchase that and run some numbers and see how everything would work if you had certain expenses and income. Doing the forms manually is just too complicated.

http://www.amazon.com/gp/product/B00...f_rd_i=3003491

I find it so much easier to use a tax preparation program and then play with numbers to determine the best way to limit taxes owed.

MrScottB

Greatly appreciate the direction and yes, for the sake of it, I will download turbo tax as its in my interest.

sir_eccles

Be very careful claiming a home office. Strictly speaking it should be a dedicated space only used for office. I would also suggest that 20% should be considered an upper limit, more than that may raise suspicions.

Chrisdc

It may be an urban myth, but I've always been told by accountants that the home office deduction is a red flag for the IRS. Probably important to follow the rules to the letter.

The last time I looked into doing it, I was dissuaded by the exclusive use rule. The example given was this: if you use the computer in that office to book a vacation or a personal email, you would invalidate the tax benefit.

Lots of info here:

http://www.irs.gov/Businesses/Small-...fice-Deduction

Michael

It supposedly does raise a red flag but if it is a legitimate office where all or most of your income comes from that business and you show a reasonable profit, it is generally accepted. Generally the people that have the most problems are people that have a day job or no or little profit after expenses.

MrScottB

I feel the above advice given may be based on misdirection from myself. I will not be running a business from my rented property but working from home to fulfill my role for my employer who's office in based to far for me to travel too. As I will be traveling 2 days of each week to meet with clients, and given the distance of my company's head office from my home, working from home makes more sense.

MrScottB

So, based upon the response from Michael above, I can write off the full amount of the dedicated office room I use in my home against my tax ?

Chrisdc

I think it's all the same to the IRS.

My one recommendation would be to get an accountant. Doesn't cost much and will help you navigate the rules.

It's pretty normal to have an accountant for your personal taxes in the US due to the bewildering tax code :-)

sir_eccles

Especially if you are running a business from home. There are clever ways of getting the most out of the deductions.

Nutmegger

My OH and I are both self-employed and both have dedicated offices in the house -- that are very obviously places of business. All our income is evidenced on 1099s from many different clients. I concur with what Michael says -- it is people who are on salary with one company who may raise the red flag.

md95065

Possibly ...

The fact that you are an employee means that there are a few more issues that need to be considered.

Read this and see if you think that you qualify.

One possible stumbling block is:

You and the IRS may take different views of the hilighted passages ...

Michael

I misunderstood what you originally posted. I mistakenly assumed you were a spouse of an E2 that was going to run a business from home.

You are not running a business from home but are only using it for your convenience. Schedule C does not apply since that is the form for Profit or Loss from Business (Sole Proprietorship) and you aren't a Sole Proprietorship but instead an employee of another company. Usually someone such as a real estate agent is a contractor (Sole Proprietorship) and can then use Schedule C.

Since you likely can't use Schedule C, office expenses will likely have to be taken on Schedule A as itemized deductions which has limitations and deductibles. Even car expenses going to your office normally can't be written off since that is your real workplace. If you have meal or hotel business expenses reimbursed by your employer, then that is not normally taxable but if they are not reimbursed, then there are limitations.

The few exceptions where I've seen employees able to write off office space in their home is when they have an level of expertise that requires them to travel from location to location and didn't have an office anywhere near where she lived (i.e. we had an employee with a PHD in encryption that traveled to many company facilities to help employees understand security requirements of how code had to be implemented).