The Money Balancing Act offers 
Some Tax Tips for 1999

More Will Be Eligible for a Home Office Deduction in 1999

Do you use space at home for handling the administrative details of your business? Many independent retailers and manufacturers cannot afford to allocate much of their precious floor space to offices. Some companies have reps who work out of their home as well. In the past, these situations did not qualify for the home office deduction. They just didn't meet the major qualifying tests:

a.. Is the space at home used to meet and deal with customers or clients?

b.. If not, then is that space at home the principal place of business?

The 1997 Tax Reform Act brought us a more liberal rule but the effective date was delayed until January 1, 1999. Now, an otherwise qualified space at home will be eligible for the home office deduction if it meets the following tests:

a.. The office is used on a regular and exclusive basis for the administrative or management activities of any business

      AND

b.. There is no other fixed location of the business where you conduct substantial administrative or management activities of the business.

It's clear we're not talking about the kitchen desk where you make a few business calls. To qualify, it needs to be the principal place where you are doing the administrative work of the business. It will still work if you have some employees at the store or manufacturing facility doing some of this work. It won't work if you do some of the management activities there and also take some work home.

If it sounds like you could qualify for this excellent business tax deduction, be sure to discuss it with your tax preparer this year as you complete your 1998 returns. Explore the possibility and come to an agreement as to which expenses you should start tracking for 1999.

The Self-Employed Health Insurance Deduction - We're gaining on it!

Our elected officials make a lot of noise about what they are doing for small business, yet it's sometimes hard to figure out just where we actually benefit. The one benefit that keeps getting better is the deduction for health insurance premiums paid by self-employed taxpayers. The 1997 Tax Act increased the percentage of the annual premiums you may claim for 1998 to 45%. The percentage was scheduled to increase each year until it reached 100% in the year 2007.

Surprise! The 1998 revisions have accelerated the schedule. You will be able to claim 60% in 1999, 2000 and 2001. Then it increases to 70% in 2002 and 100% starting in 2003.

That's better, but married taxpayers who are sole proprietors of a business still have an even better option for deducting their health insurance premiums. It may work if you hire your spouse to work in the business and give him or her the same family coverage you give to other employees. Your spouse can cover you as part of their family. That makes the entire family health insurance a business expense, which will reduce your profit subject to the self-employment tax.

If you start looking at that angle, you might also consider hiring one or more of your children, too! Unlike your spouse's wage, what you pay your children is not subject to any payroll taxes. The pay needs to be reasonable for the work they are doing. We've heard someone had their new baby model for the company brochure and paid them through the payroll. This is a great way to start putting money into their Roth IRA, since there's often no tax benefit for a traditional IRA deduction when your child's wages are low.

Did Someone Mention The Roth IRA?

Are you kicking yourself for not getting it together in 1998 to do a conversion of your traditional IRA into a Roth? Don't. It's not too late. As long as your "modified AGI" is under $100,000, you can ease your old IRA balance into a Roth and spread the tax cost out by converting only part of your IRA each year for a few years. Also, be on the look-out for a year when your income might be low enough to have the conversion taxed only at 15%.

The Roth offers the rare tax benefit of allowing us to increase your wealth without ever paying tax on it, if you play by the rules. Plan to take advantage of it. Take note that you may be eligible to put $2000 a year into a Roth IRA, even if you are using a SEP-IRA or other qualified plan for you and your employees.