Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, December 13, 1993                   TAG: 9312110022
SECTION: MONEY                    PAGE: B-6   EDITION: METRO 
SOURCE: JANE BRYANT QUINN WASHINGTON POST WRITERS GROUP
DATELINE: NEW YORK                                LENGTH: Medium

BUSINESSES AT HOME: WHAT TO WRITE OFF

On the other hand, you may be deducting too much. There's a lot of tax cheating going on among people who are indulging in what are essentially hobbies or diversions, not true businesses. You can't spend two weeks in a Honolulu resort, call on a customer while you're there, then write off the vacation as a business expense. It's morally and legally wrong. And you might get caught.

But by all means, write off every dime that's legitimate and keep good records to substantiate your costs. Here are the general rules:

You can write off some of your home expenses if you use a portion of your house regularly and exclusively for business and if it's your principal place of work. Your "office" can be part of your den rather than a separate room, but you have to maintain it as a permanent work space. It doesn't count if your kids use it as a playroom after school. Nor can you count the dining room if you spread out your work there between meals.

To establish the size of your basic write-off, figure out the percentage of your home that you use for an office, measuring in square feet. Say it's 10 percent. You can then deduct up to 10 percent of your mortgage interest, real estate taxes, rent, home owners' insurance, utilities and building upkeep, such as painting the outside of the house. You get a depreciation deduction for the space allocated to your office. If you sell products, you can write off the cost of any space used exclusively for storing inventory. There are special rules for licensed day-care businesses.

Here's something important: You can't write off more of your home expenses than you produce in home-business income, a mistake that the IRS often finds. If you're a writer but sold nothing last year, you get zero deductions for your home office expenses. Hang on to your expense records; you can deduct them next year, if you finally get an article sold or a book advance.

You also have other business expenses, such as equipment, supplies, inventory, business insurance, accounting services, travel, maybe an employee. If your child works for you after school, the work has to be genuine. You can write off these costs even if they exceed the business income that you earn, giving you a net business loss. That loss may shelter other income reported on your tax return, for example, a spouse's earnings.

You can save taxes by putting up to $2,000 of your earnings into an Individual Retirement Account and more, if you start a Keogh account or a Simplified Employee Pension.

Telephones have special rules. You can't write off the rental cost of the first line coming into your house. However, you may deduct business long-distance calls and, probably, optional services that are work-related, such as call waiting. You can write off the full costs of a second phone or fax line that's used exclusively for business.

When you drive your car on business, the IRS allows you 28 cents a mile.

New this year, you can write off up to $17,500 in equipment purchases, but not more than the business income you earned. Last year, the limit was $10,000.

Be warned: At some point, the IRS may ask you to prove that you're running a real business. Normally, that means showing a profit in three of the first five years, or at least proving a genuine attempt to earn a profit.

If you can't, your "business" is merely a hobby. Hobby income is taxable, you can't write off losses, and there are limits on your expense deductions. Can you get away with closing a losing business after three years and starting a new one that also shows an annual, tax-deductible loss? "Probably not if you're audited," says New York lawyer and accountant Sidney Kess.

Another warning: You may have heard you can write off the expenses of a vacation if, while you're there, you get interviewed for a job. Wrong. In a recent tax court case, a man, his wife and his daughter tried just that. The IRS hauled them into court and won, because the purpose of their trip was not primarily business.