This is the season when many people stay up late into the night figuring ways to justify writing off home computers, vacations and other personal items as business expenses.
Business- and job-related expenses do represent a potentially lucrative reservoir of tax deductions for individuals. The cost of hunting for a new job, going to night school, buying a personal computer, attending a midwinter convention in Hawaii, and wining and dining clients can often be written off if a true business purpose can be substantiated.
But the rules are strict. And their potential for abuse makes business deductions a prime target for Internal Revenue Service auditors.
Employees have a tougher time writing off business expenses than self-employed individuals do. In fact, most employees wind up not being able to claim a cent in job-related deductions because employee business expenses and other "miscellaneous" itemized expenses are deductible only to the extent they exceed two percent of adjusted gross income.
Self-employed individuals generally don't have the same problem because expenses related to their businesses can be deducted in full on Schedule C, where income and expenses from sole proprietorships are reported.
Even if you're subject to the 2-percent limitation, the list of job expenses that qualify for a deduction is lengthy, which should help some people surpass the threshold. They include business phone calls made from home, dues to professional associations, subscriptions to professional journals, home-office expenses, union dues, small work tools, and the cost of purchasing and cleaning uniforms. Even the cost of renting a tuxedo to attend a business-related function is deductible.
Hunting for a new job is also a deductible expense, which should be of help to some of the millions of Americans who lost their jobs last year in the recession. Deductible expenses include the cost of printing resumes, postage to mail them out, and even the cost of traveling to a job interview. Regardless of whether your job hunt was successful, you can write off your expenses provided you were searching for a job in the same line of work. People looking to switch careers and students seeking their first job aren't entitled to a write-off.
Going to school can also be a deductible endeavor, but only if it's to maintain or improve skills required in your current job. If you're taking night classes to learn a new trade, the costs aren't deductible.
Although more Americans are buying home computers with the intent of using them at least partly for work, the tax law makes it tough for employees to write them off.
Employees face two stringent requirements. First, the law requires that the computer be a "condition of employment," which essentially means that your employer requires you to have a home computer in order to perform your job. A second requirement is that the home computer has to be for the "convenience of the employer," not merely because it's more convenient for you to have a computer at home so you don't have to stay late at the office.
Self-employed individuals have a much easier time writing off their home computer. Their main challenge is figuring the amount of their write-offs. If the computer is used more than 50 percent of the time for business, you may be able to take advantage of a small business provision that allows up to $10,000 of eligible equipment costs to be immediately written off on 1991 returns, rather than depreciated over a period of years.
Generally, write-offs under this "expensing" method can't exceed taxable income from the business. But a recent IRS ruling now lets employees with sideline businesses count wages they earn from their regular job as business income.
Many of the social perks of business life also remain at least partly deductible.
Country club dues are partially deductible if the club was used more than half the time for business. And wining and dining and entertaining customers is 80 percent deductible.
Business trips can be a rich source of deductions even if a bit of vacation was added to the itinerary. If you took a trip that combined business and pleasure, you have to prorate lodging, meals and other such expenses. But you can deduct the full cost of getting there and back so long as the main purpose of your trip was business. If the main purpose was pleasure, none of your transportation costs are deductible.
For example, say you made a trip to Hawaii for a five-day business convention and you decided to stay an extra three days to lounge on the beach and sip Mai Tais. You can deduct lodging and meal expenses for the five-day convention, and the full round trip airfare to Hawaii.
If, however, you went to Hawaii for a week's vacation and decided to drop in on a customer for a brief visit, none of your travel costs are deductible, except perhaps for the cab ride from your hotel to the customer's office. In other words, adding a bit of business to a vacation does not make for a deductible business trip. Only expenses related to business transacted at the destination can be written off.
If your spouse tagged along on one of your business trips, none of his or her travel expenses are generally deductible.
But in figuring your own deductible expenses, there's no need to divide the hotel bill in half. You are entitled to write off the single rate for your room rather than half the double-rate you actually paid. Typically, single-room rates are more than half the double-rate.
Similarly, figure your deduction for local transportation based on what it would have cost you to travel alone. Rental cars cost the same regardless of the number of passengers. Taxis usually charge little or nothing for extra passengers.
Commuting to work is generally not deductible. But there are a few exceptions.
Commuting between your home and a temporary work site is a deductible business expense. To qualify, the IRS says you must have a regular place of business and the temporary work site must be a place where you perform services on an irregular basis or for a short period, generally a matter of days or weeks.
"If I go from my home to visit a client in the morning before I go to my office in town, I can now deduct the costs of going from my home to the client's office and then to my office," said Sidney Kess, a New York tax lawyer. But a doctor who stops by the hospital every morning to make rounds before heading to his office, Mr. Kess added, won't be able to deduct his commuting expenses because the hospital isn't a temporary job location for him.
Another commuting exception applies to people who work out of their homes. If your home-office is your principal place of business, travel from and to your home on business is deductible. If you hold down two jobs, traveling from one job site
to the other is a deductible business expense.