Self-employed, job seekers get more options for write-offs:

The Olympian
Olympia, Washington

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Taxes 2002 Sunday, April 7, 2002

Self-employed, job seekers get more options for write-offs

GARY KLOTT, GANNETT NEWS SERVICE

Originally published Sunday, April 7, 2002

Employees and self-employed individuals will find a few business tax breaks have been expanded on 2001 tax returns.

Many small-business owners will be able to write off thousands of dollars more of their equipment purchases.

Bigger car deductions will be in store for many workers who used their cars for business or job-related moves.

And some self-employed workers will be able to make thousands of dollars in additional tax-deductible contributions to their Keogh retirement plans this tax season.

Congress didn't provide any new tax relief for businesses or workers hurt by the downturn in the economy last year. But some employees who lost their jobs will be able to write off the cost of searching for new employment.

Job search

Job-hunting expenses are deductible provided the job you were seeking was in the same line of work you were in. Workers who were looking for a job in a different field and students seeking their first job aren't entitled to a write-off.

Deductible expenses include the cost of printing resumes, postage to mail them, long-distance telephone calls, employment agency fees, want ads and travel costs to job interviews.

Job-hunting expenditures are considered "miscellaneous" itemized expenses, which are deductible only to the extent they exceed 2 percent of your adjusted gross income.

Car deductions

The IRS standard mileage rate for business use of a car was raised by 2 cents, to 34.5 cents a mile for 2001. The rate for job-related moves was also raised 2 cents, to 12 cents for 2001.

When writing off business use of a car, workers generally have the option of deducting actual expenses or claiming the Internal Revenue Service mileage rate plus parking and tolls.

"The easier thing is just to do the mileage rate," said Thomas Pudner, personal financial planning manager at the accounting firm of KPMG in McLean, Va. "But dollar-wise you might do a little better with actual expenses."

That's especially true if you have a car that's costly to operate and maintain. Actual costs include a long list of expenses, including gas and oil, depreciation or lease payments, insurance, automobile club memberships, license fees, car washes, repairs, maintenance and more.

But the IRS mileage rate can sometimes be the more valuable option if you tend to put a lot of business mileage on the car, particularly if it's a model that's not expensive to maintain or operate.

It's especially important to compare the options when you're writing off a car for the first time. To take advantage of the IRS standard mileage rate for a car you own, you must choose it for the first year you use the car for business. If you do, you'll have the option in future years of using the fixed mileage rate or the actual-cost method.

If you want to use the IRS mileage rate for a leased car, you must use it for the entire lease period. You can't switch back and forth.

Employee cars

Self-employed individuals are not the only workers who stand to benefit from the increase in the IRS mileage rate.

The increase will also help some employees who were reimbursed by their employer for job-related use of their personal car.

Employees who were reimbursed at a rate of less than 34.5 cents a mile are eligible to deduct the difference as an employee business expense.

Business equipment

If you're writing off a computer, office furniture or other equipment used in a business, you'll generally find that the most lucrative option is the "first-year expensing" method.

This special depreciation method, referred to as "Section 179" on IRS tax forms, was created by Congress to give smaller businesses a fast and simple way to write off business equipment.

Instead of having to depreciate the equipment's cost over a period of years, the expensing method allows you to fully write off up to $24,000 of last year's equipment purchases on your 2001 return. That is up from $20,000 in 2000.

But there are restrictions. Write-offs under the expensing method are generally limited to the amount of taxable income you have from your business. So if your income was meager last year because of the economic slump, your equipment write-offs will be equally meager. One exception applies to sideline businesses of employees. The IRS allows employees to count wages they earn from their regular job as business income when figuring their limit on expensing deductions for their sideline business.

Self-employed retirement plans

Anyone with self-employment income, including free-lancers and employees with sideline businesses, can make a retirement contribution to a Keogh or Simplified Employee Pension (SEP) plan.

Only those who had a Keogh plan set up at a financial institution by last Dec. 31 can make a Keogh deposit that will qualify for a deduction on 2001 returns.

But if you didn't set up a Keogh by then, you can still earn a retirement deduction by contributing to a SEP. You have until your return is due to set up and contribute to a SEP.

How much of a deductible contribution you can make depends on the type of plan you set up.

Deductible contributions to a form of Keogh known as "money-purchase" arrangement are limited to 20 percent of self-employment earnings, up to a maximum deposit of $35,000 for 2001. The dollar ceiling is up from $30,000 in 2000.

The contribution limit for SEPs and "profit-sharing" Keogh arrangements is about 13 percent of self-employment income, up to a maximum of $25,500 for 2001.

Home-office deductions

For workers with home-based businesses, the home-office deduction can provide valuable tax savings. But before claiming the deduction, be sure to assess the tax impact on the eventual sale of your home. Some homeowners, particularly those who plan to sell their home in a few years, will be better off skipping the deduction on their 2001 return.

Homeowners who claim home-office deductions generally end up paying tax on part of their home-sale profit. And that tax can sometimes far exceed the savings from home-office deductions.

One reason is that the home-sale tax exemption of up to $500,000 ($250,000 for unmarried individuals) can't be used to protect the part of your gain that is equal to depreciation deductions allowed for the home office after May 6, 1997.

What's more, the exemption can't be used for any portion of your home that was used for business purposes for more than three of the five years prior to the sale.

As a result, eligible homeowners should carefully assess whether it's really worth claiming home-office deductions -- particularly in the two years prior to a sale.

"If you've been continually taking the home-office deduction and you're thinking about selling, ideally it would be good to stop claiming the deduction for a two-year period so that you're entitled to claim the exclusion for the entire residence," said Mark Luscombe, principal federal tax analyst at CCH Inc., a publisher of legal references for tax professionals. "It's hard to imagine where the benefit of the home-office deduction for the two years would exceed the benefit of that exclusion."

Tax series

This is the sixth in a seven-part series on taxes. Coming up:

- April 14: Tax traps to avoid

Previously

- March 3: Changes for 2001 will make filing more complicated

- March 10: Benefits, wrinkles of new law

- March 17: Tax season tricks

- March 24: Tax bite eased on some investment income

- March 31: Maximizing personal deductions

Tax filings

Selected figures from this year's individual tax-filing season through March 29 and comparison with the same period last year:

Returns filed