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taxes paid at closing for home and home office deduction...

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gobonas99

Member
What is the name of your state? New York

I'll try to be brief, but I have 2 issues with questions:

My husband and I bought our first home in April of this year, so this is the first year that we will be able to itemize our deductions. We received our year-end statement from our mortgage company yesterday with the tax form attached (can't remember the number) listing our mortgage interest, points, and taxes paid this year. The points and interest amounts are correct, and the taxes paid is the amount that was paid out of our escrow account for school taxes in September.

My question is: At closing, we paid the seller for 8.5 months of town/county taxes (April 17-Dec 31) and 4.5 months of school taxes (April 17-Aug 31) that they had previously paid. Do we get to deduct the amount we paid the sellers for these taxes at closing (in addition to the school taxes we paid in Sept that is on our statement)?

Also, in September, I started my own business selling Princess House crystal. I know that to qualify for the home office deduction, the space has to be used exclusively for your business, which is not the case with our home office, as my husband and I each have a computer in the office, and I do use my computer for personal things (although about 75% of my usage is for Princess House). However, I know there is an exception when you store inventory - although I am not real clear on the rules for that. We have a spare bedroom where I have my fax machine, and shelves on which I store product samples, hostess gifts, and printed materials (catalogs, order forms, etc). The room has a twin bed in it, in case we have an overnight guest, but it is rarely used for that (especially now, since I have catalogs and samples ON the bed :p - my husband says it looks like Princess House exploded in that room :D). Anyway - would this room classify as inventory storage and be exempt from the "exclusive use" provision of the home office deduction?

Also, I purchased a new computer (incl. a monitor and printer) shortly after I started my business because my old one was on it's last leg. I also purchased my fax machine to submit orders to Princess House. I bought the Home and Business Premier edition of Turbo Tax, and when I input the computer and fax machine for depreciation purposes, in addition to the business use %, it asked me if I wanted to take an "additional 30% depreciation" on new assets. I majored in accounting, and am an accounting analyst (though I don't work with fixed assets), and I am not familiar with this additional depreciation concept. Is this new? Is it something only available to small businesses (hence why I have not heard of it before)? Is this something that would be beneficial for me to take?

Any help would be MUCH appreciated. :) Thanks in advance!

(Sorry this is so long....)
 


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loku

Guest
AT CLOSING, WE PAID THE SELLER FOR 8.5 MONTHS OF TOWN/COUNTY TAXES (APRIL 17-DEC 31) AND 4.5 MONTHS OF SCHOOL TAXES (APRIL 17-AUG 31) THAT THEY HAD PREVIOUSLY PAID. DO WE GET TO DEDUCT THE AMOUNT WE PAID THE SELLERS FOR THESE TAXES AT CLOSING (IN ADDITION TO THE SCHOOL TAXES WE PAID IN SEPT THAT IS ON OUR STATEMENT)?

Yes, you can deduct those taxes, but don’t add them to your basis of the property.

WE HAVE A SPARE BEDROOM WHERE I HAVE MY FAX MACHINE, AND SHELVES ON WHICH I STORE PRODUCT SAMPLES, HOSTESS GIFTS, AND PRINTED MATERIALS (CATALOGS, ORDER FORMS, ETC). THE ROOM HAS A TWIN BED IN IT, IN CASE WE HAVE AN OVERNIGHT GUEST, BUT IT IS RARELY USED FOR THAT (ESPECIALLY NOW, SINCE I HAVE CATALOGS AND SAMPLES ON THE BED - MY HUSBAND SAYS IT LOOKS LIKE PRINCESS HOUSE EXPLODED IN THAT ROOM ). ANYWAY - WOULD THIS ROOM CLASSIFY AS INVENTORY STORAGE AND BE EXEMPT FROM THE "EXCLUSIVE USE" PROVISION OF THE HOME OFFICE DEDUCTION?

Following is the rule for deduction of space for inventory storage.

Storage of inventory or product samples. If you use part of your home for the storage of inventory or product samples, you can claim expenses for the business use of your home without meeting the exclusive use test. However, you must meet all of the following tests.
• You sell products at wholesale or retail as your trade or business.
• You keep the inventory or product samples in your home for use in your trade or business.
• Your home is the only fixed location of your trade or business.
• You use the storage space on a regular basis.
• The space you use is an identifiably separate space suitable for storage.
Example. Your home is the sole fixed location of your business of selling mechanics' tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.

Don’t forget that if, in any given year, you do not use the room for guests, then it is exclusively used for business.



I PURCHASED A NEW COMPUTER (INCL. A MONITOR AND PRINTER) SHORTLY AFTER I STARTED MY BUSINESS BECAUSE MY OLD ONE WAS ON IT'S LAST LEG. I ALSO PURCHASED MY FAX MACHINE TO SUBMIT ORDERS TO PRINCESS HOUSE. I BOUGHT THE HOME AND BUSINESS PREMIER EDITION OF TURBO TAX, AND WHEN I INPUT THE COMPUTER AND FAX MACHINE FOR DEPRECIATION PURPOSES, IN ADDITION TO THE BUSINESS USE %, IT ASKED ME IF I WANTED TO TAKE AN "ADDITIONAL 30% DEPRECIATION" ON NEW ASSETS. I MAJORED IN ACCOUNTING, AND AM AN ACCOUNTING ANALYST (THOUGH I DON'T WORK WITH FIXED ASSETS), AND I AM NOT FAMILIAR WITH THIS ADDITIONAL DEPRECIATION CONCEPT. IS THIS NEW? IS IT SOMETHING ONLY AVAILABLE TO SMALL BUSINESSES (HENCE WHY I HAVE NOT HEARD OF IT BEFORE)? IS THIS SOMETHING THAT WOULD BE BENEFICIAL FOR ME TO TAKE?

The simplest thing to do is to deduct the cost of those assets for the year you purchased them. There is a tax provision, called “Section 179,” which allows you do deduct up to a specified amount of the cost of assets instead of depreciating them. The amount in 2002 is $24,000. Beginning in 2003, the total amount you can elect to deduct under section 179 will increase to $25,000.

Some people, when they start their own business, get their taxes done by a professional the first year, then use that return as a model in future years.
 

gobonas99

Member
Loku - Thanks so much for the info!

I know about Section 179 assets (granted it's going back a few years to when I was in school, so the memory is a bit fuzzy here), and my assets are only $2000.....but isn't there some stipulation that if you take the Section 179 deduction, and end up going out of business before the assets would have been fully depreciated had you used traditional depreciation, then you have to take some of that deduction to income? Princess House is something that I would like to be involved in for a long time, as I want to be able to not work (at my regular job) when we have kids in a couple years (I'd like to stay home until they are in school like my mom did with me)....but things change - my husband's employer has been talking about possible layoffs....what if we have to move....etc....Princess House is something that you can start and stop whenever you want...I just don't want to get stuck having to take anything into income, if I am not with Princess House for more than 5 years (the depreciable life of computers). But on the other hand, the extra deduction would be nice this year, as it looks like we are going to owe over $1000 (damn marriage penalty!).

Then there is the benefit of being able to take depreciation of $400 for the next 5 years to offset my income.

As I asked before....do you know anything about this 30% additional depreciation thing?

As far as a tax professional goes - I am my own, since it is something extra that we really don't have room in our budget for this year...so it is just me and my turbo tax.

Thanks again!
-Christina
 
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loku

Guest
ISN'T THERE SOME STIPULATION THAT IF YOU TAKE THE SECTION 179 DEDUCTION, AND END UP GOING OUT OF BUSINESS BEFORE THE ASSETS WOULD HAVE BEEN FULLY DEPRECIATED HAD YOU USED TRADITIONAL DEPRECIATION, THEN YOU HAVE TO TAKE SOME OF THAT DEDUCTION TO INCOME?

Yes, you would have to recapture some depreciation, but the end result would be the same as if you had depreciated it from the start, so you don’t lose anything by 179ing it.
 

abezon

Senior Member
The 30% additional depreciation is part of the disaster relief laws passed after 9/11. You may take the regular MACRS depreciation, then take an additional 30% of the adjusted basis as depreciation too.


BTW, if the marriage penalty bugs you, get divorced but continue to live together. One spouse itemizes & the other spouse takes the standard single or head of household deduction. This often makes you eligible for EIC & larger tax credits as well.
 

gobonas99

Member
Abezon...

Thanks for letting me know about the 30% additional depreciation....I must have missed that one (good thing I already passed that section of the CPA exam!).

As for the marriage penalty....I will not divorce my husband whom I love, for the sake of taxes (besides it is against my beliefs). I just think it is absolutely assinine that two people who are claiming married and 0 do not have enough withheld from their paychecks to be within $50 of 0 come tax time. I realize it has a lot to do with the idea that one spouse doesn't work, but that is not the norm anymore. They should really add another tax bracket - "married both spouses work" - or something. We got married in mid-2001, so that screwed up our withholding for 2001 and we owed. And I got a new job (with a large pay increase) in mid-2002, so that screwed us up this year.

Anyhoo.....thanks again for the info on the 30%! :)
 

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