HOME OFFICE DEDUCTIONS

Q. In a previous issue, you stated that you could deduct home office expenses based on the number of rooms in the home. Do you have any authority for this statement?

A. Yes. Typically, home office deductions are based on the percentage of business use (square footage of the business portion of the home divided by the total square footage). But the IRS says in Publication 587, Business Use of Your Home, a taxpayer can base the percentage on the number of rooms if the rooms are about the same size. Say you use one room of an eight-room house for business. The room is 300 square feet out of a total of 3,000 square feet. In this case, the “rooms method” (12.5%) yields a bigger deduction than the square-footage method (10%).

You can find the IRS publication at www.IRS.gov.

CELEBRITY TAX PROBLEM OF THE WEEK

Casey Anthony on Trial, Liened by IRS

It has been quite an eventful month for Casey Anthony. The 25 year old Florida woman faced prosecutors in court for the first time this month on charges of first-degree murder in connection with the 2008 death of her daughter, Caylee. Caylee was reported missing to the Orange County Sheriff’s Office on July 15, 2008, by her grandmother, Cynthia Anthony. Prosecutors allege that Casey killed Caylee because the little girl was complicating her dating and social life, while the defense alleges that Caylee accidentally drowned in the family pool.

Just days before opening arguments in Anthony’s murder trial, the IRS filed a federal tax lien against Casey, claiming she owes $68,520.41 in unpaid federal income taxes, interest and penalties. The lien is for the same year, 2008, in which Caylee was allegedly murdered.

Casey Anthony was arrested three times between July 2008 and October 2008 on various charges ranging from forgery, fraudulent use of personal information, and petty theft. She was arrested a fourth time in October 2008, those charges related to the murder of her daughter. It is not clear whether Casey held a regular job at any point during that year although at one point, she had worked as a manager at a nightclub. An acquaintance testified at trial that Casey Anthony told her that she paid a nanny at least $400 per week for childcare, and one would assume that would be so that she could work. Of course, she would have had to have done quite well over the course of her employment that year to run up a tax bill of over $68,000. Under the circumstances, it isn’t likely that the income is solely attributed to wages.

It seems that Casey might be taking a page from former Survivor champion Richard Hatch’s playbook. A television network – in this case, ABC – had a deal with Anthony to pay $200,000 in exchange for family videos and photos. As we know from the Hatch case, this makes it taxable to the recipient. If the money was paid directly to Casey (or on her behalf), she would be responsible for reporting the money to the IRS and paying any related taxes due.

The deal was allegedly crafted with ABC by Anthony’s attorney with the understanding that the money was going to be used for defense costs. That would be a great deal for her defense attorney but unfortunately for Casey, attorney’s fees for personal reasons (and that would include criminal defense work for a homicide case) are not deductible on your federal income tax return.

Assuming a 33% tax rate for a single taxpayer in 2008, that $200,000 ABC payment would likely result in a tax bill approximating that $68,520.41 lien. That’s a little bit of educated speculation on my part and I can’t say for certain that the payment resulted in the lien though the evidence tends to suggest that it did. What is clear is that with Anthony’s freedom – and future – in limbo until after the trial, it’s likely that the IRS may never collect.

TAXABLE INVESTMENT SEMINAR MEAL

Q. I received an invitation for a free meal at an investment seminar. Is this taxable, if I go?

A: No. The event is governed by the tax rules for meal and entertainment expenses. Therefore, as the recipient of the meal, you don’t owe any income tax on this benefit. But, it’s not completely “free”. Undoubtedly, you’ll have to listen to a sales pitch from a financial planner, plus, you may have to endure follow-up contacts.

FARM SUPPORT PAYMENTS

'FARM SUPPORT PAYMENTS FACE MOST SERIOUS THREAT YET'

(McClatchy Newspapers/JournalStar.com) -- McClatchy reports that "with federal deficits and debt at unheard-of levels, the $10 billion to $25 billion spent each year on farm supports is attracting new scrutiny from the right and the left." David DeGennaro of the Environmental Working Group, a liberal organization long opposed to most farm programs, is quoted as saying that the direct payments under the farm program are "just a cash handout for landowners and farmers, who get it whether they need it or not." Meanwhile, the article notes, "some farmers contend federal payments provide an essential safety net for neighbors facing drought, floods and near-record fuel prices, not to mention an inevitable downturn in the farm economy."

http://journalstar.com/business/local/article_0dbe64e4-1070-5f2b-9966-ee0ba0d62e5f.html

CELEBRITY TAX PROBLEM OF THE WEEK

IRS CHASES AFTER ‘NATIONAL TREASURE’ STAR TO PAY UP

Think you have issues with the IRS? At least you’re not Nicholas Cage, star of dozens of films, including the appropriately named “National Treasure”.

Update: By the latest count, Cage owes Uncle Sam approximately $14 million in back taxes relating to income from 2002, 2003, 2004 and 2007. The actor just recently made a payment of $360,545. At least he’s trying.

Meanwhile, he is suing his former business manager, Samuel Levin, for $20 million. Cage claims Levin got him into this mess. The lawsuit states that Levin “lined his pockets with several million dollars in business management fees while sending Cage down a path toward financial ruin.”

Levin, who is countersuing, asserts that he tried to warn Cage about the dangers of his “compulsive, destructive spending,” and encouraged him to sell off 12 automobiles and a $1.6 million comic book collection.


Whatever you think of this guy’s financial woes, it seems like he can’t catch a break. Last year, he saw the close of escrow on his beloved Bel Air home that was sold at auction to an undisclosed limited liability company. The 1940s Tudor mansion once belonged to Dean Martin and Tom Jones. Cage put it on the market in 2007 for $37 million.


The house did not sell and, by 2010, it was burdened by loans from six different lenders totaling $18 million. The home eventually sold last July for 10.5 million. Cage purchased the property in 1998 for $6.5 million.

Real estate agent Bret Parsons told reporters at realestatechannel.com that the house has lots of mounted toy trains and other oddities. He described the interior of the house as “frat house bordello”.

About a year ago, the actor’s 14,300-square-foot Las Vegas home went into foreclosure. Cage bought the house in 2006 for $8.5 million. It boasted a 16-car subterranean garage, a theater, and an elevator. According to reports, the foreclosure sale brought nearly $5 million.

In July of 2009, Cage lost his two New Orleans homes, worth a total of more than $6.8 million, to foreclosure auctions, according to money.cnn.com. A New Orleans sheriff reported that Cage owed the city $151,730 in real estate taxes, and was behind $5.5 million in mortgage payments. The only bids came from a bank.

Regions Bank of Alabama bought Cage’s property at 1140 Royal St. in the French Quarter for $2.3 million. The property appraised at $3.5 million. Regions also purchased Cage’s other home, at 2523 Prytania St., for $2.2 million. It is reportedly worth $3.3 million.


Also, Cage recently sold his mansion in Bath, England, as well as a castle in Bavaria and his New York apartment.

It’s difficult to feel sorry for a guy who was paid enough to generate a tax bill of $14 million. Clearly, the income side of the equation is not the issue. Forbes listed him as one of the 100 most powerful celebrities, and reported that he was paid $40 million between June 2008 and June 2009. Declining real estate values didn’t help, but they probably brought to light Cage’s uncontrolled spending.

Tip: Don’t make the same mistakes as the actor. Paying the IRS on time should be a top priority.

KNOW THE DIFFERENCE BETWEEN GIFTS AND COMPENSATION

If you give a favorite employee a big check at Christmas, you might consider it a gift, but the IRS will likely consider it income. Another example would be, that you have an employee this is getting married, so you purchase that expensive food processor and think that you made a gift. Nope! The IRS may just say that the value should be added back to the W-2.

It’s hard to believe, but these examples could be true even if the employee and owner are family. In one case, the IRS said payments to an owner’s daughter (who was an employee) were for the past services, not a gift.

If you have the occasion to make a gift to an employee, talk to us so that we can keep the IRS off of your back.

BEWARE OF PHONY EMAILS FROM THE IRS

We’ve said it before and we’ll say it again: Never send personal financial data in response to unsolicited email. The IRS says scam artists are sending emails to random people, telling them they’re due for a refund or are under investigation. The message directs people to a fake IRS web site that asks for personal data. In reality, the IRS won’t contact you via e-mail.