More Bedrooms (Rental) VS. Tax Deduction For Home-Based Business (Camming)
Okay, I know I need to ask my accountant this, but I wanted to hear what everyone here also thinks.
So I'm going to be moving from a studio into either a 1 bedroom or 2 bedroom apartment soon. I can't decide which one I should focus on, and they both run around the same price for some reason.
If I opted for the 2 bedroom (I will live alone of course), would that equate to more of a tax deduction than just a 1 bedroom due to having an extra bedroom?
What if there are 2 apartments- a 1 bedroom & 2 bedroom that are the same size (same sq feet) and the same price... would it make sense from a tax standpoint to opt for one over the other?
Re: More Bedrooms (Rental) VS. Tax Deduction For Home-Based Business (Camming)
As I understand the law (please correct me if I'm wrong!) You can deduct the square footage you use for work. Does get tricky with a one bedroom apt. If you sleep in the same space you are working from you cannot deduct the whole bedroom. So if the 1 bedroom is 600 square feet and 600 dollars, with a 400 sf bedroom and you use 200 sf for just camming- then you would deduct 200 dollars.
I believe you can use another method for multiple bedrooms. If you use the bedroom JUST for business and you live in a 2 bedroom apt for 800 and both bedrooms are the same size, than you can deduct 50% (400).
In this senario the bigger apt is a better deal as far as rent.
If the bedrooms are not of equal size i think you have to go back to deducting the square footage.
Re: More Bedrooms (Rental) VS. Tax Deduction For Home-Based Business (Camming)
I think the 2 bedroom would end up being better, because then you can have a clearly dedicated room for camming and can "safely" write off 100% of that room without running into issues for using the room for dual purpose.
I think you can deduct the percentage of the rent based on square foot of the bedroom size compared to the total apartment square footage. The living room and kitchen also count toward the size, so I don't believe it is as simple as taking two bedrooms and deducting half the rent, which it sounds like shasta may be saying?
The IRS has very specific guidelines for this, so be sure you look them up. :)
Re: More Bedrooms (Rental) VS. Tax Deduction For Home-Based Business (Camming)
First and foremost the home office deduction is begging for an audit. So, have your records. Camming is one of the few businesses where the so called home office deduction will work. Still, you better be prepared for the audit, it's coming. Second, the auditor will ask for income from your cam shows. If you don't show enough income on enough days, look for the home office deduction to be disallowed and look for the service to estimate your income.
Second, have your contemporaneous deposits and expense records ready. Pay your state and federal quarterly estimates on time. Pay your self-employment taxes. All of these are necessary for you to even hope to justify the home office deduction. You better have some high speed internet and at least one HD movie camera on inventory. About the only thing the auditor won't ask for is a sample of one of your cam shows. Don't worry, they'll have checked your shows out back at the office. When you meet with the auditor, take your CPA along. Have her do the talking. It won't be fun.
Now, how much are you planning on deducting?
HTH
Z
Re: More Bedrooms (Rental) VS. Tax Deduction For Home-Based Business (Camming)
I'm not worried about a home office deduction, I think $1,000 days should be able to justify it. I just want to pick the most practical legal route for deduction.
Re: More Bedrooms (Rental) VS. Tax Deduction For Home-Based Business (Camming)
Zofia is 100% correct that claiming a 'home office' tax deduction greatly increases the chances of an audit. In addition to that, attempting to claim a 'mixed use' room ( i.e. a single bedroom used both for camming and for sleeping ) greatly increases the chances that the deduction will be denied. From that standpoint, having two bedrooms, and having one of those two bedrooms 100% dedicated to the single use for camming, will be difficult for the IRS to deny.
The 'home office' tax deduction essentially allows you to write off a percentage of all costs associated with your apartment ... rent, utilities etc. ... based on the ratio of square footage of the dedicated 'home office' room to the total square footage of the apartment. So if the square footage of that bedroom is 20% of the total apartment square footage, you can deduct 20% of your total rent and utility bills. However, as was pointed out previously, if you intend to claim this deduction you must also be 100% prepared to survive an IRS audit i.e. accurate and professional business recordkeeping, payment of estimated taxes etc. Otherwise you run the risk that the auditor might find other 'things' which add more dollars to your tax bill than you would have saved via the 'home office' tax deduction.
Re: More Bedrooms (Rental) VS. Tax Deduction For Home-Based Business (Camming)
Quote:
Originally Posted by
Zofia
Second, the auditor will ask for income from your cam shows. If you don't show enough income on enough days, look for the home office deduction to be disallowed and look for the service to estimate your income.
I've never heard this before... can you elaborate? What makes you think they will take a look at your DAILY earnings? Seems very strange to me.
Re: More Bedrooms (Rental) VS. Tax Deduction For Home-Based Business (Camming)
^^^ before answering your question, i will point out that recent pressure on foreign webcam hosts to issue 1099's to US citizen camgirls, and US laws requiring US based webcam hosts to issue 1099's to US citizen camgirls, cancels out some of the risk ... because the 1099's provide 3rd party confirmation of how much income was earned by a camgirl being audited. Without 1099's to provide 3rd party verification, a camgirl ( or dancer ) generating her own set of business books based on unverified 'cash' earnings could actually be producing accurate accounts or could be producing a total work of fiction. With that said ...
When the IRS audits someone working in a 'cash' business ... i.e. where the amount of reported earnings can't be independently substantiated by 3rd party documentation, the IRS is very aware of the fact that the person being audited has in fact received 'cash' income. The IRS is also aware that the possibility exists that the person being audited did not report and did not pay taxes on 100% of that 'cash' income. In this situation the lack of 1099's becomes a two edged sword. On the one hand, the person being audited doesn't face any 'direct evidence' that they have in fact under-reported their income. But on the other hand, if the IRS arrives at a conclusion that the person's lifestyle, spending habits, etc. are inconsistent with the amount of income that the person DID report, there isn't any 'evidence' available to help prove that the person being audited didn't actually earn as much money as the IRS may 'estimate' they must have earned in order to afford the lifestyle, spending etc.
Taking the 'home office' tax deduction at the very least implies to the IRS that the person is operating a serious full time business from that 'home office'. If the person reports $100,000 worth of business income versus a $5,000 'home office' tax deduction, that's consistent with the operation of a serious full time business. However, if the person reports $25,000 worth of business income versus the same $5,000 'home office' tax deduction, this may lead the IRS to A. consider the business operation to be less than a serious full time effort and disallow the deduction, or worse B. conclude that the person is actually earning $100,000 from their 'cash' business but not reporting and not paying taxes on $75,000 of that income !!! In the latter case, if the IRS auditor sees a Mercedes parked in the driveway and sees the person being audited wearing designer clothing, that auditor may very well conclude that 'cash' income is being under-reported, and present the person being audited with an additional tax bill on the $75,000 'additional' dollars that the auditor 'estimates' the person under audit must have earned in order to afford their current lifestyle. If that happens, lacking 1099's, a 'he said, she said' situation is likely to develop, a situation where a 'stripper' or camgirl will NOT receive the benefit of the doubt.
And this will particularly be the case if the person is conducting their cash business in a less than 'professional' manner i.e. no business registration / incorporation, co-mingling business finances and personal finances through the same bank account, failure to perform GAAP-like business accounting, failure to file and pay quarterly estimated income taxes, failure to keep receipts etc.
This is the sort of 'Pandora's box' situation that Zofia was referring to earlier ... that might potentially develop as the result of any claimed 'home office' tax deduction vastly increasing the probability that the person claiming the deduction will be audited. Indeed, if all of your camming income can be substantiated via 1099's, if your camming business is registered / incorporated, if you maintain separate business bank accounts and personal bank accounts, if you keep professional business accounting records, if you file and pay estimated taxes on time etc. then the IRS won't have a whole lot of room for speculation. But if you fall short in any of these areas, consider the Pandora's box possibilities that may stem from your 'inviting' an IRS audit by claiming the home office tax deduction.
Re: More Bedrooms (Rental) VS. Tax Deduction For Home-Based Business (Camming)
Quote:
Originally Posted by
GlamourRouge
I'm not worried about a home office deduction, I think $1,000 days should be able to justify it. I just want to pick the most practical legal route for deduction.
The only kind of deduction is the 'home office' deduction. So if your choices are 2 bedrooms (one to sleep in and one for the office) or 1 bedroom (where youd be claiming dual use) the safer choice is 2 bedrooms.
What Zofia is referring to (IMO) when she says " If you don't show enough income on enough days, look for the home office deduction to be disallowed" is the fact that claiming a home office deduction implies your operating a full time business from that 'home office'. They expect to see the same income on a consistent basis. Because in their eyes if you work 8 hours a day you should have the same profits each day. Now we know thats not the case with this type of work.
IMO a suitable fix for this would be if you have a home office is to keep a daily log of your work related activities. Paid and unpaid. ie- 8-9am worked on content. 9-10 uploaded pictures 10-1030 emailed clients. 11-3 broadcasted on MFC. This way regardless of your earnings you have 'timesheets' in case of an audit showing you were using your home office full time for your business.
(of course if you have consistent earnings every single day then you dont need timesheets because the earnings themselves are proof you are working and using the office, but if you dont, then you would need timesheets as proof of you using the office when you have zero income days or low income days)
Re: More Bedrooms (Rental) VS. Tax Deduction For Home-Based Business (Camming)
Quote:
Originally Posted by
SarahTime
I've never heard this before... can you elaborate? What makes you think they will take a look at your DAILY earnings? Seems very strange to me.
For one, it's in the auditor's handbook. For two, that's exactly what they did in Indianapolis when they swept through the restaurants and wait staff looking for tips and off the books "employees." They took a day by day look. Opening that pandora's box just for the little you could deduct for your home office seems risky to me. Unless, you keep good records and your CPA or Enrolled Agent is totally good with whatever you are doing.
HTH
Z