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General => General Discussion and ??? => Topic started by: Dottonedan on May 24, 2016, 01:07:46 PM
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So our account informed me that my Dot-Tone Designs separation business is killing us. Simply for the reason that the M&R job limits my time of course to do too much with the sep service yet, if I continue with the side income from DTD, it puts me into another tax bracket going from 15% to 25% was the example used. So, in order to keep it going and be with the effort at the 25% tax bracket, I'd have to do twice as much so work or more, and that's just not possible with the M&R job also.
So one might ask, can I make more $ if I went at it full time? Close. I could get close or match what I make with the full time job but would have to work about 80-90 hrs a week leave me with no benefits or to take Obomacare.
So far, it looks like I will be closing DTD and with my spare time, I will take a year to build on my other project that I've put off for many years. Not for sure yet.
More on that later.
Thanks
Dot-Tone-Dan
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Best of luck Dan, and thanks for the seps you've done for us...
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good luck Dan! Ever wonder how some folks can squirm out with tax loops :/
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Don't mean to cause any kind of controversy here, but just a point of clarification: tax brackets do not change how much you are taxed on any income below the bracket...
If you make 50,000 taxed at 15%, making 50,001 does not mean ANY of that 50,000 is taxed at 25% (it is still entirely taxed at only 15%), only the $1 would be taxed at 25%. You never lose money to taxes by making more money, you simply lose a larger percentage of the additional income that would put you over the threshold for the next bracket, and the exact same percentage is taxed of your original income. Making money from DTD will not cause you to have your M&R income taxed any differently.
edit: Obviously it's entirely up to you whether the higher rate taxed on whatever income is taxable at the higher bracket means your hourly wage drops below what you need to make it worth your while. a 10% decrease is certainly significant if you are near that bracket, but honestly y'all already charge very little for your seps, and I would bet you could increase your fee by 10% to absorb the difference and still get plenty of business. That would be something like $5-10 total per job for most sim process stuff.
Just sad to see you stop completely!
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If I ever needed your services, I would pay cash. Just sayin'
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probably not the best thing to record on a public forum as possible evidence in the future.
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so I probably shouldn't admit to stealing music on Napster back in the day?
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I was just kidding, for the record. I would use bitcoin.
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Best of luck to you Dan. You've been around this industry a LONG time and have helped many with your knowledge, art and color separation services. Its probably a good move to focus on your M&R career as there's nowhere to go but upwards in a forward thinking, inventive company such as M&R for a talented guy such as you.
In fact, I officially endorse (without compensation) M&R along with the M&R product which you specialize in on my website.
Steve
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so I probably shouldn't admit to stealing music on Napster back in the day?
Which peer-to-peer program do you use now? ???
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Don't mean to cause any kind of controversy here, but just a point of clarification: tax brackets do not change how much you are taxed on any income below the bracket...
If you make 50,000 taxed at 15%, making 50,001 does not mean ANY of that 50,000 is taxed at 25% (it is still entirely taxed at only 15%), only the $1 would be taxed at 25%. You never lose money to taxes by making more money, you simply lose a larger percentage of the additional income that would put you over the threshold for the next bracket, and the exact same percentage is taxed of your original income. Making money from DTD will not cause you to have your M&R income taxed any differently.
edit: Obviously it's entirely up to you whether the higher rate taxed on whatever income is taxable at the higher bracket means your hourly wage drops below what you need to make it worth your while. a 10% decrease is certainly significant if you are near that bracket, but honestly y'all already charge very little for your seps, and I would bet you could increase your fee by 10% to absorb the difference and still get plenty of business. That would be something like $5-10 total per job for most sim process stuff.
Just sad to see you stop completely!
You beat me to making this point but I doubt if I could have done as good a job of clarifying. Tax code is intricate and often simply does not make sense but it is the law therefore you gotta understand it or employ someone who does.
I agree a relatively small per job increase would offset the additional tax liability and make the effort involved in an occasional sep. well worth your time.
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Best of luck, Dan!
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Best of luck Dan, but I bet you can still do it without getting too heavily penalized as Mimo and Greg laid out... besides, I have a credit with you ;D ;D
Steve
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TAX is a dirty word when your trying to make a honest living.
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Thanks for the kind words.
I understand what you guys are saying. I donno tho. I think the thing is, (and we supposedly are getting this feedback from a professional seasoned tax business), that the day job gig is at one tax bracket but the added income I make from the DTD work sends us over into that higher bracket (on the DTD income).
I have to sit down with them and get the full story still. Most of that DTD is considered as straight income since I have little overhead in doing seps. So all of that is taxed higher (and due to the fact that I can't take on more, it's better business "on the books" to just not do it ...or go all out on it full time. "So I'm told". Maybe they are looking at it as a profitable business standpoint. It's not a business that can grow (the way I'm doing it now) just as side money. If I remember correctly, according to the Gov. A business has to show a profit over so many years. There is an income from it only, as it is now. "paying myself", but no "profit" as a business from their perspective (so I've been told by the IRS already).
So the "income" I make is going to be taxed higher as well.
I'm sure it makes sense for Scott @ Myseps since he's at it full time. It did at one point for me also, but I opted for insurance and consistency after I had my own shop I had been putting into as well. So I donno.
I'll be looking at it hard.
Thanks for the 2nd thoughts.
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Don't mean to cause any kind of controversy here, but just a point of clarification: tax brackets do not change how much you are taxed on any income below the bracket...
If you make 50,000 taxed at 15%, making 50,001 does not mean ANY of that 50,000 is taxed at 25% (it is still entirely taxed at only 15%), only the $1 would be taxed at 25%. You never lose money to taxes by making more money, you simply lose a larger percentage of the additional income that would put you over the threshold for the next bracket, and the exact same percentage is taxed of your original income. Making money from DTD will not cause you to have your M&R income taxed any differently.
edit: Obviously it's entirely up to you whether the higher rate taxed on whatever income is taxable at the higher bracket means your hourly wage drops below what you need to make it worth your while. a 10% decrease is certainly significant if you are near that bracket, but honestly y'all already charge very little for your seps, and I would bet you could increase your fee by 10% to absorb the difference and still get plenty of business. That would be something like $5-10 total per job for most sim process stuff.
Just sad to see you stop completely!
Well said.
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I'm thinking I have to see what my breaking points are. As in "how much can I do" before it takes me over into being taxed higher. Then comparing (at what seps fee increase) would I need to add on for it to balance out or be more beneficial and have it make sense for the IRS for me to stay in business. In other words, to be able to show a true profit of some sort.
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Why not just do it under the table?
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As has been pointed out, much ado about virtually nothing. You have already jumped up a bracket to be at 15%.
Though it has already been explained here, here's an article, a couple of years old, but is still applicable.
http://www.investopedia.com/ask/answers/071114/can-moving-higher-tax-bracket-cause-me-have-lower-net-income.asp (http://www.investopedia.com/ask/answers/071114/can-moving-higher-tax-bracket-cause-me-have-lower-net-income.asp)
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Start a corp that needs office space in your house, phone, internet, plus wages to you. All write offs, go in talk to them about this plus other avenues.
Sorry to see you do that.
Shane
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Start a corp that needs office space in your house, phone, internet, plus wages to you. All write offs, go in talk to them about this plus other avenues.
Sorry to see you do that.
Shane
This is how any home based business is already doing it. No need to be a corporation.
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I was thinking write offs. You are right though.
Shane
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I did just a little digging on the web. It seems that if you claim standard deductions as a business (portion of the house, Internet, phone, etc. and yet aren't "profitable" based on their list of qualifications for 2 out of 5 years or even 2 out of 7 if they please, they can put your business into a "hobby" category. In that, you become more limited on what you can claim etc. I don't know for sure yet, but the issue here could possibly fall somewhere in those details. We dug up a lot of work for deductions on our last tax bout. Maybe the accountant didn't appreciate the extra work. I donno.
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Dan, (and everyone else with a home based business). You should be deducting the obvious expenses of computers, printers and any other equipment. Then there is phone, internet and any other direct expenses related to strictly your business.
The percentage of your home dedicated to the business establishes that same percentage of indirect expenses like rent, mortgage, property tax, utilities and insurance.
Yes, if you lose money for something like three out of five years, they don't believe that you are a real business, merely a hobby, and you will have a harder time continuing without showing a formal plan to turn it around (and hoping that they go for it). But, even if you just make a few thousand dollars after all of the deductions, you are legit, and you won't be paying the higher tax on very much.
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Yea Dan, I wouldn't be too quick to turn out the lights
https://www.youtube.com/watch?v=QoQZ0qmf-mk (https://www.youtube.com/watch?v=QoQZ0qmf-mk)
Especially if it's something you enjoy doing, want to keep up your skills and still make a few bucks to enjoy a night out on the town every so often.
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The two out five years, 3 out of 7 or whatever is a lot like the % of change required for overcoming a copyright concept. It isn't a law nor a rule. Yes, If you show a profit for a few years it does pretty much automatically justify your business expenses (if they are legitimate). The IRS and tax accountants like to throw this out there to weed out stupid stuff, like horse owners who want their riding hobby to be deductible. The real test is whether you actively engage in the business and whether or not you are at risk for a loss. If it was as simple as a not showing a profit for a couple of years GM and almost every major automobile manufacturer would have been declared a "hobby" a few years ago. If you are actively engaged in your business and can show that you have worked at it in a real way then almost everything you spend in support of that endeavor is deductible. Don't let some arbitrary or random "rule" make you think otherwise. Lot's of big start ups don't show a profit for years or maybe ever. It doesn't seem to phase them or their accountants. Amazon has never shown a profit. Now whether or not a business that doesn't show a profit is worth ones time, that is a good question!
Dan's situation is one where he has to decide if the time and effort are worthwhile. My wife makes a lot more than I do. I am in a much higher tax bracket than my business alone would account for. I choose to screen print because I want to. I would never hesitate to write off expenses legitimately associated with that business. I am also working to establish myself in another field. I have manufactured a number of prototypes. I have lost money the last few years as a business due to this activity. I am not concerned by this as I can demonstrate and back up all of my legitimate business expenses. If being stupid and losing money was a crime we would see a lot more people get in trouble. The IRS isn't going to say you shouldn't have spent that money (on stupid stuff). They just want to know that you have been working to create profit, no matter how long term you may be looking at a problem.
I am sure that many of Dan's customers would hope that he stays in the separation business. I am equally sure that the government would be happy with him keeping track of his expenses to properly deduct them and minimize his taxes as much as legally possible.
Here is a link regarding hobby vs business. Anyone who says I manually print for fun or make carbon fiber hydrofoil boards as a hobby is clearly crazy :) and with proper records and investment of time the IRS will not disallow my deductions regardless of profit. http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/profit-motive-required-to-claim-business-deduction.aspx (http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/profit-motive-required-to-claim-business-deduction.aspx)
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So a little more.
It seems that once you get bumped to the next tax bracet (even though let's say another 20-50k puts me there and I'm only taxed at 25% for the amount over the 15% cap, it's the tax (deductions) that are getting me. You have a different or higher tax deduction amount to reach (overall) once you are now in that 25% bracet.
So yea, I'm only taxed at 25% for just my side work, but the allowable deductions is much greater on the total) and I have your standard for the M&R and very few already for the DTD. I dont have enough deductions to take advantage of it. You have to have X amount before you can.
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So a little more.
So yea, I'm only taxed at 25% for just my side work, but the allowable deductions is much greater on the total) and I have your standard for the M&R and very few already for the DTD. I dont have enough deductions to take advantage of it. You have to have X amount before you can.
This I don't quite understand. First off, even with no deductions, like you said, only the amount in the next bracket is taxed at the higher rate.
Then, of course, any deductions you may have (including the percentage of home-related expenses) reduces that taxable amount.
Curious as to whether your accountant alsom suggests that you scrap this additional income rather than helping coach you on how to maximize deductions and minimize the taxable amount.
Or, are you saying that by doing this you show a loss and that is not good for you?
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I would either get a second opinion or do it yourself to really see what's going on.
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You have to have X amount before you can ??
I'm lost on this too. Over the years, I've held several proprietorships and have even had my own corporation for a number of years. Deductions are deductions and I'm unaware of any threshold or higher tax deduction to reach that limits claims.
Expenses (deductions) offset income, and when expenses are greater than income, you have a net operating loss in one and in the case of multiple incomes, they all end up in the same pot where a loss in one offsets gains in another. I don't see where you would ever lose an expense and as others have said, I don't think they are going to look too hard as a business that loses money year after year as long as you're not really running a sham business, as in one that could "never" turn a profit.
I think you need to find a "real" Tax Accountant. One who knows the in and outs of Tax Law. Yes, it's going to cost more than Turbotax or H.R. Block, but you will benefit from it in the long run.
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I don't know if my accountant is top notch or not, but my taxes aren't being run by turbo tax I can assure everyone.
It's not that I can't take "any" deductions, but I'm told there are are specific levels I guess of deductions in different tax brackets and at the 25% tax bracket, I don't have enough to be able to use the deductions. I could have the details wrong.
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I don't know if my accountant is top notch or not, but my taxes aren't being run by turbo tax I can assure everyone.
It's not that I can't take "any" deductions, but I'm told there are are specific levels I guess of deductions in different tax brackets and at the 25% tax bracket, I don't have enough to be able to use the deductions. I could have the details wrong.
Which only likely means you are taking the standard deduction since you do not have enough deductions to exceed the standard deduction. You are still getting a deduction though....
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let also face it that tax law is ever changing and what may have been true 5 years ago may no longer be the case.
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We may ave some terms confused here.
While "deduction" limits definitely may be dependent on brackets, I have to believe that what qualifies as business expenses (like the direct and indirect expenses of using your home for business) in part 2 of the Schedule C (Profit or Loss of Business) do not.
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I would not try to write off the portion of the home your using for your business, if heard some horror stories of that. But Dot Tone Designs must have some expenses I would suspect. Software, computer, internet just being a few. But largely your services do not have a lot of expenses on your end. Basically you are using knowledge, a computer and Photoshop. So your margins are great. Haha. Take your 25% tax and put the rest in your pocket sir. It's not that complicated. Unless you are just looking for a way to quit doing it.
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I would not try to write off the portion of the home your using for your business, if heard some horror stories of that. But Dot Tone Designs must have some expenses I would suspect. Software, computer, internet just being a few. But largely your services do not have a lot of expenses on your end. Basically you are using knowledge, a computer and Photoshop. So your margins are great. Haha. Take your 25% tax and put the rest in your pocket sir. It's not that complicated. Unless you are just looking for a way to quit doing it.
I don't understand. For close to thirty years, our home has been the legal location of three businesses for us, and we have followed the rules to the law.
When one gives up 25% of their home to exclusive use for the business(s), one gets to list 25% of the related expenses. My accountant has never suggested otherwise. If Dan uses one room strictly as a studio, or home office, then it isn't a bedroom anymore and is now part of his business.
What horror stories? Can they stem from questionable "exclusivity"? When my wife ran a home childcare facility, I believe that hours of day in use played into it, but for my shirt decoration business, it's a simply a matter of the percentage of the residential property that I gave up for the business.
I should add that I am very conservative on this, and don't play games with the rules.
I literally gave up 25% of my home, and don't even count the additional outbuilding where actual production is done.
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I would not try to write off the portion of the home your using for your business, if heard some horror stories of that. But Dot Tone Designs must have some expenses I would suspect. Software, computer, internet just being a few. But largely your services do not have a lot of expenses on your end. Basically you are using knowledge, a computer and Photoshop. So your margins are great. Haha. Take your 25% tax and put the rest in your pocket sir. It's not that complicated. Unless you are just looking for a way to quit doing it.
I don't understand. For close to thirty years, our home has been the legal location of three businesses for us, and we have followed the rules to the law.
When one gives up 25% of their home to exclusive use for the business(s), one gets to list 25% of the related expenses. My accountant has never suggested otherwise. If Dan uses one room strictly as a studio, or home office, then it isn't a bedroom anymore and is now part of his business.
What horror stories? Can they stem from questionable "exclusivity"? When my wife ran a home childcare facility, I believe that hours of day in use played into it, but for my shirt decoration business, it's a simply a matter of the percentage of the residential property that I gave up for the business.
I should add that I am very conservative on this, and don't play games with the rules.
I literally gave up 25% of my home, and don't even count the additional outbuilding where actual production is done.
I was told early on that one of the biggest red flags to ending up getting hit with an audit is writing off part of your home as a business expense. That came from no less than 3 accountants. Now I am sure as home base businesses have become more popular maybe this has gotten to be less of an issue. But that was what I was told back when I was running my shop in a basement so we elected not to write off the space as we knew we were not going to be there super long anyway. A family friend of ours was claiming part of his home for business use. He had to pay back some of the taxes when he sold his home. I am not sure if that was a timing thing but I know he was hit pretty hard with it and his feelings where that the savings were not worth it to do going forward after he moved to a new home. He was a VP of sales for a large company and used a single room in his home to work from so it wasn't like it was something shady.
In the context of my reply, I assume Dan to be occupying basically a desk/computer in a room to do seps/artwork. Not even rendering that room useless. I wouldn't bother for the write off on that personally. If he was consuming 25% of a home for it like a screen print shop would and basically making the room/space useless otherwise, I would then yes likely do it. But id seriously have a good accountant confirm what the do's and don'ts specifically are.
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Correct, from what I understand, of course we are getting the standard deductions but it's the business end, that sends me into that higher bracket ...and as such, a higher deduction range (in order to take advantage of "business deductions). So they are saying, that for my business, I don't have (enough) legit deductions to qualify to use my 20-25% of my house. If I made less, I could. If i had more and more duductions (like you all) who have many deductions and may never be in the range to experience this, I could, it's available if I bought business stuff, I just don't. I'd have to buy equipment I don't need, just to raise me up enough to reach the new level required (at the 25%) tax bracket deductions. (As I understand it). Still haven't gotten in to speak with them on this in detail.
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75% of money is still more than no money... LOL
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I'm not an accountant, but that just isn't how taxes work as far as I know. Deductions are deductions (when it comes to how much you are actually bringing home after taxes anyway), and they will always bring down your taxable income. Making more money with fewer deductions does not mean you lose money, it just can't mean that...
The only reason to purchase equipment etc is if you are having an extra profitable year and want to offset your tax burden as a result, but again this isn't losing you money, its just helping you keep more of your money by using a deduction AND benefiting from that new equipment.
I think either they aren't explaining something well, or you should seek a second opinion.
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Maybe this will help you understand, I tried to find a chart to make it easier to see but this was best I could find on the fly:
If you make $50,000 in taxable income, then $7,550 is taxed at 10%, $23,100 is taxed at 15%, and the rest, $19,350, is taxed at 25%. That means you pay a total of $9,057.50 in income tax (this example was using old tax bracket levels but the same applies to new bracket levels).
Great Video on it here and pretty much covers your tax bracket concern:
https://www.youtube.com/watch?v=Qm1hn3N5M14 (https://www.youtube.com/watch?v=Qm1hn3N5M14)
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Fair enough.
Bottom line is, I can't make use of full deductions or any more than I already am,
I have limited time for the seps work, so I can't do any more than I am,
I'm taxed higher (on anything that I can do,
I don't have more deductions to offset,
I have little family time due to full time, overtime and side work,
So I think I'll choose to cut way back on the sep work.
I completely understand what you all are saying.
Thanks for the conversation/feedback.
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Fair enough.
Bottom line is, I can't make use of full deductions or any more than I already am,
I have limited time for the seps work, so I can't do any more than I am,
I'm taxed higher (on anything that I can do,
I don't have more deductions to offset,
I have little family time due to full time, overtime and side work,
So I think I'll choose to cut way back on the sep work.
I completely understand what you all are saying.
Thanks for the conversation/feedback.
THis is all that counts.
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Fair enough.
Bottom line is, I can't make use of full deductions or any more than I already am,
I have limited time for the seps work, so I can't do any more than I am,
I'm taxed higher (on anything that I can do,
I don't have more deductions to offset,
I have little family time due to full time, overtime and side work,
So I think I'll choose to cut way back on the sep work.
I completely understand what you all are saying.
Thanks for the conversation/feedback.
No worries, we were all just trying to make you understand you were not being taxed on your complete income at a higher rate is all. I totally understand the free time thing and don't blame you there at all. Good luck either way you go.
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"I was told early on that one of the biggest red flags to ending up getting hit with an audit is writing off part of your home as a business expense. That came from no less than 3 accountants. Now I am sure as home base businesses have become more popular maybe this has gotten to be less of an issue. But that was what I was told back when I was running my shop in a basement so we elected not to write off the space as we knew we were not going to be there super long anyway. A family friend of ours was claiming part of his home for business use. He had to pay back some of the taxes when he sold his home. I am not sure if that was a timing thing but I know he was hit pretty hard with it and his feelings where that the savings were not worth it to do going forward after he moved to a new home. He was a VP of sales for a large company and used a single room in his home to work from so it wasn't like it was something shady."
Sounds to me like he was depreciating the business portion of his home for tax purposes, which is legal, but comes back to bite you when you sell. That's different than claiming expenses, such as electricity, or internet access, or water and sewer. I don't depreciate the portion of my home for business, mainly because I'm so close to paying off the mortgage, but I do claim a portion of my utilities based on the square footage that the business occupies.
One other issue that got the attention of the taxing authorities awhile back was people having "home offices" and claiming "expenses" by sticking a file cabinet in their bedroom and calling it an office. It has to be dedicated space to the business exclusively.