A Distant Soil by Colleen Doran

Very long post updated from old blog, with important tips from comments section added. Please bookmark

If you are an artist or a writer working from home, whatever they say, DO NOT BELIEVE YOUR REAL ESTATE AGENT, MORTGAGE COMPANY OR INSURANCE AGENT WHEN THEY TELL YOU THERE IS NO PROBLEM WITH YOU, YOUR MORTGAGE, YOUR ZONING, YOUR INSURANCE POLICY, OR ANYTHING ELSE.

READ THE FINE PRINT YOURSELF!

When I first moved out on my own and bought my little home, I was very poor and qualified for a low income home loan. Great! My tiny 750 square foot condo was more than enough room for me and a little office. I told my real estate agent who I was and what I did, and what I intended to do in my home. I also told my mortgage company who I was, what I did, and what I intended to do in my home.

I got my loan, and set up a little studio space in my dining area.

Yeah, I had read my mortgage agreement, my eyes got bleary after about five pages, and I couldn’t tell you what the thing said if my life depended on it. I bought the house and can draw pictures in the house, right? It’s my house.

All was well. Until I began learning some scary things about zoning, and mortgages, and so on.

I sat down and REALLY read the fine print in my home loan agreement, and even though I had been told that my home office was OK and that my being an artist would not be a problem, the actual language of the loan specifically forbade my running any business from my home.

Ever.

For any reason.

The real estate agent and mortgage company were more interested in making a sale than they were in paying attention to the fine print, and I was more interested in getting my loan than paying attention to the fine print. So, they told me what I wanted to hear to make a sale.

And at any time if I had been called on it, I could have lost my home. The bank could have withdrawn the loan and foreclosed on my home because I was drawing comics in my home. No kidding. One neighbor with a grudge and a little smarts, and I could have lost my HOUSE.

In fact, there are MANY mortgage agreements that forbid home offices.

If you are starting up a home office, and you have not read the fine print on your mortgage agreement lately…are you in violation of that agreement? That rental agreement? Do you even know what it really says?

This is not only important because you don’t want to get your home snatched out from under you, it’s important if you want your insurance to be valid.

Have you read your insurance policy lately? Do you realize that MANY insurance policies are NULL AND VOID if you are using ANY of your home for office space?

All those disaster stories about artists being left flat when the house drowns or the studio goes up in flames are as much about creators who didn’t do their homework as they are about stingy insurance companies.

If you violated the terms of your insurance agreement, the insurance company doesn’t have to pay. It’s that simple.

Moreover, even if you do manage to get an insurance policy that will cover your home while you have an office, you may have to get a separate rider to cover the office itself. And many insurance companies will NOT insure your home office at all. (…bye State Farm!)

I’ve had to redo ALL of my insurance arrangements to protect my home, studio and home office, so I’ve done a lot of research I will be happy to share with you.

Studio/Craftsman insurance is quite affordable. I have found several places that can give you a measure of coverage for as little as $400 a year, and this will also cover you while your work is at a show or in transit.

Here are a few options. I have not been able to inquire directly with these organizations, so you will have to do that yourself. But the services they offer include studio/craftsman insurance:

The American Craft Council: On site and off site studio insurance, insurance for work displayed at shows and while in transit.

Huntington Block: A wide range of insurance for artists, equipment, studios, exhibits.

Fractured Atlas: This looks interesting. This organization which claims to have 50,000 members offers a wide range of services for artists in all areas of the arts, including health insurance and liability. You will find a link called “Teaching Artist Insurance” which has an option you can click to get more info about Studio Insurance.

Individual teaching artists and groups/organizations of teaching artists who are members of Fractured Atlas can purchase annual general liability insurance at extremely competitive rates. Coverage for studio/office space, property/artwork, and worker’s comp can also be requested in the same application.

We’re not an insurance company and we can’t guarantee any particular rate. However, we can report that to date, members have consistently saved substantially compared to their prior coverage. Most general liability policies (without property coverage) for teaching artists have been about $400-$600.

I am paying less through the Farmers plan because, well, I’m on a farm and having a home office on a farm is normal for farmers. However, I am under insured for the value of my art, and will eventually have to upgrade to a more comprehensive plan, so am doing some research to scope out the possibilities.

Don’t let a flood (already had one) or your house going up in flames leave you flat. Remember, if you have a home office, and your insurance policy does not allow you to work from your home, your ENTIRE HOUSE IS NOT COVERED. Your policy is null and void.

Don’t find out the hard way. Check your policy and check your rental/mortgage agreement. DON’T listen to your agent. In every case, when I inquired directly to my agent, the agent turned out to be wrong. Most other artists I know had the same experience.

Take the time to do the research yourself.

Comments:

Laurie: Bloody hell. That’s downright horrifying. Having a space for a “home office” is touted as a selling point by real estate agents these days more than ever before. A home office is a deductable expense on the federal income tax. A home office is almost a given these days. And it’s all a sham, a chimera? No safety net?

Colleen: Well, I wouldn’t say it is all a sham. I would say that it may not be allowable under your mortgage agreement, to say nothing of the Homeowners Association agreement, or your insurance policy. You need to check. You need to cover yourself if your principle place of business is in your home. And you should never take your agent’s word for it. Read the fine print yourself.

As a matter of fact, after I had lived in my first home for ten years, my Homeowners Association began making sweeping changes to the rules that pretty much made it impossible for me to continue to live there! And they suddenly declared that I would have to pay a whopping $1,000 per month policy to indemnify the entire HA from any damages that might occur from my working in my home.

WTF?

Moreover, something they don’t tell you about that home office tax deduction: if you take it, then this changes your tax situation when you sell your home.

I never took the home office deduction, so it did not affect me. I was able to sell my first home and the entire sale price was exempt from tax (my profit was under the taxable threshold). If I had declared the home office deduction, I would not have been able to take the entire exemption.

Very important safety tip if you intend to sell your home. Are you going to save more money by taking the deduction, or will you save more money by being able to make the sale on your home tax free?

If you do not intend to sell, might as well take that deduction. But the pennies you save now could cost you big time later.

With more and more people worksteading, people need to check their contracts and be careful where they choose to live.

This goes double for self publishers.

While you may be able to be exempt from many zoning problems as a writer, those exemptions do not apply the minute you become a publisher, one of the numerous landmines aspiring self publishers fail to consider when they dream of publishing their own comic book.

Arlnee: This is one of the reasons that, while my meager self pub income is enough to have me filing my Schedule C dutifully every year (royalty income) I do not take any deductions or claim a home office. This also keeps me from the conundrum of, if I operate at a loss for a certain amount of time, it’s no longer write-offable and becomes a “hobby” and it’s not a hobby dammit

I’m convinced that this is why financial matters are made of math: to confuse the writers who are made of words. There comes a point where you just throw the calculator aside and say “the savings is not worth the spins it’s putting my head through”.

Colleen: Hi Arlnee.

I’m glad you brought that “conundrum” up. It’s no conundrum. It’s an urban myth.

The myth is that you had to show a profit over a certain period of time or your business would be declared a hobby.

That’s just not the case. There is no formula, no rule.

All you have to do is prove that you materially participated in and tried to run a profitable business. You don’t have to show a profit 3 out of 5 years, or anything like that.

I have found MANY sites that make this claim. It is simply NOT TRUE. All you need is a “profit motive”.

Here’s an article at MSNBC that you may want to read.

http://articles.moneycentral.msn.com/Taxes/TaxShelters/TheUltimateTaxShelterYourOwnBusiness.aspx

Go ahead and take those deductions for business expenses, even if you don’t take the home office deduction. If you only declare $5,000 a year in business deductions, that is a tax savings of about $1,500 a year. Use that tax saving and put it in a non-taxable retirement fund.

DO IT.

There is NOTHING stopping you here.

You don’t need to show a profit AT ALL. Trust me on this. Self publishing sure taught me that lesson!

Read the article, get out your receipts, and take those deductions to which you are entitled for 2007. Those deductions for the self employed INCLUDE 50% of your health insurance and 50% of your self employment tax.

THAT ADDS UP.

You have the legal right to take these deductions. Take them. There is no reason for you to be paying taxes you don’t have to pay.

Even if you only made $1,000 in royalties that year, you may have used reference books, your computer, and had many other deductions, including a partial deduction for the use of your phone.

You are legally entitled to deduct every penny of these things, and you may show a loss of thousands of dollars which could give you a good refund over the next few years, enough to save or use to help promote your work and expand your writing options.

And that may increase your ability to write and promote your work, enabling you to make more money as a writer in future.

In fact, the IRS EXPECTS that new businesses will lose money for YEARS before they show a profit.

BTW, I sincerely suggest that if you have not taken the deductions you were fully entitled to over the last couple of years, get on the ball and file an amended return for the last couple of tax years.

It will cost you nothing but time, and you have the LEGAL RIGHT to take these deductions.

Don’t live in mortal fear of the IRS or an audit. If you have your receipts, then you have nothing to fear. In all my years, I have never been audited, and I showed a loss for several years.

Even if you get audited and don’t have all your receipts (Some of my records were destroyed int he flood last year), then you can show average deductions over time that can prove your case. Read the article. You’ll see what I mean.

I know one self publisher who had NO IDEA he could deduct his losses.

He thought, like you, that losses triggered audits and his work could be declared a hobby.

Hogwash.

He filed an amended return and took $5,000 in deductions for a previous tax year, giving him a nice, fat tax refund.

Arlnee, if you have those receipts for 2006, and can document which of them were business related – even as a portion of your use of the internet and so on – then I strongly recommend you file an amended return for 2006, and whatever you do, take your 2007 deductions. Deductions include convention attendance, and I know you have been to major shows like San Diego. That’s deductible! You go to meet potential clients and to promote your work, right?

I will have to do a post that covers what you can deduct. If you examine the wide range of things you can deduct, I guarantee you’ll find a few thousand dollars a year that you weren’t declaring from your taxes.

That’s your money and you have the right to take those deductions!

Bill: Well, actually, as someone who used to prepare taxes part-time I’d say it’s more a misunderstanding of difficult-to-follow IRS language. As the MSN article you referenced stated, the IRS presumes that an activity that has made a profit in three of the last five years is a business, hands down. But what people fail to grasp is that activities that have not been so profitable may also qualify as a business, depending on whether they meet other criteria.

Anyone of a mindset to wade through this crap may find the following IRS publication illuminating:

http://www.irs.gov/pub/irs-pdf/p535.pdf

Or you may just decide to tear your own eyeballs out.

But seriously, in this day and age there’s no reason to take tax advice from Uncle Joe, or even a newspaper article. The IRS Web site is chock full of information, and if you have trouble understanding it, you can always call them. And yes, there have been reports of IRS agents giving bad information. But as a former part-time tax preparer, I’ll let you in on a dirty little secret: there are a hell of a lot of tax professionals who don’t know what they’re talking about either.

Colleen: OK Bill, spill. Tell us everything we need to know to dodge the IRS.

And yeah, tax professionals who aren’t so professional? And how. Paid a tax lawyer $2,000 to do nothing for me.

Very vexed.

But thanks for pointing out where that tidbit of misunderstanding came from. Very cool of you.

Do not fear the tax man!

He’s as confused as you are.

Anyway, I can’t always recommend the IRS site as a THE place to get info, simply because it is extremely difficult to search for info, it is overwhelming, and the legalese doesn’t always make sense. And if IRS agents can’t understand it, that’s saying something.

It doesn’t hurt to read articles from people with professional experience who can distill information down for you. Such as the simple info that you do NOT need to show profit 3 years out of 5 to be considered a business. It’s just not true. It may be a tax pro guideline, but it’s not a fact.

Take the deductions to which you are entitled whether you make a profit or not. You have to do is show you materially participated in the business, ran it with a profit motive, and kept records. There’s no requirement that you showed a profit.