You can't win - the trap of the home office depreciation

On the advice of an accountant, I depreciated my home office. Bad mistake. When you sell, there are lots of headaches. Grrr. The infuriating part is that if even if you deducted expenses, but not depreciation, the IRS taxes you as though you claimed the depreciation.

Between Digital Rights Management and the IRS I'm ready for a life of crime.

Depreciation Appreciation 101: The Ins and Outs of Deducting for a Home Office - New York Times

By DAMON DARLIN

... The I.R.S. allows you to take a home office deduction if you meet certain conditions, and about 30 million taxpayers manage to meet them. The rules are pretty clear for the self-employed. The home office has to be the primary place of business, used exclusively and regularly for that business. If your office fits that definition, you can write off a percentage of the utilities, the mortgage, repairs and maintenance and, of course, all the office equipment and furniture stuffed into it.

... when you sell your home for a profit you have to recapture the depreciation you took on that office and pay taxes on it. For example, say you bought a house for $500,000 and used 10 percent of it for an office. (You figure that out by measuring the square footage of the office and dividing that by the square footage of the entire house.) You are allowed to depreciate 10 percent of the purchase price of the house each year using what the government succinctly calls the "39-year commercial property straight time depreciation schedule." That adds up to about $6,000 in depreciation over five years.

You later sell the house for $750,000. The $250,000 in profit is excluded from tax. But the $6,000 you took in depreciation over the years must be reported as a gain on Schedule D, in the gains and losses section. It is taxed at a 25 percent rate.

What if you take other home office deductions and skip the depreciation? Nancy Mathis, an I.R.S. spokeswoman, says that will not help. "Even if you don't take this depreciation, it will be treated as if you did when it comes times for calculating the basis of the home sale and capital gains exclusion." The I.R.S. will not say why it makes that assumption, but accountants surmise it is because the government cannot keep track of home-office owners who might depreciate some years and then stop right before selling in hopes of avoiding the extra tax.

Here's something to think about: If you rent, you avoid this entire frustration when claiming a home office deduction.

Now for the more complicated question: Remember that the government allows a single person to exclude $250,000 of capital gains on a home sale and a married couple, $500,000. If you claimed 10 percent of your home as a home office and wrote that off over the years, when you sell the house, do you owe capital gains tax on 10 percent of the profit? This is what is tripping up Mr. Sigal, the chemical engineer.

The government used to say, you owe the tax on the portion of the residence that is used for commercial purposes. But it gave taxpayers a little gift when a new rule took effect in 2002. The home office inside the structure of your house is no longer considered commercial property. Everything is covered under the capital gains exclusion. If your accountant is not up to date on that, ask him or her to check it out.

Indeed, Mr. Sigal does not owe as much as he was told and a new accountant confirmed that he owes taxes on only the $2,000 of recaptured depreciation.

But in changing the rules, the I.R.S. also made things more complicated. Funny how that happens. That no-tax rule applies only if the home office is part of the structure of the main residence. "If it is a separate building," said David Gitel, a New York City tax accountant, "you are out of luck." When you work out of a detached garage or shed, you must compute the profit that is attributable to that structure and pay a capital gains tax of 15 percent on it, plus the tax on the depreciation recapture.

In that case, what you can do is make what is called a 1031 exchange. Don't do it without guidance from an accountant, but buy another piece of commercial property within 190 days and you can avoid paying taxes.

Given how complicated it is, many people might ask whether it is worth the bother to deduct a home office on Schedule C, the form for private businesses. Would it be easier to just write off most of the expenses as nonreimbursable business expenses on Schedule A?

You probably are deducting your interest payments and your property taxes on Schedule A anyway. The benefit to using Schedule C - you'll need two other forms, 8829 and 4562 - is that the mortgage, the taxes and other costs of running the home office decrease the income you made from your home-run business. That means there is less that is assessed the 15.3 percent self-employed Social Security tax. "You get more out of it on Schedule C," Mr. Gitel said.

But if you don't qualify for a home office, Schedule A is the place to deduct business expenses. A good tax accountant will make easy work of this. Tax software, like the Premier edition of TurboTax, can do it, too, and will also walk you through the process of depreciation recapture in a series of interview questions.

You can deduct other things if you have a home business. In addition to a share of utility bills, you can deduct an extra phone line, any business equipment you buy or the business use of the car.

You can hire your spouse as an employee and provide medical insurance. He or she puts you on her medical plan and your business swallows the cost as a business expense, reducing your taxable income. Retirement accounts for private businesses are also quite generous and another good way to shield income.

As for Mr. Sigal, he has a home office in his new condo. But this time he is cutting his taxes by deducting business expenses that were not reimbursed by his employer.

In Minnesota, when you sell, you're asked if you ever took the home office deduction. I'm told savvy people give the same answers as Judge Alito -- I can't recollect that.

I do like the bit about the spousal insurance though.

Alito and Roe vs. Wade

As a resident commie socialist pinko democrat, I feel compelled to say something about Alito and Roe vs. Wade.

First, I like the comments that this is now Kennedy's court. He's the swing vote as the court moves right. Kennedy is usually considered a libertarian. We could do much worse. Alas, I get the feeling not everyone on the liberal bloc is necessarily immortal.

Secondly, since Kennedy has affirmed Roe V. Wade, it will probably survive. The GOP should be immensely relieved. Irregardless of whether one thinks abortion should be funded by medicaid, or available to the wealthy only, or illegal entirely, Roe v. Wade is hugely valuable to the GOP. It's a primary rallying point for much of their base.

On the other hand, cynical Dems, suffering in our dim dungeons, would secretly, oh so secretly, love to see Roe v. Wade go away. To the non-specialist it seems like have a rather peculiar legal foundation, and losing Roe is a big win for the Democratic base. The fight would then shift to the federal and state legislatures, and I think Dems would win some red states as a result.

Alas, the GOP knows they need Roe. It won't go away.

Bated or baited breath?

Questions & Answers: Bated breath. What a fun site. I may never come across it again, but I do love finding these chance things.

Is it ethical to download music I own?

Allofmp3.com is a Russian site that provides mp3 encoded music. The copyright holders get nothing for this music. The musicians get nothing. Unsurprisingly, it's very cheap.

Whether or not it's illegal to download that music (in Russia, murder is almost a misdemeanor), it's certainly unethical.

But what about music I own on old cassette tapes or LPs? It is ethical and probably legal for me to digitize that music and load it in iTunes. Is it ethical (forget legal) for me to download the mp3 of the music I own from allofmp3.com instead of wasting hours on the digitizing?

Which is more likely to lead to future revenue to the license holders -- music on tapes I don't listen to, or music I listen to that leads me to purchase new CDs? On the other hand, Allofmp3.com's main mission is theft, so my money would be supporting their primary mission. On the other hand, the amount of money coming to them from people like me would always be insignificant.

Hmmm. I could ask my friend Lin, but shortly after getting the words 'allofmp3' out of my mouth I would need plastic surgery ...

Comments on Capitalism: Gilded Age III

Obsidian Wings writes about health care in the new China, and someone comments:

... Capitalism is a system for finding local minima. It optimizes for the local system. I think communications and interconnectivity may widen the scope of the optimized domain, but it still feels too local.

Capitalism delivers local truths. The weak are not worth investing in. Economic output usually declines after age 40. As 'The Economist' recently noted the maxim 'survival of the fittest' has always been more true of Capitalism (where Spencer first applied it - approvingly) than of nature (where the long grinding calculations of evolution optimize for body-bound genes, gene pools, and emergent interdependent environments).

Can capitalism deal with the risks of social unrest? What if the poor rebel? The weak may not be powerless as a mass movement. Crushing the weak effectively (see history China, Egypt) may not be consistent with capitalism, and it may be distasteful.

Capitalists like George Soros and Warren Buffett prefer a future that doesn't require crushing the weak. Others may feel that super yachts and island fortresses are a better solution.

I don't know how this will play out. If I had to bet, I'd bet we'll retreat from the new Gilded Age and we'll see a return to a social net that will include adequate (fully depreciated) health care.

Gilded Age II

Joseph Nocera writes in NYT Business (TimesSelect):

... from 2000 to 2003 the total compensation of the five best-paid officers of all publicly held companies amounted to 10 percent of corporate earnings.

The futures market in American Socialism is up another five points. However the futures market in 'Servants are US' is up 100 points.

BTW, contary to predictions that the TimesSelect paywall would fall, it's holding. Interestingly, putting this kind of commentary behind the paywall has the presumably unintended consequence of lessening its social impact. That may account for the disproportionate grown in 'Servants are US'.

Personally, the more the Times goes behind the PayWall the more I'm inclined to pay. I didn't care for much of the OpEd (David Brooks is a smart moron, whatshername is a juvenile), but as the PayWall expands it does cover things I do care about. I don't mind paying for valuable content, they just weren't offering enough of value up until now.

The Gilded Age

Where can you park a 200 million dollar toy?

The New Megayachts: Too Much of a Good Thing? - New York Times

... From Miami to St. Thomas, new marinas with names like Super Yacht Harbor and Yacht Haven are being developed with berths for boats as long as 450 feet, roughly half the length of a 2,000-passenger cruise ship. To keep megayacht owners busy - not to mention spending - while their boats are parked at the marina, developers are surrounding their ports with high-end restaurants and retail shops. To entice yacht owners and their entourages to stay longer, they are also building luxury condominiums and five-star hotels.

As a result, a new real estate concept is beginning to emerge centered on the lifestyle of the boating elite. Island Capital Group in New York is transforming an existing port, Long Bay Harbor in St. Thomas, into a megayacht marina called Yacht Haven Grande with 48 slips averaging 120 feet in length. Twelve luxury condominiums, four waterfront restaurants, high-end shopping and a private yacht club around the 32-acre harbor are scheduled to open in the fall.

I'd wondered how the ultrawealthy would separate themselves from the trogs. A floating city should do nicely.

The end of the inheritance tax was very good for the yacht business. American socialism is up 10 points on the futures market.

Breeding the long-lived dog: Step One

I have long hoped breeders would focus on breeding a dog with a long, healthy, lifespan.

Modern veterinary care has added 2-3 years to the canine lifespan, but many mid-sized breeds die at about age 10-12 (the lifespan of some giant dogs is criminally short).

How hard would it be to get to a 20 year dog? One could start with the australian cattle dog. At least one of these dogs is thought to have lived 29 years. True, they are not ideal family dogs, but that's what breeding is for. Mix in some European lab and some other sociable laid back breeds with relatively long lifespans and good health. In 30 years we could be well on our way ...

On taking companies public

I thought this rule of thumb was quite interesting. (HIStalk is read religiously in my industry. That's a sort of blog influence that doesn't show up in the newspapers.):

An Exclusive Interview with Jon Phillips, Managing Director of Healthcare Growth Partners (HIStalk)

It seems that going public makes small companies worse once they fall into the never-ending quarterly earnings cycle.

The objective of most companies is either to be sold or go public. Sometimes a company is happy just to make money and not grow, but not often. The pressures increase exponentially on a publicly traded company. Even just trying to go public makes you so focused on financial results that you lose sight of the strategy.

To go public, you need to be a $50 million company. If you’re a $20 million company, you might go out and make acquisitions just to get bigger, even though they don’t follow the strategy. Sometimes companies cut back on services or support just to pretty themselves up for a sale.

My standard advice for companies is to run the business as if you’ll be running it independently with no extra capital and no buyer. Then, if something good happens, you can always build on that. You don’t try to position the business for sale or for an investment and then find you’ve got an asset without much worth. Focus on the business. The rest of that stuff will come.

Working class wages in Britain - 1300 to 1840

From Brad DeLong:

Brad DeLong's Semi-Daily Journal: The Condition of the Working Class in Britain, 1300-

Data built by Greg Clark on real wages coupled with population estimates.

I read this as showing slow improvements in technology from 1300 to 1600 offset by the coming of the 'little ice age.' Thus from 1300-1600 when population went up real wages went down, and vice versa. After 1600, with the climate no longer deteriorating, improvements in technology get you a more favorable population-real wages tradeoff. After 1700 the speed at which the tradeoff moves left accelerates ('agricultural revolution') and after 1800 it accelerate again ('industrial revolution').

See also the picture on the left of this page.

Sick child with very painful legs - think meningitis

A sick child presents. Do they need:

1. a lumbar puncture?
2. blood cultures and observation?
3. blood cultures and IM antibiotics, f/u 24 hours?
4. treat as benign viral illness ...

BBC summarizes a Lancet article on early signs of meningitis. I'll have to look for more informative synopses of the article, but the 'unable to stand due to leg pain' sounds like it could be possibly distinctive enough to shift one's focus from blood culture only to culture and puncture. The circumoral pallor seems subtle (especially in non-Euros) and the cold hands and pale skin seem pretty nonspecific.

I just wonder how much that one relatively specific finding would really add by itself ...

Orcinus channels a right wing lust for lynching

Orcinus has collected a nice set of right wing lynch and murder fantasies. It's a good reference to keep at hand should one ever run into complaints about "extreme" rhetoric from "left wing" blogs or newspapers.

These people are nasty loons.

Google Earth is still staggering

My wife and I are in our mid 40s. At dinner the other night we were trying to imagine what the world might look like in 20 years, taking the median assumption that it would change less than one might expect. So no climate crash, oil exhaustion, teenage bioweapons, gray goo nano, reengineering brains, China bust, ocean exhaustion and (especially) no sentient AI. For that matter no meteors or super volcanoes, alien visitors, or massive suboceanic landslides. Ok, so gas is $20/gallon, but I'll have a really trick trike.

The median assumption is not unlikely. I have a hunch that our inter-connected world is increasingly a self-reinforcing system, that shows some emergent properties of homeostasis and healing. Even incompetent governance of the world's most "powerful" nation may be corrected by system level effects. After all, if I were to be transported from 1986 to 2006 I'd probably not notice many differences on the surface. I might notice it was hard to find a payphone and that people seemed to talk to themselves quite a bit. Ok, so that's a bit weird.

But then there's Google Earth. That still manages to astound. I played with it on my PC at work, but it really is impressive on my iMac at home. The overlays of photographs and links to wikipedia articles have added an entirely new dimension since I last looked. It gives me a wee sense of the future shock I got when my friend Paul Kleeberg showed me Gopher [1] at a family medicine meeting @ 1992-1993.

I do need to contribute some twin cities photos. We are very under-represented.

[1] Wikipedia claims Mozilla Firefox 1.5 is the only mainstream browser app to still include Gopher support. It was added after 1.0. Odd!

Update 10/11: I edited my original to link back into some earlier related notes of mine, and to strengthen the case for the median prediction.

Mirror neurons and their alternative uses

When we watch a person doing something, we create an internal simulation of their actions using the same cortical structures required for the observed action. We use that simulation to predict the person's intent and emotional status. So say the "mirror neuronists".

What is the relationship to sleep and dreaming? What is the relationship to the observer effect that some say collapses quantum envelopes? What alternative uses could some brains put that network to? Since dogs are supposed to be uniquely good at anticipating human action, how much of their brains are mirror neurons?

Cells That Read Minds - New York Times
January 10, 2006
By SANDRA BLAKESLEE

... The monkey brain contains a special class of cells, called mirror neurons, that fire when the animal sees or hears an action and when the animal carries out the same action on its own.

...The human brain has multiple mirror neuron systems that specialize in carrying out and understanding not just the actions of others but their intentions, the social meaning of their behavior and their emotions.

The discovery is shaking up numerous scientific disciplines, shifting the understanding of culture, empathy, philosophy, language, imitation, autism and psychotherapy.

Everyday experiences are also being viewed in a new light. Mirror neurons reveal how children learn, why people respond to certain types of sports, dance, music and art, why watching media violence may be harmful and why many men like pornography.

Found in several areas of the brain - including the premotor cortex, the posterior parietal lobe, the superior temporal sulcus and the insula - they [mirror neurons] fire in response to chains of actions linked to intentions.

... "When you see me perform an action - such as picking up a baseball - you automatically simulate the action in your own brain," said Dr. Marco Iacoboni, a neuroscientist at the University of California, Los Angeles, who studies mirror neurons. "Circuits in your brain, which we do not yet entirely understand, inhibit you from moving while you simulate," he said. "But you understand my action because you have in your brain a template for that action based on your own movements.

"When you see me pull my arm back, as if to throw the ball, you also have in your brain a copy of what I am doing and it helps you understand my goal. Because of mirror neurons, you can read my intentions. You know what I am going to do next."

... Language is based on mirror neurons, according to Michael Arbib, a neuroscientist at the University of Southern California. One such system, found in the front of the brain, contains overlapping circuitry for spoken language and sign language. [jf: see also sign language and the evolution of reading]

In an article published in Trends in Neuroscience in March 1998, Dr. Arbib described how complex hand gestures and the complex tongue and lip movements used in making sentences use the same machinery. Autism, some researchers believe, may involve broken mirror neurons. A study published in the Jan. 6 issue of Nature Neuroscience by Mirella Dapretto, a neuroscientist at U.C.L.A., found that while many people with autism can identify an emotional expression, like sadness, on another person's face, or imitate sad looks with their own faces, they do not feel the emotional significance of the imitated emotion. From observing other people, they do not know what it feels like to be sad, angry, disgusted or surprised.

... Nevertheless, a study in the January 2006 issue of Media Psychology found that when children watched violent television programs, mirror neurons, as well as several brain regions involved in aggression were activated, increasing the probability that the children would behave violently. [jf: another recently published functional imaging study has greatly strengthened the connection between observing violence and acting violently]

People who rank high on a scale measuring empathy have particularly active mirror neurons systems, Dr. Keysers said.

... Humiliation appears to be mapped in the brain by the same mechanisms that encode real physical pain, he said...

I'm particularly interested in alternative uses of the mirror neuron subsystem. That system is doing a lot of work at a high metabolic cost. In some humans it could be used to provide alternative functions, sacrificing social prediction. Evolution could allow this as a backup system for brain injury, or as an alternative path in relatively secure social environments. Isaac Newton, one of the great geniuses, was famously rude and unempathic. If gene defects cause widespread problems with neural connectivity (one subtype of "autism"), then could the mirror neuron network be partially repurposed? What about those persons missing a hemisphere who still manage to function well?

Update 1/10/06: Hmm. So in multiple personality disorders, do the mirror neuron subsystems take on a life of their own?

Dean is back: PZ Myers tells the tale

I miss Howard Dean. Maybe I'll hear more from him. PPZ Myers (Pharyngula) quotes a Dean interview with Blitzer:

Dean: "There are no Democrats who took money from Jack Abramoff, not one, not one single Democrat. Every person named in this scandal is a Republican. Every person under investigation is a Republican. Every person indicted is a Republican. This is a Republican finance scandal. There is no evidence that Jack Abramoff ever gave any Democrat any money. And we've looked through all of those FEC reports to make sure that's true."

... how pathetic and desperate Wolf Blitzer looks—he tries to spin the whole thing into the usual Republican talking points, and Dean just burns him to the ground with a glance of his laser-beam eyes.

I want to get a T shirt that says "I scream for Dean". To heck with rational, calm, acceptable candidates. I bled for Kerry. I'm ready now for a raving populist. (It helps, of course, that I believe Howard Dean is very much a rationalist at heart.) I'd rather go down in flames with 30% of the vote than rust away with 48% ...