Home Office Writeoff Tricky but Beneficial
Self-employed people, doctors, small-business owners and others seeking to take the elusive home office tax deduction may find the going a bit easier, thanks to a recent U.S. Tax Court ruling.
But the rules are still tough, and you’ll have to be careful if you want to avoid triggering an audit.
If you qualify, a home office deduction can be quite beneficial. Homeowners can write off a percentage of depreciation, utilities and other operating expenses. Also, once you qualify, you can deduct your costs of traveling from the office to other places of work as business-related travel expenses. And it’s easier to take accelerated depreciation writeoffs on a computer or other office equipment.
Qualifying is the hard part. You must use your home office exclusively--and regularly--for business. Also, authorities have generally maintained that you must generate income from activities in your home office--in other words, it must be the “focal point” of your business activity.
But the U.S. Tax Court ruling last month has somewhat weakened that focal point requirement. The court ruled that an anesthesiologist who had no office in the hospitals where he worked could deduct home office expenses, despite the fact that his income was directly generated by seeing patients at the hospitals. That is because he phoned patients and hospitals, prepared for specific patients, kept records, read journals and performed other activities in the home office.
The Internal Revenue Service had disallowed the deduction on grounds that the doctor did not generate income at his home office. But the Tax Court overturned that decision, saying he could deduct the costs of the home office because it was necessary for managing his business, he spent a lot of time there and no other space was available.
The ruling mean in effect that you don’t necessarily have to meet the focal point test to claim a home office deduction, says Sidney Kess, a New York CPA and tax attorney. Instead, like the anesthesiologist, you can meet an alternative “facts and circumstance” test that determines whether your home is a “principal place of business,” Kess says.
To do that, you must meet three criteria: Your home office must be used to carry out functions essential to your business activity; you must spend substantial time there, and you must have no other location available.
Who can this ruling help?
Kess cites an example of a full-time college professor who has no office at the college where he teaches and therefore must write papers and perform other work at home. The ruling might also help a professional musician who has no office at the concert hall or other locations where he performs and uses his home for practicing, writing songs or other work. An owner of a small business, such as a Laundromat, that contains no space for an office also could qualify, Kess says.
However, you still must show that you use your home office exclusively--and regularly--for business, Kess says.
And if you are not self-employed, you must meet yet another strict rule: You must show that you maintain a home office “at the convenience” of your employer. That means your employer fails to provide adequate office space for you to do your job at the workplace. A sales agent, for example, might claim the deduction if his employer provides no office space to keep logs of sales, make phone calls and the like.
If you think that you can meet these criteria, by all means claim the home office deduction. But be careful. That deduction is subject to great abuse and thus warrants tough IRS scrutiny. Accordingly, it’s one of the primary things that can trigger an audit.
Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot personally answer letters and phone calls. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
