Q&A; : Deductions on Home Office Use Are Still Possible
Accountants, teachers, contractors, doctors, salespeople and small-business owners can still get some tax mileage out of their home office expenses, despite a far-reaching Supreme Court ruling last week that struck down one anesthesiologist’s home office deductions. The question is whether it’s worth the effort.
“A lot of us believe this is an audit trigger item”--one of a handful of issues that’s likely to kick your return out of the stack for a more careful review by an IRS agent, says Bernard Oster, partner at Cohen Primiani & Foster, a Los Angeles business and tax law firm.
Taking the deduction may have been worthwhile when tax court decisions were going in favor of taxpayers--as they had been for the last several years. But it often doesn’t make sense when the issue is likely to result in a protracted fight. And the Supreme Court’s decision in IRS vs. Soliman virtually guarantees a fight for anyone whose circumstances are similar.
“You can’t spend money on attorneys and CPAs on the home office deduction,” Oster adds. That would surely cost you more than you save.
Here’s a look at what the Soliman decision does to home office deductions and how savvy taxpayers may want to handle their working-from-home expenses.
Q Who was Soliman and why can’t he write off his home office?
A Dr. Nader E. Soliman is an anesthesiologist who spent 30 to 35 hours a week sedating patients at three suburban Washington hospitals. None of the hospitals provided him with office space for billing, telephone calls and other necessary paperwork. So he used the spare bedroom of his McLean, Va., home 10 to 15 hours a week for that purpose. He claimed a $2,500 deduction on the basis that his home office was the “focal point” of his operation.
The court ruled that billing was no more important than anesthetizing patients, so Soliman had to meet other tests to get the deduction. Did he meet patients in the home office? No. Did he spend the bulk of his workday there? No.
No deduction.
Q Does this affect my home office deduction?
A It depends on what you do, where you do it and why. Doctors, sales representatives, general contractors and others who do the bulk of their business elsewhere, but who use home offices for paperwork, are likely to have their deductions disallowed. However, those who spend the majority of every workweek in the home office, meet clients there and can prove the home office is essential to their livelihood are likely to still win if challenged over a home office deduction.
Q Does this increase the chances I’ll get audited if I claim a home office deduction?
A If you took this deduction, your chances of being audited were always better than average. This just makes it more likely that you’d lose the deduction, once audited. Taxpayers check a box on their return when they’re claiming a home office deduction. That makes it easy to program IRS computers to kick such returns out of the automated process for individual review. Additionally, the IRS acknowledges that home office deductions are a hot button because they’ve “traditionally been abused,” notes Robert Giannangeli, an IRS spokesman. Whenever a return is audited, the IRS agent looks for home office write-offs, Giannangeli adds.
Q What’s a home office deduction worth? A Surprisingly little. Aside from a small share of your utility and maintenance costs, you’d get to write off a total of $7,500 over 27 years if you used a 150-square-foot room in a $300,000, 3,000-square-foot house as a home office, says Harvey Gettleson, tax partner at Ernst & Young in Los Angeles. In other words, you get a write-off of about $278 per year for a total annual tax savings of $86 for a person in the 31% federal tax bracket. (Gettleson is assuming that half the cost of the house is land value, which can’t be written off.)
Q What about all the money I spent on office equipment?
A Deductible. And you don’t need to claim a home office to do it. Typewriters, computers, fax machines, copiers and the like can be depreciated as business expenses. If you are self-employed, they’re fully deductible, Gettleson says. If you’re employed by a company, they’re subject to the 2% miscellaneous itemized deduction floor. In any case, they will probably net you a better annual savings than the home office because they can be depreciated over shorter periods--usually between five and seven years.
Q What if I’ve already claimed a home office deduction?
A Even if you haven’t been audited, you should probably start compiling documentation to ensure that you can prove the business use of the office. “The wisest people who deduct this are those who have anticipated proving it,” says Oster.
Q What will I need to prove a legitimate business use?
A The office must not be used for any purpose other than business; you should meet clients or business associates there; you must operate the office for your employer’s convenience, not your own, and you’re better off if the office is detached from your home, such as a separate garage or studio.
Q Any other suggestions along those lines?
A Don’t keep televisions, VCRs, beds and other personal items in the home office. Keep a log--or calendar--that details appointments and their purpose. And get a letter from your boss saying that you have no office space at work and your home office is required for your job, Oster suggests.
Q Where can I get additional information?
Ask the IRS for a copy of Publication 587, “Business Use of Your Home,” by calling (800) TAX-FORM. Specific questions can be answered by the IRS’ tax information hot line at (800) TAX-1040.
