Home Office Deduction Worth Adjusting For

A few years ago, my boss did me an odd favor. He gave away my desk.

Admittedly, I wasn’t using it much. I had been working from home for nearly six years, buzzing into the office just once a week, mainly to pick up mail. But until that fateful day, I always had my own perch among the other reporters at Times Mirror Square.

But that day, I gained a potential deduction--a fairly substantial one at that. It’s the “home office deduction” that allows you to write off a portion of the cost of owning and operating your home because you conduct business there.

But like millions of other Americans who work from home, I still haven’t claimed the tax break. Why? I don’t quite qualify.

The home office deduction is one of the thorniest breaks in the decidedly prickly U.S. tax code. And in the last few years, it has become even more difficult to touch. That may be why the number of individuals using this sometimes lucrative tax break has been steadily declining, despite the fact that the number of home-based businesses is skyrocketing.

An estimated 24 million people operate full- or part-time businesses from their homes, but only 1.54 million individuals claimed home office deductions in 1994--the most recent year for which statistics are available, according to the IRS.

The home office claims are down from 1.61 million in 1991, 1.57 million in 1992 and 1.55 million in 1993. However, they’re now worth a bit more on average. While the average deduction claimed in 1991 was $1,795, today’s average home office write-off equals $2,029, tax officials say.

What makes a home office deduction so difficult to claim?

First, you have to determine that you use a specific portion of your home exclusively and regularly for work. If you set up your office in the den, where the kids are allowed to play computer games, you’ve nixed your ability to write off the office.

If your home office is exclusively an office, there are more tests to meet. It must be your principal place of business, or where you regularly meet customers or clients, or where the most important part of your work is done.

That “most important part of your work” test is not a joke. Doctors who set up home offices to handle their copious paperwork have been denied deductions based on the argument that the most important part of their job is to meet patients. (One doctor argued that without the paperwork, there was no pay. But he lost.)

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The same holds true for salespeople who generally go to their customers, rather than the other way around. But starting this year, there is a narrow exception for outside sales representatives who use their homes to store samples and supplies, says Susan Jacksack, an attorney with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

In this case, you could get a home office break for a portion of a room--or closet--that’s used exclusively to store these supplies.

If you are an employee, having a desk in your employer’s office is a killer. It indicates to the IRS that your home is not your primary place of business: The primary place of business, no matter how little time you spend there, would be at the employer’s office.

What do you get if you meet all the tests? If you are a renter, you can deduct the “business portion” of your monthly rent and a portion of your insurance, utilities and trash-collection bills. If you own your home, you can deduct mortgage interest and depreciation, real estate taxes and repair costs too.

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Homeowners already get to deduct their mortgage interest and real estate taxes. So, generally speaking, you’re only getting additional deductions for depreciation, repairs, insurance, utilities and other maintenance costs.

How do you determine the business portion of your home? There are several methods. If your home office takes up one room in an eight-room house, you can claim one-eighth of the expenses. Or you can do it by square footage. Your home office encompasses 200 square feet in an 800-square-foot house? One-quarter of your expenses are deductible.

Let’s say, for example, that you’re a renter, paying $600 a month for a two-bedroom home--25% of which is your office. You spend an additional $1,500 a year on insurance, utilities, repairs and maintenance. One-quarter of your annual $8,700 outlay is deductible. Your total deduction: $2,175, which saves you $609 in federal income tax if you’re in the 28% marginal tax bracket.

If you are a homeowner, you get the additional ability to depreciate--over 39 years--the portion of your home that’s dedicated to work. To do this, you have to determine the value of the home--minus the land value--and your depreciation schedule. (The IRS publishes a depreciation schedule in Publication 587, “Business Use of Your Home,” which can be ordered by calling the IRS forms line at [800] 829-3676.)

However, be careful if you take depreciation because, in effect, it reduces the “tax basis” in your home. Simply put, that means you’ll have a larger gain when you sell. Worse, if you claim home office depreciation in the year you sell your house, the portion of the gain that relates to the home office cannot be rolled into a new residence of equal or greater value.

There’s a trick to getting around this, says Jacksack, but if you don’t pay attention, it’ll cost you.

It’s worth mentioning that even if you don’t qualify for--or choose not to take--the home office deduction, you can still get some significant tax breaks when you work at home.

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All business equipment and supplies you buy--desks, chairs, computers, fax machines, copiers, lamps, Rolodex, business publications, paper, staplers and the like--can be either written off in the year they’re purchased or depreciated over five- to seven-year periods.

If you set up a second phone line or pay fees for Internet access for work, those costs can be written off too. In 1996, up to $17,500 in business equipment can be written off outright against your business income.

And you don’t have to shove your kids out of the den to do it.

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THE TIMES TAX GUIDE

* Prepare yourself for the tax season with The Times’ tax guide online. Go to: https://www.latimes.com/taxes/