Redefining the home-office deduction

Nation's Business, Sept, 1997 by Gloria Gibbs Marullo

"I tell my clients to keep a log of how many hours they spend in their home office versus on site with clients," says Brown. "There's no clear-cut rule on what proportion of time you must spend in your home office, but if a client is ever audited, at least he'll have documentation."

Another gray area is telecommuting. Growing numbers of employers are permitting employees to work from home at least part of the time. "In theory, employees as well as the self-employed can take the home-office deduction," says Brown. An employee, however, must show that his or her use of a home office is for the employer's convenience -- a standard that "for years few if any employees could establish," Brown adds. Telecommuting presents "a classic case where technology and tax laws are not moving in sync," she says.

For those who do qualify for the homeoffice deduction, however, the tax savings can be considerable. Sandy Botkin, a former IRS attorney and president of the Tax Reduction Institute, a firm in Germantown, Md., that conducts tax research and education, estimates that the actual tax savings for a sole proprietor with a qualified home office in a $150,000 home is about $2,500 per year. That includes a proportionate share of costs such as mortgage interest or rent, depreciation, heat, electricity, cleaning, insurance, and security systems.

"Many people are afraid the home-office deduction will trigger an IRS audit," says Brown, "but if there's a tax deduction for which you are legitimately entitled -- and you have the records to support the deduction -- you should take it. If you don't, it's like walking into a store and volunteering to pay more for the merchandise."