Deducting home office expenses

Black Enterprise, Sept, 1996 by Donald Jay Korn

Deduct part of your electric bill? Write-off refrigerator repairs? Depreciate your house? Such tax advantages aren't easy to sustain but you can enjoy them if you spend at the right time in the right place.

Suppose you live in a 10-room house and set aside one room exclusively for business use. You may be able to write off 10% of your utility bills, deduct 10% of home maintenance costs and even take depreciation deductions based on 10% of your home's value. However, you must follow the rules carefully if you want to avoid a disallowance.

"The IRS has established a two-part test for approving home office deductions," says Joseph Odzer, tax manager in the Chicago accounting firm of Ostrow Reisin Berk & Abrams. "Your deduction will depend on the amount of time you spend in that office and the relative importance of the work you do there."

The key question the IRS asks is whether your home office is your "principal" place of business. If it is, and it's only used for business, you're entitled to home office deductions. However, you won't be allowed any write-offs if your home office is not your principal place of business.

"To qualify for these deductions, you must show that you spend more business time in your home office than anywhere else," says Richard Wagman, tax manager in the Washington, D.C., office of the accounting firm of Coopers & Lybrand. "You also must show that the functions performed in the home office are the most significant events relative to that business."

If you're a graphic artist, for example, you might work at home but also spend time meeting clients. As long as the at-home work is the most significant part of your business, you can qualify for home office deductions by showing that you spend more time working at home than at other locations.

On the other hand, if you're a consultant who spends time at home doing paperwork but generally performs services at your clients' premises, you won't be entitled to a home office deduction. Your on-site work will be considered more important than your at-home work. "For an individual who performs services at customers' job sites," says Wagman, "the use of a home office for management and planning won't be deductible."

Some savvy strategies may help you get the rules on your side. "The tax code permits home office deductions for separate structures," says Odzer. "An office in a room above your garage will likely qualify." Another technique is to set up a separate business, limited to home-based activities. Then, you can take home office deductions for that business, up to the amount of income generated by those activities.

For example, suppose you're a consultant who travels to various companies, presenting seminars. The administrative work you do at home won't qualify for a home office deduction. However, if you create a separate company to prepare a manual that you sell to your clients, and do this work from home, the revenues from that company may be offset by home office deductions.

"Keeping good records is always crucial to sustaining a home office deduction," says Odzer. "And don't be reluctant to take the deductions if you're entitled to them. Establishing a home office may also enable you to take more auto-related deductions." As Wagman notes, if you have a home office that's your principal place of business, daily transportation expenses incurred in traveling between your residence and other work sites are deductible.

You can get more information on deducting your home office expenses by reading IRS publication No. 587, Business Use of Your Home. Call 800-829-3676 to order. You can also get some more tax tips from the IRS Web site (www.irs.ustreas.gov). To hear a tape recorded message on the subject, call 800-829-4476, and punch in No. 509. Finally, to speak to an IRS representative, call 800-829-1040.