Residential office tax deductions carry rules

St. Louis Daily Record & St. Louis Countian, Feb 13, 2004 by Mike Nixon

More than 30 million Americans performed their jobs from home last year, and the Bureau of Labor Statistics projects that with the combination of advanced technology, self-employed individuals, contract workers and businesses wanting to cut the cost of office space overhead, this trend should continue into the foreseeable future. With more people conducting business from home, an increasing number of workers are finding it necessary to create residential office space - a move that can prove both more productive and tax deductible under the right circumstances.

Internal Revenue Service spokeswoman Sally Hale noted last week that there has been a steady increase in the number of taxpayers taking residential office deductions. Between 1998 and 2001, the number of taxpayers claiming workspace in their place of residence grew from 1.7 million filers to nearly 2.5 million. It's hard to say how many more people have home offices and do not take the deduction, Hale said.

With tax filing time quickly approaching, Hale recommended that taxpayers look over the qualification guidelines to see if they are entitled to this deduction, which can amount to as much as 35 cents on the dollar savings depending on an individual's tax bracket. But like any other section of the federal tax code, there are rules to be followed.

For some telecommuters, it is not simply a matter of if they qualify for residential office deductions, but taking a survey of one's workspace can provide a measure by which to determine if this specific deduction would work to their advantage.

Hale noted that like any other part of the Tax Code, the IRS has placed exclusions, exceptions and variations on this rule. The foremost requirement is that for any taxpayer filing as an individual cash operation or as a S corporation, a specific portion of one's home must be designated as an area offering exclusive use for business on a regular basis in order to be eligible for this deduction.

Residential office or workspace deductions can be considered if the space being claimed is a principal place of business for the tax filer. Such a location is defined as being space where patients, customers or clients meet and conduct business with the taxpayer during the normal course of operating one's profession. Hale admitted that this rule on the surface might sound simple enough. But it is a little more detailed than what might appear to be obvious. And even if one cannot deduct the office space itself, it does not mean he is not entitled to claim office supplies, telephone use and other work- related expenses.

The mandatory requirement that stands above all others is that the space in question must be used exclusively for work. This is why many professionals working from home recommend making a room into an office, specifically for business, rather than trying to work from the kitchen table just because it is closer to the coffeepot.

The IRS offers as its example of an attorney using a den as an office where legal briefs are written and cases prepared. That room no longer qualifies as a deduction if it is also used as the area where family members watch television or play games. The IRS holds a position that exclusive use refers to the area being where activities that facilitate one's making an income with no other regular use involved.

Assuming that one qualifies for this deduction, Hale explained that one might claim a portion of one's mortgage interest, real estate taxes, insurance, utilities, repairs, security system and landscaping. Real estate taxes and mortgage interest remain deductible by themselves even if an office or other workspace is not claimed.

The IRS has offered a formula in which if, for example, the office space represents 20 percent of a house's total square footage, 20 percent of the home space counts as a business percentage and deduction. That amount can vary based on the size of one's residence and the workspace involved at that location.

Hale offered instruction to be reasonable about claiming a deduction. A red flag will be raised just as high if one identifies workspace the size of a closet as if one attempts to claim 1,500 square feet in a 2,000-square-foot home. While tax advisers note that there is nothing wrong with having a comfortable workspace in the home, they warn not to become excessive in what is being claimed as office equipment.

Another key rule is that the workspace must be established as a convenience for the employer. Just because an employee prefers to work at home it does not mean that a bedroom transformed into office space will qualify as a deduction because it may not be a necessity based on an employer expectations and desires. As with other tax deductions, Hale advises one consult a tax professional before making a residential office claim.