Meetings & Conventions: Planner's Portfolio February
BY JULIAN BLOCK
Taxing the Home Office
The IRS comes down hard on those who claim their house is
Thinking of taking a home office as a tax deduction? Not so
fast. Just because you can walk 20 feet from your bedroom to your
work area and conduct business in your bathrobe doesn’t mean the
nook with the computer qualifies as a bona fide office. The IRS is
suspicious of these deductions because audits turn up ample
evidence of taxpayers taking advantage. But if you can clear the
distinct hurdles and claim a legitimate home office, you will be
entitled to deduct a portion of your home-insurance premiums,
utility bills and depreciation for home owners or a percentage of
The first test requires that you use your home office regularly and
exclusively for business. Generally, that means a separate room.
The IRS concedes that it can be part of a room if the division is
clear and you can show no personal activities take place there.
IRS regulations disqualify a dual-purpose room, however. Suppose
you conduct a full-time operation from a room, putting in 12 hours
a day, but when you are elsewhere, your youngsters occasionally use
the office PC to play some games. Result: The kids erase your
Regulations don’t stomp down on all personal activity, though.
According to IRS sources, the agency neither prohibits personal
conversations on an office phone nor insists that you rush outside
when family members want to ask questions. As a guideline, allow
personal activities only to the extent they would be permitted in
an office building.
What constitutes regular use? Usually, it’s sufficient to work
in the office a couple of hours every day. But the IRS would
dispute a deduction if you use an empty room infrequently for a
purpose incidental to your business. Just how the IRS construes
such use depends on the particular circumstances.
TIME IS NOT OF THE ESSENCE
Interestingly, there is no requirement that it be a full-time
endeavor. Deductions can be taken when you have a full-time job
elsewhere and moonlight from your home office.
A tougher standard applies when you bring work home from your
“real” office. You must show that the at-home work is required by
your employer and is justified by the nature of your job. You might
have to prove this with a letter from your boss saying,
essentially, “No home office, no job.”
There’s no write-off allowed when you use part of your place to
read financial publications or clip bond coupons, for instance. The
only exception, cautions the IRS, is for someone whose investing
activities qualify as a trade or business, a stipulation that few
THE MAIN STAGE
Even if you’ve passed these “exclusive and regular” tests, you’re
not home free. In IRS-speak, your home office also has to be the
principal place of your business. That means you have to meet
clients or customers there regularly or spend most of your business
hours and conduct actual work there not just paperwork and phone
calls do not count. That’s how the law stands through the end of
this year. Beginning with Form 1040 for 1999, to be filed in 2000,
less stringent rules kick in.
The current standard resulted from a 1993 Supreme Court decision
that drew heavy criticism from the growing number of people who use
technology to work from home, including downsized employees who
became their own bosses and started home-based businesses. In the
lawsuit, the Supreme Court upheld the IRS’s disallowance of a
deduction for Dr. Nader Soliman, a self-employed anesthesiologist.
He spent two or three hours a day in the spare bedroom of his
McLean, Va., apartment, where he kept billing records and patient
logs. The Court said it was irrelevant that the converted bedroom
was Dr. Soliman’s only office. It held that his home office was not
his principal place of business because the chores he took care of
there were less important than his real work, i.e., administering
anesthesia at three local hospitals.
Tucked into the 1997 tax act is a provision liberalizing the
home-office deduction, starting with returns filed in 2000. Under
the expanded definition, a principal place of business includes a
home office used for key administrative or management activities,
provided there is no other fixed location where you conduct such
activities for that business.
Thus, assuming the other requirements are met, the deduction
remains available to someone who (1) carries out administrative or
management activities while traveling (e.g., from a hotel room or
car), or (2) does occasional paperwork or administrative tasks at a
Julian Block is a tax attorney based in Larchmont, N.Y. This
article was adapted from Frequent Flyer magazine, a sister
publication of M&C.
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