May 2004 Monthly News Update

Can You Deduct Home Office Expenses?

by Richard J. Eckstein, CPA, MST, Director of Tax Services

So I'll set up an office in my home and I'll be able to "write off" my house operating expenses as a business expense. You all know the rule - "if it sounds too good to be true it probably is". A home based business can offer a way to deduct some of your expenses, however, there are strict rules that govern what and how much you can deduct.

You may deduct your home office expenses if you meet any of the three tests described below:

Separate structures: The easiest test allows a deduction for the costs of a separate unattached structure on the same property as your home - for example, an unattached garage, artist's studio, or workshop - that is used as a home office. To qualify for the deduction, the separate structure must be used exclusively and regularly in connection with your business.

Home office used for meeting patients, clients, or customers: You may deduct home office expenses if you use the home office exclusively and regularly to meet or deal with patients, clients, or customers in the normal course of your business. You have to meet with them inside your office - telephone meetings (calls) won't do the trick.

Principal place of business: If you use your home office exclusively and regularly as a principal place of business, as the main location of a business that you operate, you may deduct the expenses. If your home is the sole location of your business, and you supply services (or sell goods) from that location, then you automatically meet the principal place of business test. However, if you perform some business functions inside and outside of your home, determining where your principal place of business is located can be difficult. Business people or professionals who manage their business from a home office, but provide goods or services outside the home cannot satisfy this test. Home office deductions have been denied for many individuals, such as doctors who work at a clinic but do their paperwork at home, salespeople who use their home office as a base but sell outside the home, and owners of retail businesses or tradespeople who do their business paperwork at home. Fortunately, relief is on the way! Scheduled to go into effect in 1999, these types of business people and professionals will regain the right to their home office deductions.

So what do you get if you qualify for the home office deductions? You may take business expense deductions for:

• The direct expenses of the home offices, such as the costs of painting or repairing the home office, and

• The indirect expenses of maintaining the home office, such as part of the utility costs, depreciation, insurance, etc., for your home, as well as part or your mortgage interest, real estate taxes, and casualty losses.

There are limitations (of course!). The amount you may deduct as home office expenses is subject to several limitations. In addition, several years ago, the IRS introduced a special form (8829) which must be filed to claim the deduction. If you are getting the idea that home office deductions aren't a do-it-yourself proposition, you're right! The rules are quite complex BUT they can be rewarding for those who know how to apply them properly. We can put you on the right track quickly and efficiently.