Home-office deduction has pitfalls
BY JOYCE M. ROSENBERG
AP BUSINESS WRITER
NEW YORK - One of the most highly coveted tax deductions for a small business owner is for a home office. It's also an issue fraught with anxiety, because home office deductions have a reputation of being triggers for an IRS audit.Accountants say those fears are unjustified and make many business owners shortchange themselves.
"I have seen a lot of taxpayers not even want to claim it," said Bob Doyle, a certified public accountant with Spoor, Doyle & Associates in St. Petersburg. "It's a very valid deduction, as long as you have valid expenses."
Anyone considering a home office deduction should read IRS Publication 587, Business Use of Your Home, which lays out the parameters under which small business owners can take deductions for using parts of their homes to conduct business.
One of the primary IRS requirements is that your home be your principal place of business, where you carry out regular administrative or managerial functions, or meet with customers or clients. Equally important is that the part of your home you want to take as a deduction be used exclusively for business.
This means you can't deduct part of your home if you already have a fixed place of business elsewhere. And it means you can't deduct an office that doubles as a family room, or the corner of your bedroom where you keep your computer.
The government's treatment of the home office deduction is different from its provisions about a family car that's also used for business. It's perfectly valid to deduct part of your car for business even if you also use it to ferry your children to and from school; that's because Congress approved a more lenient approach for auto usage.
As with many other tax code provisions, there are exceptions to the home office deduction rules. The IRS cites one in Publication 587 - an anesthesiologist who does his administrative work at home. Even though he sees patients at a hospital, he can deduct the home office.
Tax professionals note that the IRS considers all of a business owner's circumstances in determining whether a home office deduction is valid. So, Doyle recalled a client who was able to claim his dining room, which he used exclusively for business.
In general, you can't deduct part of a room unless, Doyle said, "you can show some effort . . . to make a dedicated work area."
That might mean installing a built-in work station that is clearly used for business - and that doesn't contain the family PC for use by your spouse and children.
Another exception cited by the IRS is for a business owner who stores inventory in the family garage. The garage isn't being used exclusively for the business, but at least part of it can be deducted as a storage area.
Once business owners have established that they're eligible for a home office deduction, they should carefully examine their records to be sure they include all the expenses the IRS allows. It's not just mortgage payments and utilities that qualify. So does the money you spend on improvements to your home, and on expenses such as insurance, pest control, snow plowing and your security system. Landscaping and gardening expenses, however, cannot be deducted.
Steven Levey, a certified public accountant and personal financial specialist with Gelfond Hochstadt Pangburn PC in Denver, said many business owners don't take full advantage of their valid deductions.
"They don't look at all the categories" of expenses, he said.
To deduct expenses, you generally need to calculate the percentage of your home's square footage that is dedicated to the office. If it's 20 percent, then you can deduct 20 percent of your qualifying home expenses.
Accountants warn against taking too much square footage, but again, the facts and circumstances of your business will determine whether your calculation is valid. Levey recalled a client who finished his entire basement as a showroom for his company - its only showroom.
Doyle and Levey both said an often overlooked deduction is for depreciation. Normally, a home cannot be depreciated, but the part of the home used for business can be depreciated on a tax return.
Even if you bought the home years ago and only recently turned part of it into your place of business, you can still claim depreciation. However, both accountants noted that if you sell the house, you might then have to report the depreciated amount as a capital gain.
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