The Home Office Deduction: A Taxing Question

Contributed by Elaine Landau

If you have your own business, you know that it is always better to play it straight when it comes to deductions. When my friend introduced me to her accountant, Louie the Loophole, and said he did amazing things, I didn’t doubt it for a second. Then again, I ran, not walked, to my computer to e-mail friends for a good tax advisor recommendation.

In general terms, home-based businesses can take deductions including, and not limited to, advertising, cost of goods sold, insurance costs, payments to independent contractors (which involves 1009 forms), accounting fees, legal fees, travel expenses, vehicle expenses, credit card interest for business expenses, business account bank fees, employment taxes, business-related magazines, and dues to business-related organizations. Your accountant or tax advisor should have a more comprehensive list, but this gives you an idea.

So, can you take a home office deduction? The truth is that “home office” is a loose term that means different things to different people. To some, it means keeping your paperwork on the washer while using your laptop on the dryer. That may be considered a home office by that worker, but the IRS would not be as impressed.

Basically speaking, you can deduct office expenses, rent or lease payments, utilities, real estate tax paid on business property; local assessments paid for business property repairs and maintenance, and casualty losses. Those kinds of deductions are pretty clear. It’s just when you claimed a business-related meal and entertainment when you ate a pizza and watched a video in your office, you may have entered Louie the Loophole’s shaky domain.

If you are worried about being audited, then you might want to review your circumstances. If you are claiming a business office in your home, that space is designated for conducting your business…only your business. You can’t keep your ironing board up in there because that is the only place it will fit. You cannot store the boxes of old clothes you intend to give to charity. Your business office cannot be used for anything other than conducting your business.

If your business office is in your home, you cannot claim all your utility expenses against your office. Your office is a portion of your home; therefore you can claim an equal portion of your utilities.

Your computer must be used for your business only in order to be a real deduction. If the kids use it for games and homework, it is not exclusively business equipment. You should consult a tax advisor to be sure if any of these hard and fast rules apply to you and the state in which you live.

If you use your computer to educate yourself and the courses are directly related to your business, you are still using the machine for business purposes, even though you are learning at home. If you have basic computer education, but you need to do research for a client on the Internet, or complete a or tutorial, it is all business related.

If you want to start a home business but intend to keep working for a company as a wage earner until your own business can pay all your bills, you should probably consult a tax advisor while you are setting up your home business, not after. You can deduct gas and vehicle repairs if your home business includes traveling to meet clients, but you cannot take those same deductions for commuting back and forth to your job. Good record keeping is key to avoiding confusion. And if you are ever audited, clearly documenting your home-business expenses will eliminate a lot of confusion.

The best advise is to keep a strictly-business home office. As soon as you blur the lines or try to be clever, expect the IRS to red flag your return and take a closer look at your deductions.