IRS Scrutinizes Functions, Time Spent at Work
Today many people “telecommute,” or work at home at least some of the time.
The IRS allows you to deduct costs for the business use of your home if you meet certain requirements. There is some complexity on this subject, which I hope to clarify here.
Generally, you can deduct the costs of a home office in any of the following situations:
1. You are self-employed and the home office is your principal place of business; or
2. You work for someone else but the home office is for the convenience of your employer; or
3. You use the home office to meet with patients, clients or customers in the normal course of your business; or
4. You use space in your home to store inventory used in your trade or business.
Also, your home office or storage area must be used on an “exclusive and regular” basis for your business to qualify for a tax deduction.
– Designate A Specific Place For Working
“Exclusive” means that you have a specific room or space used solely for your business activity. If you designate part of the living room as an office this can result in denial of deductions because other family members are allowed to use it. I recommend designating a separate room, and to lock the room so that it is not available for use by other family members.
“Regular basis” means that your home office is your principal place of business. This is tricky for people who use more than one location for their work.
As a lawyer I have a downtown office and a home office, so I have to establish that I spend a substantial amount of time at my home office, that my home office is essential to my business, and that it’s the focal point where services are performed and income is generated.
The IRS will scrutinize the functions performed at each location and the time spent at each place to determine if your home office qualifies as the principal place of business.
You can take deductions if your home office is used on a regular basis to meet with patients, clients or customers , and your business requires you to meet or confer with clients or patients, or to deliver goods or services to customers. Occasional meetings at home are insufficient to establish tax deductions.
You should keep records as to the regularity of your use of a home office, such as a log of telephone calls, meetings or other work you perform there. You should also keep records of canceled checks, receipts and other evidence of expenses paid for your home office.
– Storage Space Must Be Used Regularly
You can take tax deductions for space used to store inventory or products sold in your business. The storage space must be separately identifiable, such as part of a basement or a storage room. It must be used regularly, and must be the only fixed location for storage.
There are other requirements, so you should consult an expert to determine if your particular circumstances qualify.
Some people need a home office for administrative or management activities of their trade or business. This qualifies for a tax deduction if you do essential organizational, administrative or management activities at home , as distinguished from activities that generate income , and you have no other fixed location to attend to such details.
Even if you conduct some paperwork in a car, hotel room, or even at your regular office, that doesn’t affect your ability to claim a home office deduction for administrative activities.
If you are not self-employed, your home office qualifies for a tax deduction only if it is for the “convenience of the employer.” That means the space in your home is required by the nature of your job, not just that it’s helpful, appropriate or convenient for you.
– Show That No Other Location Is Available
For university professors, concert musicians, writers and actors, it’s important to show that there is no other location available for performing functions of your job such as writing or individual practice.
For instance, a professor might show that the university office is noisy, or that it’s unsafe or must be shared, and is therefore unsuitable for research activities. In these cases the home office is not for your personal convenience, but is for the convenience of the employer.
A home office can qualify for deductions just by having a separate area of your bedroom used exclusively as your home office. However, I recommend that you mark off your home office or storage space by a permanent partition such as a wall, door or curtain, to more clearly show the specific area used.
What expenses are deductible for a home office? You can deduct the cost of computers, utilities, homeowner’s insurance, lawn care, repairs and maintenance of the residence as a whole, security systems, mortgage or rent payments, and depreciation deductions , with apportionment of costs based on square footage of the office space compared to the property as a whole.
Deductions for a home office are limited to the gross income you earn from work done at the home office in each year. If costs of the home office are greater than the income you generate, you can’t use that excess to offset income from other sources.
For instance, a writer generating $5,000 of income during the year from work at the home office, but who incurs $l0,000 in costs, cannot deduct more than $5,000 from gross income.
– Separate Structures Expand Deductions
However, you can have unlimited tax deductions if your home office is a free-standing structure separate from your dwelling, such as a studio, greenhouse or barn.
That way, you are entitled to unlimited deductions regardless of income generated from that office in that year.
Taking home office deductions is a “red flag” that can make it more likely to be selected for an IRS audit. Consult a tax expert to support your compliance with the tax laws.
Cohan is a writer and attorney based in Los Angeles, who is currently working on a book on Aristotle’s ethics.