CMO Home Office Deduction

Taken from The Minnesota Society of CPAs, " Money Management", July 31, 2000:

Planning to make the most of the home-office deduction

Summer is here and it’s hardly the time you want to start thinking about your 2000 tax return. But if you’re one of thousands of Americans who started a home-based business this year, it might be worthwhile for you to brush up on the recently changed and somewhat more liberal tax rules governing the home office deduction.

More taxpayers qualify for the home office deduction

Prior to January 1, 1999, the home office deduction was not available to self-employed workers who did most of their work at their customers’ locations. For example, musicians, plumbers, computer consultants, and house cleaners were not eligible for the deduction, even if they used a home office for administrative and management functions.

Under the new law, effective for tax years beginning after December 31, 1998, your home office will qualify as your principal place of business as long as you use it exclusively and regularly to conduct business or management activities. This law applies even if you perform a substantial portion of your work away from your home office. If you are billing clients, scheduling appointments, ordering supplies, writing reports, and performing other administrative and management tasks at your home, you can qualify for the deduction – as long as there is no other fixed location where you conduct these activities.

Regular and exclusive use rules remain in effect

Most of the old rules for qualifying for the deduction remain in effect. To be eligible for the home office deduction, the portion of the home used as an office must be used regularly and exclusively for business. Regularly means often, rather than just once or twice a month, and exclusively means exactly that – exclusively – no children doing homework on your PC. Bear in mind that your home office doesn’t have to be an entire room or separate unit, but whatever space you designate must be restricted just to business.

Planning makes perfect

If you think you might qualify for the home office deduction, it’s not too late to start collecting the information you will need to claim the deduction for 2000. Start gathering records of your mortgage or rent payments, utilities, insurance, repair bills, and other qualified expenses.

To support the validity of a home office, keep a log of whom you see, when you use the office, and what you do there. It’s also a good idea to have your home office address on your business cards and stationery. You might consider having someone take a video or photograph you in your office with your equipment and office furnishings, in the event of an IRS audit down the line. Remember, if you claim your home office on your 2000 return, you can generally be audited any time through April 15, 2004. During the three-year statute of limitations, you may move, discontinue the business, or even discontinue the use of your home office. Storing a video or some photographs in your tax file can help to prove that the home office deduction was legitimate for 2000.

Planning to sell your home?

If you anticipate selling your home in the near future, there is a factor you should consider before taking the home office deduction. Current tax law contains a provision allowing married couples to exclude from tax up to $500,000 in capital gains on the sale of a home ($250,000 for single). But since the area in your home that you have designated as your home office does not qualify for that exclusion, any depreciation claimed for a home office must be subtracted from the exempt amount. In some cases, the tax you pay on this capital gain could exceed the benefits you received from the home office deduction.

While recent legislation has liberalized the home office write off, it remains one of the more complex deductions. For this reason, you may want to consult with a CPA or other tax professional for advice on claiming the home office deduction.

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