MONEY MATTERS  MANAGING YOUR BOTTOM LINE    

By Nancy L. Scarlato

Home Run

While business owners are fleeing office parks in droves for the comfort of working out of their homes, Congress seems to be behind the times, especially in light of legislation it passed which makes it extremely difficult for homebased businesses to take tax deductions.  However, legislation introduced last summer aims to clear the path to taxpayers' front doors by liberalizing the home office deduction.  Here are a few of the current guidelines:

Location

The location or office must be your principle place of business.  Here's a little history.  The Soliman decision was a 1993 US Supreme Court case in which the court ruled that even though Dr. Nader Soliman, an anesthesiologist, used his home office exclusively for business and had no other office, the majority of his work was conducted in hospitals and, therefore, a home office deduction was not allowable.  The legislation introduced last summer would broaden this definition of a home office to include the place where the essential administrative or management activities of the business are conducted.

The Office

The office must be used exclusively for your business.  According to CPA E. Martin Davidoff, this means, among other things, you can't call your stockbroker or make any personal calls from the telephone in the room.  And, unless you're in the clothing business, the closet in the office shouldn't be filled with your summer clothes.  On the other hand, as long as you're meeting the requirements, you don't have to use an entire room for business activities.  For instance, you can apportion half of the living room for business use.

Main Page

Not only does the office have to be your principal place of business and used exclusively for that business, but the activities in the home office must also be the most important, consequential or influential activities of the business.  So if you're a plumber who does billing at home, forget the home office deduction; your clients' homes are where your most important work occurs.  If you see clients, that contact must occur at your office or your office must be the place where the greatest share of the business's income is generated.

Consistency

Your office has to be used on a regular basis.  This means that you can't sit down at the dining room table to grade math midterms four times a year and then deduct your dining room as a home office.

Profits

You can't use your home office deduction to put your business into a loss situation.  For example: If you have a $2,000 profit, and taking the deduction reduces your income to a loss, you cannot take the deduction.

While it may seem that taking the home office deduction can create more headaches than it's worth, Davidoff says the good news is that there are a number of businesses that are performing the bulk of their work within the home, and for these businesses the home office deduction is certainly advisable.  Consulting businesses, graphic designers, certain kinds of accountants, freelance writers and telephone salespeople are good examples of home-based businesses that shouldn't have problems taking the deduction.  "You can increase the likelihood of getting this deduction past the IRS by making every effort to get clients to visit you at home and, if feasible, hiring staff to work in your home office," contends Davidoff.

And if the home office deduction applies to your business situation, you are also allowed to take the proportionate deductions or depreciation for such items as utilities, insurance, maintenance and cleaning, furniture, files and computers.

While rumors abound that taking the home office deduction raises a red flag for IRS auditors, Davidoff counsels, "If you feel you're entitled to the deduction, and your business records support this, then by all means, take it."