Reaping the tax benefits of having an office in your house


September 02, 1991|By Adriane Miller | Adriane Miller,Special to The Sun

People who work at home seem to have the best of all worlds.

They work when they want, dressed -- or not -- as they want. They watch ice storms through the window while others are gingerly driving to their Jobs. Best of all, they enjoy enormous tax write-offs.

"That's just a myth," says Frank Hajek, a Baltimore-area certified public accountant. "People think because you have an office in your home you're going to get these tremendous write-offs. It's just not true."

Besides, he says, as a home-based entrepreneur or employee, "your primary focus should be to make money, not just to spend money to decrease taxable income."

Operating an office from home does offer some tax advantages, as long as profit-making remains the objective and detailed records are kept. Here are some tax tips that apply generally to home-based businesses -- consult a tax professional for detailed information.

* It's perfectly legal to deduct expenses for office space in the house, says Al Hannan, a home-based CPA and assistant professor of business at the College of Notre Dame. However, he says, the IRS insists that the space is a dedicated business office. It can't double as a dining room, sewing room or game room.

"What many people try to do is use one of the kid's bedrooms or the basement where they keep the Nintendo as an office," he says. "But it can't be [deducted as an expense] unless it is a room used exclusively for business."

When Diane Shinn moved from Pittsburgh to Baltimore, finding an apartment with room for a dedicated office was essential. Ms. Shinn had arranged with the University of Pittsburgh's Katz Graduate School of Business to "telecommute" to her job as director of communications.

She says her husband "had this tiny studio apartment at the Ambassador," in Baltimore, "and we knew there was no way we could fit my stuff in there. We really liked the building though. We found a one-bedroom apartment there with a sun room, a perfect work space."

The room is about 7 feet by 13 feet with plenty of room for files and work storage. Ms. Shinn uses it exclusively for her work and can deduct it as a business expense.

* A portion of the cost of utilities also may be deducted.

"If you've got a 100-square-foot office in a 2,000-square-foot house, one-twentieth of household expenses can be deducted," Mr. Hannan says. Such expenses may include gas, electricity, trash collection, water, sewer and homeowner's insurance.

* Improvements made to a dedicated home office -- wallpaper, paint, carpet, lighting fixtures -- may be deducted as business expenses.

"If you paint the whole house you can consider the room [a percentage] of the house and deduct that percentage of paint," Mr. Hannan says. He recommends taking precise measurements of the entire house, then the office, and deducting only the percentage belonging to the office.

* Personal equipment and furniture transferred to business use, such as a dining room table that becomes exclusively an office desk, may be deducted as a "Section 179" expense. Mr. Hajek says the value of the item may be estimated at about 50 percent of its original purchase price.

"The advantage is you get the immediate tax write-off," says Mr. Hajek. "The 'election to expense' cannot take your business income below zero -- you can't use it to take a loss. But you can use it [as] shelter income from self-employment."

Home-employed people who expect higher income in future years may be better off to depreciate costs of their office equipment over a few years, says Mr. Hannan. "Your income is usually nominal in your first few years [of self-employment] so it's often better to spread out depreciation than take one expense all at once."

* To qualify as a business expense, your telephone must be for business only -- no personal use, Mr. Hajek says. You may, however, deduct toll charges on your personal line if the calls were made in pursuit of business. Business phone charges may be deducted even if you don't have an exclusive area in your home for an office.

"You do have to prove that those charges weren't to call your mother-in-law," Mr. Hannan says -- good reason to keep a phone log.

* Keep meticulous records of all expenses. Mr. Hannan suggests home-employed people file receipts from business in a dozen manila folders.

"Each month they can put the receipts in a new folder, or put all stationery expenses in one folder, all advertising, expenses in another. It makes it much easier at the end of the year when you do a Schedule C for your tax return," he says.

* Keep a diary of auto usage and activities. "Record any trips related to business: visiting your attorney, CPA, visiting customers and suppliers, visiting the copy shop," Mr. Hajek says. "Record who, what, where and when. Then you can deduct bTC costs for the auto, or the standard mileage rate.

"Normally if you're not using the vehicle at least 50 percent for business, you're better off using the standard mileage deduction," now 27.5 cents per mile.

* Take advantage of tax credits due you. Starting last year, self-employed individuals are entitled to a credit for paying self-employment tax, which is more than 15 percent of their income.

A self-employed individual who makes $30,000 will pay about $4,500 in self-employment tax. Now, that person may claim half of what they pay, about $2,250, as a credit against their salary, reducing the ultimate tax burden.

* "Segregate business and personal funds," says Mr. Hajek. "Set up a business account. If you spend personal funds on a business expense, reimburse yourself out of the business account.

"If you're going to take a personal loan for business purposes, there has to be a clear indication that it is for business," for the IRS to allow the interest to be deducted.

"The more you mingle business and personal activity," he says, "the harder it is going to be to capture" deductions at tax time.

Adriane Miller is a free-lance writer who often covers business issues for The Sun.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.