Self-employed get the jitters over tax ruling

January 13, 1993|By Ellen James Martin | Ellen James Martin,Staff Writer

Just say the words "home office deduction," and Jonathan Tyson's antenna goes up.

Were he to lose the valuable federal tax deductions associated with office use of a spare bedroom in his Laurel home, the economic consultant doubts he could stay self-employed for long.

"This is what makes me affordable -- what keeps my rates reasonable. I don't have to pay that huge downtown overhead," said Mr. Tyson, 39, who does economic forecasts for such big defense contracting firms as General Dynamics.

Some 1.6 million Americans claimed home office deductions on their federal income tax returns for the tax year 1991, Internal Revenue Service figures show. And to some -- such as Mr. Tyson -- word of yesterday's Supreme Court decision that would narrow the number of taxpayers allowed to take such deductions brought apprehension.

"I'm concerned any time the government talks about reducing deductions for home office," Mr. Tyson said. Upon hearing of the court ruling, he vowed to check with his accountant to make sure his home office expenses are still deductible.

Although accountants say most taxpayers such as Mr. Tyson who have claimed home office deductions in the past will be allowed to continue doing so, they say it's understandable that the ruling should make some nervous.

"There's a lot of self-employed people right now who are just barely making it, and a lot of them work out of their homes," said Ed Davis, a certified public accountant who runs an accounting firm from the basement of his house in Columbia.

Among the 40 small businesses that Mr. Davis counts among his clients, fully a third took a home office deduction last year -- including several who spend much of their time in the field. In particular, he worries that small electrical, plumbing or heating contractors could be negatively affected by the court ruling, and that it could result in fewer small business start-ups.

"In the beginning, when you're starting a service-type company, the home office deduction is the difference between whether you can make it in the first few years of business or not," said Mr. Davis, who opened his accounting business a year ago.

Doctors, lawyers and other professionals who keep an office in their home yet spend much of their business time in other locations are among those who could be negatively affected by the court ruling, said Paul Bloomberg, a Columbia attorney and CPA who advises a number of clients on tax matters.

"Tax advisers are going to be more careful in advising people on what they can and can't do with home office deductions after this ruling," Mr. Bloomberg said.

At the IRS headquarters in Washington, spokeswoman Gail Ellis noted that, starting with 1991, the IRS required use of a new schedule -- "Expenses for Business Use of Your Home" -- by taxpayers who claim deductions for an in-home office. Previously, those taking such deductions had only to check a box on "Schedule C" of their return.

Those taxpayers who can legitimately claim home office deductions on their federal returns can deduct a portion of their home expenses --including maintenance, utilities, homeowners' insurance, real estate taxes and mortgage interest, according to Ms. Ellis.

While an estimated 1.6 million Americans claimed such deductions for 1991, 2.9 million made claims for business use of their homes the prior tax year, she said.

Ms. Ellis said the IRS was "inundated with calls" relating to the Supreme Court ruling. But she insisted it was too soon to predict whether fewer Americans would claim home office deductions on their 1992 federal returns.

Mr. Bloomberg, the Columbia tax law specialist, said he believes that the IRS has sought to tighten the practice of taking home office deductions in recent years.

"These are deductions that lead to substantial tax savings and have also been subject to substantial abuse," Mr. Bloomberg said. Claiming a home office for tax purposes "is a red flag on the tax return that increases the possibility of an audit," he said.

His advice to taxpayers? "If you're going to tax home office deductions, better make sure you can substantiate that you have a true home office by IRS standards," he said.

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