There’s a great scene from one of the Seinfeld episodes involving Jerry and Kramer. Kramer comes up with a plan to get Jerry a refund on his stereo that is two years out of warranty. Kramer breaks the stereo in pieces and sends the stereo in a USPS package to Jerry. Since Kramer sent the package to him insured; now all they must do is collect the insurance money from the post office. The following conversation then took place as Kramer was attempting to assure Jerry that the USPS would easily hand over the money:
Kramer: “It’s a write-off for them.”
Jerry: “How is it a write-off?”
Kramer: “They just write it off.”
Jerry: “Write it off what?”
Kramer: “Jerry, all these big companies, they write off everything.”
Jerry: “You don’t even know what a write-off is.”
Kramer: “Do you?”
Jerry: “No, I don’t.”
Kramer: “But they do. And they’re the ones writing it off.
How many times have you heard someone say something like “you can just write that off,” and having no idea what that means, but also knowing full well that they have no clue what they are talking about?
Let’s talk about one of these “write-offs” that affects many of us: the home office deduction. In fact, you may even find that after reading this article that you too may be eligible for this deduction. What’s great about this deduction is that if you do qualify then essentially the personal expenses you already have been paying for anyway can now reduce your taxable income. Since personal expenses are not valid deductions from your taxable income, a home office can be a great way to cut your expenses.
This doesn’t mean that just anyone with an office in HIS home qualifies for a deduction; rather the taxpayer’s expenses must be allowable under the Internal Revenue Service tax code. To qualify for this tax deduction a portion of the home most be used “exclusively and on a regular basis” as either (1) the principal place of business; or (2) a place to meet patients, clients, or customers in the normal course of your business.
Let’s break down this tax code jargon to see how it can practically be applied. The first criterion to focus on is “exclusively and on a regular basis.” With regards to the “regular basis,” there is no minimum amount of time needed to work in that area to be considered regular, as long it’s more than just the occasional use. The “exclusive” aspect is a bit tougher to observe. This means that the designated office area is used only for work on that particular business. So if you work at your dining room table each day and that area is used by the family to eat at night, then you have just lost out on the exclusivity. As a side, if you use the area for multiple businesses, then they must all satisfy the IRS’s definition of a home office or you risk losing the deduction completely.
But where many people make a mistake is that to qualify for a home office deduction, you technically don’t even need to have an office. Your “office” could be a small corner in your living room as long as you can show that it is used exclusively for that business’ purpose. Be prepared to prove to the IRS that this area is used exclusively for business. A good idea is to furnish that area as you would any office with a desk, computer and files. I’ve heard of many “heimishe accountants” advising people to take home office deductions in cases where they didn’t actually meet this exclusivity test. As a general rule to live by, it’s good for your kugel and cholent, to be described as heimishe, but not your accountant, unless of course you have a thing for being audited. We will discuss later how you calculate the expenses based on the area considered to be the “home office.”
Once you pass the “exclusive and regular basis” piece of the test, it now must be considered either: (a) the principal place of business or (b) a place to meet patients, clients, or customers in the normal course of your business. The second test is pretty much self-explanatory. It’s most common with doctors and therapists that maintain an office at home where they see clients. However, the beauty of this requirement is that this doesn’t mean you have to use your home as the prime location to meet with clients. Remember, the IRS’s definition of “regular” just means that it’s used more than just occasionally. So if you’re an attorney with an office in Manhattan but also regularly meets with clients in your home office, then you have just satisfied the IRS’s definition of a home office. Keep in mind that you must physically meet with the clients. Phone calls do not count as meetings for this purpose. Your other option is the first test, which is for the home office to be the principal place of business. A major factor the IRS will look to in meeting this test is to see where your administrative activity is done. For example, a plumber or electrician’s prime work location will be in people’s homes, constructions sites, etc. However, if he uses his home office for his administrative duties, such as filing paperwork and scheduling appointments, then the home office is considered his principal place of business, as long as he has no other office.
Now the question is how much of your personal expenses can you deduct? While IRS prefers you apportion your expenses based on the percentage of the square footage of the home office area in relation to the rest of your home, there are a couple other options available. One of those options are just apportioning based on the amount of rooms. So if you use one room as a home office and you have ten rooms in your house all around the same size, you would just allocate 10% of your expenses to be deducted. Another simpler option is to use the IRS prescribed model of $5 per square foot of your home office area with a maximum of a $1,500 deduction. The advantage to using this last method is that you will not have to breakdown all your expenses by the allocated percentage and list them on your return.
Finally, let’s discuss what kind of expenses can be deducted. This is where you will see how much of an advantage a home office can be. While this is not an all-encompassing list, the most advantageous deductions include deprecation on your home if you own (usually depreciation over a 39-year period) or rent expense if you rent your home, depreciation on any office furniture such as desks and chairs, maintenance and utilities, homeowner’s insurance, and phone expenses. The Tax Court has even ruled that you can deduct lawn care and landscaping expenses in cases where the taxpayer had clients visiting on a regular basis.
The home office deduction is often overlooked as most people tend to think it only applies to the few that work exclusively at home. But as you can see from the IRS’s definition of a home office, it applies to thousands of people that are simply not taking advantage of this very beneficial deduction. If you have any questions about your eligibility for the home office deduction, be sure to ask you accountant.
Daniel Magence, CPA, Esq. is a partner at Pristine CPA Solutions LLC. Pristine CPA Solutions offers tax and accounting services to individuals and small businesses. He can be reached at [email protected].
By Daniel Magence, CPA, Esq
