HOME OFFICE : Setting Up Shop in the Same Place You Live

In her Newport Beach office, Karen Mason prepares a tax return for her accounting practice while cooking a roast in the oven.

Mason’s home office allows her to performs such feats.

She operates her business from the corner of the dining room in her one-bedroom apartment. Her office consists of a computer and typewriter on an L-shaped desk, surrounded by filing cabinets and shelves stuffed with tax books. Potted plants screen the office from the rest of the apartment.

“People say, ‘Boy, are you lucky,’ and others think I’m wealthy because I seem to have so much free time,� Mason said, an enrolled agent tax specialist. “But what I like best (about working at home) is there is no commuting, I can set my own hours and it’s tax-deductible.�

If taxpayers meet basic criteria, they can deduct a percentage of their mortgage interest or rent, property tax, maintenance, utilities, security, pest control, insurance and depreciation. The amount will be based on the percentage of their home used for business.

Ed Beckerley, a CPA with Deloitte & Touche in Costa Mesa, explained the basic home office deduction this way: “You are entitled to deduct the portion of your home expenses that are directly attributable to the cost of running an office in your home. You are eligible if your home office is used exclusively and on a regular basis as either your principal place of business or where clients or customers meet to do business with you. Other criteria may apply, depending on your particular circumstances.�

Deductions are limited to the gross income from home office activity.

“During the recession, people laid off from their jobs are doing business out of their homes,� Beckerley said. “Their home office deduction is perfectly legitimate as long as there is income from the business.�

In addition to the home office itself, taxpayers may qualify for other deductions depending on the type of business they operate from their home. For example, a plumber could also deduct garage space for parking his truck and an additional area for storing plumbing pipe and materials.

However, it must be the principal place of business. Doctors who practice in hospitals but administer their practice at home, teachers who grade papers and prepare for class at home, and musicians who perform in public areas but write music and rehearse at home do not qualify, according to rulings by the tax courts.

Home offices required by taxpayers’ employers are generally not deductible. However, if a home is the West Coast office for an East Coast employer, it may be deductible.

Tim Morgan, an enrolled agent with Abacus Tax and Financial Services in Santa Ana, warns that if taxpayers are planning to sell their home within three years, they may not want to take the deduction even if they are eligible.

“While the home office deduction enables you to depreciate your home, depreciation increases your taxable gain on the sale of your home and it reduces the portion of your gain that is available for rollover in a new residence,� Morgan said.

Unless taxpayers are certain they meet the basic criteria of earning income from operating a business in their home, they should consult a tax specialist to determine their eligibility.

Most of the information needed to compute a home office tax deduction is the same as for the basic tax return. The only special information that the tax preparer may need is the square footage of the home, the number of rooms and square feet dedicated to the home office and related storage.

Not all taxpayers, though, are taking the deduction on the advice of their accountants. Allen and Margret Burger, who devote 500 square feet of their 1,200-square-foot Huntington Beach mobile home to offices for their engineering and sales business, are awaiting clarification. The U.S. Supreme Court announced recently it will make a decision about the home office deduction, but the ruling is not expected until next year.

To help determine eligibility and compute home office tax deductions, the Internal Revenue Service created Form 8829, Expense for Business Use of Your Home, and Publication 587, Business Use of Your Home, both new for the 1991 tax year. These are available at IRS offices or by mail. For more information, call the IRS at (800) 829-1040.