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Home office tax breaks
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January 21, 2000: 5:41 a.m. ET
IRS eases up on deduction allowances, professionals to benefit
By Staff Writer Shelly K. Schwartz
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NEW YORK (CNNfn) - If you're a doctor, sales professional or repairman, tired of not getting respect from the IRS, this could be your lucky year.
Starting this tax-filing season, the federal government is making good on its promise to broaden the definition of what technically constitutes a "principal" place of business.
For business owners who meet clients off-site but do their paper pushing at home, the long-awaited leniency means they'll finally be able to claim as a business expense the portion of their home they use for work-related activities.
It could also mean thousands of dollars each year in new write-offs.
"Most home-based business owners already qualify for the standard home office [tax] deduction," said Larry Montague, a partner with big five accounting firm Deloitte & Touche. "This new tax break is really going to impact the professionals who meet clients outside their home, but aren't able to do administrative work, such as billing and scheduling, elsewhere."
Then and now
The new home-office deduction rules are part of the Taxpayer's Relief Act of 1997, which also brought to bear the higher education tax incentives commonly referred to as the Hope Scholarship Credit and the Lifetime Learning Credit.
Estimates on how many new taxpayers will be able to claim the deduction vary widely. But the Congressional Joint Committee on Taxation projects the tax break will take a $250 million bite out of the nation's budget each year.
"It's easier for home offices to qualify as a principal place of business now," said IRS spokesman Don Roberts. "Telecommuters wouldn't be able to claim this, since they are employees, but I'd see this being useful for anyone whose primary work is selling products and traveling outside their home to meet clients."
What's changed?
Under the new tax rule, you can take the deduction if your home office is used "exclusively and regularly for administrative or management activities of your trade or business."
To qualify, you must also have "no other fixed location where you carry out substantial administrative or management activities of your trade or business."
Prior to the tax change, professionals who used their home office strictly for administrative or management activities were not able to claim that deduction, since their home office was not technically considered their "principal place of business."
The new deduction rules are Congress' response to a Supreme Court case in 1993 involving an anesthesiologist who treated patients at various hospitals and did his administrative work at home. He ultimately was denied his request for a home-office deduction, because the law did not then recognize his office as his principal place of business.
The case upset so many on Capitol Hill and in the business community at large, that the law was changed four years later.
(See the Legal Information Institute summary of the decision).
"This is much fairer for taxpayers," Montague said. "I think everyone was upset by that Supreme Court ruling."
The bottom line
So, how much can it save you? That's depends.
The size of your deduction depends on what percentage of your house, measured in square footage, you use for business.
"I've seen (previous home office) deductions of anywhere from $2,000 to $10,000," Montague said.
If you determine, based on square footage, that 12 percent of your home qualifies as your principal place of business, you'll be able to deduct from your business expenses 12 percent of your utility bills, your homeowner's insurance, the depreciation on your home, mortgage interest and real estate taxes.
It's a good idea to check with a professional tax adviser before claiming anything.
Word of warning
And, as always, don't forget to play by the rules.
Montague said you should calculate your deduction percentage carefully, using exact measurements and square footage.
"I've seen anywhere from 5 percent to 30 percent used as a percentage," he said. "Some people are very aggressive."
Keep in mind, though, that home office write-offs are widely perceived by tax professionals as red flags for an IRS audit. Be prepared to back up your deductions with blue prints and math.
Failure to do so could result in penalties for inaccurate claims, which can range from a slap on the wrist -- back taxes owed plus interest -- to fraud penalties. That can tack another 75 percent onto your unpaid tax bill.
"It all depends on the facts and circumstances of each case," Roberts said.
He noted the IRS has access to information that enables the agency to double check allowable home-office deductions on its own. 
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