"Getting Down to Business With Office Tax Breaks”

By Robert J. Bruss
Chicago Tribune Media Services

Are you self-employed, or an employee, working full or part time at or from your owned or rented residence? If you are among the more than 25 million taxpayers who work at home, you may be entitled to liberalized home-business tax deductions.

Many homeowners and renters are still not aware of the improved tax breaks for using part of their residence for business use. Beginning Jan. 1, 1999, if you have an “exclusive business area” such as an office or inventory storage area in your residence, you may be able to deduct all or part of applicable home expenses.

Examples of deductible home-business expenses include utilities, insurance, repairs, painting, property taxes, mortgage interest and even depreciation. Qualified renters get to deduct part of their rent, plus other applicable expenses.

Self-employed business owners are the primary beneficiaries of the home-office tax breaks found in Internal Revenue Code 280A. But employees who are expected to work from home because their employers do not provide suitable work space can qualify under the “convenience of the employer” test.

Examples of eligible home-business workers include computer programmers and telemarketers working from their residences. However, if you just enjoy working from home instead of at your employer’s premises, such as a school teacher grading tests and preparing lesson plans, you are ineligible unless your employer does not provide suitable, safe work space. Real estate agents whose brokers provide office desks and phones similarly are not eligible for home-business deductions.

Self-employed taxpayers must be able to prove they operate full- or part-time home businesses. Their residences must either be used to meet or deal with patients, clients or customers or, if they have no other fixed business location, the principal business location that is used for administrative activity.

Presuming your home-business use met either the “convenience of the employer” or self-employed tests, the next test requires an “exclusive business area” that is not also used for personal purposes.

This home-business area can, but need not, be a separate room. Part of a room can qualify, such as an area of your bedroom where you have a desk and file cabinet.

If you qualify, IRS Form 8829 (Expenses for Business Use of Your Home) is the place to claim home-business tax deductions. It calculates partial deductions based on the square footage of your home used for business. The room count method can no longer be used.

To illustrate, suppose you own or rent a 1,500-square-foot house or apartment. Your qualifying exclusive business area is 500 square feet. The result is 33.3 percent of applicable home expenses are tax-deductible. If you rent your residence, 33.3 percent of your rent, plus the same percent of other expenses, such as utilities and insurance, are deductible.

However, 100 percent of some home-business expenses are deductible. For example, you can deduct all of your home-business telephone expenses, as well as the full cost of painting your home-business area. If your business day begins at your home-business location and you used your truck or car for business in 2001, its business operating costs are deductible at 34.5 cents per business mile. Or, if you prefer, you can deduct the actual vehicle business operating expenses.

If you own your residence, you can depreciate the lower of your home’s adjusted cost basis (usually the purchase price, plus capital improvements added during ownership) or its market value on the day home-business use began.

If you bought business equipment for your home business, such as a computer, fax machine or copier, which was placed in service in 2001, you can deduct up to $24,000 of the cost.

If your home business did not produce any taxable profit, you can’t deduct your home-business expenses.

Please consult your tax adviser for more details.

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