Publetariat Contributor, attorney and tax expert Julian Block has generously allowed us to reprint this excerpt from the newly updated, 2013 edition of his book, Easy Tax Guide For Writers, Photographers and Other Freelancers.
Thinking of taking a home office as a tax deduction? Not so fast. Just because you can walk 20 feet from your bedroom to your work area and conduct business in your bathrobe doesn’t mean the nook with the computer qualifies as a bona fide office.
Home-office deductions aggravate the IRS. Audits turn up abundant evidence that lots of writers mistakenly claim these deductions. In fact, an aggrieved agency has gone to court repeatedly, winning support for its strict stand in rejecting write-offs for spaces supposedly set aside as home offices. So whether you’re sorting out home-office complexities for the first time or are an old hand at it, don’t go too far.
Internal Revenue Code Section 280A allows work-at-home writers to claim home-office deductions only if they pass a series of tests. You must use a portion of your home exclusively and on a regular basis for work in your business. It has to be your principal place of business.
TIP: Arranging things to pass the tests lets you transform otherwise nondeductible personal expenditures (a portion of everything from home-insurance premiums to repairs to utility bills to depreciation if you own your house or a percentage of your rent) into deductible business expenses.
“EXCLUSIVELY” MEANS JUST THAT
The IRS is a stickler about what constitutes exclusive use. It insists that you use the entire area—whether a single desk, a room or an entire floor—only for business and nothing else. Use the home office for any personal, family or investment activities, and you forfeit all rights to home-office deductions.
IRS revenue agents and office auditors are at ease when scrutinizing a deduction for an office in a room that is closed off from all non-business activities. They remain at ease when the office is just a small part of a room as long as you clearly separate the business portion from the rest—by a partition, perhaps. The burden is on you to establish that no personal activities take place within the business area, which accounts for why examiners pounce on deductions for offices housed in studio apartments.
CAUTION: A television in the office is a surefire way to fail the exclusive test—with a possible exception for someone who shows a business need to keep up with the news. Another no-no is when the office is where you stash your cat’s litter box or your children play video games or do their homework on personal computers. Code Section 280A is fleshed out by detailed administrative regulations. The regulations don’t tell revenue agents and office auditors that all personal activities are verboten. Most IRS staffers are reasonable. They don’t mind that you had personal conversations on office phones or computers. And they don’t insist that you should have rushed outside whenever family members needed to ask questions or Fluffy craved some Meow Mix.
TIP: An appropriate standard for your at-home office: Permit personal activities only to the extent they’re permitted for someone who’s an employee in an office building.
HOW DOES THE IRS DEFINE “REGULARLY”?
Because gray areas abound, the regulations set no arbitrary standard for how much you must use the office to pass the regular-use test. Examiners base their decisions on the particular circumstances. Usually, working in the office a couple of hours a day, several days a week proves sufficient; a couple of hours a week probably doesn’t pass muster. While the regulations allow some leeway, look forward to a disputed deduction if you use an otherwise empty room infrequently for a purpose that is incidental to your business.
TIP: The regulations don’t require your endeavor to be a full-time business. It can be part time, as when you moonlight from your home as a writer and have a full-time job elsewhere. Examiners don’t care that you devote more time to moonlighting than to your job.
“PRINCIPAL PLACE OF BUSINESS” HAS ITS OWN MEANING.
You aren’t home free just because you pass the “regularly” and “exclusively” requirements. In IRS-speak, the home office also has to be your “principal place of business.” Without the legalese, that means the place where you personally meet clients or customers (phone calls don’t count) or the only fixed location where you conduct your business’ key administrative or management activities. There can’t be another fixed location outside of your home where you conduct such activities for that business. Some IRS-approved examples of administrative or management activities: arranging appointments; billing clients, customers or patients; ordering supplies; maintaining records; forwarding orders; and preparing reports.
TIP: Assuming the other requirements are met, the deduction remains available when you (1) carry out administrative or management activities while traveling (e.g., from a hotel room or car) or (2) do occasional paperwork or administrative tasks at a fixed location other than your home.