Home Office Deduction

Discussion in 'Tax' started by Hans, Dec 17, 2003.

  1. Hans

    Hans Guest

    I'm considering taking the Home Office Deduction since I
    have a complete bedroom set aside for my home office which I
    work out of at least 4 days a week @ 8+ hours per day. I am
    a telecommuting employee of a company that does have a
    corporate office. Here are my questions:

    --Am I eligible for this deduction?
    --How is the amount of the deduction figured?
    --What are the drawbacks of taking this deduction?
    --And is this deduction indeed a "red flag" for an audit?

    Also, if I purchased a whole bunch of office furniture and
    supplies in preparing for this job are those expenses
    deductible if they were not paid for or reimbursed by my
    employer?

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    Hans, Dec 17, 2003
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  2. "Hans" <> wrote:

    > I'm considering taking the Home Office Deduction since I
    > have a complete bedroom set aside for my home office which I
    > work out of at least 4 days a week @ 8+ hours per day. I am
    > a telecommuting employee of a company that does have a
    > corporate office. Here are my questions:
    >
    > --Am I eligible for this deduction?
    > --How is the amount of the deduction figured?
    > --What are the drawbacks of taking this deduction?
    > --And is this deduction indeed a "red flag" for an audit?
    >
    > Also, if I purchased a whole bunch of office furniture and
    > supplies in preparing for this job are those expenses
    > deductible if they were not paid for or reimbursed by my
    > employer?


    Does your employer "REQUIRE" the home office???

    In Writing????

    If not NO!!

    --
    Regards,

    Mark Rigotti

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    Mark Rigotti, CPA, Dec 18, 2003
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  3. "Hans" <> wrote

    > I'm considering taking the Home Office Deduction since I
    > have a complete bedroom set aside for my home office which I
    > work out of at least 4 days a week @ 8+ hours per day. I am
    > a telecommuting employee of a company that does have a
    > corporate office. Here are my questions:
    >
    > --Am I eligible for this deduction?


    It sounds like you will.

    > --How is the amount of the deduction figured?


    The square footage of teh office space as a percentage of
    teh total square footage of the home is applied to the
    household expenses (rent/mortgage interest & property tax;
    utilities, repairs & maintenance, insurance, etc).

    > --What are the drawbacks of taking this deduction?


    For homeowners, you will have some amount of taxable gain on
    the sale of your house as it relates to the home
    depreciation.

    > --And is this deduction indeed a "red flag" for an audit?


    It would be, but more so where the business is consistently
    losing money, or just at breakeven, or the % of office space
    seems unreasonable (like 99%)

    > Also, if I purchased a whole bunch of office furniture and
    > supplies in preparing for this job are those expenses
    > deductible if they were not paid for or reimbursed by my
    > employer?


    Office furniture is depreciated over a number of years
    (generally 7), computers over 5, etc. See Form 4562.

    --
    Paul A. Thomas, CPA
    Athens, Georgia
    taxman at negia.net

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    Paul A Thomas, Dec 18, 2003
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  4. Paul A Thomas <> wrote:
    > "Hans" <> wrote


    >> --What are the drawbacks of taking this deduction?


    > For homeowners, you will have some amount of taxable gain on
    > the sale of your house as it relates to the home
    > depreciation.


    Also, profit on the office part is not excludable ($250K or
    $500K).

    Which leads to a question: Suppose the office is 20%, and
    the total profit on sale (after living there long enough,
    etc.) is $1 million. I'd guess that $800K of profit is due
    to the "home" part, on which the full exclusion can be
    taken, and $200K (+ accumulated depreciation) on the
    "office" part, on which full taxes (recaptured depreciation
    + capital gains) are owed. Is that correct?

    If the full sale price is then spent on buying a
    more-expensive home, what else can be excluded? (If, say,
    20% of the new home is office, how does that affect things?)

    (This is all just curiosity, so if you need facts I didn't
    specify, just make them up.)

    Seth

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    Seth Breidbart, Dec 19, 2003
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  5. Mark Rigotti, CPA wrote:
    > "Hans" <> wrote:


    >> I'm considering taking the Home Office Deduction since I
    >> have a complete bedroom set aside for my home office which I
    >> work out of at least 4 days a week @ 8+ hours per day. I am
    >> a telecommuting employee of a company that does have a
    >> corporate office. Here are my questions:
    >>
    >> --Am I eligible for this deduction?


    (snipped)

    > Does your employer "REQUIRE" the home office???
    >
    > In Writing????
    >
    > If not NO!!


    My first reaction too.

    These days however, many employers are allowing (even if not
    requiring) employees to work at home. In fact one of my
    clients is now allowed this choice. Easy for him, since
    he's a computer person and is very adept at sending and
    receiving files. And he has posed this question to me.

    Maybe IRS wouldn't give a rat's ..... but he "gobmint's"
    policy should be to encourage people to save gasoline and
    energy. (No, let's NOT debate that here) Let's see now,
    any deduction would be sec 162, right? So, would home office
    use by an employee be ordinary? necessary? reasonable in
    cost? I think so. The question then, is what guidance the
    IRS already has on this issue? Does anybody know?

    Christmas Cheer$,
    Harlan Lunsford, EA n LA

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    Harlan Lunsford, Dec 22, 2003
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  6. Harlan Lunsford <> wrote:

    > These days however, many employers are allowing (even if not
    > requiring) employees to work at home. In fact one of my
    > clients is now allowed this choice. Easy for him, since
    > he's a computer person and is very adept at sending and
    > receiving files. And he has posed this question to me.


    Home office use by an employee is subject to the
    "convenience of the employer" test. This test does NOT
    required the explicit directive of the employer, but it does
    require a showing that (in so many words) the job could not
    be done properly without the expense.

    In the case you mentioned, if the employer has sufficient
    office space and facilities for the employee, then I don't
    see how the employee's voluntary choice to work at home
    could meet the COE test. However, if the employer LACKED
    sufficient space, and thus asked a number of employees to
    volunteer to work at home, I think the deal would fly.

    MTW

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    Michael T Wing CPA, Dec 24, 2003
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  7. Harlan Lunsford wrote:

    > Maybe IRS wouldn't give a rat's ..... but he "gobmint's"
    > policy should be to encourage people to save gasoline and
    > energy. (No, let's NOT debate that here) Let's see now,
    > any deduction would be sec 162, right? So, would home office
    > use by an employee be ordinary? necessary? reasonable in
    > cost? I think so. The question then, is what guidance the
    > IRS already has on this issue? Does anybody know?


    Nope, as Michael notes, the United States Congress has.
    Section 280A. That provides the following general rule at
    Section 280A(a):

    "Except as otherwise provided in this section, in the case
    of a taxpayer who is an individual or an S corporation, no
    deduction otherwise allowable under this chapter shall be
    allowed with respect to the use of a dwelling unit which is
    used by the taxpayer during the taxable year as a residence."

    That trumps Section 162 <grin>, so while your Section 162
    argument would otherwise allow the deduction, the above
    blocks up.

    Luckily, Section 280A has exceptions, the most prominent of
    which are found in Section 280A(c) (see (1), (2) and (3)).
    However, following that nice list, you find the clause
    Michael noted which says, in reference to those three terms,
    that "In the case of an employee, the preceding sentence
    shall apply only if the exclusive use referred to in the
    preceding sentence is for the convenience of his employer."

    As Micheal notes, the courts have generally interpreted that
    provision as meaning the convenience of the employer as
    opposed to the convenience of the employee. So you need to
    find an *employer* reason for wanting the employee to work
    from home. Now, if the *employer* had a good reason for
    wanting to "encourage" employees to conserve energy (maybe
    PR??) and had made it a public policy to let it be known
    that their employees worked from home to save energy, you
    might have an argument (though don't expect the IRS to roll
    over immediately on it <grin>). But, otherwise, you may
    have some real problems--and it would be better for the
    employee to be ordered to work from home.

    --
    Ed Zollars, CPA
    Phoenix, Arizona

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    Ed Zollars, CPA, Dec 29, 2003
    #7
  8. "Ed Zollars, CPA" <> wrote:
    > Harlan Lunsford wrote:


    >> Maybe IRS wouldn't give a rat's ..... but he "gobmint's"
    >> policy should be to encourage people to save gasoline and
    >> energy. (No, let's NOT debate that here) Let's see now,
    >> any deduction would be sec 162, right? So, would home office
    >> use by an employee be ordinary? necessary? reasonable in
    >> cost? I think so. The question then, is what guidance the
    >> IRS already has on this issue? Does anybody know?


    > Nope, as Michael notes, the United States Congress has.
    > Section 280A. That provides the following general rule at
    > Section 280A(a):
    >
    > "Except as otherwise provided in this section, in the case
    > of a taxpayer who is an individual or an S corporation, no
    > deduction otherwise allowable under this chapter shall be
    > allowed with respect to the use of a dwelling unit which is
    > used by the taxpayer during the taxable year as a residence."
    >
    > That trumps Section 162 <grin>, so while your Section 162
    > argument would otherwise allow the deduction, the above
    > blocks up.


    Well, yeah, but only, as the statute says, "in the case of a
    taxpayer who is an individual or an S corporation...." I
    guess it comes down to whether "individual" means sole
    proprietorship of any individual including employees.

    My recollection, as you note, is that courts generally seem
    to apply the rule to all individuals, including employees.

    Stu

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    Stuart O. Bronstein, Dec 30, 2003
    #8
  9. Stuart O. Bronstein wrote:

    > Well, yeah, but only, as the statute says, "in the case of a
    > taxpayer who is an individual or an S corporation...." I
    > guess it comes down to whether "individual" means sole
    > proprietorship of any individual including employees.


    I don't recall that there's any distinction in the IRC
    between an "individual" and a "sole proprietor", nor do I
    recall ever seeing a court make this distinction. An
    individual can (and in a majority of cases does) have a
    trade or business. The "special case" that comes up quite
    often is whether that trade or business is carried on as an
    employee (see Section 62 as well as Section 280A). And,
    generally, when the code does refer to carrying on the
    business as an employee, it's to take away or restrict a tax
    benefit.

    --
    Ed Zollars, CPA
    Phoenix, Arizona

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    Ed Zollars, CPA, Dec 31, 2003
    #9
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