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Of telework and taxes

By Jeff Zbar
Net.Worker, 08/16/01

The first of two part series

Quick, a pop quiz: Your employer has no dedicated office space for you at any of its locations, so you telework. Is your home office tax deductible?

The short answer is yes, says Doug Stives, CPA, a partner specializing in individual and small business taxes with Wiss & Company, a Red Bank, N.J.-based accounting firm.

Part 2: Does deducting your home office send a red flag to the IRS?

"It's one of the best-kept secrets in business," he adds.

Long thought to be the bastion of the home-based entrepreneur, the home office deduction presents possible tax savings for select teleworkers as well, says Stives, who prepares teleworkers' tax returns each year.

Whether you telework full or just a few days per month, your home office space can be deductible under certain circumstances. If your employer doesn't provide you with customary, dedicated workplace available each day, then your home office is deductible. Even hoteling, a practice in which workers are provided a different workspace each time they visit the corporate office - may qualify the worker for the home office deduction, Stives says.

On the flip side, a home office is not deductible if the worker has a dedicated corporate office available and still the employee chooses to telework for personal convenience, though. Even cubicle space that has become available with layoffs could be viewed as suitable space, thereby disallowing any deductions for the teleworker's home office. And if you telework just because you don't want to commute three hours each way each day? That won't fly with the persnickety I.R.S.

"The word we use is it may be 'fatal,' " warns Stives.

The math involved with deducting your home office space is similar to that used by the home business owner. It is calculated based on the percentage that the office and dedicated storage area makes up of the entire home. For example, in a 2,000-square-foot residence, a 200-square-foot office would allow deductions of 10%. That 10% is applied to mortgage interest or rent payments, property taxes, insurance and utilities.

To deduct a home office, no door is required. Where previously the law required the space be "dedicated and exclusive," Congress's 1997 changes to the U.S. Tax Code amended the I.R.S.' requirement for "exclusive" space. As of 1999, when the changes went into effect, the deduction also can be applied to workspaces not located in dedicated rooms, but which are used primarily for business, like a workspace in a corner of the den or bedroom.

Regardless of whether you qualify for or take the home office deduction, or even if you telework from home part time, office furniture and equipment may be tax-deductible business expenses if the expense exceeds 2% of the employee's adjusted gross income, Stives adds. Business telephone and fax/data lines and the bona fide business calls made on them, often are completely deductible, providing another reason to invest in dedicated telephone or broadband connections.

Keep your receipts, track your work-at-home days and ensure your home office passes muster with your accountant. Stives advises that a well-considered strategy will help "chip away" at I.R.S. arguments against teleworkers taking the home office deduction.

"If you're taking the deduction correctly, you will prevail."

Next week: Part 2 - How and why to take the home office deduction.