Rangefinder Magazine

December 2000
How About That Home-Office Deduction?
New Leniency in the Home-Office Rules Can Mean Big Savings for Photographers
by Howard Scott

HE BIGGEST CHANGE in the tax code for this upcoming tax year is the expansion of the home-office deduction. What that means for you is that now you might be able to take the deduction, whereas before you were not able to have this advantage. As home-office deductions could easily run $3–$4000, this change might mean a significant reduction of paper profits and a lowering of tax liability.

A home-office deduction can be taken by the professional photographer if he uses a room(s) in his house or garage for doing the administrative work of his business regularly and exclusively for that purpose. Under the old rules, to qualify, it had to be one’s principle place of business. In addition, there had to be no other place where one could do these chores. In other words, if the home space was a second office away from the regular place of business, one couldn’t use a home-office deduction.

In a famous court case, an anesthesiologist, named Solomon, who worked at three hospitals and conducted his administrative business at home (billing clients, studying client records, planning his workday), couldn’t take a home-office deduction because three hospitals could have given him office space to do his work, even though they didn’t. It’s exactly this situation to which the expanded rules apply.

Under the new rules, a home office qualifies as a principle place of business “if (1) the space is used by the owner to conduct substantial administrative activities, and (2) there is no other fixed location where the owner conducts substantial administrative activities.” In addition, the space must be used exclusively and regularly for business. The critical word is ‘substantial.’ If an owner does most of his administrative work in a home office, regardless of whether he has an office at his place of business or not, is a sufficient requirement. This is a looser interpretation. Now, any photographer who has a home office and does substantial administrative work there qualifies. He/she qualifies even though the business is several miles away and the owner goes there every day. Interestingly, the tax code does not specify what ‘substantial’ means.

Does the owner have to do 50% of his administrative work at home to qualify—70%, 90%? That is left to individual judgment.

To determine if you qualify, you must answer the following statements affirmatively:
• I use a room in my home to do substantial administrative work for my business.
• I do more administrative work there than I do at my place of business.
• The designated space is used exclusively for business.
• I work there regularly and frequently.
• The space looks like an office, although it could have some non-office-like furniture.

If you can answer all in the affirmative, then you probably qualify for the home-office deduction. Check with your accountant. If there is some area where he has doubts, you might be able to change things before the end of the tax season. For instance, if you were using the kitchen for doing paperwork, you might be able to create a permanent office space out of a day room, and use that exclusively for business. Or, if you were in the habit of going to your business in the evenings, you might set up a place at home to do these administrative chores. Or you might pick out several tasks which can be done at home, and arrange to do them there.

The additional kicker this year is that, if you have a home office, you can claim other space you use in your basement or garage to store work materials, even if that space isn’t used exclusively for work. Say you have a home office that is 10% of your house space, but you use an equal amount of space in your garage to store files, then you can take 20% of your home as a home-office deduction.

Of course, if you work out of your house as your principle place of business, then you most likely are already using a home-office deduction. The question you must ask yourself is: can you legitimately take more space?

Have you not counted the storage space in the basement? Well, now you can. Here’s how you will benefit from a home-office deduction. All relevant direct and proportionate expenses are full-deductible expenses to your business. Say you use 20% of your home space for your home office. Then 20% of all house costs, including mortgage payments, repairs, taxes, utilities (not water), insurance, and depreciation are fully deductible. Moreover, if you do repairs to your home office, such as remodeling, they are 100% deductible. That’s a direct cost. So if your total house expenses are $30,000, you receive a $6000 home-office deduction. Even if you only occupy 10% of the house, you receive a $3000 home-office deduction. Many individuals fear taking depreciation because they have heard that such use will have impact when you sell your home. If you stop taking depreciation two years before the sale of your home, it will not have any effect. In fact, depreciation is an excellent reduction because no cash outflow occurs. It is simply normal wear and tear on the house. Moreover, with today’s valuations—the typical house in the U.S. is now valued at $300,000—annual depreciation are significant. A $300,000 home with $75,000 land value will give off an annual depreciation of $5696.

Moreover, every home expense can be part of your deduction. Even lawn care can if you can show that it in some way helps your business. For instance, if clients or salespeople sometimes come to your home office, you can justify this expense as necessary to keep up appearances. If you suffer a casualty loss, such as fire or flood, this expense can be part of your home-office expense. The only obstacle in taking a full home-office expense is the limitation of profit. If your company doesn’t make profit, you cannot take a home-office deduction. Nor can you carry a home-office deduction forward to the next year.

If, in the above example, your business made $50,000, it would now make $44,000 ($50,000 minus $6,000), and your taxes would be reduced by about $1800 depending on your state. That’s an $1800 reduction without spending a cent, because the expenditure is normally incurred in maintaining your house. Your personal taxes will be marginally affected, because on Schedule A, only the portion of mortgage payments and property taxes not allocated to home office will be used. But, on balance, you’ll come out far ahead.

If you are a renter, you are also entitled to take a home-office deduction, if you qualify. In that case, the proportion of rent that covers your business space is the home-office deduction, plus any appropriate utilities, insurance, and tax escalation payments. In the old days, it was said that a home-office deduction signaled a red flag to the IRS. But, now things are different. Know your situation. Be confident that you comply with the above and take your full home-office deduction off business profits. If your accountant is conservative, point out that the new rules permit you to take full advantage of home-office deductions. If he is still doubtful, tell him to study the new rules, and explain why you are not eligible. If he still hesitates, get a second opinion. You want your photography business to succeed. Every dollar you can put in your company’s coffers rather than in Uncle Sam’s gets you there quicker.

Howard Scott is a business writer who has published 2000 magazine articles and two books. During tax time, he is a professional tax preparer specializing in small businesses.