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There’s no place like home: Be wary of claiming office deduction

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More and more people these days are working at home, often as an employee or as a small business owner with a home office. In 2003, 19 percent of employed people did some or all their work at home, and by 2015 it was up to 24 percent, thanks largely to broadband Internet access.

In other words, thousands of Colorado taxpayers who previously never thought about the office-in-the-home tax deduction, or OIH, are now eligible for this claim on their annual income tax return. There are a few things they should know.

First, a little OIH history:

Back in the 1960s, lots and lots of school teachers were audited because they had claimed business use of the home for grading papers and prep work for their classrooms. We agree, teachers work hard; but the IRS determined the tax deduction was not appropriate. The home has to qualify as the primary location for the employment or business, and that was obviously not the case with the school teachers.

Then in the 1980s, an anesthesiologist in Washington, D.C., made his office-in-the-home claim a landmark case.

The anesthesiologist plied his craft at several hospitals in the D.C. area but had purchased a residence with a separate bedroom used regularly and exclusively accommodate his business, and to conduct all the business’s administrative affairs.

The good doctor argued his right to the deduction all the way to the U.S. Supreme Court. Unfortunately, the Supremes decided that since the anesthesia was applied to patients at the various hospital locations, and that was how the practice made its money, there was NO allowance for the OIH.

You might not be a teacher or an anesthesiologist, but you are probably starting to get the picture of how this OIH works.

Regular and exclusive

In the early 1990s, Congress re-wrote the rules, and now the law states that if the home office is the ONLY office to perform the administrative work of a business - scheduling appointments, doing the books, etc. — then it’s okay to take the OIH deduction.

The business STILL must abide by the “regular and exclusive” use tests — that means that the business use of the home is on a routine, regular basis, and the area designated is used exclusively for the conduct of the business.

The OIH deduction becomes particularly interesting as it relates to business use of a person’s automobile. The OIH becomes a measuring “anchor,” meaning Denver-area taxpayers for example may ONLY deduct mileage if they use the vehicle to travel to work OUTSIDE of the metro area, or if the taxpayer goes from a fixed location to a temporary location (you work at Bank A, but a second location needs you to fill in temporarily: The fixed location is Bank A and the second bank is the temporary location), or if you claim the office in the home.

Compounding the difficulties for the anesthesiologist in our story, he lost ALL his business mileage to all those hospitals when he became ineligible for the home deduction.

A sad ending, indeed.

Fran Coet is founder and owner of Coet2 CPAs in Westminster, www.Coet2.com. Call 303-426-6444.

Fran Coet, taxes,

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