Tax Tips for Small Business

HOME OFFICE DEDUCTIONS

Over the last several years the home office deduction has been one of the most contentious issues involving small businesses and the IRS. Many small business associations have lobbied Congress to change the very restrictive rules that currently apply to home office deductions. Well, the good news is that help is on the way. The bad news is that you will have to wait until 1999 to get relief. The Taxpayer Relief Act of 1997 contains provisions that will greatly expand the number of persons who will be eligible to take tax deductions for home office expenses. These rules go into effect in 1999.

Existing law determines the deductibility of home offices expenses for 1997 and 1998 as follows:

1. USE. In order to qualify for a home office deduction under existing law, an office in the home must meet one of the following criteria:

   • It must be used as the principal place of business for the business involved; or,

   • It must be used as a place to meet with patients, clients, or customers.

   Most of the disagreements regarding home office deductions involve determining where your principal place of business is located.

2. TWO-FACTOR TEST. A two-factor test is used to determine the location of your principal place of business, in situations where you have more than one business location. The two factors are:

   • the relative importance of activities conducted at each location

   • the amount of time spent at each location

   Relative importance of activities is determined by the nature of the business. The amount of time spent at each location is determined by simply comparing the time spent on business at the home office with the time spent on business at other places.

   In summary, if the most important activities of your business are conducted at your home office then you can qualify to take a tax deduction for your home office expenses.

   (As always, consult with your own tax professional - The Advisor)