Why Is It So Difficult to Write Off Your Home Office?

by Steven Sodini 18. May 2012 10:00
These days almost everyone seems to work from home, at least occassionally. According to the U.S. Census, about half of all U.S. businesses are based at home, and most professionals work from home at least some of the time, so it’s only right that you should get a tax break for segregating part of your home over to your job. Wishful thinking. The IRS doesn’t think you deserve a write-off for reading your smartphone in the bathroom. For those who legitimately have separate spaces in their homes used under IRC Section 280A “exclusively and regularly” for work (and for employees, the use must also be for the convenience of the employer), the IRS offers some relief, but it’s not easy to claim. IRS Publication 587 for the home office deduction runs 34 pages, and only about a third of eligible taxpayers actually take it, because of the confusing legal history in this area, the recordkeeping requirements, the increased risks of audit by the IRS, and the difficulty determining what portion of the home is actually used for business in a given tax year. The convoluted history of this part of the tax code reveals how, over the years, work escaped from the offices and factories to invade every inch and hour of a person's life, particularly this day in age with the aforementioned smartphones, that allow a person to be plugged in 24-7-365.  A 32 page law review article titled "Simplication is not enough: An Analysis of the Home Office Deduction and the Home Office Simplification Act of 2009" in the 2010 Baltimate Law Review recounts the entire situation in detail.  However, what actually counts as a legitimate home office has been unclear from the start. Before 1976, the tax code had no specific home office provision, but employees who were required to work from home could write off some related costs.  In 1969, in Newi vs. Commissioner, the Tax Court ruled that George Newi, a TV ad salesman who spent three hours a night working from his converted den, could deduct a quarter of his rent, even though he worked after hours by choice when he could have returned to the office. That loose, fuzzy standard invited generous interpretation by people, including one individual who was actually an attorney for the IRS.  In Bodzin vs. Commissioner, Stephen Bodzin tried to write off part of his rent because he did some work at home in the evenings and on weekends. In 1975 (eight years after the tax return in question), Bodzin lost his case against the agency he worked for when an appeals court found that his home wasn’t his place of business. Rather, he sometimes, by choice, did some of his reading and writing at home. The following year, Congress later passed a tax reform law that narrowed the home office definition to prevent taxpayers from abusing the deduction, which caused even more confusion. In another case, Drucker vs. Commissioner, musicians for the Metropolitan Opera who spent 30 hours a week practicing in their homes were initially denied the break because a court ruled that their place of work was Lincoln Center; they won on appeal. In Commissioner vs. Soliman, an anesthesiologist who did paperwork at home because he had no hospital office was denied his write-off by the Supreme Court in 1993. “The facts in each case will vary, making it difficult to develop a bright line test,” the high court said.  This case in particular, set off a firestorm, because it completely denied a home office deduction for legitimate business expenses for numerous professions, including painters, carpenters, landscapers, construction workers, doctors, professors, musicians, artists, and sales professionals, because these types of professions effectively required the business to be conducted at other locations, rather than the home office. However, in 1997, Congress finally decided to correct the problems resulting from the Soliman decision, and passed the Taxpayer Relief Act to explicitly include home offices used for administration in businesses that have no other fixed location, which would give Dr. Soliman the tax break he requested years earlier.  However, as previously noted, the legislative solutions still treat self-employed individuals different from employees, as the latter are required to show additional evidence that the home office is for the convenience of the employer, rather than themselves, which is often difficult to prove. For the past decade, advocates for the home-based workforce have sought to give taxpayers the option to check a box for a standard $1,500 home office write-off. That would save them the difficulty of calculating what percentage of the home is dedicated to business—and therefore what share of rent, insurance, utilities, and maintenance costs can be deducted. Various versions of the proposal have languished in Congress for years to no avail. Unlike employees’ wages, business income and deductions can’t be easily verified by the IRS. In one analysis, 57 percent of sole proprietors misreported income, compared to one percent of employees. So the IRS doesn’t have much of an interest in making it easier to take the home office deduction, for fear that it could be easily abused to short-change Uncle Sam. That leaves a headache for those trying, legitimately, to write off the cost of a workspace that happens to be in the same place that they sleep.  Even the various proposals that have arisen over the years, do not address the primary problems of the disparity in the treatment of self-employed individuals vs. employees and the requirement that the home office be used on a regular basis, without defining what "regular basis" actually means.  A simple solution would be to repeal the "for the convenience of the employer" requirement for employees, which would then put everyone on equal footing and clearly defining "regular use" with some type of minimum use standard.  Unfortunately, the most recent attempt to clear of the legal confusion in this area, the "Home Office Simplification Act of 2009", died in committee, and no new legislation appears to be on the horizon, so the future in this area is still very much unclear.
Categories: Tax

It's Back to School Time - Is the Tution & Fees Deduction Right For You???

by Steven Sodini 8. September 2011 13:22
This time of year, it’s back to school time for many people.   For those back in college (or other post-secondary school), you may be able to deduct qualified tuition and related expenses that you pay for yourself, your spouse, or a dependent, as a tuition and fees deduction.  This deduction is an “above-the-line” deduction (which means you don’t have to itemize), which can reduce the amount of income subject to tax by up to $4,000 so long as your modified adjusted gross income (MAGI) is not more than $80,000 ($160,000 if filing a joint return).  The deduction is calculated on Form 8917 and any allowable deduction flows to Form 1040, Line 34. Of course, like most deductions, there are usually some limitations, so you’ll have to do some calculations to determine whether your tax benefit would be more from taking the tuition and fees deduction, or from an education credit such as the American Opportunity, Hope or Lifetime Learning credit, since you cannot take both.  In addition, you also cannot claim the tuition and fees deduction if your filing status is married filing separately or if you may be claimed as a dependent on someone else’s return, even if other person does not actually claim that exemption.  Finally, non-resident aliens also cannot claim the deduction.  The deduction must be claimed in the tax year that the expenses are actually paid and the student must be claimed as a dependent in that same tax year. You calculate the deduction based on qualified education expenses you pay for yourself, your spouse, or a dependent. For purposes of the tuition and fees deduction, qualified education expenses are tuition and related expenses required for enrollment or attendance at an eligible educational institution (any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education).  Related expenses are narrowly defined as student-activity fees and expenses for course-related books, supplies, and equipment if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.  Qualified education expenses do not include amounts paid for insurance, medical expenses (including student health fees), sports, transportation, room and board and similar personal, living, or family expenses – even if the payment of these expenses are a condition of enrollment or attendance.  The student must be enrolled in at least one qualified course at an eligible institution to be eligible for the deduction. You can use money that you borrow in order to calculate the deduction, but as expected, you cannot claim a deduction or credit based on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds such as a Coverdell education savings account, tax-free savings bond interest or employer-provided education assistance. Other restrictions and exceptions may apply so check with the tax professionals at Urish Popeck, to determine if this deduction is right for your tax situation.
Categories: Tax