What’s deductible when working from home?

By Cyndia Zwahlen | August 15, 2011

Small-business owners who work at home might not have to worry about a commute, but figuring out their taxes could make the 405 Freeway at rush hour seem like a piece of cake.

Rules concerning home office deductions are hazy, experts said. For example, does a stereo or television in a home office qualify as a business-tax deduction? What about artwork on the walls, rugs on the floor or fresh flowers on the desk? What if the business owner lives and works on a boat?

 “People are so unclear about these issues,” said Jan Zobel, an Oakland tax preparer and author of “Minding Her Own Business: The Self-Employed Woman’s Essential Guide to Taxes and Financial Records.”

The Internal Revenue Service doesn’t publish black-and-white rules on every aspect of the topic. Instead it’s up to the small-business owner — and his or her tax preparer — to be able to make the case to the IRS as to whether something is a legitimate home-business expense and to what extent.

To be deductible, a home office space “has to be used on a regular basis and exclusively” for the business, said Sam Jarrar, a certified public accountant in Marina del Rey.

Even a corner of a room can meet that test and be deducted, he said. But no working on the family finances in the home office, not matter what size it is.

The deduction is based on what share of the total space in a dwelling the home office takes up. If it’s, say, 20%, then the business owner could deduct that portion of a number of indirect costs — such as utilities or real estate taxes — as a business expense. A renter could deduct that percentage of the rent payment.

If the home office deduction is taken, direct costs related only to the space, including repairs or wallpaper, can also be deducted.

When Denise Abdun-Nur set up an office in a spare room of her house for her Amazing Grace Organizing service in Ventura, she was able to deduct the cost of direct expenses for the room, such as new window blinds and paint for the walls.

She relied on a trusted accountant to make the calls as to what was tax deductible for her small business, and advised other business owners to do the same.

“That’s not my area of expertise, and I would rather pay for their service now than pay fines later,” Abdun-Nur said. “If you listen to other people, like friends and other business owners, you get a lot of different information.”

Even if the home office itself is deductible, not everything in it necessarily is.

“In order to deduct an expense, it needs to be necessary in order to bring the business owner more profit, and ordinary, in the sense that other business owners would have the same expense,” Zobel said “I didn’t deduct the TV or iPod I have in my exclusively used home office, but someone who’s more aggressive might have.”

If a business owner is using just a corner of a room, then something like a stereo or television is probably not a deductible business expense because it’s probably not used exclusively for the business. Zobel said that fresh flowers for the area probably wouldn’t be deductible, either.

Colleen Wainwright, who runs her social media consulting business, Communicatrix, out of her former dining room in Los Angeles, bought a small money tree for her space.

It’s supposed to be good for career success, she said, but Wainwright didn’t deduct the $4 cost.

“I am very fond of being conservative with the IRS,” she said. “Why invite trouble? It comes too often on its own.”