BUSINESSWEEK ONLINE: FRONTIER - the resource for entrepreneurs  
By Karen E. Klein
MAY 11, 2000

When a Home Office Serves Two Masters

If you're employed and run a business on the side, watch out for tax pitfalls


E-Mail Story

Tax Breaks: Don't Forget Your Home Office

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Smart Answers Archive

Q:  I have a full-time job and also have a business that I operate out of a room in my house, for which I take tax deductions for business use of my home. I am considering telecommuting for my full-time job. Are there any benefits or drawbacks, particularly tax-related, to setting up the telecommuting office in the same room of my house as my home business?

-- S.V., Columbus, Ohio

A:  There are certainly some potential drawbacks. First, employees can take the office-in-the-home deduction only if they're working at home because their employers have asked them to, for such reasons as location, hours, or lack of space at the office. If working at home is simply your preference and your employer agrees to it, the home-office deduction can't be taken for your employee work.

Second, a home office is only deductible if it is used regularly and exclusively for work. This is fine if only self-employment work is being done in that space. But if you also do employee work in the same space, you will need to make certain that you're working at home for your employer's -- not your -- convenience. Otherwise, you may lose the tax deduction altogether if you mix the two uses, says Jan Zobel, a San Francisco-based CPA and author of Minding Her Own Business: The Self-Employed Woman's Guide to Taxes and Recordkeeping.

You should investigate other liability and legal issues that may arise if you combine the two types of work in the same home office, experts say. And the expenses of the office will need to be allocated to each activity in a reasonable and consistent manner, says Mary Lou Pier of the Chicago-based accounting practice of Pier & Associates.

Anyone taking a home-office deduction needs to be aware that a portion of their residence is being depreciated as part of the deduction. If depreciation occurs in the year that the residence is sold, there could be tax consequences, according to David R. Flamer, a Los Angeles-based CPA with Lasher, Flamer & Associates. This is important because gains on the sale of personal residences are often excluded from income and not subject to taxes. Mixing in depreciation from a home office introduces a host of possible pitfalls, so make sure you talk it over with your accountant. Many people also fear the Internal Revenue Service scrutiny associated with a home-office deduction, which in the past has been a red flag for a possible audit.

Despite the caveats, most CPAs encourage clients to take all the deductions to which they are entitled.

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