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It was a battle well-fought and deservedly won. Starting in January 1999, the coveted home office deduction in the Taxpayer Relief Act of 1997 will be reinstated for home office owners who conduct much of their business in the field and reserve their offices for administrative duties.
"This tax break supports an entrepreneur's decision to be closer to family or to cut down on office expenses by running his or her business from home," explains Rep. Jim Talent (R-MO), chair of the House Small Business Committee. "It's a big step toward leveling the playing field for these entrepreneurs."
The crux of the deduction, which overturns the Supreme Court's 1993 Soliman decision, lies in the term "principal place of business." In the Soliman decision, the Supreme Court determined this meant where you generate the bulk of your business's income, thereby eliminating the deduction for many home office owners who do a lot of business outside their homes, including salespeople and consultants who call on offices or medical professionals who work in hospitals. Now homebased business owners can take the deduction for their office if it's the "fixed location" for "administrative or management activities."
One question remains, however: Was the result worth the effort? The deduction, which allows you to deduct office expenses as a percentage of your related household expenses, usually amounts to less than $1,000. For many home office owners, though, it isn't the monetary amount that shouts victory. "The bigger point is one based on principle," says Betty Stehman, owner of Entrepreneurial Financial Services Inc., an accounting and small-business consulting firm in College Park, Maryland. "[In the past,] if you were willing to pay commercial rent, you were allowed to deduct. If you were smart and running your business out of your home, which lowers your overhead, you were penalized."
Beverly Williams, president of the American Association of Home-Based Businesses, agrees. "It's a very big victory insofar as it creates recognition of the value of homebased businesses," she says. "The reality is, for an individual homebased business owner, we're talking about very little money. But it helps raise the professional image and legitimacy of homebased businesses."
To calculate your deduction, divide the square footage of your house by the area of your office. If, for example, your office measures 20 square feet and your home measures 200 square feet, you can deduct 10 percent of your household expenses. However, your office space must be used only for business activities (it can't double as a guest bedroom). And if you plan to sell your home soon, claiming your home office may deny you access to capital gains tax exclusion, which could cost you more than the deduction can save you.
American Association of Home-Based Businesses, (800) 447-9710, http://www.aahbb.org
Entrepreneurial Financial Services Inc., (301) 345-6922, http://www.efsnet.com
House Small Business Committee, (202) 225-5821