If you’re like most financial advisors, chances are you maintain a home office in which you regularly review client files and prepare and respond to e-mails, among other work-related tasks. But in order to successfully claim home-office expenses on your annual tax return, you have to meet certain very specific tests, depending on whether you are an employee or self-employed.
For employees, if the workspace in your home is the location in which you perform your duties of employment “principally” (more than 50% of the time) and you are “required by the contract of employment” to maintain such an office, you can deduct certain home-office expenses. Your employer must certify this requirement on Form T2200, “Declaration of Conditions of Employment.”
If you’re self-employed, the only condition you must meet in order to be allowed to deduct home-office expenses is that your home office must be your principal place of business. If it’s not, then it must be used “exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business.”
A recent Tax Court decision challenged a taxpayer’s ability to write off her home-office expenses. The taxpayer, an employment lawyer, attempted to deduct home-office expenses of approximately $6,600 and $10,000 in her 2007 and 2008 tax returns, respectively. The taxpayer decided to open her own practice in 2006 so that she could control her hours of work and have more time to spend with her kids. She testified that she set up a home office in September 2006 and for the first few months, “practiced fairly exclusively out of her home.” That year, she also leased commercial office space along with a friend and four other lawyers.
Although it was not her principal office, she testified that her “home office” measured 20% of her home and consisted of an office on the main floor and “most of the area of her basement” in which she stored 200 client files. She stated that the she saw clients at her home office, “in both the upstairs office and the basement office.”
Yet, when asked if she had any documentary evidence, such as her appointment calendar for 2007 and 2008, she said that she used “the software PCLaw for her calendar and it ‘self-erased’ every six months.” She stated that she also used Microsoft Outlook and it “self-erased.”
The Judge felt that the taxpayer’s evidence “defies common sense and is implausible. I do not believe that any professional, especially a lawyer, would use a computer program to maintain her records, which self-erased after six months.”
As the taxpayer was unable to provide any details with respect to seeing any clients at her home, the judge disallowed her home-office expenses. As the judge wrote, “I have no doubt that the [taxpayer] may have had an office in her home. However … she has not satisfied me that there was a work space in her home which was used … on a regular and continuous basis for meeting clients.”
So, if you’re a self-employed advisor and also have a commercial office, be sure you keep a log of all the clients you see at your home office to be able to justify writing off those home-office expenses.