Death & Taxes

With the advent of the computer age, many more people are working out of their homes. The question of deducting for home office expenses has become a very relevant tax issue.

Q: My wife is a commissioned salesperson who will be going on maternity leave in October. If we install a desk system, a modem link to her company's computer, call forward her work phone line to the house, and add a fax -- she can work out of our home on a limited basis and not lose clients. This home office equipment is not just not just a convenience, but is essential to competing in the world of sales with a babe in arms. Without trying to write off the space in our home, can we deduct these expenses from our taxes?

P.S. I have a letter from the president of her company that states that these items are necessary to the continuation of her job during maternity leave and that the company cannot provide them to her.

A: First of all, although you tell me that your wife is a commissioned salesperson, you forgot to tell me if she is a W-2 type employee or a 1099 employee. I'll assume that we're talking W-2 employee here. If not, things change a bit. It sounds like she is going to buy a desk, chair, files, a modem, etc.; and she'll also need to pay for some telephone installation and monthly line charges. I also assume that she will be using an existing computer to modem link to the job.

Certainly all of the charges that you mention are deductible as business expenses, subject to the 2% floor.** The desk, chair, etc. must be depreciated, but you can elect the Section 179 expensing election to take the entire cost in the year purchased. The monthly call forwarding expense is deductible. The monthly telephone expense attributable to business and the installation of the new phone line are also deductible. The new modem must be depreciated, but once again, you can use the Section 179 election to expense. None of this has to do with the office in home rules, since you are NOT claiming an "office in the home" deduction. See the difference?

You already have the letter from the employer indicating that these expenses are required for her job and will not be reimbursed. So you're already over that hump. Nice job. All of these expenses are ordinary and necessary and are certainly deductible.

Now then, let's talk about the office in the home rules just for a second. If the home office is used exclusively for business purposes and is for the convenience of the employer, it automatically qualifies for the office in the home deduction.

** 2% Floor = "An expenditure permitted to be used in order to reduce an individual's income-tax liability. Potential deductions of particular interest to investors are expenditures for subscriptions to financial publications, a lock box for storing securities, and computer software for investment-related activities. These deductions, combined with employee business expenses and miscellaneous deductions, are deductible only to the extent that they exceed 2% of the taxpayer's adjusted gross income. Interest paid on loans used to finance investments is deductible only to the extent of investment income."