RSM Resources

For most midsized business owners and executives,the workday doesn’t end when you head to the company parking lot. But, if you’re planning on writing off expenses related to home offices or working vacations, tax experts say you’ll need good records to make the case.

"You need to meet certain standards in order to defend the deduction, particularly if you’re a salaried executive or employee," says Mark Luscombe, principal tax analyst at CCH, a national tax and accounting information provider.

Like any deduction, a home office requires both justification and good record-keeping. The IRS reported that in 2002 about 2.5 million people filed for a home office deduction, which shaved an average of $2,544 from their individual tax bills. In general terms, this tax break may allow you to write off a percentage of certain expenses such as rent, utilities, insurance, depreciation, painting and repairs. If the office space occupies 10 percent of a home’s total usable square footage, excluding hallways and bathrooms, you may be able to deduct that percentage of qualified household expenses.

However, salaried executives or employees seeking this deduction must be able to prove that the home’s business use is for the convenience of the company — not the individual. Meeting that standard, Luscombe says, requires strong anecdotal or written proof.

"If you have a circumstance where a company effectively has ’hoteling space,’ where there are no fixed desks or workspaces, it would be easier to defend the idea that a home office served the employers’ interests," says Luscombe. "Or, if a company agrees in writing that an employee may work a certain number of hours from a home location, that would also be a good defense."

In addition to the convenience standard, the IRS requires that any home office deduction meet two key tests, including:

• Principal meeting place. Under this rule, a home-based office is deductible if it serves as the main place where you conduct your trade or business, or as a location where you meet and deal with clients or patients in the course of business. If a separate structure not attached to your home is used for office space, the IRS allows deductions for qualified expenses related to that structure.
• Exclusive and regular business use. Tax regulators will not look favorably upon a home office that is regularly used by other family members, for storage of personal goods, or for nonbusiness-related activities. The space must be restricted to "exclusive and regular" use associated with managing your trade or business.

Even if you don’t qualify for a home office deduction, experts say you may be able to deduct the cost of basic supplies,postage and the cost of a second telephone line or Internet connection. And,the cost of computers and office furniture purchased for home use may be depreciable — even without the larger home office write-off.

Mixing business and travel
Contrary to myth, the IRS doesn’t have a problem with people who have some fun while on business. However, tax regulators will not smile if you can’t back up travel-related deductions without hard proof of a business purpose.

"If you go to a conference, and you have brochures or working documents that correspond with your travel dates, that’s pretty good evidence that the travel was business-related," says Luscombe. "If you’re on a family vacation, and you spend part of that time meeting with a customer, you can deduct only the costs associated with that meeting —not the whole trip."

Generally speaking, all reasonable conference fees, transportation, lodging and 50 percent of meal or entertainment costs for domestic business-related travel are deductible (unless such expenses are reimbursed by the company). If a business purpose can be established, your spouse’s expenses may also be deductible. As a safeguard, Luscombe says midsized business owners and executives should discuss any questionable expenses with their accountant or company travel office before an excursion,and keep a detailed diary listing key work-related details and receipts during the trip.

The rules for international business travel are a bit more complex. If the trip is primarily for business, and less than seven days in duration, all air fare and travel to and from airports is deductible.Longer trips, on the other hand, require an "allocation approach."

Here’s how it works. If you take a 10-day overseas trip, and spend eight of those days on documented business activity, you could deduct 80 percent of all transportation expenses, lodging and related costs. Deductions for meals, on the other hand, are limited to 50 percent.

The rules get even tighter for conventions held outside North America. To justify a business deduction, the IRS requires significant documentation on the convention’s purpose, its sponsor, the residences of attendees, and a listing of prior and future meeting locations. And, if you’re seeking a tax break for business-related meetings on cruise ships, you must document how the sessions were directly related to your trade or business, that the ship had U.S. registry, and that the ports of call were limited to the United States and its possessions. Additionally, you must provide two statements — one personal and one from the sponsoring organization — reporting the number of business activities offered and attended. Write-offs for cruise ship business activities are limited to a $2,000 annual deduction.

By keeping some of these tips in mind, you can help minimize your tax bill while enjoying greater flexibility in your daily work and business travel schedule.