Issue 14 - November 2003

Finance & taxes by Mark Battersby
How to axe taxes on your home office

In years past, deducting the expenses of maintaining an office in the home or operating a home-based chiropractic practice was both complicated and often questioned by the ever-vigilant Internal Revenue Service.

A home office is no longer required to be the principal place of business for the chiropractic practice. Today, it is easier than ever for a chiropractor to claim a tax deduction for the expenses related to maintaining an office at home — even if that home office is used solely for management or administrative purposes.

Thanks to today’s tax rules, every chiropractor is permitted to claim a home office deduction — even when services may actually be provided to patients at some other location outside of the home. What’s more, under today’s liberalized rules, a chiropractor is allowed the deduction for home office expenses even when some of those administrative or management activities, such as billing, may actually be performed by others at other locations.

In fact, the home office deduction is available under our current tax law even though a chiropractor actually performs the same administrative activities in other places, such as in a car, clinic or hospital, that are not “fixed” locations and even if another office is available for them to perform the activities.

Of course, even under today’s liberal home office rules, no chiropractor is automatically entitled to deduct the expenses of using his or her home for business purposes. Those home office expenses must be attributable to a portion of the home (or a separate structure) that is used exclusively and on a regular basis as a place of business. Then, and only then, may the expenses be deducted — subject to limitations and restrictions, of course.

The tax rules define a place of business as being either the principal place of any business carried on or as a place of business that is used by patients, clients or customers in meeting or dealing with the taxpayer in the normal course of business. Obviously, the exclusive use test or requirement is not met if the home space is used for both business and personal purposes.

Fortunately, most chiropractic professionals have a specific area within their home that is used solely and expressly for the purposes of carrying on their chiropractic practice. However, even with a qualifying home office or clinic, the amount of a tax deduction is limited.

A number of home office expenses are tax deductible regardless of whether a home office deduction is claimed or not. In other words, regardless of whether a home office qualifies, many expenses such as taxes and mortgage interest may be deductible as personal, itemized expenses. With a home office, a portion may be deductible as a home office expenses and the balance as a personal itemized deduction.

Another restriction placed on the deduction for home office expense requires a profitable practice. Home office expenses cannot exceed the net income of the practice. Fortunately, any deductions that are disallowed because they would create or increase a net loss from the chiropractic practice may be carried over to future years, subject to the same limit in the carryover years.

Working for a practice
Many chiropractors who maintain a home office do not own their own practice. Others may be employees of their own chiropractic practices. Fortunately, employees are also permitted to claim a tax deduction for home office expenses — albeit limited and subject to the restrictions and ceilings placed on personal itemized deductions.

In order for chiropractors who are employees to qualify for the home office deduction, they must meet the requirements already mentioned. In addition, the exclusive use of the home office (or clinic) must be for the convenience of the chiropractor’s employer. And that doesn’t mean renting the home (or a portion of it) to the employer. The IRS and the courts frown on this.

Traveling on Uncle Sam's dime
On a more positive note, our tax rules permit sole practitioners, employees or chiropractic practice principals who use their homes as their principal place of business to deduct transportation expenses that would otherwise be classified as nondeductible commuting costs. Unlike someone who must commute to and from work, the employee with a home office using the home as his or her principal place of business, is permitted to deduct the cost of transportation — going from that place of business to a clinic or patient’s office or merely running business errands.

One warning about substantiating expenses connected to the home office might be in order: In order to claim any tax deduction, a chiropractor must be able to prove that the expenses were, in fact, paid or incurred.

According to the IRS, the following expenses which are deemed particularly susceptible to abuse, must generally be substantiated by adequate records or sufficient evidence corroborating the chiropractor’s own statement:

• Expenses related to travel away from home (including meals and lodging),
• Entertainment expenses,
• Business gifts and
• Expenses related to the use of so-called “listed property” such as cars and computers.

Not only must the portion of the home be used exclusively and regularly as a home office, the computers used in that home office must also meet the tests required of “listed property”, property that may be subject to abuse of our tax rules.

More restrictions
The availability of depreciation deductions for “listed property” is restricted. This term embraces automobiles and other forms of property that lend themselves to personal use (such as airplanes, trucks and boats) — especially computers and peripheral equipment, such as cellular telephones and similar telecommunications equipment.

Unless this listed property is used predominantly for business (used more than 50 percent-use for business), depreciation deductions must be determined using an alternative method. These rules also apply to any portion of the cost of purchased “listed property” that the chiropractor chooses to expense or immediately write-off under Section 179 of the tax law.

If the more than 50 percent use test for “listed” equipment is not satisfied in the year the property is placed in service, the property will not qualify for the first-year expensing election.

A chiropractor will be denied a business deduction for basic local telephone service charges on the first phone line in his or her residence. Additional charges for long-distance calls, equipment, optional services (such as call waiting) or additional telephone lines may be deductible home office business expenses.

Today, almost everyone — employee, sole practitioner or employee of their own chiropractic practice — is entitled to an income tax deduction for the expenses associated with maintaining a home office. Every chiropractor can now benefit from the existing tax deductions that are available — and legal — for the use of a home office. They must, quite simply, obey the rules.

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal or accounting advice. Please consult you professional adviser for any issue related to your practice.