High-net-worth clients who maintain an office in their home might have a harder time deducting the expense of that space under the Tax Cuts and Jobs Act. They may also face a nasty tax surprise when they sell the home.

The TCJA suspended miscellaneous itemized deductions beyond 2 percent of one’s adjusted gross income. “An employee who has work-related, qualifying home-office expenses is no longer able to deduct these expenses, as is the case with unreimbursed employee business expenses in general. Self-employed individuals can continue to deduct qualifying home-office expenses,” said Glenn DiBenedetto, director of tax planning at New England Investment and Retirement Group in North Andover, Mass., and Naples, Fla.

What are the tequirements to claim the deduction? “Was it used regularly and exclusively and was it your principal place of business?” said Craig Richards, managing director and director of tax services for Fiduciary Trust Company International in New York. “You need to understand what types of expenses are deductible and keep track of those expenses.”

If your client uses the office to do business with customers, clients or patients, he or she can deduct direct expenses for the home office plus a proportionate share of indirect expenses, such as mortgage interest, property taxes, utilities, repairs and insurance.

“The biggest question is the concept of ‘exclusive use,’” DiBenedetto said. “If they qualify, can substantiate and can benefit by deducting home-office expenses, taxpayers should not fear IRS audit risk.”

“In addition, you can claim a depreciation deduction for the part of the home used as an office,” added Martin Abo, a CPA with Abo Cipolla Financial Forensics in Mount Laurel, N.J.

Taxpayers have an option to calculate the deduction. “They can pro rate the actual home expenses or they can use the $5-per-square-foot [rule],” said Todd Koch, a CPA/CFP and partner with John A. Knutson & Co. in Falcon Heights, Minn. “I remind clients to also consider the time it takes to gather the actual expenses.”

Often the burden of maintaining records leads clients to use the “simplified” method: $5 per square foot for the portion of the home used for business to a maximum of 300 square feet, and a maximum deduction of $1,500, said Brenda K. Lowe, an accountant in White Bear Lake, Minn. “There’s no record keeping needed for the simplified deduction other than the amount of square footage,” she added.

The biggest misconception wealthy individuals have concerning the home-office deduction is that all of their home expenses are deductible. “If you’re a lawyer using a room in your house to run your practice, don’t try to deduct the cost of your swimming pool,” Richards said.

A home office also doesn’t need to be an entire room, and the deduction can provide a benefit if the business is currently unprofitable, Koch said. “You can carry these unused deductions forward to a future year,” he said. “There may also be a deduction on your state return.”

Sale of the home is when the deduction can also bite back. Home-office depreciation may add post-sale tax costs in the form of a recapture tax on depreciation taken up to the maximum tax rate of 25 percent, depending on total income. Over years, Abo added, this can actually add up to less tax than if your client hadn’t taken the home office deduction.

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