In Actor Speak

At one time the IRS worked from the following basis on the use of a Home Office:

"The Supreme Court held that only when the more essential aspects of the taxpayer's work are performed in the home office may the taxpayer deduct the cost of a office in the home. For entertainers, most of whom mainly perform in clubs, theaters, etc., this effectively eliminates any home office deduction." 

Although the rules have been significantly loosened for this deduction to be acceptable, the IRS usually starts working from the above premise until you prove your right to take this deduction.  As a result we urge all of our clients to first consider the actual value of using the home office deduction on their tax return before doing so.

• There aren't too many performers who earn the bulk of their entertainment income performing at home.

• The use of this deduction may well attract unwanted attention (i.e. "Red Flag") and/or help to determine whether you are audited or not.

• Considering all of the requirements you must fulfill versus the actual monetary "benefits" of using this deduction, you usually find the tax savings that it actually generates is not worth the additional risk of an audit and/or ultimately losing the deduction in an audit.

We have provided a sample scenario to help you understand the value (or not) of using this deduction.  We know there are a lot of preparers who make use of a home office to improve your refund.  The end result helps them look better in your eyes and you are thrilled.  Regardless we urge you take great caution before you allow your preparer to place this on your return.

Make sure you are very aware of what the preparer is trying to do.

Here's how the deduction works. 

You must determine the amount of space in your home designated as an office and the percentage of your total home this space constitutes.  Then after adding all of the costs of maintaining this space (such as rent or mortgage, upkeep and utilities,) multiply that total times the percentage of the used space.

For example, if your costs were:

Monthly Rent: $750 
Monthly upkeep:  $25
Utilities:  $50

Total Monthly costs:  $825

Multiplied by 12 months for the year:  $9,900

Total space in Apartment:  900 sq. feet
Space Used for office:  100 sq feet 
(This would be a 10 foot by 10 foot room or space used SOLELY for your career.)

Percentage of Space used:  11%

$9,900 multiplied by 11% equals:  $1,089

What all these numbers mean:

In the 15% tax bracket (the tax rate on a single person's taxable income between $8,000 up to $34,000) this $1,089 write-off equals $163 in actual tax savings.

CONCLUSION

So the question is (under the above scenario) would the $163 you may actually receive as a refund (or by reduced taxes) be worth the increased potential of an audit plus the subsequent trouble of proving the expense at the audit?

Even if you doubled the numbers (higher rent, etc) the refund is just $326.  Although this is hardly chicken feed for most actors, the additional risk of an audit is probably something you would like to avoid. 

Remember, even if you prove the home write-off during the audit, you have opened your entire list of expenses to examination by the IRS.  Should the auditor turn down any of your other write-offs you have to pay back the applicable taxes plus pay additional interest.

On the other hand, if the space you use is a higher percentage of the total home OR you find yourself in a higher tax bracket  (25% of taxable income from $28,400 to $68,800 for a single person) you may find this deduction valuable to you IF you can prove the specifics indicated in the opposite column.

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In the Words of the IRS:

In the entertainment industry the issue of home office frequently arises. Taxpayers usually claim their home office is used for keeping records, making telephone contacts, rehearsing, and a myriad of clerical chores. While this may well be true, the issue of allowability remains [and] severely restricts the deduction for office in the home. The office must be used on a regular basis and exclusively for business. Regular use means on a continuing basis, not just occasionally. In the entertainment industry regular use is not generally a problem.

Exclusive use means that the area that serves as an office must be a distinguishable area used only for qualified business use. Moreover, all use of the office must be qualified use. 

Qualified business use must be one of the following:

1. As the principal place of business

2. As a place to meet with patients, clients, or customers

3. A separate structure not attached to the dwelling unit.

4. A designated storage space for inventory in the trade or business of selling products at retail or wholesale.

Principal Place of Business

The most frequently heard of the above three arguments, in the entertainment industry, is the principal place of business. In Soliman v. Commissioner, 113 S.Ct. 701 (1993), the taxpayer claimed a home office for administrative duties essential to his practice. IRS's position was that the income the taxpayer received was for services performed at another site; and, therefore, the home office was not the principal place of business. The Supreme Court held that only when the more essential aspects of the taxpayer's work are performed in the home office may the taxpayer deduct the cost of a office in the home. For entertainers, most of whom mainly perform in clubs, theaters, etc., this effectively eliminates any home office deduction.

For designers, technicians, and others, there may still be a deduction, in certain cases; for example, freelance special effects creator whose workshop or studio is in his or her home.

For musicians, the principal place of employment is where the performance occurs, not the home practice area.

Employees

As with any industry, an employee will only be able to deduct office in the home when all requirements are met and the home office is required by and for the convenience of the employer.  

Personal Service Corporation

Individuals who have formed a personal service (C) corporation may still deduct business use of their home, but the creation of the corporate entity would give rise to separate issues, for example, the corporation would have to rent the premises from the taxpayer. This may, in turn, give rise to passive activity loss limitations for the rental activity. 

Multiple Business Activities

When a taxpayer has multiple business activities, all of the activities for which the office is used must meet the qualifications. If any of the activities uses the home office and does not meet the requirements, the exclusive use test is not met and no deduction is allowed.

This position was upheld by the Tax Court, in Hamacher, 94 T.C. No. 21. The taxpayer was an actor who performed on stage, screen, and radio as an independent contractor. He was also employed at one theater as an acting instructor and administrator. His employer provided him with an office at the theater, but the taxpayer also set up an office in his home. The home office was used in connection with both his employment and his self-employed activities.

The Tax Court found that the employer did not require the taxpayer to do any work at home. The home office may have been helpful but was not for the convenience of the employer. It was not necessary for the court to determine if the home office would have qualified solely in conjunction with the taxpayer's self-employment. Since the use with regard to the taxpayer's employment was not qualified, the exclusive use test was not met and no office in the home deduction was allowed.

In addition to the obvious expense for office in the home, this issue has impact on the allowability of business mileage for what would otherwise be commuting expense. 

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