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HOME OFFICE
Tracking
Your Deductible Expenses
Home Office
Today, more and more people are working from their homes.
This is readily made possible due to technological advances
such as the computer, fax, internet and E-mail. If you are
running a business out of your home or thinking about
starting an in-home business, this information should be helpful in detailing when and how you can
claim the tax deductions available to you.
Home Office Guidelines
Under liberalized guidelines for Home Office Deductions
more people will be eligible to deduct home office expenses.
The rules allow workers such as plumbers, contractors and
consultants, who primarily perform services away from home,
to deduct their home office expenses. Prior to 1997 it was
very difficult for home-based workers whose jobs routinely
took them out of their homes to qualify for home office
expense deductions.
While more details will follow, generally:
 | Specific tests must be passed to
claim Business Use of Home or home office deductions
|
| There is a limitation on the
amount of otherwise non-deductible expenses |
| The term "home" includes a house,
apartment, condominium, mobile home or boat. It includes
structures on the property, such as an unattached
garage, studio, barn or greenhouse |
| The term "home" does not include
any part of the property used as a hotel or inn |
Deductibility Requirements
Not sure whether you can deduct your home office expense?
You may deduct home office expenses if you meet these
tests.
On-going Trade or
Business
If the space is used in a trade or business on a regular
and continuing basis:
| To provide daycare services |
| As a place to meet with patients,
clients or customers |
| To store inventory for a wholesale
or retail sales business and your home is the business’
only fixed location |
| In a separate structure which is
not attached to your residence and is used exclusively
for business |
| As the principal place of business
for your trade or business. |
Importantly, you must present sufficient evidence to
convince the IRS that business was conducted on a regular
basis.
Note:
Management by an individual of his/her
investment portfolio is not considered a trade or business.
Exclusive Use
| There can be no personal use
(other than minimal personal use) of the home office
portion of the residence at any time during the taxable
year. |
| The use of only a portion of a
room is acceptable as long as you can prove a particular
portion of the room was used exclusively for business.
|
| There are exceptions to the
exclusive use condition if:
• inventory is kept for use in selling products at
wholesale or retail.
•the residence is the only fixed location of your trade
or business; and the space is separately identifiable (a
portion of a room regularly used is acceptable). |
Caution: If the space must be used to store
inventory, the cost of storage space for books, files or
equipment cannot be deducted unless you qualify under one of
the following tests:
• the space is used for storage of product samples, thus
you need not attempt to distinguish between inventory and
product samples.
• the space is used as a Daycare Facility, provided you
comply with all state approval requirements and you are in
the business of providing day care for children, persons 65
or older or persons who are physically of mentally unable to
care for themselves.
Separate Structures
| You can deduct expenses for a
separate and free-standing structure, such as a studio,
barn or garage if you use the structure exclusively and
regularly in your business. The structure does not have
to be your principal place of business or the place you
meet patients, clients, or customers. |
Place to Meet
Patients, Clients or Customers
| The patients, clients, or
customers must be physically present on the premises.
|
| Conversations with you by
telephone do not constitute use of the premises by
patients, clients, or customers. |
| The use of the dwelling unit by
patients, clients, or customers must be substantial and
integral to the conduct of your business. |
Principal Place of
Business Test
| A taxpayer is deemed to have a
principal place of business for each trade or business
in which you engage. |
| When you engage in a single trade
or business at more than one location, the principal
place of business is determined in light of the specific
facts and circumstances of running the business. |
Note:
The Supreme Court has held that the principal
place of business is a subjective process that must be made
on the facts of each case by comparing two primary factors:
A. The relative importance of the business activities
performed at each location; and,
B. The time spent working at each place
One’s best bet to insure the home office deduction
without IRS challenge is to:
1.
Work in a separate structure or portion of your home
2.
Meet with customers at home
3.
Show that the most important activities are performed
at home
The Rules
Tax Relief Act of 1997 effectively liberalizes by
retaining all of the pre-established conditions (e.g.
regular and exclusive use, storage of inventory and samples,
separate structure, a place to meet patients, clients, or
customers) but adds that a home office also qualifies as a
principal place of business if:
| The office is used on an exclusive
and regular basis for the administration or management
activities of any trade or business and, |
| There is no fixed location of the
trade or business where you conduct substantial
administrative or management activities of the trade or
business |
| Therefore, a home office deduction
is allowed if a portion of the home is exclusively and
regularly used to conduct administrative or management
activities as long as you don’t perform these duties at
another location even though some administrative and
management activities may be conducted by someone else
at another location. |
| This home office deduction is
allowable even if you perform administrative or
management activities outside the home in a non-fixed
location (e.g. auto or hotel room) or if in another
fixed location, the administrative or management
activities are not substantial. This liberalization of
home office deductibility will benefit:
 | Doctors and nurses whose job
performance primarily occurs in the hospital |
| Sales people when most of
their time is spent in customers’ offices |
| Authors and writers whose time
is mostly spent with publishers, on publicity tours
or doing research outside the home |
| Teachers who perform their
duties at schools and universities |
| Contractors, painters,
plumbers and similar trades people who spend most of
their time on job sites |
| Employees who work out of
their home for the convenience of their employer
also qualify |
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Tip:
Previously nondeductible commuting costs may now
become deductible business travel costs as the principal
place of business will now include your home office.
If you are an employee
A home office deduction may be possible if:
| The business use of your home must
be for the convenience of your employer. |
| Convenience of the employer is
defined as a business necessity on which employment is
based. |
| Use for personal convenience is
not adequate. |
Figuring the Business Deduction
| Divide the area used for business
by the total area in your home to determine the pro-rata
share of rent, utilities, and other expenses. |
| Capture depreciation based on the
lower of either the adjusted basis or fair market value
at the time business use begins. |
Caution:
If the business is active less than a full year
consider the time period in business for which the deduction
is allowed.
| Costs incurred in
repairing/painting directly in the business rooms are
totally deductible. These same costs in the rooms which
don’t benefit the business room are not deductible but
you may allocate business and non-business portions of
these costs if the benefit is to both. |
| Expense of lawn care and
landscaping are not deductible. |
| Telephone costs :
| The basic costs for the main
first line into your residence are not deductible
|
| Long distance business charges
are deductible |
| Deduct the business portion of
additional line costs and rental of equipment |
|
| Deductions are limited to the
gross income from business use of the home office
(except for mortgage interest & property taxes).
|
| Deductions in excess of the
current year’s limitation may be carried forward. |
| When sale of residence occurs, all
depreciation for home office must be recaptured in sale
of residence gain or loss calculations. So save those
home improvement receipts. |
Please call
Accounting
Connections, LLC
(770)
846-7799
For help in
determining your HOME OFFICE DEDUCTIONS. |
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