Archive » January 4, 2007
By Gary A. Bartick
Home-office Tax Deduction
The cyber world is making it possible for more of this nation’s workforce to operate from their homes, rather than in an employer-provided workspace. And as we head into tax season, more users of virtual home offices can use their expenses as a tax deduction.
However, just commuting from your bedroom to a home office in sweats doesn’t mean you qualify for the deduction. In the past, many tax preparers and entrepreneurs actually feared that taking the deduc¬tion might trigger an unwanted visit from an IRS auditor. That partly explains why, according to the American Institute of Certified Public Accountants, only 10% of the nation’s 14 million full-time, self-employed taxpayers take a home-office deduction.
But new liberalized rules for home-office deduction reflect the reality of today’s tech-driven, small business-owning, office-liberated workforce.
Qualifying Tests: In order to qualify for the deduction, the taxpayer must meet a few IRS tests. First, your use of your home office must be exclusive, regular, and for a trade or business. It’s important to under¬stand the concepts of “regular” and “exclusive.”
Regular use does not mean that you have to use your office every day or even every week, but sporadic use probably won’t qualify for a deduction. Nor does exclusive use require an entire separate room. A clearly defined part of a room qualifies for the deduction so long as you devote that space solely and exclusively to your business.
Taking a home-office deduction requires spending most of your working hours in your home office and conducting most of your important business there, such as meeting with customers on a regular basis. Conversely, those who spend most of their hours performing services in another place and use the home office only for routine tasks like record keeping cannot take the deduction.
Second, in order to qualify, the business part of the home must be either your principal place of business, or a place where you meet or deal with patients, clients, or customers, or a separate structure you use in connection with your trade or business.
Substantiating your deduction is easier if you 1) maintain a separate telephone number for business purposes only, 2) encourage customers to visit your home office on a regular basis, 3) keep a separate log of all cus¬tomer visits and the amount of time you spend in your home office, and 4) have business correspondence addressed to your home office. These precautions should not be a deterrent to taking the deduction.
Amount: To determine the amount of your deduction, first calculate what percentage of total household space your home office occupies – that is, divide its square footage by the total home square footage. Then add up total rent or mortgage interest, total utilities, and total spent on upkeep and insurance. Multiply the result by the percentage you just calculated. That amount should be deductible.
Also deductible is a calculated amount for depreciation. However, keep in mind that total depreciation claimed can reduce the $250,000 (single filers) or $500,000 (joint filers) tax exclusion on your gain from the sale of a qualified principal residence; the percentage used for a home business isn’t eligible until two years after it is converted back to residential use.
Finally, remember that the home-office deduction cannot be used to create or increase a tax loss from your business. For example, if after deducting all other business expenses, your business is showing net income of $1,000 before claiming the home-office deduction, then your deduction is limited to $1,000. However, any excess home office expenses may be carried over into future tax years.
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