| Business Expenses / Home office expense deduction for self-employed taxpayer |  |
|||
|
If you're self-employed and work out
of an office in your home, you should know about the strict rules that
govern whether you can deduct your home office expenses. You may deduct your home office
expenses if you meet any of the three tests described below: the
separate structure test, the place for meeting patients, clients or
customers test, or the principal place of business test. You may
also deduct the expenses of certain storage space if you qualify under
the rules described further below. If you do qualify, you compute your
home office deductions on Form 8829, and report them above-the-line on
Schedule C. Separate structures.
The easiest test to meet allows a deduction for the costs of a separate
unattached structure on the same property as your home—for example, an
unattached garage, artist's studio, workshop, or office building—that
is used as a home office. To qualify for the deduction, the separate
structure must be used exclusively and on a regular basis in connection
with your business. Home office used for meeting
patients, clients, or customers. Alternatively, you may deduct your
home office expenses if you use the home office exclusively and on a
regular basis, to meet or deal with patients, clients, or customers in
the normal course of your business. The patients, clients or customers
must be physically present in the home office. Telephone calls to them
from your home office won't do the trick. Principal place of business.
In addition, you may deduct your home office expenses if you use your
home office, exclusively and on a regular basis, as your principal place
of business. There are two tests for determining
whether a home office is a principal place of business—the
"management or administrative activities" test, and the
"relative importance/time" test. If your home office satisfies
either of these tests, it will be treated as your principal place
of business. Management or administrative
activities test. A home office will qualify as the taxpayer's
"principal place of business" if the taxpayer uses the home
office to conduct administrative or management activities of the
business, so long as the taxpayer doesn't have another fixed location
where the taxpayer conducts substantial administrative or management
activities of the business. According to IRS, the office must be used
exclusively, and on a regular basis, for the administrative or
management activities. Relative importance/time test.
In applying this test, there are two primary considerations in
determining a taxpayer's principal place of business: (1) the relative
importance of the activities performed at each location where the
taxpayer's business was conducted, and (2) the amount of time spent at
each place. IRS says that it will first apply the "relative
importance" test by comparing the activities performed at home with
those carried on elsewhere. If this comparison clearly shows where the
principal place of business is, there's no need to look further. Where
the "relative importance" test doesn't give a clear answer,
says IRS, the "time" test comes into play. However, these
tests may not clearly reveal that any location is the taxpayer's
principal place of business. In that case, the taxpayer will be treated
as not having a principal place of business.
Space for storing inventory or
product samples. If you're in the business of selling products at
retail or wholesale, and if your home is your sole fixed business
location, you can deduct home expenses allocable to space that you use
regularly to store inventory or product samples. The space doesn't have
to be used exclusively for business purposes. And you can do business at
the fixed locations of your customers (e.g., retail stores, if you're a
wholesaler), and non-fixed locations, such as flea markets or craft
shows. Exclusive and regular use
requirements. As noted above, when you claim to be using your home office
under any of the tests outlined above (except the "storage
space" test for retailers and wholesalers), the home office must be
used exclusively and on a regular basis in connection with
your business. (For storage space used by retailers or wholesalers, the
space must be used regularly for business purposes, but doesn't have to
be used exclusively for those purposes.) The exclusive use requirement means
that you must use your home office solely for the purpose of
carrying on your business. Any other use of the home office will
result in loss of all deductions for your home office expenses. For example, a professional
musician's home studio that's used only for rehearsal, recording demo
tapes, etc., passes the exclusive use test. But a caterer's living room
that's used to meet with clients and potential clients, but is also used
for family entertainments and gatherings, won't pass the test. Neither
will a spare bedroom that's used to work on and store business records,
but that's also used to sleep occasional overnight guests. The regular basis requirement means
that you must use the home office in carrying on your business on a
continuous, ongoing or recurring basis. Generally, this means a few
hours a week, every week. A few days a month, every month, may
do the trick. But occasional, "once-in-a-while" business use
won't do. We can help you figure out whether
your home office satisfies the exclusive and regular use tests, and
suggest things you might do to make sure that you do pass these
tests—for example, removing non-business furniture and fixtures, not
letting guests use your home office, keeping the kids out, etc. What you get if you qualify for home
office deductions. If your home office is your principal place of
business under the rules noted above, the costs of travelling between
your home office and other work locations in the same trade or business,
regardless of whether the other work location is regular or temporary,
and regardless of its distance, are deductible transportation expenses,
rather than nondeductible commuting costs. If your use of your home office
qualifies under any of the rules discussed above, you may take business
expense deductions for the following: . . . the "direct
expenses" of the home office—e.g., the costs of painting or
repairing the home office, depreciation deductions for furniture and
fixtures used in the home office, etc.; and . . . the "indirect"
expenses of maintaining the home office—e.g., the properly allocable
share of utility costs, depreciation, insurance, etc., for your home, as
well as an allocable share of mortgage interest, real estate taxes, and
casualty losses. Amount limitations on home office
deductions. The amount you may deduct as home office expenses is subject
to limitations based on the income attributable to your use of the home
office, your residence-based deductions that aren't dependent on use of
your home for business (e.g., mortgage interest and real estate taxes),
and your business deductions that aren't attributable to your use of the
home office. Example:
Say you operate your business out of a home office that occupies 20% of
the space in your home. This year, your business grosses $50,000. The
mortgage and real estate taxes on your home total $20,000, $4,000 of
which is allocable to the home office. You have $5,000 of additional
home office expenses (depreciation, utilities, etc.). And your business
has $30,000 of expenses that aren't attributable to the use of your home
office (secretarial and bookkeeping services, legal and accounting fees,
advertising expenses, etc.). To figure out whether you can deduct your
home office expenses, you first subtract the home-office portion of the
mortgage and real estate taxes, $4,000, from the business's gross
income. This leaves you with $46,000. Then, from this, you subtract your
business expenses that aren't attributable to your use of the home
office, $30,000. This leaves you $16,000. If this figure exceeds the
amount of your remaining home-office expenses, here $5,000, you can
deduct all of those expenses. If this figure is less than your remaining
home-office expenses, your deduction is limited. For example, if your
remaining home-office expenses were $25,000 instead of $5,000, you'd
only be able to deduct $16,000 instead of the full amount. And the
computation gets even more difficult if your business effectively earns
money both in your home office and at other locations, because the
limitation formula only takes into account the income attributable to
the use of the home office. Any home office expenses that can't
be deducted because of the above amount limitations may be carried over
and deducted in later years. Computers and related equipment.
If your use of your home office qualifies under any of the rules
discussed above, you may deduct the cost of computers and related
equipment that you use in the home office, and the deductions are not
subject to the "listed property" restrictions that would
otherwise apply. Effect of home office deductions on later sales of your principal residence. You should be aware that, if you claim any home office deductions with respect to a portion of your principal residence, when you sell the residence, any profit attributable to the portion used as a home office may not be eligible for the otherwise available $250,000/$500,000 exclusion for gain on the sale of principal residences. |
Home
Tax topics
|
|||