DiSabatino CPA Blog

Mike DiSabatino CPA

7 minutes reading time (1358 words)

How to Secure a Home Office Deduction

How to Secure a Home Office Deduction

How to Secure a Home Office Deduction

Even if you have never before qualified for a home office deduction, you may be able to now. Starting a few years ago, the IRS began to apply more liberal rules, allowing more people to qualify for the write-off. Specifically, the old, hard-to-meet “principal place of business” standard was made much more taxpayer-friendly. But there are other scenarios that allow you to claim deductions as well.

Four paths to a deduction
If you use the space regularly and exclusively for your sole proprietorship, LLC or partnership business, there are four ways to qualify for the write-off:

  • First, your office now meets the definition of “principal place of business” if you conducted most of your income-earning activities from the home office.
  • Second, it can qualify if it’s used for administrative and management activities and you have no other fixed location for these functions (such as an “official” office downtown or work space provided by one of your customers or clients).
  • Third, you qualify for write-offs if in the normal course of business you meet with patients, clients or customers in your home office. For example, an architect might regularly use his home office for meetings with clients after-hours and on weekends. The principal-place-of-business issue doesn’t apply in this case, and it doesn’t matter if you have another office elsewhere.
  • Fourth, you are entitled to deductions if your office is detached from your home and used in your business for any purpose. Again, the principal-place-of-business test does not apply here, and you can have another office somewhere else. In fact, there’s nothing to prevent you from decking out the facility in lavish fashion—with full kitchen facilities, a deluxe bathroom and even a pool. Just make sure there is zero nonbusiness usage.

What if you and your spouse both use the space for your respective businesses? No problem, as long as you both pass one of the three tests explained above. Similarly, you can use the space for two or more of your own separate businesses. In either of these scenarios, it’s also OK to use separate areas for your different businesses.

Under any of the circumstances described above, you must use the space in your home regularly and exclusively for business. “Regularly” means often, rather than occasionally. More importantly, “exclusively” means absolutely no personal use during the year. None. Spending a lost weekend playing computer games at your desk means no deductions, according to the IRS.

Also, if you use the office for both a sideline business and for work taken home from your regular job, watch out. Unless the job-related usage is for the convenience of your employer (as we’ll explain later), it’s considered personal and your hoped-for write-offs go down the tubes.

Deduct expenses on Form 8829
If you are a sole proprietor or single-member LLC owner, use IRS Form 8829 (Expenses for Business Use of Your Home) to claim your deductions. It’s available at www.irs.gov/pub/irs-pdf/f8829.pdf . Here’s what happens on the form when all is said and done:
You get to deduct 100 percent of any expenses directly related to your office space, such as cleaning service charges and the extra premium for a business coverage rider under your homeowners policy (if you can get it). You can also deduct 100 percent of your business phone lines and all your utility charges if you have separate hookups.
Indirect expenses are those that relate to your entire residence. You get to write off a percentage of these. Examples are mortgage interest, property taxes, insurance, homeowner association fees, depreciation, utilities (if you don’t have separate hookups), security monitoring, garbage pickup, general maintenance and repairs. However, you can’t count as indirect expenses any outlays that are directly allocable to nonbusiness parts of the home, such as the cost to repaint your living room or kitchen.

Note that you still deduct the nonbusiness percentage of your mortgage interest and property taxes on Schedule A, as always.
There are two ways to figure the percentage of indirect expenses that you can deduct:
1. You can use square footage. Count only finished living space in the equation.
2. You can use any “reasonable method” to compute the business percentage. For example, you can use number of rooms if the room used for your office is of average size.    

Your write-off is limited to the taxable income from your business before the home office deduction. In other words, home office expenses can’t be used to generate an overall business loss on your Schedule C. Any disallowed excess gets carried over to the following year. However, this taxable-income limitation doesn’t apply to the business percentage of your mortgage interest and property taxes; they are fully deductible in any case.   

Deduct areas used for storage space
If you use an area of your house as the only fixed location for storing product samples or inventory for your retail or wholesale business, you can take advantage of a special rule. In this case, you need not use the area strictly for business.
For example, if you are a multilevel marketer and store products in part of your family room for eight months out of the year, you are still entitled to a write-off even though you slide the pool table over into that space during the rest of the year.

Home office used for your job
Although the home office rules for self-employed individuals have been liberalized, the same is not true for employees who use space in their homes for company business. If you are in this situation, all the above rules apply equally to you (even if you are employed by your own corporation), but you get no deductions unless both of the following apply:
1. The work-at-home arrangement is for the convenience of your employer.
2. Your unreimbursed office expenses exceed 2 percent of your adjusted gross income when lumped together with all your other “miscellaneous itemized deductions” on Schedule A.

As for the convenience-of-the-employer part, forget about claiming any deduction if you are allowed to telecommute as an accommodation to you. By contrast, if your company booted everyone in your job class out of company-provided space to save money, you pass the test.  

However, even if you clear the second hurdle by having expenses in excess of 2 percent of adjusted gross income, your deduction is subject to phaseout rules if you income is too high. If you pay the alternative minimum tax, your deduction is entirely disallowed.

Home office used for investing activities
Using a home office to keep track of your investments counts as a personal activity. No deductions. That’s bad enough, but the real problem with such usage is that it could negate an otherwise allowable deduction for business use of the same space. Why? Because you must use the office exclusively for business. Remember that.
Strategy: To preserve your business-related home office write-off, set up your investment headquarters on the kitchen table or in another room of the house.

Tax return ‘side effects’
Perversely enough, your home office situation also affects how much you can write off for business use of your car. If the office meets the principal-place-of-business definition explained earlier, you can deduct the cost of driving to your first business appointment plus the trip back home from your last business stop.

By contrast, if your office is not your principal place of business, the IRS says those first and last trips are nondeductible commuting. You can still write off the cost of driving between your various business stops during the day, however.

Having a deductible home office also means not having to keep usage logs to depreciate computers and peripheral equipment kept there. (Your office can be deductible for any of the three reasons explained earlier.) But you still must document business usage for other gear that can be used for recreation as well as business, such as cellular phones and photographic, video, audio and communications equipment.

You need not classify the cost of long-distance business calls or items used strictly for business—like bookshelves and fax machines—as home office expenses. You can write these off directly on Schedule C, whether or not the office itself qualifies for deductions.

4
Get 'extra credit' for your kids in college
Can I Defer My RMD if I'm Still Working?

Related Posts

 

Speed Up Your Success!

Contact Us Today: 1-805-389-7300

© 2006-2018 Michael DiSabatino, CPA. All Rights Reserved.