The home office deduction allows individuals to deduct expenses that are not otherwise deductible such as utilities and homeowners insurance. There are certain requirements you must meet to have a home office.
You should if you want to take full advantage of a tax deduction many people overlook. The home office deduction allows individuals to deduct expenses that are not otherwise deductible such as utilities and homeowners insurance. There are certain requirements you must meet to have a home office, including:
You own a business (if you are an employee, you must meet the "for the convenience of the employer" test). You have an area set aside in your home used regularly and exclusively for specific administrative or management activities There is no other place of business where you conduct those activities
These requirements help you to determine whether the area used in your home is your principle place of business for certain business functions.
If you don't think the area you use qualifies, you may just need to change the facts. Are there too many nonbusiness items in your office area? Move them to another room and you may qualify. Are you struggling to find business activities that you can do at home? Bookkeeping, billing and ordering supplies are just a few activities that are easily done from home.
Once you've determined that you have a home office and you would like to take the home office deduction, you need to track certain expenses.
Allowable home office expenses include:
- Utilities
- Mortgage interest
- Property taxes
- Homeowners and liability insurance
- Repairs and maintenance of office area
- Depreciation of office area
Deductions that do not qualify as home office expenses are items that do not relate to the home office such as landscaping and pool care. In addition, taxpayers are denied a deduction on a first phone line regardless of the level of business use. A taxpayer must have a second phone line to deduct telephone expenses, long distance charges and internet service.
Of course you can't deduct 100% of these expenses. The expenses are allocated based on square footage or number of rooms in the house. In most cases, the number of rooms allocation yields a higher deduction, make sure your CPA calculates both numbers to maximize your deductions.
- What You Should Know About Home Office Deductions -
Home office deductions are allowed for areas used exclusively for the management and administrative duties of the business when these functions are not conducted in the principal place of business.
Prior to 1999, the IRS regarded the location of major business transactions, based on time usage, as the principal place of business. For example, sales conducted in customer's homes disallowed the home office deduction, even if invoicing, bookkeeping and other management functions were conducted from the home. Now these responsibilities are accepted for home offices.
However, if multiple businesses are conducted from the home, separate office space should be allocated, or the entire deduction taken, in the most active business. This is particularly important where spouses each conduct business from the same home office space.
Home Office Requirements:
The home office must be an area in the home set aside and used regularly and exclusively as an office. No other fixed place of business can be used to conduct the same business regularly.
General expenses of your home are deductible in proportion to the business office percentage of your home. This can be measured either by square footage or by number of rooms, excluding bathrooms and hallways.
Certain home office expenses must be paid through your company, while others are personal expenses.
The following items should not be paid by your company:
- Mortgage expense and interest.
- Property taxes.
- Homeowners and liability insurance.
- Repairs and maintenance of the office space.
The following items should be paid through your company:
- urniture and fixtures purchased specifically for business purposes, whether stored in the home office or at another location.
- Separate business phone lines that are installed at the home office.
- Office supplies.
- Other items specifically used for the business.
The following items are not generally deductible:
- Landscaping and lawn maintenance.
- Pool care.
Don't Drive By This Tax Deduction!
Have Your Business Reimburse You for Its Use of Your Personal Vehicle Your business can reimburse you for allowing it to use your car - even if you are the one using it in the business!
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