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Do You Qualify for a Home Office
Deduction?
Confused by Publication
587's 35 pages on "Business Use of Your Home"?
For
years as a tax preparer, I have witnessed countless small business
owners failing to claim a home office deduction on their tax
returns. Many of those taxpayers feared that listing home office
expenses would invite an audit; others never thought of doing so; and
some thought it was too much work for too little tax
benefit. Moreover, I have prepared tax returns for employees who
were
eligible for the deduction and who failed to take the deduction on
tax returns for prior years. In addition, a number of individuals
did not claim the deduction because they simply did not know if they
were entitled to the deduction because the rules for determining
eligibility can be a bit daunting, if not intimidating, to small
business owners and employees with home offices.
A home office tax deduction can save a taxpayer thousands of dollars in
taxes. If you are self-employed or an employee who works at home,
you may be
eligible for this significant tax deduction. In order to
claim this tax deduction, you must meet the following tests:
- Part of your home must be used in a business.
- Its use must be regular.
- Incidental or occasional use is not regular.
- Its use must be exclusively for business.
- It cannot be used both for business and for
personal purposes.
- The area must be a separately definable area.
- It need not be a separate room.
- The home must be the principal place of business for
your business.
- It must be used exclusively and regularly for
administrative or management activities of your business.
- There is no other fixed location where
substantial administrative or management activities of your business
are conducted.
- Administrative and management activities include,
among many others:
- Billing customers, clients, or patients.
- Keeping books and records.
- Ordering supplies.
- Setting up appointments.
- Forwarding orders or writing reports.
- If the business
use of your home fulfills all of the
above "basic" criteria, then you are allowed to deduct home
office
expenses on your business tax return. If you are an employee,
you are entitled to a home office deduction as
long as you meet the following two
conditions in addition to those
above (i.e., items 1 - 4):
- You work at home for the convenience of your
employer.
- If the use of the home office is merely
appropriate and helpful, you cannot deduct expenses for the business
use of your home.
- You do not rent part of your home used for
business to your employer.
- However, if your home is not the
principal place of business for your business, you may still be
eligible to deduct your home office expenses as an expense of your
business as long as you meet all of the
other previously listed "basic"
conditions (i.e., items 1 -3) and satisify one of the
following conditions:
- The area of the home is a separate structure
(e.g., studio, garage, barn), or
- It is a place used to meet patients, clients, or
customers in the normal course of your business.
- Using
your home for occasional meetings and telephone calls will not qualify
you to deduct expenses for the business use of your home.
- If the part of your home used for business is
not used exclusively for your business but also for personal reasons,
and you meet all of the other above "basic"
requirements (i.e., items 1, 2, and
4), then you still may be
able to deduct home office expenses if either
of the following applies:
- You use part of your home for the storage of
inventory or product samples, meeting all
of the following tests:
- You sell products at wholesale or retail as
your trade or business.
- You keep the inventory or product samples in
your home for use in your trade or business.
- Your home is the only fixed location of your
trade or business.
- You use the storage space on a regular basis.
- The space you use is a separately
identifiable space suitable for storage.
- You use part of your home as a daycare facility
and satisfy the following two
conditions:
- You
must be in the trade or business of
providing daycare for children, persons age 65 or older, or persons who
are physically or mentally unable to care for themselves.
- You
must have applied for, been granted, or be exempt from having, a
license, certification, registration, or approval as a daycare center
or as a family or group daycare home under state law. You do not meet
this requirement if your application was rejected or your license or
other authorization was revoked.
Let's summarize and review. If you
are self-employed and you use a part of your home regularly and
exclusively as your principal place of business (items 1 - 4, the "basic" criteria)—or if you
are an
employee, and in addition to these conditions, you work at
home for your employer's convenience without renting this work area to
your employer (item 5)—you are entitled to deduct your home office
expenses. In addition, there are exceptions to the principal place of business
criterion for those operating their business from a separate structure,
or those meeting customers there (item 6); and to the exclusivity
criterion for those storing inventory or product samples, and those
operating daycare facilities at home (item 7).
If you are visually oriented, the IRS provides a flowchart
in its Publication 587 to assist you in determining whether you can
deduct the business use of home expenses; however, it excludes items 6
and 7 as well as supporting, explanatory, qualifying details of its
criteria and terminology:
Have a tax or an accounting question? Please feel free to submit
it to William Brighenti,
Certified Public
Accountant, Hartford CPA Accountants. For information
and assistance on
any tax and accounting issue, please visit our website: Accountants CPA
Hartford.
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to the extent that this publication contains contributions from tax
professionals who are subject to the
rules of professional conduct set forth in Circular 230, as promulgated
by the United
States Department of the Treasury, the publisher, on behalf of those
contributors, hereby states that any U.S. federal tax advice that is
contained in such contributions was not intended or written to be used
by any
taxpayer
for the purpose of avoiding penalties that may be imposed on the
taxpayer by
the Internal Revenue Service, and it cannot be used by any taxpayer for
such
purpose. The above tax advice was
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practice of the publisher and any transaction described herein. The taxpayer recipients of this offering
memorandum
should seek
tax advice based on their particular circumstances from an independent
tax
advisor
.
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