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Home Office Part III – How Big is My Deduction?
Filed under: Home Office | Tags: 39-year, business use of home, cable, carryover, daycare, deduction, depreciation, Form 2106, Form 8829, furniture, home office, improvements, insurance, janitorial, landscaping, maintenance, miscellaneous itemized deductions, mortgage interest, repairs, satellite, Schedule A, Schedule C, square foot, taxes, trash, utilities, water
Leave a comment Originally published in the Cedar Street Times
August 23, 2013
Four weeks ago, I discussed a new simplified option for calculating the home office deduction that is effective for 2013. Two weeks ago I discussed the rules to qualify for a home office deduction. In this final installment on home office deductions, we will discuss the standard method of determining your deduction, which will still yield the greatest benefit for most people – especially in high cost localities. (If you missed the prior two articles, you can find them on my website at www.tlongcpa.com/blog.)
The standard method of calculating your home office deduction is done on a Form 8829 or on tax worksheets. It typically starts with a square footage calculation of the livable space in your home, and a calculation of the portion used exclusively for your business activity, to determine the percentage used by the business. You can use a calculation based on the number of rooms in the house if they are similarly sized, but in practice hardly anybody uses this method.
The next step is to gather your expenses and multiply them by the business percentage you just determined. Add up in separate categories your utilities, water, trash/recycling service, janitorial (house cleaner), repairs and maintenance, homeowner’s or renter’s insurance, and any other recurring expenses used to maintain your house. If you regularly meet with clients at your house, you can generally do the same for your landscape maintenance expenses as well.
If you rent your home, you add up your total rent and multiply it by the business percentage. If you own, you apply the business percentage to your mortgage interest and real estate taxes (the balance go on Schedule A). Some people will throw their internet access fees on the 8829, but often a better deduction is obtained by thinking about actual business use versus personal use, as square footage is not a great metric for internet use. You could then put that directly on your schedule C if you run a business, or Form 2106 if you are an employee with a qualifying home office. If you buy furniture or equipment exclusively for your office, that is generally put on a depreciation schedule and often linked directly to your Schedule C or Form 2106 instead of running it through your business use of home form.
The first telephone line into the house is not deductible at all. A second line could be, however. But in that case it is typically a dedicated business line, and you would put that on your schedule C or Form 2106 in full to get a better deduction. Your cable or satellite service is probably off limits for most people since there is such a high degree of personal use and it is an area subject to abuse. Based on facts and circumstances some people may be able to build a case for part of it – such as a day trader that depends on the financial channels, or if you have a waiting area which clients regularly use to watch television.
If you own the home you need to set up the home and and any improvements on a 39-year depreciation schedule (not 27.5 like a rental home – common mistake) and run depreciation deductions through your business use of home calculation (beyond the scope of this article). Many people fail to do this thinking it is a choice. It is not. There is a use or lose it rule, and you are responsible for depreciation recapture taxes upon the sale of the home whether or not you claimed the deduction. So you might as well take it!
Facts and circumstances and reasonableness will generally rule the day as an overarching principle to the application of all of these rules. Technically, if you only painted your office, you can take 100% of the cost into consideration for your business use of home deduction. On the flip-side, if you painted everything but your office, you shouldn’t really take any deduction. In practice, records are generally not kept that precisely, and the dollar figures are not that large, so you often end up applying the business percentage to everything in that category for the year for practical purposes.
Even after calculating the deduction, there is another hurdle you must pass – you cannot create an overall loss on your Schedule C from business use of home expenses with the exception of real estate taxes, mortgage interest, or casualty losses which would be deductible on Schedule A regardless. If you have a loss, the excess business use of home expenses will get suspended and carried over to a future year when your business is profitable.
Employees have a different hurdle since their home office deduction is an employee business expense which is a miscellaneous itemized deduction subject to a two percent of adjusted gross income floor. So if their total miscellaneous itemized deductions exceed two percent of their adjusted gross income, then the excess is an itemized deduction, and if their itemized deductions exceed the standard deduction, then they can benefit!
Of course there are many other considerations that can come into play depending on your circumstances such as separately metered properties, or separate structures, multiple offices in the same home, or different homes, a daycare home office, etc. This article should be enough to give you the gist, but it is always best to consult with a professional to ensure you are complying with the laws as well as getting all the deductions you deserve.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Home Office Part II – Do I Qualify?
Filed under: Home Office | Tags: accounting, administrative, administrative and management activities, billing, business owner, business use of home, deduction, detached building, employee, employer's convenience, exclusively and regularly, fixed location, home office, making appointments, management, meet clients, meet customers, multiple businesses, ordering supplies, personal use, principal place of business, qualify, self-employed, separate structure, telecommuting
Leave a comment Originally published in the Cedar Street Times
August 9, 2013
Two weeks ago, I discussed a new simplified option for calculating the home office deduction that is effective for 2013. (You can find the article on my website at www.tlongcpa.com/blog if you missed it.) The rules to qualify for a home office, however, have remained unchanged, and still complicated! At the end of the last article I promised I would discuss the basic rules to qualify – so let’s get to it!
The purpose of the home office deduction is to offset the costs of maintaining a dedicated office space in a home related to a business owned by an individual, or in some cases for an employee’s job.
Let’s talk about employees first. Many employees these days work from home, but more often than not, they are not entitled to the deduction because it is their personal choice to work from home. The law requires that the office be for the employer’s convenience – not yours. If your employer does not require you to work from home and provides space for you at the main office which you choose not to utilize, you are generally barred from taking the deduction.
An employer hiring for telecommuting position so it can save on corporate office rent or obtain/retain talent in distant places would certainly be for the employer’s convenience. Or perhaps an employer would like to have a presence in a particular area, so it hires somebody to work out of his or her own home office, and meet clients there, instead of having to rent another space. This would also be for the employer’s convenience. Often, people work a couple days from home, and a couple days in the office. They could be closer to a customer base from their home for appointments, for instance, but then also come to the main offices for staff meetings, etc. Many times, it is certainly convenient for both parties.
The key thing employees would want to have is an expectation in writing from the employer about maintaining and using their own office. Rationalizing in your own mind that the employer is benefiting will not help, even though it may be true. If it does seem the employer is better off as a result of your home office, and your job description does not discuss maintaining your own office, you may want to talk to the employer about changing your job description to include this.
Now let’s discuss people running their own business. In this circumstance, the IRS says the office must be one of three things: 1) the principal place of business, 2) a place of business that is used to meet customers, or 3) a separate structure from the home, but used for the business. If you have a business, and your home is the only office, it is pretty clear you meet one of these three. When someone has an office space outside the home, but also has a home office it gets a little trickier, especially if you don’t regularly meet with customers at your home (occasional use won’t qualify) and you don’t have a detached building at your home.
Digging further into item one you find that the IRS distinguishes your principal place of business from other offices as the place where your administrative and management activities such as billing, accounting, ordering supplies, making appointments, etc. takes place. If you have no other fixed location where you conduct substantial administrative and management activities then your home office would qualify as your principal place of business. For instance, if you were a personal trainer and rented space for you and your staff to meet with clients and use your exercise equipment, but you did all of your accounting, billing, appointment making, etc. from your home office, your home office would qualify as the principal place of business.
For any home office, whether it be for employees or business owners, the office must be used “exclusively and regularly” as an office for that business. The rules are very rigid. You can’t use a room a couple times a year and write it off, even if you did not use it for anything else. It needs to be used with regular frequency, and be substantial and integral. You also can’t double up your living room as an office during the day and a TV room at night. You can’t have a family office where the kids use it for computer games on the weekends, dad uses it to work on the finances in the evening, and then mom uses it as her office during the day and tries to deduct it. People often try to write off the whole guest bedroom which also houses there office, but courts have typically denied this if they have a bed in there and admit to having guests on occasion. Technically, any nonbusiness purpose use disqualifies the space (special rules apply to childcare providers, however).
In practice there is at least de minimis personal use of virtually every office space, and at the end of the day, it is quite difficult to know if someone uses an office for some personal purposes. However, if the auditor shows up and the kids are playing games on your computer and your in-laws’ suitcases are next to the bed in your “office,” I think you will have a problem! Stick to the spirit of the law, carve out a dedicated space, and everyone will be happy. Keep in mind that you don’t have to use an entire room, but you can define a portion of a room as the dedicated space, write off closet space for storage, etc.
If you have multiple businesses, you can use the same space for all of them, but if one business fails to qualify, then it is seen as personal use and thus none of the businesses qualify to claim the home office deduction. (Note, in calculating the deduction, you would allocate the allowable deduction to the businesses – you would not get a double or triple deduction for the same space.)
In the final installment on home offices in two weeks, I will discuss the normal method of calculating the home office deduction and what expenses generally qualify.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 