Home Office And Taxes Article
Tax Advantages Of A Home Office
If you are just starting a new home based business, you have probably heard that there are numerous Tax advantages to owning your own business. Many expenses that you have been paying for with after tax dollars, can now be paid for with before tax dollars, meaning that the expenses are deductable from your gross income and therefore, not taxed, and thereby lowering your overall tax liability. But one of the possible deductions that is sometimes overlooked or misunderstood is the area of deducting your Home Office. Many times this deduction is overlooked because of mis-information or a less than complete knowledge of the rules. The fact of the matter is that if you truly have an office that you use exclusively for your business, than you are entitled to take a deduction for that office. So lets explore some of these rules to see if you qualify.
BUSINESS USE OF YOUR HOME
To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited. To qualify to claim expenses for business use of your home, you must meet both the following tests.
1. Your use of the business part of your home must be:
a. Exclusive,
b. Regular,
c. For your trade or business, AND
2. The business part of your home must be one of the following:
a. Your principal place of business (defined later). A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
b. A separate structure (not attached to your home) you use in connection with your trade or business.
Exclusive Use.
To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Which means that if you are using your dining room table as your desk and later you use the same table for dinner, then that would not qualify for a specific and exclusive area for your business.
On the other hand, if you set up separate area in your house such as an extra bedroom or even the dining room, so long as you only conduct business in that area, then it qualifies.
Principal Place Of Business
Your Home Office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements.
• You use it exclusively and regularly for administrative or management activities of your trade or business.
• You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
FIGURING THE DEDUCTION
After you determine that you meet the tests for a Home Office deduction, you can begin to figure how much you can deduct. You will need to figure the percentage of your home used for business and the limit on the deduction.
Business Percentage
To find the business percentage, compare the size of the part of your home that you use for business to your whole house. Use the resulting percentage to figure the business part of the expenses for operating your entire home.
You can use any reasonable method to determine the business percentage. The following are two commonly used methods for figuring the percentage.
1. Divide the area (length multiplied by the width) used for business by the total area of your home.
2. If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home.
Example 1.
- Your office is 240 square feet (12 feet x 20 feet).
- Your home is 1,200 square feet.
- Your office is 20% (240 ÷ 1,200) of the total area of your home.
- Your business percentage is 20%.
Example 2.
- You use one room in your home for business.
- Your home has 10 rooms, all about equal size.
- Your office is 10% (1 ÷ 10) of the total area of your home.
- Your business percentage is 10%.
With this percentage you can now figure your office's percentage of the mortgage costs (or rent), home owners insurance, and utilities. Don't forget about utilities. A percentage portion of the cost for utilities can also be deducted. If your electric bill alone is $200 a month, and your office represents 20% of of your home, you have a $480 deduction ($200 x 12 x 20%). Other expenses that qualify include maintenance, repairs, and even the lawn service. You can deduct the same percentage of these costs.
Telephones:
If you haven't set up a separate telephone line for your business than a percentage of your telephone costs will also be deductible. However this would only amount to a percentage of the basic line charges and costs for long distance calls that can be attributed to business calls. So it would be necessary to set up a phone call log to keep track of all of the calls made for business.
In actuality, the more prudent way do this is to set up a separate business telephone line. One that will have its own number dedicated to the business name, and that won't be answered by the children who might exclaim "Daddy's not here now". This telephone line will be 100% deductible to the business. Further if your spouse was to inadvertantly use this line to call Mom across the country, that long distance call just became deductible also. Hmmm.
As I stated before, having a home office will definitely afford you with some worthwhile tax saving advantages. So long as you can meet the criteria of having a legitimate Home Office, you should take advantage of the deductions that IRS has given you to use. It is every person's duty to pay taxes. But it also your right to pay as little as legally allowed. So look for those deductions.
For more information or questions on how to file for your Home Office deductions, contact your tax advisor. And for other ways to qualify to deduct home office expenses, you can refer to IRS Publication 587.
