J. William Seabrooke CPA P.C.

Note:  A related discussion on this topic appeared on January 12, 2011 under the topic “Are You Planning To Start A New Business?”  The contents of this article are not intended to duplicate the information which was previously provided.  There is additional, new information provided below. 

From an “Overview” perspective, If qualified, making a decision regarding whether to claim the expenses for the use of your home for your business operations is a continuing issue and a problem for both American taxpayers and the Internal Revenue Service.  As you may have already concluded, there are far too many instances of fraud and abuse by those taxpayers who are clearly not entitled to the deduction.  It is also a potential “red flag” area that could cause your tax return to be examined and audited.  In summation, if you meet the requirements and qualifications then claim the deduction.  Otherwise, you are paying too much in income taxes.  If you do not meet the requirements and qualifications, don’t even think about it! 

Prepare a letter or memorandum for your records that includes both the requirements and your rationale for meeting these requirements.  Include all of your supporting documents, i.e. a copy of your appraisal, HUD 1, etc.  Keep them in a safe place or save them on your hard drive.  These documents will be invaluable IF your tax returns are audited. Be sure to review the “Recordkeeping” requirements on page 18 of IRS Publication 587 (“Business Use of the Home”).

If you do meet the requirements, there are additional points which you should know, including:

1. The simplest method to determine the relative percentage of your home that is devoted to your business office is to divide the total square footage of your office by the total square footage of your home, i.e. 200/2,400 = 8.3%;
2. There will usually be both “direct” (i.e. a second telephone line, Internet connection, repairs to your office) and “indirect” (i.e. insurance, taxes, mortgage interest, utilities etc) expenses on your tax return (Form 8829).  “Indirect” expenses require the use of the percentage which was calculated in #1 above;
3. “Depreciation” – only the cost of your home is included in the cost basis and not the land.  Read pages 10-11 (“Depreciating Your Home” ) in IRS Publication 587 for specific guidance and procedural steps;
4. Additional information on this subject can be obtained from reading IRS Topic 509, “Business Use of the Home” which is available via this website link; 

Work From Home? Consider the Home Office Deduction 

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.  Here are six things the IRS wants you to know about the Home Office deduction

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business, or
• as a place to meet or deal with patients, clients or customers in the normal course of your business, or
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see IRS Publication 587, Business Use of Your Home, available at http://www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). 
 

Links:

• Publication 587, Business Use of Your Home (PDF 214K)
• Form 8829, Expenses for Business Use of Your Home (PDF 64K)
• Form 8829 Instructions (PDF 29K)
• Schedule C, Profit or Loss from Business (PDF 111K)
• Schedule A, Itemized Deductions (PDF)