 |
 |
|
BUSINESS BASICS CHANNELS 
|
Your Home Office Tax Deduction Today many people starting up businesses find that setting up an office in their home is the only economical way to operate. Others are abandoning the traditional corporate office for the privacy and convenience of working at home. So this month, I want to take a look at the benefits and pitfalls of using your office at home for a tax deduction. Tax treatment of a home office depends on many factors. The first factor is whether you are an employee or self-employed. If you are an employee, you can only deduction a home office if it is required by your employer for his or her convenience and a condition of your job. Also, you must generally not have another office available for your use other than your home office. Generally, in order to claim a home office deduction, you must meet certain stringent rules. First of all, the home office must be your "principal place of business". Before 1999, this used to mean that only the most important, consequential place of business qualified for the home office deduction. So if you were an outside salesperson and spent 75% of your time on the road, but only 25% of the time in your home office, you lost the deduction because it was not your principal place of business. This changed for years beginning after 1998. If you have no other fixed location to office in, but your perform administrative or management tasks in your home office, you can still get the deduction (assuming you can jump through the other hoops). You must use this home office "regularly and exclusively for business". This means that you cannot balance your checkbook, check your investments, or do any personal tasks in the home office, or you lose the deduction. A trap here is if you use a home computer in your home office. If you are honest enough to say you use the computer for less than 100% business but you then claim the office in which you use the computer, you lose the deduction. But of course, does anyone in business EVER use their computer for any personal purpose? I didn't think so. If you have a separate part of your house (say an attached room with a separate entrance), you can deduct any direct expenses of maintaining that room. Otherwise, you have to allocate all expenses based on the total square feet of the home. You can deduct a portion of the mortgage interest, real estate taxes, homeowner's insurance, utilities, repairs, trash collection, etc. You can also depreciate the cost of your home. But beware, there are a couple of traps here. First, you can only take home office deductions to the extent of your income from your trade of business (with the exception of interest and taxes). Let's say your home business makes $2,500 before any home office deduction. Then your business portion of the interest and taxes come to $1,500. If your business portion of the other expenses comes to $1,200, you can only deduct the first $ 1,000 and the rest is carried over to the next year. The next, and biggest trap, was added into the tax law under what we sometimes refer to as the law of unintended consequences. When Congress changed the law to liberalize (gee, I hate that word) the deduction for business use of a home, they also caused a major problem down the road. Under the old law, if you took home office deductions, you merely had to stop deducting anything in the year you sold your home, and you were pretty much let off free. But now, if you use, let's say 10% of your home for business, then when you go to sell the house, you will have to recognize gain on 10% of the proceeds instead of receiving the tax free treatment you would ordinarily get. So when you get ready to take advantage of the business use deductions, keep this in mind. Remember, the deductions for business use of your home are calculated on IRS Form 8829. As usual, I suggest that this form be left for professionals to complete-Do not try this at home. Of course, I have a vested interest in saying this, so go ahead and try it for yourselves. The best thing I can suggest is to keep good records on your home office. How much is used for business? How many hours? What is done there? These things will go a long way to keeping that deduction in case Uncle Sam's shining representatives ever invite you in for a visit. |
|