Do you Qualify for the Home Office Deduction?

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Do you Qualify for the Home Office Deduction?
By Miriam Eisenbach

With the advancements of technology, it has become more convenient for taxpayers to work from home. Taxpayers have been reluctant to utilize the home office deduction because they are uncertain as to whether they qualify for the deduction.
The following requirements must be met in order to take the home office deduction:
Requirement #1: Regular and Exclusive Use: The space must be used exclusively for conducting your trade or business
Exceptions:

  1. Storage: If you use space in your home for storage of inventory and samples, you can deduct expenses for your trade or business use of home without meeting the exclusion test. However the following criteria must be met:
    1. Your business sells products at wholesale or retail
    2. The storage is for the use of your trade or business
    3. Your home is the only fixed location of your trade or business
    4. The storage space issued on a regular basis
    5. The space is a separate identifiable space
  2. Day care:  If you use space in your home to provide daycare on a regular basis, you may be able to claim that space even if you use the same space for nonbusiness activities. The following criteria must be met:
    1. You use the space in a trade or business to provide daycare for children, persons aged 65 and older, or persons who are mentally or physically unable to care for themselves.  AND
    2. You must have applied for, been granted or exempt for having a license, certification or registration for a daycare center.

Requirement #2: Principal Place of Business: You must be able to prove that your home is your principal place of business.  If you conduct business outside your home, but also substantially in your home, then you may quality for a deduction. If for example you normally meet clients, customer or patients in the regular course of business in your home, then you qualify for the home office deduction.  The following are a list of items to consider in determining if you satisfy this criterion:

  1. The importance of the activities performed
  2. Amount of time spent
  3. Your home would also qualify if the following are met:
    1. You use your home exclusively and regularly for administrative and management activities AND
    2. You have no other fixed location.

For example, a plumber conducts his work at his clients’ locations, but all of his administrative and management is done from his home in a space that is exclusively used for his business. He would qualify for a home office deduction even though he is not conducting his trade from his home.
Additional Requirements for Employee Use:

  1. The business use must be the convenience of your employer
  2. You may not rent any part of your home to your employer and then use the rented portion to perform as an employee for your employer

Methods
The IRS now has two methods to calculate the home office deduction:

  1. Simplified Method: For tax years starting after January 1, 2013, the IRS has issues a simplified method that would require less record keeping. In most cases you will calculate the area used for your trade or business and multiply it by $5. The area used is limited to 300 square feet for a total deduction of $1,500.
  2. Regular Method (Actual Expenses):  The taxpayer must determine the actual expenses of their home office. This deduction is based on the percentage of the home devoted to the trade or business. Examples of expense included in the deduction are real estate taxes, mortgage interest paid, insurance, utilities, repairs and depreciation (please keep in mind that any depreciation taken will create a taxable gain when the property is sold).

Methods comparison (provided by www.irs.gov)

Simplified Option Regular Method
Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes Same
Allowable square footage of home use for business (not to exceed 300 square feet) Percentage of home used for business
Standard $5 per square foot used to determine home business deduction Actual expenses determined and records maintained
Home-related itemized deductions claimed in full on Schedule A Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F)
No depreciation deduction Depreciation deduction for portion of home used for business
No recapture of depreciation upon sale of home Recapture of depreciation on gain upon sale of home
Deduction cannot exceed gross income from business use of home less business expenses Same
Amount in excess of gross income limitation may not be carried over Amount in excess of gross income limitation may be carried over
Loss carryover from use of regular method in prior year may not be claimed Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year


Keep in mind that the deduction is limited to your income. If you have any questions, please feel free to contact us directly at 847-556-2358 or meisenbach@bkl-cpa.com

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What’s Ahead For Mortgage Rates This Week – March 24, 2014

Last week’s economic news included several housing-related reports including the Housing Market Index (HMI) for March, a report on housing starts, and building permits for February.

The National Association of REALTORS® also released its Existing Home Sales report for February and the Federal Reserve issued its first FOMC statement under the helm of Fed Chair Janet Yellen.

Home Builders Conservative On Housing Market Conditions

The National Association of Home Builders Wells Fargo Housing Market Index rose by one point to a reading of 47 in March against a reading of 46 in February and against an expected reading of 50. Readings above 50 signify that more builders have a positive view of housing market conditions than not.

Conditions contributing to the sluggish reading included a lack of lots for development and labor shortages. The NAHB also cited rising home prices and mortgage rates as reasons for builders’ conservative outlook.

Commerce Department: Housing Starts And Building Permits

The U.S. Commerce Department released reports on Housing Starts and Building Permits Issued for February. Housing starts dipped to 907,000 in February against expectations of 908,000 expected housing starts and January’s reading of 909,000 housing starts. Severe winter weather froze construction and transport of building supplies.

Building permits issued increased to 1.02 million on a seasonally adjusted basis against January’s reading of 945,000 building permits issued.

February’s reading represents a 7.70 percent increase over January’s permits issued and was attributed to a sharp rise in plans for condominiums and rental housing projects.

407,000 permits for multi-unit buildings were issued in February and represented a 24.3 percent increase on an annualized basis. Analysts saw the increase in building permits as a sign that construction will pick up as warmer weather arrives.

Existing Home Sales Fall, Rising Home Prices And Mortgage Guidelines Cited

The National Association of REALTORS® reported a decrease of 0.40 percent in sales of existing homes from January’s reading. February’s reading of 4.60 million homes sold on a seasonally-adjusted annual basis was lower than January’s reading of 4.62 million existing homes sold, but exceeded expectations of 4.58 million existing homes sold.

Analysts identified familiar causes such as high mortgage rates and home prices, bad weather and a short supply of available homes for the dip in existing home sales. New standards for “qualified mortgages” became effective in January and were seen as a possible obstacle to would-be home buyers as mortgage lenders keep a tight rein on mortgage credit policies.

Federal Open Market Committee Statement Details $10 Billion Dollar Change

Reports indicate that Fed Policy is expected to stay much the same as it was under its previous chairman. FOMC approved an additional $10 billion reduction in asset purchases designed to keep long term interest rates low.

The Fed will now purchase $55 billion monthly in mortgage-backed securities and treasury bonds as compared to its original level of $85 billion monthly.

Wall Street did not respond well to FOMC’s revised projections for short-term interest rates, which were revised from 1.75 percent by the end of 2016 to a possible short-term rate of 2.25 percent.

FOMC removed the benchmark 6.50 percent national unemployment rate for raising the federal funds rate, which is currently 0.250 percent. Instead, the Fed will review a wide range of economic indicators before changing monetary policy.

Janet Yellen, in her first press conference as fed chair, said that the Fed may consider rising short-term interest rates a few months before its original target of October to December of 2015.

Mortgage Rates Drop

Mortgage rates dropped last week according to Freddie Mac. Average mortgage rates fell from 4.37 percent to 4.32 percent for 30-year fixed rate loans. Rates for 15-year mortgages dropped from 3.38 percent to 3.32 percent.

The average rate for a 5/1 adjustable rate mortgage fell from 3.09 percent to 3.02 percent. Discount points were unchanged at 0.60 percent for fixed rate mortgages and 0.40 percent for 5/1 adjustable rate mortgages.

What’s Ahead This Week

Scheduled economic reports for this week include the Case-Shiller and FHFA Home Price Indexes for January. New Home Sales and Pending Home Sales will also be released.

What’s Ahead For Mortgage Rates This Week – March 17, 2014

What's Ahead For Mortgage Rates This Week March 17 2014Last week’s economic reports provided rays of light as compared to the recent slump in positive economic news.

Unusually severe winter weather conditions affected housing-related indicators as home builders and home buyers stayed on the sidelines.

With spring on the horizon, last week’s economic news showed welcome signs of growth.

Job Openings Up, New Jobless Claims Fall

Employment is a major factor in the decision to buy a home; would-be home buyers received a vote of confidence last week as January’s job openings increased by one million to 40 million as compared to December’s reading of 39 million job openings.

February’s reading will likely reflect a lull in activity due to winter weather conditions in much of the U.S.

Weekly jobless claims fell from 324,000 to 315,000. The Bureau of Labor Statistics reported expectations of 330,000 new jobless claims, so the latest report was good news.

Weekly reports are more volatile than monthly statistics; analysts typically track employment trends by reviewing rolling averages of several weeks’ new jobless claims data.

Mortgage Rates, Retail Sales Rise

Freddie Mac reported that average mortgage rates rose last week. The rate for a 30-year fixed rate mortgage rose by nine basis points to 4.37 percent. 15-year fixed rate mortgages had an average rate of 3.38 percent; this was an increase of six basis points

The average rate for a 5/1 adjustable rate mortgage was 3.09 percent, up from the previous week’s reading of 3.03 percent.

Discount points dipped from 0.70 to 0.60 percent for a 30-year fixed rate mortgage, were unchanged for 15-year and 5/1 adjustable rate mortgages at 0.60 and 0.40 percent.

Retail sales increased for the first time in three months according to the Commerce Department.

February retail sales surpassed expectations of a 0.20 percent gain and came in at 0.30 percent. January figures were downwardly adjusted to -0.60 percent. Retail sales exclusive of automotive sales were also higher at 0.30 percent than expectations of 0.10 percent.

The University of Michigan Consumer Sentiment index for mark was slightly lower at 79.9 than expectations of 80.8.

This was the lowest reading in four months, and was attributed in part to higher gas prices and consumer concerns over developments in Ukraine.

What’s Coming Up

This week’s economic news includes several housing-related reports.

The NAHB Home Builder Index for March, Housing Starts and Building Permits for February, and Existing Home Sales are set for release.

On Wednesday, the Fed’s FOMC statement will be released and Fed Chair Janet Yellen will give a press conference. The Fed is expected to continue its ongoing tapering of quantitative easing.

Leading economic indicators will be released along with the Weekly Jobless Claims report and Freddie Mac’s Primary Mortgage Market Survey.

Top 100 Safest cities to live in the USA – NeighborhoodScout

Top 100 Safest cities to live in the USA – NeighborhoodScout.

Our research reveals the 100 safest cities in America with 25,000 or more people, based on the total number of property and violent crimes per 1,000 residents. Crimes include burglary, larceny-theft, motor vehicle theft, murder, forcible rape, armed robbery, and aggravated assault. Data used for this research are 1) the number of total crimes reported to the FBI to have occurred in each city, and 2) the population of each city. See our FAQ on how we rank the safest cities in America

Click on any city name below to get a report

rank city
100 Windsor, CA
99 San Clemente, CA
98 Upper Arlington, OH
97 Ossining, NY
96 Palatine, IL
95 Leander, TX
94 Soledad, CA
93 Spanish Fork, UT
92 Glen Ellyn, IL
91 New Milford, CT
90 West Chicago, IL
89 Missouri City, TX
88 Lehi, UT
87 Arlington Heights, IL
86 Peachtree City, GA
85 Plainfield, IL
84 Poway, CA
83 Highland Park, IL
82 Chino Hills, CA
81 Mission Viejo, CA
80 Dublin, OH
79 Marshfield, MA
78 Arlington, MA
77 Carol Stream, IL
76 Billerica, MA
75 Park Ridge, IL
74 Yorba Linda, CA
73 Melrose, MA
72 Hanover Park, IL
71 Rancho Palos Verdes, CA
70 Laguna Niguel, CA
69 Fair Lawn, NJ
68 Westport, CT
67 Belmont, MA
66 Vernon, CT
65 San Ramon, CA
64 Holly Springs, NC
63 Blacksburg, VA
62 Menomonee Falls, WI
61 Midland, MI
60 Newton, MA
59 Lincoln, CA
58 North Ridgeville, OH
57 Winter Springs, FL
56 Mundelein, IL
55 Foster City, CA
54 Glenview, IL
53 Shelton, CT
52 Milton, MA
51 Wheaton, IL
50 Bethel Park, PA
49 Temple City, CA
48 Dracut, MA
47 Parker, CO
46 Milton, GA
45 Plum, PA
44 Kaysville, UT
43 Long Beach, NY
42 Weston, FL
41 Little Elm, TX
40 Agawam, MA
39 Ridgewood, NJ
38 Danville, CA
37 Moorpark, CA
36 Fishers, IN
35 Los Altos, CA
34 Glastonbury, CT
33 Carmel, IN
32 Friendswood, TX
31 West Linn, OR
30 Westfield, NJ
29 Florence, AZ
28 Keller, TX
27 South Kingstown, RI
26 Needham, MA
25 Syracuse, UT
24 Wellesley, MA
23 Aliso Viejo, CA
22 Andover, MA
21 Cheshire, CT
20 Buffalo Grove, IL
19 Merrimack, NH
18 Rexburg, ID
17 Flower Mound, TX
16 Fort Lee, NJ
15 Bartlett, IL
14 North Chicago, IL
13 Reading, MA
12 Saratoga, CA
11 Bella Vista, AR
10 Shrewsbury, MA
9 Ballwin, MO
8 Sammamish, WA
7 Lexington, MA
6 Johns Creek, GA
5 Rancho Santa Margarita, CA
4 Greenwich, CT
3 Parma, OH
2 Bergenfield, NJ
1 Franklin, MA