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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
- 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:
- Your business sells products at wholesale or retail
- The storage is for the use of your trade or business
- Your home is the only fixed location of your trade or business
- The storage space issued on a regular basis
- The space is a separate identifiable space
- 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:
- 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
- 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:
- The importance of the activities performed
- Amount of time spent
- Your home would also qualify if the following are met:
- You use your home exclusively and regularly for administrative and management activities AND
- 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:
- The business use must be the convenience of your employer
- 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
The IRS now has two methods to calculate the home office deduction:
- 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.
- 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 firstname.lastname@example.org