A home-office deduction is generally easier for self-employedindividuals to claim. But even then, the Internal Revenue Service hascertain requirements a taxpayer must meet.
General requirements
First, your home-office area must be used regularly andexclusively for your business needs. You can't set up a computer inyour den, sporadically type invoices and claim that room as your homeoffice.
Secondly, the business part of your home must be either yourprincipal place of business or where you meet or deal with patients,clients or customers in the normal course of your business. A separate,detached structure such as a garage or guesthouse that is used forbusiness also may qualify as a home office.
A few years ago, the IRS broadened the business activitiesthat can be considered in determining whether a home office is ataxpayer's principal place of business. Now, if a home office is usedexclusively and regularly for the administrative or managementactivities of your business, it also qualifies.
Such things as billing operations, keeping your books andrecords, ordering supplies or setting up appointments qualify asadministrative duties. Be careful here. The IRS cautions that your homelocation must be the only place where you can fulfill theseresponsibilities.
Possible break for employees, tooIf you are an employee who also works at home, you must meetthe same home-office standards as do self-employed taxpayers. However,as an employee, your use of a home office to do your job must be foryour employer's convenience.There are no hard-and-fast rules when determining whether yourhome's business use is for your employer's convenience. It depends onall the facts and circumstances.A common case where this tax-deduction requirement applies,for example, is if your company does not provide you space at itslocation. However, having a home office simply because it makes thingseasier for you and your boss generally won't pass IRS home-officemuster.Where to Claim Home-Office CostsIf you meet all the requirements to claim a home office, some of theexpenses you can deduct include a portion of your real estate taxes,deductible mortgage interest, rent, utilities, insurance, depreciation,painting and repairs. The total amount you can deduct depends on thepercentage of your home used for business. Your deduction will belimited if your income from your business is less than all yourbusiness expenses.Self-employed taxpayers need Form 8829to figure the home-office deduction. They then must report this amounton Schedule C.
Employees can use the worksheet found in IRSPublication 587, Business Use of Your Home, to calculateallowable expenses. The costs then are claimed as itemized deductionson Schedule A.The example on pages 18 and 19 of Publication 587 details how anemployee would claim itemized home-office deductions.Selling Your Home and Home OfficeThere's one final tax gift for home-office workers when they selltheir residence.Previously, when you claimed a home-based business deduction, you owedtax on that percentage of your home when you sold. A $100,000 profit ona home where 20 percent of the space was dedicated to business meanttaxes due on $20,000.In December 2002, however, the IRS decided that taxpayers nolonger have to allocate gain between business and residential use ifthe business was conducted totally within the residence. So there's noproblem if your office is in your spare bedroom.But if it's in the guest house in your backyard, the portionofyour sale proceeds attributable to that separate structure would betaxable, even though the building was part of your overall home sale.And you still must pay tax on the gain equal to the total home-officedepreciation claimed after May 6, 1997.Freelance writer Kay Bell writes Bankrate's taxstories from her home in Austin, Texas, and blogs on tax topics at Don'tMess With Taxes.Bankrate.comis theWeb's leading aggregator of information on financial products includingmortgages, credit cards, new and used automobile loans, money marketaccounts, certificates of deposit, checking and ATM fees, home equityloans and online banking fees. Visit Bankrate.comto get the tools and information that can help you make the bestfinancial decisions.
Source: Money & Work
