Whetheryou are self-employed or an employee, if you use a portion of your homefor business, you might be able to deduct the associated costs.
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.
Recently, a tax court ruling allowed one work-from-hometaxpayer to claim a deduction for proportionate use of some home space.Some tax watchers think this decision might provide a foundation forother similar claims, so keep your eyes open and stay in touch withyour tax adviser as to any changes in this regard. For now, though, theexclusive use of a home's space is the rule when it comes to deductingyour home office. 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, someof the expenses you can deduct include a portion of your real estatetaxes, deductible mortgage interest, rent, utilities, insurance,depreciation, painting and repairs. The total amount you can deductdepends on the percentage of your home used for business. Yourdeduction will be limited if your income from your business is lessthan all your business expenses.
Self-employed taxpayers need Form8829 to figure the home office deduction. They then mustreport this amount on ScheduleC.Employees can use the work sheet 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 18and 19 of Publication 587 details how an employee would claim itemizedhome office deductions. Selling your home and home officeWhile the home office deduction can help lower your tax bills,it does increase your tax-filing and compliance duties. And it couldhave some tax consequences when you sell your home. The largest taxfactor here is depreciation claimed on the homeoffice space.One home office issue, however, is no longer a tax problemwhen you sell your residence. Previously, whenyou claimed a home-based business deduction, you owed tax on thatpercentage of your home when you sold. A $100,000 profit on a homewhere 20 percent of the space was dedicated to business meant taxeswere due on $20,000.In December 2002, however, the IRSdecided that taxpayers no longer have to allocate gain between businessand residential use if the business was conducted totally within theresidence. So there's no problem if your office is in your sparebedroom.But if it's in the guesthouse in your backyard, the portion ofyour 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 depreciation on thehome office.
Freelance writer Kay Bell writes Bankrate's taxstories from her Austin, Texas, home. She also writes two tax blogs,Bankrate's Eye on the IRS, and Don'tMess With Taxes. Bankrate.comis the Web's leading aggregator of information on financial productsincluding mortgages, credit cards, new and used automobile loans, moneymarket accounts, certificates of deposit, checking and ATM fees, homeequity loans and online banking fees. Visit Bankrate.comto get the tools and information that can help you make the bestfinancial decisions.
