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        Making the Most of the Home Office Tax Deduction

        a home based business onlinehome business ideas

        Another AHBBO Article
        Taxing Times ... The Home Office Deduction

        © 1999-2017 Elena Fawkner

        Yay!  It's tax time again (or near enough).  I can't wait.  Just love
        this stuff.  Not!  OK, I know it's boring, I know your eyes glaze
        over at the mere thought of all those forms and paperwork but it
        has to be done so let's just bite the bullet and get on with it.

        Now let's start with the fact that there's no substitute for a
        qualified professional when it comes to this sort of stuff so I'm
        not going to attempt a comprehensive survey of everything you
        need to think about when it comes to tax and your home business. 
        What we're going to look at in this article is *one aspect* of home
        business taxation in the U.S.: the home office deduction.  By
        having a  working knowledge of this deduction BEFORE you hand
        everything over to your accountant will not only save both of you a
        lot of time (and therefore expense), you will be able to make sure
        you're keeping good records for everything you need to.  Although
        this article considers U.S. tax law, many other countries have
        enacted similar laws so if you're outside the U.S., check with your
        local tax office to see what comparable deductions may be available
        in your country.  I know, for example, that the Australian home
        office deduction is very similar.

        I figured a good place to start researching this article was the IRS
        itself.  Clever, no?  There's a pretty handy flowchart at the IRS site
        that sets out quite clearly the elements you need to satisfy in
        order to deduct the business use of home expenses, so we'll
        just follow that.  If you're interested in checking it out for
        yourself, it's at http://www.irs.gov/forms_pubs/graphics/15154t01.gif.

        WHAT IS A HOME?

        For the purposes of the home business deduction, a "home"
        means a house, apartment, condo, mobile home or boat as
        well as other structures on the property such as a garage,
        shed or barn.  It does not include property used exclusively
        as a hotel or an inn.


        If not, you can't deduct business use of home expenses.  Duh.
        Stop reading now.

        In order to satisfy the trade or business use test, you must use
        part of your home in connection with a trade or business.  So
        far so good.  But if you use your home for a profit-seeking activity
        that is not trade or business, you cannot claim a deduction for
        the business use of home expenses.  A good example given by
        the IRS is research you undertake for your own private
        stockmarket investments.  Although this is a profit-seeking
        activity, you are not involved in the trade or business of
        stockbroking or dealing and so you cannot claim the home
        business deduction.


        OK, this is where things get a little trickier.

        => The Exclusive Use Test

        To qualify under the exclusive use test, a specific area of your
        home must be used solely for your trade or business.  It can be
        a separate room or part of a room but it need not be marked off
        by any form of permanent partition.

        So, if you have an "L" shape living room/dining room area
        and the dining room area is hived off as your "office" and is used
        for no other purpose, then this satisfies the exclusive use test. 

        If, however, you clear the dining table of your papers every night
        so the family can use it for dinner, you don't meet the exclusive
        use test.  So confine family meals to the kitchen!  Easy.

        => Exceptions to the Exclusive Use Test

        The only exceptions to the exclusive use test are if you use
        part of your home for the storage of inventory or product
        samples or as a day-care facility.

        If you use part of your home for storage of inventory or product
        samples, although you don't have to satisfy the exclusive use
        test, you must meet all of the following tests instead:

        * you keep the inventory or product samples for use in trade or
        * your trade or business is the wholesale or retail selling of
        * your home is the only fixed location of your trade or business;
        * you use the storage space on a regular basis; and
        * the space you use is an "identifiably separate space" suitable
        for storage.

        Therefore, if you store your inventory of knitting wool for your
        internet business of selling wool, knitting patterns and knitting
        needles in your basement, then you will still be able to deduct
        your basement expenses (or part of your basement expenses)
        even though your basement is also used as a recreation or
        workshop area.

        => The Regular Use Test

        In addition to satisfying the exclusive use test, you must also
        satisfy the regular use test.

        This means that you must use the specific area of your home
        you use exclusively for business purposes on a continuing basis.
        This means more than occasional or incidental use.


        Your home will be your principal place of business if you use
        it exclusively and regularly for the administrative or management
        activities of your trade or business and you have no other fixed
        location where those activities are conducted.

        "Administrative or management activities" include activities
        such as billing customers, keeping books and records, ordering
        supplies, setting up appointments, forwarding orders or writing

        Furthermore, and this is a recent change in the law from 2013
        onwards, even if certain administrative or management activities
        are performed outside your home, you will not necessarily be
        disqualified from satisfying the principal place of business test. 
        You may, for example, engage third parties to conduct your
        administrative or management activities at other locations.  An
        outside bookkeeping service is one example.  You may also
        conduct some of your management or administrative activities
        from your car on your cellphone without disqualifying your home
        as your principal place of business.

        Alternatively, if you conduct your business at more than one
        location, whether your home can be considered your principal
        place of business depends on a consideration of the relative
        importance of the activities performed at each location.  If this
        is not determinative, you can then take into account the time
        spent at each respective location.

        If, after conducting this analysis, you home can be identified
        as your principal place of business then, provided you also
        satisfy the trade or business and exclusive and regular use
        tests, you can deduct home office expenses.


        Even if you can't meet the principal place of business test,
        if you use your home to meet with patients, clients or
        customers in the normal course of your business, you may
        still be able to claim the deduction. 

        You can deduct expenses for the part of your home used
        exclusively and regularly for business if you physically meet
        with patients, clients or customers in your home and their
        use of your home is "substantial and integral" to the conduct
        of your business.

        This means that the use of your home for occasional
        meetings and telephone calls is not sufficient as the use of
        your home is not substantial and integral to your business.


        You may deduct expenses for a separate free-standing structure
        such as a garage if you use it exclusively and regularly for your
        business.  It does not have to be your principal place of business
        or a place where you meet patients, clients or customers.

        For example, if you're an internet consultant whose principal place
        of business is at an office downtown, but you also use your garage
        exclusively and regularly as your home office for reviewing client
        websites and writing reports in relation thereto, you can claim the
        home office deduction for expenses associated with your garage.


        To summarize, then, to qualify to deduct expenses for the business
        use of your home, you must satisfy the following tests:

        1.  Your use of the business part of your home must be:

        (a) exclusive (unless the storage of inventory or day-care
             facility exceptions apply); AND
        (b) regular; AND
        (c) for trade or business


        2.  The business part of your home must be one of the

        (a) your principal place of business; OR
        (b) a place where you meet with patients, clients or customers
        as a substantial and integral part of your business; OR
        (c) a separate structure such as a detached garage you use in
        connection with your business.


        Calculating your business use of the area of your home that
        you are using exclusively and regularly for business purposes
        is not complicated.  First, calculate the percentage of the business
        area of your home as a proportion of your total home area.

        Next, add up your rent or mortgage interest, utilities, repairs and
        maintenance, insurance and property taxes.  Finally, multiply the
        total by the percentage you calculated above.  If you own your
        home, you can also include depreciation on the business
        portion of your home.

        Note though that you cannot deduct your home office if you have
        a loss from your business or if you would create a loss by
        claiming the deduction.  If you find yourself in this situation, never
        fear.  Any expenses you can't claim this year can be carried forward
        to future years.


        So, that's the home office deduction in a nutshell.  Not too
        difficult, is it?  Should you claim it?  Why or why not?

        To help you answer these questions, let's wrap up with a quick
        look at the pros and cons of claiming the home office deduction.

        First, the big con.  Claiming the home office deduction increases
        your chances of being audited.  So, be sure that your claim
        is legitimate before you claim it because the odds are relatively
        higher that the IRS will come knocking on your door.  Don't let
        that stop you if you have a legitimate claim that's worth claiming
        though as there are some significant advantages in claiming your
        home office even after you consider the fact that your mortgage
        interest and real estate taxes are already tax deductible.

        To begin with, deducting as business expenses what would
        otherwise be personal expenses reduces not only your income
        tax but also your self-employment tax.  Next, if you claim for a
        home office, you can deduct rent, utilities, insurance and
        depreciation which you couldn't otherwise take as expenses.
        Finally, a home office allows you to deduct more car expenses
        because it allows you to claim the miles you drive from home
        to your first business stop of the day and from your last stop
        of the day back home.  This would otherwise be undeductible
        commuting mileage.

        Tax law is not a favorite subject of many people, I hazard to
        guess.  But, dry and brain numbing as it is, strive to have at
        least a working knowledge of the fundamentals.  This can help
        you structure your business from the outset in a way that allows
        you to take maximum advantage of the tax laws that work in
        your favor and to minimize those that may work against you if
        you don't plan your tax affairs effectively.  A good accountant is
        your best ally when it comes to tax.  This article has hopefully
        given you a working knowledge of the fundamentals of the home
        office deduction but consult your accountant as to your own
        particular circumstances.


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        Copyright 1998-2017, AHBBO.com. All rights are reserved. Tuesday, 26-Jan-2021 03:13:42 CST

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