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“A fine is a tax for doing wrong.
A tax is a fine for doing well.”
--Anonymous
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Home Office
Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to deduct the associated costs. If you can't qualify for home office deduction, you still can deduct expenses directly related to your business.
Requirements a Taxpayer Must Meet
First, your home-office area must be used regularly and exclusively for your business needs. You can't set up a computer in your guest bedroom, input invoices and then claim that room as your home office.
Secondly, the business part of your home must be either your principal 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 for business also may qualify as a home office. Beginning in 1999, the IRS broadened the business activities considered in determining whether a home office is a taxpayer's principal place of business. Now if a home office is used exclusively and regularly for the administrative or management activities of your business, it also qualifies. Such things as billing operations, keeping your books and records, ordering supplies, or setting up appointments qualify as administrative duties. The IRS cautions that your home location must be the only place where you can fulfill these responsibilities.
If you are an employee who works from home, you must meet the same home office standards as do self-employed taxpayers. Plus, you cannot deduct your home office unless the business use of your home is for your employer's convenience. There are no hard-and-fast rules when determining whether your home's business use is for your employer's convenience. It depends on all the facts and circumstances. However, having a home office simply because it makes things easier for you and your boss won't pass IRS audit.
Deductible Expenses
Certain costs of operating and maintaining the part of the home used for business are deductible.
Indirect expenses are the expenses that cover the entire home. These include rent (if your home is rented), or if owned, real estate taxes, mortgage interest and depreciation of the home. Include only mortgage interest that qualifies as an indirect expense. You cannot include interest on a mortgage loan that did not directly benefit your home (e.g., a home equity loan used to pay off credit card bills, buy a car or pay tuition costs). Other indirect expenses are utilities such as lights and heating, home insurance and repairs. The deductible portion is based on the percentage of your home used for business. You can never include any portion of the first phone line even if it is used for business – you can deduct the long distance charges.
Direct expenses are those that cover only the area used for business, for example, painting, decorating or repairs of your home office. Direct expenses are deductible in full.
Limit on Deductions
Your home office deductions cannot exceed the net income derived from the business. This means you cannot use home office expenses to create or increase a tax loss from your business. However, unallowed home office expenses can be carried over to later years when there is more income from the business.
Effect of Business Auto Deductions
If your home office is your principal place of business, the costs of traveling between the home office and other work locations in the same trade or business, regardless of whether the other work location is regular or temporary, and regardless of its distance, are deductible transportation expenses. This can be a significant savings.
Effect on Sale of Home
Depreciation recapture rules apply to the profit on the portion of the residence used as a home office.
Recordkeeping
Good recordkeeping is vital to maximize your deductions and ensure you can substantiate them in the event of an audit. Save bills, receipts and cancelled checks. Keep a work diary of all hours spent working in and out of the office. Take a picture of your home office so you can show that it indeed existed in the event you move or change offices.
The information you obtain at this site is not, nor is it intended to be, tax advice. You should consult a licensed tax professional for individual advice regarding your own situation.