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Whether you are self-employed or an
employee, if you use a portion of your home for business,
you might be able to deduct the associated costs.
A home-office deduction is generally easier
for self-employed individuals to claim. But even then,
the Internal Revenue Service has certain requirements
a taxpayer must meet.
General
requirements
First, your home-office area
must be used regularly and exclusively for your business
needs. You can't set up a computer in your den, sporadically type
invoices and 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.
A few years ago, the IRS broadened the
business activities that can be 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. Be
careful here. The IRS cautions that your home location
must be the only place where you can fulfill these responsibilities.
Recently, a tax court ruling allowed one work-from-home taxpayer to claim a deduction for proportionate use of some home space. Some tax watchers think this decision might provide a foundation for other similar claims, so keep your eyes open and stay in touch with your tax adviser as to any changes in this regard. For now, though, the exclusive use of a home's space is the rule when it comes to deducting your home office.
Possible
break for employees, too
If you are an employee who
also works at home, you must meet the 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 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.
A common case where this tax-deduction
requirement applies, for example, is if your company
does not provide you space at its location. However,
having a home office simply because it makes things
easier for you and your boss generally won't pass IRS
home-office muster.
Where
to claim home-office costs
If you meet all the requirements to claim a home office,
some of the expenses 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
the percentage of your home used for business. Your
deduction will be limited if your income from your business
is less than all your business expenses.
Self-employed taxpayers need Form
8829 to figure the home-office deduction. They then
must report this amount on Schedule
C.
Employees can use the worksheet found
in IRS
Publication 587, Business Use of Your Home,
to calculate allowable expenses. The costs then are
claimed as itemized deductions on Schedule
A. The example on pages 18 and 19 of Publication
587 details how an employee would claim itemized home-office
deductions.
Selling
your home and home office
There's one final tax gift
for home-office workers when they sell
their residence. Previously, when you claimed a
home-based business deduction, you owed tax on that
percentage of your home when you sold. A $100,000 profit
on a home where 20 percent of the space was dedicated
to business meant taxes due on $20,000.
In December 2002, however, the IRS
decided that taxpayers no longer have to allocate gain
between business and residential use if the business
was conducted totally within the residence. So there's
no problem if your office is in your spare bedroom.
But if it's in the guest house in
your backyard, the portion of your sale proceeds attributable
to that separate structure would be taxable, 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 the home office.
Freelance writer Kay
Bell writes Bankrate's tax stories from her home in
Austin,
Texas, and blogs on tax topics at Don't
Mess with Taxes.
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