When is an Office a Home Office?
by Nancy F. Blumberg, CPA, CFP
Simon Master & Sidlow, P.A.
Corporate downsizing has caused more people to choose to work at home.Many people find working at home attractive: overhead costs are kept to a minimum with the absence of the cost of renting office space and commuting.Working at home permits a more flexible work schedule.It may offer more independence and more family time.Add the benefit of deducting home office expenses and many people are enticed to start working out of their home.
Qualifying for the home office deduction is not simple.The deduction is often looked at closely by the IRS so it’s important to be certain one meets the guidelines, which include:
- The home office must be used exclusively for business; the home office area must be a distinct area of your home; it must be used regularly.
- The essence of one’s business must be conducted in this office (goods delivered or services rendered in this place.)
- The amount of time spent at this location should illustrate that this is the principal place of business.
Other ways to qualify for the home office deduction include using the home to provide day care services or to store inventory.To qualify for these as tax deductions, the space must be used regularly but does not need to be used exclusively for business purposes.
Business deductions are based on the percentage of the home used for the business.To calculate this business percentage measure the square footage devoted to the home office and determine what the percentage this area is to the total area of the home.
When deductions are claimed for use as a day care facility, special rules apply when calculating what percentage to apply.The business use percentage must be reduced because part of the time the space is available for personal use.To calculate the allowable amount compare the number of hours the space is used for day care to the total number of hours the space is available.
In computing the home office deduction the following indirect expenses are considered when applying the percentage of home usage:Utility bills, house insurance bills, overall home repairs and maintenance costs.Direct expenses such as repair or maintenance of the business space are deductible in full.
When deducting a home office, part of your interest and property tax deductions are converted from personal itemized deductions to business writeoffs.Since business expenses reduce self employment income, they reduce the amount owed in social security taxes.
Also note that home office deductions cannot exceed your business income.
The home officededuction can be very attractive.Become aware of the IRS guidelines once the home office is established and make certain the rules are properly applied.