Home Office Expenses

Are you taking all available deductions?

Having a home office may provide tax savings. To claim a deduction for the business use of your home, you must qualify under one of the following circumstances:

•     You use a portion of your home regularly and exclusively (1) as the principal place of business for a trade or business; (2) as a place to meet with clients, patients or customers in the course of the trade or business; or (3) in connection with your trade or business, if the location is in a separate structure not attached to the home.

•     Your employer requires that you maintain a home office for their convenience and you meet the regular and exclusive use requirement.

•     Your home is used for the storage of inventory or product samples used in your trade or busi­ness of selling products at retail or wholesale, and there is not a fixed location for storage. (The regular and exclusive use requirements do not need to be met.)

•     You operate a day care out of your home. (If you do not meet the regular and exclusive use requirements, you can still claim a home office deduction if you are complying with state and local laws in operating your home day care.)

Note: “Exclusive use” means a specific area of your home is used only for your trade or business. The term “principal place of business” includes a place that you use for administrative or management activities of any trade or business if there is no other fixed location where you are able to perform those activities.

Calculations

There are two ways to calculate your home office deduction. The simplified method uses a standard deduction. If you maintain a qualifying home office, you may elect to deduct annually $5 per square foot of home office space up to 300 square feet, for a maximum deduction of $1,500. If you choose this method, you cannot depreciate that portion of your home; however, you can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Alternatively, you may calculate your deduction using the actual expense method. Consider direct and indirect expenses when making home office calculations. Direct expenses are those that pertain exclusively to the home office, such as painting the walls or installing new cabinets, shelving, carpeting, etc. Indirect expenses are those that pertain to the entire residence, such as rent, mortgage interest, taxes, insurance, repairs, casualty losses and depreciation. Allocate indirect expenses between the business and non-business portions of the home. This is done based on the business use percentage of your home.

Limitations

The amount of expenses you can deduct are subject to specific limitations and ordering rules. The overall limitation is based on your net income from your trade or business. For employees, this is your wage less other business expenses listed on Form 2106. For self-employed taxpayers, this is the net income shown on your Schedule C without the home office deduction.

Home office expenses can represent a significant dollar amount in reducing your tax liability. I’ve just provided you with a basic overview of this fairly complicated area of tax law. If you think your situation meets the requirements, give me a call and we can discuss how to qualify for home office deductions. As always, I’m here to help with these calculations.