Home Office Deduction

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Home Office Deduction

Warning If your return is audited, and you have claimed a home office deduction, don’t be surprised if the IRS wants to visit your home office as part of a field audit. They will be looking for games or your kid’s homework assignments on the computer. They will be looking for recreational equipment, such as a TV or a Wii Fit in the office space. And, yes, an employee at a desk in a traditional office may well have Angry Birds or the novel that he or she is writing on the computer and the IRS would not blink. But don’t expect that same treatment when a home office deduction is being scrutinized. (It’s tax law–it’s not supposed to be fair.) However, keep in mind that the home office deduction refers to writing off a portion of your otherwise non-deductible house expenses (such as the electric bill.) So, if you didn’t claim a home office deduction, but only a deduction for the business use of that computer, the mere existence of a few personal files would not cost you that deduction

Home Office Deduction

If your return is audited, and you have claimed a home office deduction, don’t be surprised if the IRS wants to visit your home office as part of a field audit. They will be looking for games or your kid’s homework assignments on the computer. They will be looking for recreational equipment, such as a TV or a Wii Fit in the office space. And, yes, an employee at a desk in a traditional office may well have Angry Birds or the novel that he or she is writing on the computer and the IRS would not blink. But don’t expect that same treatment when a home office deduction is being scrutinized. (It’s tax law–it’s not supposed to be fair.) However, keep in mind that the home office deduction refers to writing off a portion of your otherwise non-deductible house expenses (such as the electric bill.) So, if you didn’t claim a home office deduction, but only a deduction for the business use of that computer, the mere existence of a few personal files would not cost you that deduction

Home Office Deduction

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Helpful hints If you generally have to pay the Alternative Minimum Tax (AMT) when you itemize deductions, a home office deduction may be a factor contributing to your AMT status. If so, you may want to forego the home office deduction. This consideration is only relevant if you are an employee and not a self-employed person. If you include home depreciation as part of the home office deduction and eventually sell your home at a profit, you will have to pay a capital gains tax on the total amount of depreciation deductions you took while you were living there, assuming you sold the home for a profit. Limit on write-offs – the law puts a cap on how much you can deduct for the business use of the home. Basically, your home office deductions can’t exceed your home-based business income. In other words, home office expenses can’t create a tax loss to shelter other income.

If you generally have to pay the Alternative Minimum Tax (AMT) when you itemize deductions, a home office deduction may be a factor contributing to your AMT status. If so, you may want to forego the home office deduction. This consideration is only relevant if you are an employee and not a self-employed person. If you include home depreciation as part of the home office deduction and eventually sell your home at a profit, you will have to pay a capital gains tax on the total amount of depreciation deductions you took while you were living there, assuming you sold the home for a profit. Limit on write-offs – the law puts a cap on how much you can deduct for the business use of the home. Basically, your home office deductions can’t exceed your home-based business income. In other words, home office expenses can’t create a tax loss to shelter other income.

Homeowners’ Deductions. If you would be entitled to claim an itemized deduction for an expense related to your home, you can claim that without regard the home office deduction. For example, home mortgage interest and real estate taxes would be allowed as an itemized deduction on Schedule A of your tax return in any case, even if you can’t take a home office deduction.

“I think it’s safe to say the IRS encourages people to be afraid of taking the home office deduction,” Turner says. “In 35 years in business, I’ve had one audit on the home office deduction — this was for a lady who used almost half of her house as an office and got a nice deduction from it every year. We won.”

You don’t have to do all your work from home to take the home office deduction. If you’re an outside salesperson, you probably spend most of your work time elsewhere. But the home office has to be essential to your business, and you must spend substantial time there.  If you do your billing and other office work from your home office, and there’s no other location available to perform these functions, your home office should qualify for the deduction.

Principal place of business In addition to passing the exclusive- and regular-use tests, your home office must be either the principal location of that business, or a place where you regularly meet with customers or clients. If you are an employee and have a part-time business based in your home, you can pass this test even if you spend much more time at the office where you work as an employee. There is, though, the question of what constitutes a business. Making money from your efforts is a prerequisite, but for purposes of this tax break, profit alone isn’t necessarily enough. If you use your den solely to take care of your personal investment portfolio, you can’t claim home office deductions because your activities as an investor don’t qualify as a business. Taxpayers who use a home office exclusively to actively manage several rental properties they own, though, may qualify for home office tax status—as property managers rather than investors. As with the regular-use test, whether your endeavors qualify as a business depends on the circumstances. The more substantial the activities, in terms of time and effort invested and income generated, the more likely you are to pass the test. What if your business has just one office—in your home—but you do most of your work elsewhere? First, remember that the requirement is that the office be the principal place of business, not your principal office. As long as you at least use the home office to conduct your administrative or management chores and you don’t make substantial use of any other fixed location to conduct those tasks, you can pass this test. This rule makes it much easier to claim home office deductions for individuals who conduct most of their income-earning activities somewhere else (such as outside salespersons, tradespeople, or professionals). If your home office is in a separate, unattached structure—a loft over a detached garage, for example—you don’t have to meet the principal-place-of-business or the deal-with-customers test. As long as you pass the exclusive- and regular-use tests, you can qualify for home business write-offs.

In addition to passing the exclusive- and regular-use tests, your home office must be either the principal location of that business, or a place where you regularly meet with customers or clients. If you are an employee and have a part-time business based in your home, you can pass this test even if you spend much more time at the office where you work as an employee. There is, though, the question of what constitutes a business. Making money from your efforts is a prerequisite, but for purposes of this tax break, profit alone isn’t necessarily enough. If you use your den solely to take care of your personal investment portfolio, you can’t claim home office deductions because your activities as an investor don’t qualify as a business. Taxpayers who use a home office exclusively to actively manage several rental properties they own, though, may qualify for home office tax status—as property managers rather than investors. As with the regular-use test, whether your endeavors qualify as a business depends on the circumstances. The more substantial the activities, in terms of time and effort invested and income generated, the more likely you are to pass the test. What if your business has just one office—in your home—but you do most of your work elsewhere? First, remember that the requirement is that the office be the principal place of business, not your principal office. As long as you at least use the home office to conduct your administrative or management chores and you don’t make substantial use of any other fixed location to conduct those tasks, you can pass this test. This rule makes it much easier to claim home office deductions for individuals who conduct most of their income-earning activities somewhere else (such as outside salespersons, tradespeople, or professionals). If your home office is in a separate, unattached structure—a loft over a detached garage, for example—you don’t have to meet the principal-place-of-business or the deal-with-customers test. As long as you pass the exclusive- and regular-use tests, you can qualify for home business write-offs.

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