Irs Home Office Deduction

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Irs Home Office Deduction

Exclusive use The biggest roadblock to qualifying for these deductions is that you must use a portion of your home exclusively and regularly for your business. The office is generally in a separate room or group of rooms, but it can be a section of a room if the division is clear—thanks to a partition, perhaps—and you can show that personal activities are excluded from the business section. The law is clear and the IRS is serious about the exclusive-use requirement. Say you set aside a room in your home for a full-time business and you work in it at least ten hours a day, seven days a week. Let your children use the office to do their homework, though, and you violate the exclusive-use requirement and forfeit the chance for home-office deductions. The rule doesn’t mean you’re forbidden to make a personal phone call from the office, or that you have to rush outside whenever a family member needs a moment of your time. Although individual IRS auditors may be more or less strict on this point, some advisors say you meet the spirit of the exclusive-use test as long as personal activities invade the home office no more than they would be permitted at an office building. (Two exceptions to the exclusive-use test are discussed later.) There’s no specific definition of what constitutes regular use. Clearly, if you use an otherwise empty room only occasionally and its use is incidental to your business, you’d fail this test. But if you work in the home office a few hours or so each day, you’d probably pass. This test is applied to the facts and circumstances of each case the IRS challenges.

Irs Home Office Deduction

The biggest roadblock to qualifying for these deductions is that you must use a portion of your home exclusively and regularly for your business. The office is generally in a separate room or group of rooms, but it can be a section of a room if the division is clear—thanks to a partition, perhaps—and you can show that personal activities are excluded from the business section. The law is clear and the IRS is serious about the exclusive-use requirement. Say you set aside a room in your home for a full-time business and you work in it at least ten hours a day, seven days a week. Let your children use the office to do their homework, though, and you violate the exclusive-use requirement and forfeit the chance for home-office deductions. The rule doesn’t mean you’re forbidden to make a personal phone call from the office, or that you have to rush outside whenever a family member needs a moment of your time. Although individual IRS auditors may be more or less strict on this point, some advisors say you meet the spirit of the exclusive-use test as long as personal activities invade the home office no more than they would be permitted at an office building. (Two exceptions to the exclusive-use test are discussed later.) There’s no specific definition of what constitutes regular use. Clearly, if you use an otherwise empty room only occasionally and its use is incidental to your business, you’d fail this test. But if you work in the home office a few hours or so each day, you’d probably pass. This test is applied to the facts and circumstances of each case the IRS challenges.

Irs 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.

Irs Home Office Deduction

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.

Irs 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.”

Irs Home Office Deduction

If you drive for your business, using the home office deduction can increase your mileage deduction. This is because it can cut out the IRS’s commuting rule. The IRS says that personal commuting is not deductible. For example, you can’t deduct the cost of driving from home to your regular outside office.

Irs Home Office Deduction

In order to use the actual expense method of the home office deduction, you have to depreciate your home. Depreciation refers to an income tax deduction that allows taxpayers to recover the costs of property, due to wear and tear, deterioration or obsolescence of the property, according to the IRS. The depreciation you’ve taken in deductions would then become subject to capital gains tax when you sell your home, Smalley says.

Irs Home Office Deduction

Not so long ago, claiming a home office deduction was akin to pleading with the IRS to audit your tax return. Today, with more than one-third of the country working from home, the deduction is much less likely to trigger an audit and much easier to take.

The home office deduction can save you taxes. It allows you to deduct a part of your rent or mortgage payments, utilities and other home expenses. It can also increase your business mileage deduction. Yet, there are many requirements you must meet to qualify for the deduction.

You can only take this deduction if you use part of your home only for your business. If your home office is also used for personal reasons, you won’t qualify for the deduction. The more space you devote only to your business, the more your deduction will be worth.

In order to get the largest home office deduction, you’ll likely have to use both methods to find which deduction is larger. Remember, your deduction can’t exceed the gross income from the business use of your home.

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.

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