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Home Office Tax Saving
By cpa | March 24, 2008
Do you spend a lot of your time working from home? If you do, you may find not only it is convenient, low overhead, but more importantly, it allows you to deduct the business use of your home and take the advantage of tax saving.
Your personal household expense are generally not deductible. By utilize your home office, you are able to convert part of your personal household expense to business deductible expense.
The home office deduction is available to both homeowners and renters. You home can be a house, condo, co-op or even a mobile home. Not only you can use the office space, but also garage, storage space.
In order to qualify the home office deduction, IRC 280 states that a home office deduction is available only to the extent that a portion of your home is used exclusively and on a regular basis as your principal place or at least you must be able to show business at least one of the following:
- You meet patients, clients, or customers at home.
- You use a separate structure on your property exclusively for business purposes. If you write legal briefs at a desk in your den where your kids also play, you won’t pass the “exclusive use” rule. It is important to shows that you are serious about the business and do not mix personal stuff to the home office area. You do not want to fool the IRS.
You also need to meet the following requirements:
· If you are self-employed, your gross income is more than your related deductions.
· If you’re a company employee, the home office need to be “for your employer’s convenience”. That means if you are encouraged to work at home to save the company office space, you could claim a deduction for the expenses your company doesn’t reimburse. But not if you negotiated with your boss to work from home a few days a week.
Although it is not required that all activities taking place at home, it is important that your home office is used for book keeping, ordering goods, administration and meeting clients.
The following are strategies to increase your bottom line when you work at home:
· Convert your furniture to business use: If you purchased the desk, file cabinet and chairs two years ago, you can still convert the assets to business.
· Use your home office for storage: A deduction is allowed if you use your home for inventory or product samples.
The example of the deductible expenses are:
· utilities
· phone bills - IRC 262 does not allow deduction for the first telephone into your personal residence. Local charges are deductible only if you install a second phone in your home. Long distance charges are deductible and should be documented.
· rent
· insurance
· depreciation - if you have taken any depreciation on your home, you must pay tax on the depreciation deduction you have taken regardless of the gain is within the exclusion amount.
· mortgage interest
· real estate taxes
· repairs and improvements.
Please note that your home office deduction is limited to the net income from the activity conducted from your home. However, any expenses disallowed solely because they exceed your business income can be carried forward.
Since a home office deduction can sometimes trigger IRS flags, we highly advice that you always have the following proofs ready:
1. A diagram or photographs to show that part of your home is being used as your office.
2. You home address is your business mailing address. You business card and stationery should show the same address as your home address.
3. Have a separate phone line installed in the business part of your house.
4. Keep a guest books of your clients’ visits.
If you don’t qualify for the home office deduction, you can still deduct ordinary and necessary business expenses that you incur at home — for example, long-distance phone calls, a separate business telephone line, and the cost of office supplies and equipment. The home office rules only apply to the expenses of actually running and maintaining your home, such as utilities, rent, depreciation, home insurance, mortgage interest, real estate taxes, and repairs.
Topics: Businesses |