What Qualifies for a Home Office Tax Deduction?

March 25, 2013 | By | Reply More

After a careful deliberation, you have ascertained that the business use of your home qualifies for a tax deduction. Per the IRS, you can claim for home office tax deduction if your “home office” is the principal place used exclusively and regularly for your trade and business:

  • as a principal place of business
  • as a place to meet or deal with patients, clients or customers

Note that the term “home office” may not necessarily be an office. It could be a separate structure from your home, but is connected to your trade or business such as your garage to do mechanical repairs or a greenhouse near your home to grow plants for sale.

home office tax deduction

The next question, therefore, is: what qualifies for a home office tax deduction?

According to the IRS, your home office tax deductions will depend on two things:

  • whether the expense is direct, indirect or unrelated; and
  • the percentage of your home used for business.

Direct expenses are the expenses directly related to the business use of your home, such as painting of your home office. These types of expenses are deductible in full, subject to the deduction limit set by your business income and loss. Home office deductions cannot exceed your gross income from your home office activity.

Indirect expenses, such as insurance, utilities and general repairs, are deductible based on the percentage of your home used for business. These expenses are indirectly related to business use of your home office; rather, they relate to your entire home. Hence, if you use only 25 percent of your home as a place of business, then you can only deduct 25 percent of your rent or repairs.

Unrelated expenses, or your expenses for the parts of your home not used for business, are not deductible. Landscaping or lawn care, for example, cannot be deducted even if done to enhance the look of your business and home office (unless you are in the landscaping business).

As a rule, the cost of owning or renting your home is a personal one and, except for certain specific expenses, you cannot deduct personal expenses.




Home Office Tax Deduction

Some of the expenses that you can claim as home office deductions in order to reduce your taxes are as follows:

Rent

Rent is considered an indirect expense, and you can deduct the business portion of rent if you qualify for the home office requirements. Multiply your rent payments by your home-use percentage. If your rent is $800/month (or $9,600/year) and you use 20 percent of your home for your business, then your deductible is $1,920.

If you own your home, you cannot deduct the fair rental value of your home office. Rather, you can claim depreciation on your home office.

Insurance

A portion of homeowners or renters insurance policy is deductible if you are eligible for home-office deduction, equivalent to the percent of the business use of your home. However, if you pay additional coverage directly related to your home office, treat the additional expense as a direct expense. Some home entrepreneurs carry special coverage for their home office equipment.

Casualty Losses

These are losses from fire, storm, theft, shoplifting or vandalism. What you can deduct as part of your home business deduction will depend on the property affected. If it is a direct expense, meaning the loss is on the portion of the property you use solely for business purposes, you can deduct the entire loss. For example, your home office is damaged in an earthquake and you are not fully compensated by insurance, you claim your loss as a direct expense. If the loss is for a property used for both business and personal purposes, such as a leak in the roof of your house, you will deduct only the percentage of your business use. However, if it is an unrelated expense, or the loss is on a property you do not use in your business, you cannot use this loss in your tax deductions.

Security

You can deduct the business part of the expenses for the installation of a security system that protects the windows and doors of your home. The business portion of your monthly monitoring fees is an indirect expense. The IRS also allows a depreciation deduction for security expense, based on the percentage use of your home for business.

Repairs

You can deduct the cost of repairs, supplies and labor that relate to your business, such as the cost of the repair the air-conditioning system of your house. Since repairing the air-conditioning system benefits your entire house and home office, you can deduct the percentage of your home office use. If you use 20 percent of your house for business, then you can deduct 20 percent of the cost of the aircon repair. On the other hand, repairs to the window of your home office are a direct expense; thus, you can deduct the entire cost. If major and considerable repairs are made, they must be depreciated.

Utilities and Services

The IRS primarily considers expenses for utilities and services, such as electricity, gas, trash removal and cleaning services, as personal expenses. However, you can deduct the business part of your expenses if you meet the home office requirements. There are cases when you can deduct more for a utility expense, particularly if your electrical bill is higher than the allocable percentage of your whole bill. If you can prove that the additional cost is a direct result of your business operation, then you can claim that additional amount as a direct expense.

Home Owner’s Fees/Associations

You can deduct a percentage of your home fees based on the percentage use of your home as a place of business.

Property Taxes

You can deduct a percentage of your home property taxes only if you are allowed a home office deduction.

Condominiums

If you are allowed a home office deduction, you can deduct a percentage of your condo lease, or depreciate a percentage of your condo if you own it, and deduct a percentage of any related fees.

Moving Expenses

The business portion of the move is fully deductible, if you are allowed the home office deduction.

Important Notes on Home Office Tax Deduction

One important caveat, though: the home office rules apply to sole proprietors, partners, owners of S-corporations, and members (owners) of LLCs. These rules do not apply to C corporations. Home office deductions are reported on Form 8829, “Expenses for the Business Use of Your Home.

Certain expenses are deductible whether you use a home office or not. Take telephones, for example. The rule is that the basic local telephone service change, including taxes for the first telephone line in your home is a nondeductible personal expense. However, if you do business long distance phone calls on that line, you can deduct it as part of your business expenses. If you get a second phone line in your house exclusively for your business, you can deduct this as a business expense.

Tax laws are often complicated, even unfriendly. Figuring out whether your home office qualifies for a tax deduction can be an arduous process. Be careful with your deductions, as the taxman can smell questionable deductions a mile away.

It is important that you consult with your accountant or tax consultant help you determine the kind of expenses that can be deducted given your unique circumstances.

 
Recommended Books on Home Office Tax Deductions:

 

Jenny Fulbright

Jenny Fulbright

Jenny Fulbright is a writer for PowerHomeBiz.com.

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