Home > Income Tax Advice > HOME OFFICE DEDUCTIONS


October 28th, 2009

I’m writing this business letter at home and asking myself if I can take a deduction for a home office.  Or more properly stated – Business Use of the Home deduction.  Maybe.  Here’s why.


Required Business Use:   Just because you make money at home doesn’t mean you’re in business.  Preparing taxes at home is a business, investing for personal gain is not.  Odd, since the tax work may generate only $25,000 per year and the day trading could garner over a million and still be personal in nature.  Also, terms like “exclusively and regularly as a principal place of business” and “meets or deals with customers” come into play.  So, sitting and writing a business letter at the dining room table is not a business use, but sitting with a client and preparing a tax return is.


Try this on for size.  A barber cuts customer’s hair in the garage, builds a greenhouse and grows plants for a nursery in the yard, is a licensed realtor and uses a spare bedroom as an only office and writes articles for the New York Times at the dining room table.  Yes, yes, yes and no – as to business use of the home. 


Employees working from home must be doing so for the convenience of the employer.  Sounds easy to qualify, but it is not.  Another office provided elsewhere by the employer usually disqualifies the home use.  For an employee to qualify, usually their employer has to be located in another state or in a city located more than a commuting distance away.


Now that you qualify, what is deductible?  Expenses that are “directly related to business use” and those that have a “business portion of indirect use” are deductible.  The first group includes the costs of building a greenhouse, the second, things like property taxes and utility bills.  Direct expenses are typically 100% deductible, indirect expenses are allocated on a percentage basis.  However, business use of home deductions can never produce a business loss – only zero income.


Telephones:  The basic local charge, including taxes, on the first telephone line is never deductible.  If you have only one telephone, only the specific business long-distance calls are deductible.  Stay tuned for a posting regarding cell phones, computers and other “listed” property – special business use rules apply.


Depreciation:  Take your original cost plus capital improvements or fair market value, whichever is less.  Determine the date of the first business use and then let me do the rest. 


Allocation Methods for Determining Business Use:  Generally, any reasonable method is fine.  I typically add up the number of large rooms and find a percentage.  (2 bedrooms, 1 living room, kitchen – the bedroom used for business equals 25%)


Sale of the Home:  The depreciation deduction can come back to bite you.  Now that a portion of your personal residence is business property, that portion is taxed as business property when sold.  If the home has appreciated in value this can be a bad thing.  This is my biggest reason for discouraging taking a deduction of business use of a home.  Also consider this, if your business is audited you have opened up much your personal life style and expenses to examination as well.


Automobile Expenses:  Here’s good news, since you work at home you no longer commute to work.  And as we all know commuting miles are not deductible.


When the Home is Rented:  All the above rules apply except instead of the messy depreciation you just deduct a percentage of your rent.


So where do you go from here?  If you really want to take a home office deduction, keep really good records and even take pictures.  After that, talk to me and see what I think.  If you’re still of a mind to take the deduction we’ll talk about the many details that were not covered here.

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