Home Office Tax Deduction…Explained Simply

Published on: Author: Anne Langton

Can’t you just feel the excitement in the air?  The season is upon us…TAX SEASON that is.  It’s that time of year when weary eyes abound and refrains of “where did I put that?” can be heard uttered through out the land. Most of us are fortunate in that we can hand over documents and information to a qualified accountant (who mysteriously understands the language spoken by the IRS) and thus magically transforms it all into a completed IRS tax return.  I certainly am not a qualified accountant…I am not even an unqualified accountant.  But I am an office organizer who specializes in home offices and in my travels I hear a lot of confusion about this issue…so I sought out advice from tax expert and CPA Marietta Z. Courtney who helped me understand the “home office” tax deduction…explained simply

I enlisted Marietta’s assistance not only because of her tax expertise but also because of her ability to explain complicated issues in a simplified manner.  After all, who does not need an extra dose of “simplified” especially at tax time!  The goal of the Home Office Deduction (HOD) is to reduce the taxable income of a business or an employee.  In order to qualify there are 2 very important criteria that must be met and they are found in 2 little words…

EXCLUSIVELY” and “REGULARLY” says Marietta “are the important words AND BOTH words must apply if any ONE of the following qualifications is met…

#1…An entrepreneur or employee qualifies for the HOD if they use part of their home as a place of business.  However, this defined space or room must be used EXCLUSIVELY and REGULARLY for that business and ONLY that business.

YES:  A room or area that has a defined work space where ONLY that business operates.

NAY NAY:  A sofa or dining room table on which a lap top is used. A guest bedroom containing a desk and file cabinet…these spaces are NOT deductible!
 
#2…A place in your home where you EXCLUSIVELY and REGULARLY meet clients or customers in the normal course of business.
 
YES: A seating area or conference table that is ONLY used for meeting clients
 
NAY NAY: Usually you meet clients or customers at Panera Bread but 3 times in the past year, you met them in your living room…your living room in NOT deductible!
 
#3…A separate structure that is used EXCLUSIVELY and REGULARLY for that business
 
YES: Part of your garage contains an office that you only use for business purposes
 
NAY NAY: There is a file cabinet in your garage that is used 2 times a year for your business…your garage is NOT deductible!
 
#4…Part of your home is used for storage of inventory that is used EXCLUSIVELY and REGULARLY for your business
 
YES: As an Avon representative, you store products to be sold.  Or to promote your organizing business, you have written a book and store the inventory on premises.
 
NAY NAY: As an organizer, occasionally I use my Ziploc bags to help my clients get organized…my kitchen cabinets space would NOT be deductible!
 
Okay so you’ve determined that at least ONE of the 4 requirements listed above have been met.  Now what?  Now it’s time for math…determine the square footage (that’s length x width) of the space that meets the requirement. Next, using the total square footage of your home (don’t forget upstairs and downstairs), you determine what percentage this Home Office occupies within your home.
 
EXAMPLE: 
I have a room that I use for a home office.  This room is 15’ x 16’ or 240 square feet.
Total square footage of livable space in my home is 1200 square feet.
240sf divided by 1200sf is 20%
My home office occupies 20% of my home
 
WHAT IS THE BENEFIT OF THE “HOME OFFICE” DEDUCTION?
 
According to Marietta, meeting one of the 4 requirements above now enables you to deduct that percentage of personal expenses. These are expenses that normally would not be deductible.  Using the example above, 20% of expenses is now deductible. Expenses such as… 
·         Home Utilities (except the first telephone line)
·         Home Insurance
·         Indirect Home Repair (such as a broken furnace)
 
Remember THE GOAL of the HOME OFFICE DEDUCTION (HOD) is to REDUCE THE TAXABLE INCOME OF A BUSINESS

Marietta is clear that there are exceptions and side rules that apply to the HOD so ALWAYS consult a tax professional first.  For example Day Care Facilities and even Employees that work out of their home to benefit their employer could reap additional benefits.  The important thing is to know when this is a conversation you should be having with your CPA.  As Marietta says, “this is not trying to get away with anything. This is a deduction that the IRS allows…so why not take advantage of it.”  However she strongly recommends that people to consult a tax advisory as Home Office Deductions do come under close scrutiny by the IRS.  Additionally Marietta suggests checking out the IRS 8829 form and worksheet to gain more insight about the HOD.

Marietta Courtney is a CPA providing tax services to business owners in all phases of business, from start-up to established businesses.. For more information go to her website at  www.Courtneycpa.com.

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