Tax
| Lock in big home-office deductions |
| Published Thursday, February 25, 2010 7:00 am |
The rising unemployment rate and desire to become an entrepreneur have resulted in more home-based businesses taking root. The business may be the main source of income for the family breadwinner or a sideline to supplement another job. In either event, expenses may be offset by home-office deductions.
Basic tax rules: A business taxpayer may deduct home office expenses if he or she uses a specific area in the home "regularly and exclusively" as the principal place of the business, a place to meet or deal with customers, clients or patients in the ordinary course of business or a place to store inventory or product samples. In addition, deductions may be available for a separate structure (e.g., a detached garage or shed) used in connection with the business.
However, if the taxpayer is a corporate employee, the home office must be used for the "convenience" of the employer and as a condition of employment. Proper documentation is required.
Caution: Be careful about meeting the "regular and exclusive test" for home-office deductions. If the office is used for personal reasons, it may taint the deductions. Consult your trusted advisor for more guidance.
Home-office deductions are generally claimed on the taxpayer's personal tax return. Deductions are based on the percentage of the home that is attributable to business use.
Example 1: A taxpayer uses 10% of the home as his or her principal place of business. As a result, the taxpayer can deduct 10% of the mortgage interest or rent, property taxes, utility bills, cleaning services, private trash removal costs and property insurance. If the taxpayer owns the home, he or she may also qualify for a depreciation deduction based on 10% of the home's business use.
Normally, an individual taxpayer can deduct the full amount of mortgage interest and property taxes anyway. But the other deductions represent an extra tax boost. Also, claiming a portion of mortgage interest and property taxes as business expenses may reduce AGI for other tax purposes.
The IRS says that the applicable percentage may be based on either the square footage in the home or any other reasonable method, as long as the size of the rooms is comparable.
Example 2: A taxpayer uses one of eight rooms in the home as an office. The entire home is 2,500 square feet, while the office is 250 square feet. In this case, the percentage used for home-office deductions is 12.5% based on the number of rooms or 10% under the square-footage method.
Note: Home-office deductions cannot exceed the business income derived from the home office less (1) regular business expenses (e.g., supplies, postage, etc.) less (2) the portion of deductions able to be claimed anyway (e.g., mortgage interest and taxes). Thus, the deductions cannot create a tax loss on a personal return.
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Michelle B. Shulman, CPA is a Senior Manager in the Tax Services Department and works out of our Boca Raton office. Her primary focus is providing tax planning, projections, and compliance services for family-owned and emerging businesses. Michelle helps business owners make sound, tax-efficient decisions to keep them on track for the future growth and success of their companies. In addition to traditional tax services, Michelle provides valuable advisory services to business owners, including executive compensation planning, accounting system analysis, financial forecasting, and implementing effective cash management systems. With a thorough understanding of owner-operated businesses, Michelle also serves as a liaison for financial planning and investment advisory services to ensure that owners have the best possible financial foundation for ongoing operations and, eventually, a secure retirement.
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