Taxing Times ... The Home Office Deduction
Part 3

BRINGING IT ALL TOGETHER

To summarize, then, to qualify to deduct expenses for the business use of your home, you must satisfy the following tests:

1. Your use of the business part of your home must be:

(a) exclusive (unless the storage of inventory or day-care facility exceptions apply); AND 
(b) regular; AND 
(c) for trade or business

AND

2. The business part of your home must be one of the following:

(a) your principal place of business; OR 
(b) a place where you meet with patients, clients or customers as a substantial and integral part of your business; OR 
(c) a separate structure such as a detached garage you use in connection with your business.

CALCULATING YOUR BUSINESS USE

Calculating your business use of the area of your home that you are using exclusively and regularly for business purposes is not complicated. First, calculate the percentage of the business area of your home as a proportion of your total home area.

Next, add up your rent or mortgage interest, utilities, repairs and maintenance, insurance and property taxes. Finally, multiply the total by the percentage you calculated above. If you own your home, you can also include depreciation on the business portion of your home.

Note though that you cannot deduct your home office if you have a loss from your business or if you would create a loss by claiming the deduction. If you find yourself in this situation, never fear. Any expenses you can't claim this year can be carried forward to future years.

WHETHER TO CLAIM THE HOME OFFICE DEDUCTION

So, that's the home office deduction in a nutshell. Not too difficult, is it? Should you claim it? Why or why not?

To help you answer these questions, let's wrap up with a quick look at the pros and cons of claiming the home office deduction.

First, the big con. Claiming the home office deduction increases your chances of being audited. So, be sure that your claim is legitimate before you claim it because the odds are relatively higher that the IRS will come knocking on your door. Don't let that stop you if you have a legitimate claim that's worth claiming 
though as there are some significant advantages in claiming your home office even after you consider the fact that your mortgage interest and real estate taxes are already tax deductible.

To begin with, deducting as business expenses what would otherwise be personal expenses reduces not only your income tax but also your self-employment tax. Next, if you claim for a home office, you can deduct rent, utilities, insurance and depreciation which you couldn't otherwise take as expenses. Finally, a home office allows you to deduct more car expenses  because it allows you to claim the miles you drive from home to your first business stop of the day and from your last stop of the day back home. This would otherwise be undeductible commuting mileage.

Tax law is not a favorite subject of many people, I hazard to guess. But, dry and brain numbing as it is, strive to have at least a working knowledge of the fundamentals. This can help you structure your business from the outset in a way that allows you to take maximum advantage of the tax laws that work in  your favor and to minimize those that may work against you if you don't plan your tax affairs effectively. A good accountant is your best ally when it comes to tax. This article has hopefully given you a working knowledge of the fundamentals of the home office deduction but consult your accountant as to your own particular circumstances. 

Click here for Part 1 of this article.

Click here for Part 2 of this article.

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