Who Wants to Take a Home Office Deduction?

Who Wants to Take a Home Office Deduction?
You should if you want to take full advantage of a tax
deduction many people overlook. The home office deduction
allows individuals to deduct expenses that are not
otherwise deductible such as utilities and homeowners
insurance. There are certain requirements you must meet to
have a home office, including:

You own a business (if you are an employee, you must meet
the "for the convenience of the employer" test). You have
an area set aside in your home used regularly and
exclusively for specific administrative or management
activities There is no other place of business where you
conduct those activities

These requirements help you to determine whether the area
used in your home is your principle place of business for
certain business functions.

If you don't think the area you use qualifies, you may just
need to change the facts. Are there too many nonbusiness
items in your office area? Move them to another room and
you may qualify. Are you struggling to find business
activities that you can do at home? Bookkeeping, billing
and ordering supplies are just a few activities that are
easily done from home.

Once you've determined that you have a home office and you
would like to take the home office deduction, you need to
track certain expenses.

Allowable home office expenses include:

- Utilities
- Mortgage interest
- Property taxes
- Homeowners and liability insurance
- Repairs and maintenance of office area
- Depreciation of office area

Deductions that do not qualify as home office expenses are
items that do not relate to the home office such as
landscaping and pool care. In addition, taxpayers are
denied a deduction on a first phone line regardless of the
level of business use. A taxpayer must have a second phone
line to deduct telephone expenses, long distance charges
and internet service.

Of course you can't deduct 100% of these expenses. The
expenses are allocated based on square footage or number of
rooms in the house. In most cases, the number of rooms
allocation yields a higher deduction, make sure your CPA
calculates both numbers to maximize your deductions.

- What You Should Know About Home Office Deductions -

Home office deductions are allowed for areas used
exclusively for the management and administrative duties of
the business when these functions are not conducted in the
principal place of business.

Prior to 1999, the IRS regarded the location of major
business transactions, based on time usage, as the
principal place of business. For example, sales conducted
in customer's homes disallowed the home office deduction,
even if invoicing, bookkeeping and other management
functions were conducted from the home. Now these
responsibilities are accepted for home offices.

However, if multiple businesses are conducted from the
home, separate office space should be allocated, or the
entire deduction taken, in the most active business. This
is particularly important where spouses each conduct
business from the same home office space.

Home Office Requirements:

The home office must be an area in the home set aside and
used regularly and exclusively as an office. No other
fixed place of business can be used to conduct the same
business regularly.
General expenses of your home are deductible in proportion
to the business office percentage of your home. This can be
measured either by square footage or by number of rooms,
excluding bathrooms and hallways.

Certain home office expenses must be paid through your
company, while others are personal expenses.

The following items should not be paid by your company:
- Mortgage expense and interest.
- Property taxes.
- Homeowners and liability insurance.
- Repairs and maintenance of the office space.

The following items should be paid through your company:
- urniture and fixtures purchased specifically for business
purposes, whether stored in the home office or at another
location.
- Separate business phone lines that are installed at the
home office.
- Office supplies.
- Other items specifically used for the business.

The following items are not generally deductible:
- Landscaping and lawn maintenance.
- Pool care.

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Tom Wheelwright is not only the founder and CEO of
Provision, but he is the creative force behind Provision
Wealth Strategists. In addition to his management
responsibilities, Tom likes to coach clients on wealth,
business, and tax strategies. Along with his frequent
seminars on such strategies, Tom is an adjunct professor in
the Masters of Tax program at Arizona State University. For
more information, please visit
http://www.provisionwealth.com