Once you have determined that you are entitled to claim a
deduction for business use of your home, you then need to
determine the allowable deductions that are related to your
business, and the use of your home.
So what household expenses are deductible? To make this
determination it is necessary to separate your household
expenses into three categories;
1) Expenses that are not related to your business use.
2) Expenses that are indirectly related to your business.
3) Expenses that are directly related to your business.
Let's eliminate one category right away. Expenses that are
totally unrelated to your business are not deductible,
therefore these expenses need to be treated as personal
expenses. In general I would state that all expenses
directly related to your business would be deductible.
Also, the business portion of indirectly related expenses
would be deductible. I might caution you that because of
limits placed on deductions for expenses that pertain to
your business, you may find that even directly and
indirectly related expenses could be disallowed. I won't go
into this here, but you could research what limits are
placed on deductions to make a determination in your
situation.
I should explain what a directly related expense is. These
would be the expenses incurred in your home that benefit
only the business portion of your home. This would be for
the area used exclusively for your business, and only for
the business area. An example would be new carpet only in
the area used exclusively for business, or painting the
area.
Directly related expenses are fully deductible but are
subject to a limit based on the gross income of the
business . If a direct expense is for the purchase of
property that will be used for more than one year
(furniture), the cost must generally be depreciated over a
number of years.
Ok now let's discuss indirectly related expenses. These are
the expenses that you incur in maintaining and running your
entire home.
These expenses benefit both your business and personal
portions of the home. You may use the business portion of
these expenses to calculate the home office deduction.
Indirect expenses include such items as: 1. Real estate
taxes;
2. Deductible mortgage interest;
3. Rent;
4. Utilities and services;
5. Insurance; and
6. Depreciation.
Special rules apply to determine the deductible amount of
some indirectly related expenses. You should research
these special rules.
Expenses for utilities and services (e.g., electricity and
trash removal) must be allocated between the deductible
business portion and the nondeductible personal portion of
the expense. The business portion of these expenses can be
based upon the percentage of the home that is used for
business.
The basic local telephone charge, including taxes, for the
first telephone line into your home is a nondeductible
personal expense So if you only have one telephone line
into your home, you may not claim any deduction for charges
that are required to obtain local telephone service, even
if you are able to prove that the line is used 100% for
business reasons. Charges for optional services such as
call-waiting, call-forwarding, three-way calling, or extra
directory listings are deductible if a business purpose can
be established. In addition, charges for long-distance
calls or payments for a service that permits you an
unlimited number of calls to or from persons that live
outside your local area are deductible, even if they are on
the first telephone line, provided that you establish a
business purpose for them.
Business calls made on a second line in the home and/or
from a cellular telephone used exclusively for business
would generally be fully deductible. Deductible telephone
expenses are not part of the office-in-home expenses.
Instead, they are deducted as part your other ordinary and
necessary business expenses.
Home owners insurance can be tricky. If your home insurance
provides coverage beyond the end of the tax year, the IRS
position is that the you may currently deduct only that
portion of the premium that provides coverage on the
business portion of the home until the end of the year. The
remaining portion would be claimed in the next year
The next topic should be the depreciation of your home. To
do so there are some things you need to determine. You will
need to determine the percent of business use of your home,
the month and year that you first satisfied the tests for
deductions and the adjusted basis and fair market value of
your home at the time you first qualified for the deduction.
The basis for depreciation is the lesser of:
1. Your basis (i.e., cost plus capital improvements minus
any casualty losses) in the home on the date that the
individual became eligible for the deduction; or
2. The fair market value of the home on that date.
Unrelated expenses are those that benefit only the portions
your home that are not used for business reasons.
Unrelated expenses include such costs as lawn and garden
care, and repairs to the non-business areas your home.
Unrelated expenses are not deductible as part of your
office-in-home expenses.
So now you have general information on what to deduct for
your office in home. This article is not intended to be a
complete review of office in home deductions, and you
should research further as needed. For instance, if you are
a child care business, you have some other rules to follow.
Please use this information with other resources available
to make a good sound determination of what you should be
deducting in your situation.
----------------------------------------------------
Steve Jackson is a professional income tax preparer with
over twenty years experience, helping clients with their
individual tax situations. Steve offers tax services and if
you file online, he can be here to help you with your tax
situation, and will provide you with free updates during
the year. Contact Steve at http://www.jjackson328.com
No comments:
Post a Comment