What Home Office Deductions Can Save Me Money?
Changes in the tax laws affecting businesses may have many of you wondering what tax deductions are still allowable.
In fact, you may be wondering what qualifies as home office use, period. Let’s take a look.
First, the home office will qualify if you use it as your administrative office for your business. This is true, whether you operate as a sole proprietor, an LLC or a corporation.
With the new tax law, Section 280A was amended to provide that a home office may qualify as a principal place of business.
What Does “Principal Place Of Business” Mean In Practice?
You’ll want to be sure that all uses of the home office qualify for the home office deduction. Simple? Strictly speaking, that means the office can’t be used as both a home office for your business and an ad hoc guestroom when needed.
The IRS publication 587 states that – your home office will qualify as your principal place of business for deducting expenses for its use, if you meet the following requirements:
- You use it exclusively and regularly for administrative and management activities for your trade or business.
- You have no other fixed location where you conduct substantial administrative and management activities for your trade or business.
- You must use the office exclusively for business
- This administrative office is a principle office
- You must use it regularly for business
- You must do your administrative work in this home office
- You must not do any significant portion of your administrative work in an office outside your home.
More Complicated Home Office Scenarios
Another important quote from IRS 587 highlights the fact that you can have more than one business location, including your home, for a single trade or business.
In addition, the home office can be used by more than one business as a principal office, if both businesses qualify. That is a must.
Now, it gets a bit more complex. If two spouses decide they each want use of the room – one for a home office, the other for nonoffice use, it is perfectly acceptable for them to split the usage.
Keep in mind though, that if one spouse uses the room as an office and the other spouse uses that “business desk” to pay the monthly household bills, the room will not qualify. However, if half the room is dedicated to office use, where all of the above requirements qualify, and the other half of the room with a separate desk or table is used for home related tasks, like paying the monthly bills, the half that is dedicated to a home office will still qualify.
Based on the IRS, the split must actually be a physical one, like the example above, with one portion of the room or living area dedicated to one business and the other portion of the area set aside for a nonbusiness activity. This does not require that it be marked off by a permanent partition but there must be actual separation of uses in the divided space.
What won’t work, is this example from the IRS website:
You are an attorney and use a den in your home to write legal briefs and prepare clients’ tax returns. Your family also uses the den for recreation. The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den.
What Expenses Can You Deduct?
Now that you know your home office use qualifies with the IRS for deductions, what can you deduct?
This table is a good start.
What you can deduct will depend on whether your deductions are considered:
- Direct expenses, indirect expenses or unrelated expenses.
The next defining consideration is the:
- Percentage of your home that is used for your business.
IRS publication 587 provides instruction and on page 20, a worksheet to calculate your expenses. The following publications are suggested:
Detailed instructions are available in Form 8829 for more information about figuring and deducting the business part of these otherwise allowable expenses. For more information about deducting real estate taxes, see Pub. 530, Tax Information for Homeowners. For more information about deducting home mortgage interest, see Pub. 936, Home Mortgage Interest Deduction. For more information about deducting casualty losses, see Pub. 547, Casualties, Disasters, and Thefts.
Where you deduct these home office expenses on the form 1040 will depend on whether you are a self-employed person or a partner.
Determining the percentage of your home for business use (to determine indirect expenses) can be calculated by measuring the length and width of the space used for your home office. Say it is 15’ x 15’ which equals 225. Divide that by the size of your home. As an example, say it is 1,500. 255 divided by 1500 = 15 percent.
Tax Help for Marin Businesses Located in Corte Madera
If you are just starting a business in Marin and want to be sure you are tracking expenses correctly, or if you’ve been in business for years and want to know how the new tax law will impact your 2018 tax return, now is a great time to contact our Corte Madera office. April will be here before you know it.