work from home Taxes Part II

The time is approaching for the annual inquisition into the settling of accounts between the home office business owner and the federal government. For most, this chore is as enjoyable as having teeth pulled. However, it is a good idea to review some of the rules and parameters the IRS imposes with effect the home based tax payer.

Some of the lesser known deductions a WFH taxpayer may be eligible for include many that are specific to filing a schedule C (Profit or Loss Prom Business) as an attachment to the 1040. If this convention is chosen (schedule C), then the taxpayer should be aware that if part of their home is used for business, whether or not it is a full-time occupation, it may be possible to deduct use of the home from the business’s income. If so, portions of home mortgage interest or rent, maintenance, insurance, real estate taxes and utilities can be deducted. However, if itemizing deductions, (reported on 1040 schedule A), the total mortgage interest and real estate taxes claimed on Schedule A must be reduced by the amount claimed for the business use of the home (schedule C). Additionally, portions of the depreciation of the home may also be deducted as a business expense. But, the schedule C deductions that would not normally be available to an individual (depreciation, insurance, utilities etc.) cannot be greater than the net income of the business. The form to claim the deduction is 8829, (Expense for Business Use of Your Home).

To qualify for the working from the home expense deduction, two standards must be met. These are the principal place of business test and the regular and exclusive use test. With the principal place of business test, a portion of your home must be the principal place of business,  Or it must be a place used by the clients, patients or customers of the business, or in connection with the business if it is a separate building from the house. Principal place means that the main portion of the business takes place at the home and is the place where money is actually earned. Therefore, if only certain portions of the business are performed at a home office like book keeping or other administrative chores, while the nuts and bolts of the business is actually conducted at a different location, then the standard may not have been met.

The other standard, the regular and exclusive use test, means the home office must be used exclusively for the business and on a regular basis. However, a room used as a home office does not have to be used only for business (confusing?) If for example, a spare bedroom is converted to a home office and a closet in the room is used for household storage or something not connected to the business, then the room still passes the exclusivity test because part of it is used regularly for business and only for business. The entire room does not have to be used only for business in this case.

If the home office is used for more than one business, then both businesses must meet the two standards or neither is eligible for the deduction. For example: I operate a freelance writing business from my home office but perform administrative work for an airplane detailing business there also. Because I perform the second businesses  main function at the airport, I cannot claim the home office expense deduction.

There is an exception to the exclusive use test and that is in the case of a state licensed day care center. It would be rather impractical to restrict a group of restive children to just one exclusive room in a private house. If so, it would be interesting to see who would loose their mind first; the kids or the day care provider.

Posted:Monday, December 08, 2008