work from home Taxes III

You operate a small, successful work form home business and you are looking for any advantages available to you when filing your annual federal income tax. Wishing to maximize any entitled deductions, you and your spouse have decided to file as married filing jointly. You have filed as such since your union as man and wife began twenty years ago and so far it has rendered the most favorable taxing benefits available. Because you have been in business for only a year and both of you hold outside jobs, (you are a draftsman for the city and your wife teaches high school math), you both have reasoned that MFJ is your safest and best bet this year. As your business progresses, you plan on retiring from your day jobs, devote all your time to the WFH business and form an S-Corp next year. But this time it’s the old 1040 and you will itemize on a schedule A and take the home office expense deduction of schedule C and report it on form 8829.

You have qualified for the home office expense deduction because the home office you and your wife use to run an on-line math tutoring business passes the principal place of business, and the regular and exclusive use tests. Your house is your principal place of residence and there is ten years left to pay n a 30 year mortgage.

So far, your schedule A has been filled out listing your itemized deductions. Now, you are figuring your Profit or Loss from Business on the schedule C. Determining the amount of the home office expense deduction will be done in several steps. The first is to complete Part I of form 8829 which asks what portion of your home is used for business. The most common way is to find the answer is to measure the square footage of your home office, (include any area used for storage of product or samples or anything else related to your business). Then measure the area of the entire house. Divide the area of your office by the area of your house and enter the figure onto the form as a percentage.

Then it is on to part II. Some of the information to be entered here will be transferred from your schedule C, (Such Schedule C entries included gross income and total expenses of your business.) On the 8829; part II will also ask to record casualty loses, deduct able mortgage interest, real estate taxes and other expenses. The expenses recorded here are either direct or indirect. Direct expenses are fully deductible because they come from the part of the house directly used for running the business. Indirect expenses are partially deductible because they are used in the entire house and you can only deduct the portion that affects the office portion used for business. An example of a direct expense would be storm windows put in the office. An indirect expense would include the home mortgage interest, real estate taxes or repairs to the roof.

Part III of the 8829 address’s the Depreciation of the House, you can depreciate the portion of your house use as the home office take you are the owner. Determine the home’s adjusted basis (cost) or the fair market value. This is rather tricky in this climate of downward spirals of home values. You will also need to know the value of the land and the business basis of your building which is calculated by multiplying the basis of your building by the business percentage which was entered earlier. The depreciation percentage is determined by how long you have owned your business, not by how long you have owned the home. In your case your home is depreciated over 31.5 years because it was purchased before May 12, 1993.

You started using your home for business in January last year; therefore (from IRS charts) the depreciation percentage of your home office is 2.461%. FINALLY, depreciation allowable for you home office is determined by multiplying the business basis (calculated earlier) by the depreciation percentage (2.461%)

This is much easier to do than I have explained here. It may be worth the effort to calculate the deduction. After all, you have the whether-all to operate a WFH when times are tough, in comparison this task should be a walk in the park.

Resources: IRS.com

Liberty Tax Service

Posted:Sunday, December 14, 2008