Sunday, February 8, 2015

HOME OFFICE DEDUCTION


The Home Office deduction is one of the more complicated and misunderstood tax deductions for the small business person who works from home or for employees who must maintain a home office for the convenience of their employers. The following are the rules for claiming the home office deduction.

First of all, the business must be for profit or an expectation of profit. Next, you must set aside an area that is used exclusively for this business. Perhaps you have set up a room with a desk, computer, file cabinets, and storage for your product. Use the room entirely and exclusively for business purposes and it will be deductible. Beware, however, that as soon as you add a sofa bed in the corner for your in-laws to use when they come to visit, the space is no longer exclusive and you lose the deduction.

What is eligible for a deduction? This is where the math comes in. You must determine the total square footage of your home and the total square footage of the office. Example: Total house is 2000 square feet and the office area is 200 square feet. This will give you a 10% office usage equation. You will then be allowed to deduct 10% of your costs for the upkeep and maintenance of your home which includes insurance, taxes, mortgage interest (or rent if you do not own), electricity, gas, and repairs for the entire house. Additionally, you can take specific fix-up and maintenance costs in full if they are solely for the business space.

Also available is a deduction for depreciation on the home. To determine this figure, use the cost of the house, less the value of the land, and depreciate this value over 39 years.  As long as you determine actual expenses and qualify to claim depreciation, the allowable depreciation reduces the basis of your home accordingly, whether or not you actually claim it on your tax return.  
When you sell the home, you must make an adjustment for the amount of the depreciation taken. This depreciation adjustment is recaptured on your tax return at the 25% tax rate.
However, in 2013 and later tax years, there is a simpler option. Qualifying taxpayers may use a prescribed rate ($5 per square foot limited to 300 square feet) to compute their business use of home deduction. This option used instead of determining actual expenses has the advantage of reducing taxpayers' recordkeeping burden. Under this option, depreciation is treated as zero and will not reduce the basis of your home. In addition, under this optional method, taxpayers can still deduct business expenses unrelated to qualified business use of the home for that taxable year, such as advertising, wages and supplies.

Be sure you fully understand the home office deduction and subsequent depreciation recapture before using it. Rules for the home office deduction can be tricky; therefore it is wise to get professional tax help.

As always you are free to call me with questions on this or any other tax matter. (781) 363-5519