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
