Do you work for yourself and are the type of person who likes to work in the comfort of your own home and be your own boss? The home office deduction is a tax deduction that may save you some tax dollars.
Aside from the stress free and hassle free travel to your work place, there is also a tax deduction in addition to the ordinary business expenses people typically put on their tax return. The expenses of repairing your office and depreciation of the of the office furniture are legal tax deductions that may benefit you. Another aspect of the home office deduction is being able to allocate home operating expenses such as utility costs, insurance, depreciation, mortgage interest, real estate taxes, etc. and use them as deductions. The expenses are allocated on a percentage basis. The percentage is calculated by taking the square footage of the office and dividing by the total area of the home. Also, if the home office qualifies as the “principal place of business,” travel costs from the home office to other work locations are deductible.
In order for the home office to qualify for the deduction it must pass one of the following three tests:
1. Structures test. The cost is deductible when the structure is not attached to the employee’s home, when the structure is used solely and regularly for the business.
2. Office location is the place for meeting clients, customers or patients. The office is used regularly to meet with clients, customers or patients. The clients, customers or patients must visit the home office. Making telephone calls to clients, customers or patients does not satisfy this requirement.
3. Principal location test. A self-employed person can take the home office deduction when the home is used exclusively and regularly, as the principal location of business. To satisfy this requirement the principal location of business is where the self-employed spends more than half of their time. Administrative and/or management duties done in the home qualify the home for the “principal location test.”
When the office passes under any of the three categories discussed above, the home office needs to pass one more test. The area must be used exclusively and regularly for work.
For example, a self-employed person works in a spare bedroom with a desk, home computer, and a treadmill inside of it. The self-employed person also uses the treadmill to exercise; this is personal use of the home office and fails the exclusive use requirement. There is one exception to the exclusively and regularly test, expenses related to storage of products and samples, even if the space is not for exclusive use, the expenses still may be deductible.
Sale Of The Home
Typically when someone sells their primary residence they qualify for the “Home Sale Tax Exclusion” This exclusion allows homeowners to exclude part or all of the gain from their income. When a house that contains a home office is sold for a profit, then the profit equal to the depreciation previously claimed for the home deduction is not allowed as part of the “Home Sale Tax Exclusion.” This is called depreciation recapture.
Sometimes not all the expenses are deductible in the current year. There are limitations on the amount of deductions that are considered deductible. Interest on the home loan and property taxes are always deductible. The limitations of the deduction apply to the operating expenses such as utilities, insurance and depreciation. The amount of operating expenses that are deductible is limited to the income from the business. Any operating expenses that are not deductible are carried over to the next year.
We hope this article was helpful. This article is an example for purposes of illustration only and is intended as a general resource, not a recommendation.