home office deduction, to deduct or not deduct?
DESCRIPTION
Home Office Deductions, To Deduct or Not Deduct? Connect with Traders Accounting – Find Help for Day Traders; Have Complaints about taxes and accounting Traders Accounting can help!TRANSCRIPT
Home Office DeductionTo Deduct or Not Deduct?
Jim CrimminsTraders Accounting
Updates
To ensure you have the latest home office information subscribe to our free e-mailed newsletter.
http://www.tradersaccounting.com
Business Use of Your Home
The IRS says you can deduct it
“With technology making it easier than ever for people to operate a business out of their house, many taxpayers may be able to take a home office deduction when filing their federal income tax.” IRS Summertime Tax Tip 2009-16
Qualifying for a Deduction
You must use part of your home Exclusively and regularly as your principal place of business.
•Exclusively and regularly as a place where you meet or deal with clients or customers in the normal course of your trade or business.•You must use a specific area of your home only for your trade or business.
Storage of Inventory or Product Samples
You can deduct expenses for the business use without meeting the exclusive use test, but you must meet all of the following tests:• You sell products at wholesale or retail as your
trade or business.• You keep the inventory or product samples in your
home.• You use the storage space on a regular basis.• The space you use is a separately identifiable
space suitable for storage.
Regular Use
To qualify under the regular use test:• You must use a specific area of your home
for business on a regular basis.• IRS code does not define regular use.• Courts indicate that 3-4 times a week for a
total of 10 – 12 hours a week should be sufficient.
Trade or Business Use
To qualify you must use part of your home in connection with a business:
– Trader in Securities (sole proprietorship)– Formal Entity (LLC or Limited partnership)
Principal Place of Business
To determine if your home is your principal place of business you must consider:
– The amount of time spent at each place you do business.
– The relative importance of the activities at each location.
– You have no other fixed location. where you conduct substantial administrative or management
activities.
What are Administrative or Management Activities?
• Billing customers, clients, or patients.• Keeping books and records.• Ordering supplies.• Setting up appointments.• Forwarding orders (trading) or writing
reports.
More Than One Trade or Business
You can use your home office for more than one business activity, but you cannot use it for any nonbusiness (personal) activities.
Place to Meet Patients, Clients, or Customers
If you meet with other people in your home:
• Using our home for occasional meetings and telephone calls will not qualify it to deduct expenses
• You must use the part of your Home exclusively and regularly to meet other people
Deduction Limit
• Your gross income from your home business must equal or exceed your total business deductions.
• If your deductions are greater than the business profit, you can carry over the excess to the next year even if you do not live in that home the next year.
Direct Expenses
Only the expenses for the business portion of your home is deductible.
EX:Painting or repairs only in the area used for expenses. - Fully deductible.
Indirect Expenses
Expenses for maintaining your entire home:
• Insurance•Utilities•General repairs of your house
Deductible to the extent of the percentage of your office to the total size of your home.
Unrelated Expenses
Expenses only for the parts of your home not used for business.Non-deductible ex:
• Lawn care.• Paining a room not used for business.
Examples of Expenses
Expenses that are deductible whether or not you use your home for business:
– Real estate taxes– Qualified mortgage insurance premiums– Deductible mortgage interest– Casualty losses
Examples of Expenses
If you use your home for business you can deduct:– Insurance– Repairs– Utilities and services– Security system– Rent– Mortgage interest and
premiums–Depreciation
Property Bought for Business Use
You have three choices in how to deduct:
– §179 and deduct the cost.– You can split the property between §179
and depreciation.– You can depreciate the cost over a
specified time period.You elect the section 179 deduction by
completing Part 1 of Form 4562.
Personal Property Converted to Business Use
• No §179 deduction is allowed.• MACRS Depreciation must be taken.• The basis will be the fair market value of
the property on the date of conversion.
Recordkeeping
You must have records that provide the information needed to figure your deductions for the business use of your home.
Your records must show the following information:– The part of your home you use for business.– That you use part of your home exclusively and
regularly for business as your principal place of business.
– The depreciation and expenses for the business part of the home.
Recordkeeping
You must keep your records for as long as they are important for any tax law.
– Keep records to prove your home’s depreciable basis.
– Photograph the office – prove that it actually existed.– Keep a blueprint of your home
showing the office.– Keep a time and work activity
log.
Where to Deduct
It depends upon your classification– A self–employed person (Trader in
Securities).– An employee (C Corporation).– A partner (LLC or Limited Partnership).
Partners
•If you were required to pay ordinary and necessary expenses on behalf of the partnership and this is required by the partnership agreement, you may be able to deduct the expenses.
•If you trade in an LLC or LP insure that your agreement has this language in it.
Facts About the Home Office Deduction
1. Generally, you must use part of your home exclusively and regularly for business.
2. Generally, the amount you can deduct depends on the percentage of your home that you used for business.
3. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
