The Home Office

M THOMAS ACCOUNTING

Requirements

• The home office must be:– Principal place of business, – A place to meet with customers, and – Related to your business, if the location is in a

structure not attached to the home.• If you are an employee, your employer must

require the business use of your home.

Calculations

• Consider direct and indirect expenses.• Direct expenses are those that pertain exclusively

to the home office.• Indirect expenses are those that pertain to the

entire residence.• Allocate indirect expenses between the business

and nonbusiness portions of the home.

Limitations

• Your net income from business.• For an employee, this is wages less expenses.• For a self-employed person, this is the net

income shown on Schedule C.

Deductions

• If there is a loss, the IRS does not allow a deduction and the expenses are carried forward.

• The IRS allows three deductions in full:– Mortgage interest,– Real estate taxes, and – Casualty or theft losses.

• Once the otherwise deductible expenses have reduced net income, you can deduct other business expenses.

• If you go out of business before using up any potential deductions, these amounts are lost.

Sale of Property

• When you sell the home that had been the location of your home office, some of your gain may be taxable.– The depreciation the IRS allows you to claim

on your home office is subject to taxation.– You can avoid some potential tax situations if

you are renting your principal residence to your employer.

Planning Considerations

Home office expenses can represent a significant dollar amount in computing your tax liability. As a tax professional, I’m available to help you through the process.

Thank you.