Labradoodleductions
Labradoodleductions
Home Office
Home Office
Print Full ArticleLast Reviewed: Feb 2011
Last Modified: Feb 2011
Under certain circumstances, the Business Use of Home deduction can provide a significant tax reduction. There are a couple pitfalls to avoid, though, so we will review those carefully after looking at the benefits.
Owning or renting a home is expensive. And while the tax code allows a deduction to be taken for mortgage interest and real estate taxes, other costs such as rent, utilities, and maintenance are generally non-deductible. If a portion of your home is used for business purposes, however, you may be able to claim some of those costs as business expenses, thereby saving not only income tax but also Self Employment tax. The area must be used regularly and exclusively for the business and this has tripped up many a taxpayer, so let's explore these requirements a little further.
The exclusive use requirement is fairly intuitive - the area being deducted for business must be used solely for the business. No spare bed for visiting relatives, no storage of outgrown children's clothing, no bookshelves stuffed with dusty old novels and trinkets. The other requirement, regular use, is a little more obscure but no less important. The area claimed as a business expense must be used on a regular basis - this rules out the 900 square foot basement that sits empty for weeks or months at a time, only to be used once or twice a year as a temporary work area. The area must meet BOTH requirements - exclusive business use AND regular business use.
Little known fact: There is no requirement that the business portion of the home be a separate room or even be partitioned off. As long as the area claimed meets the use tests, it qualifies (caveat - areas used for administrative functions do not qualify if you have an office elsewhere). This means that half of a bedroom, for example, can be claimed as a business expense as long as that half meets the tests. So put your mother-in-law, your musty old books and your kids' worn shoes on one side of the room and your desk, filing cabinet, and inventory on the other and reap the tax benefit. And who wouldn't want their mother-in-law watching them work from across the room??
Allowable business-use-of-home expenses include all the costs of keeping up the home (pro-rated by area used, of course) such as:
- Mortgage interest or rent
- Real estate taxes
- Homeowners or renters insurance
- Utilities
- Security system
- Repairs and maintenance
- Depreciation (if you own the home)
Be sure to keep a separate tally of expenses related directly to the business area, as these are not subject to the proration formula. For example, painting an office that occupies 15% of your home would be fully deductible, while painting the entire house would be 15% deductible.
