July, 2007 Tax Tip
If You Work From a Home Office Let It Work For you
I am amazed by the number of people who are hesitant to take a tax deduction for a legitimate home office. When I’ve asked new clients why they hadn’t taken a home office deduction in the past, even though they were qualified to do so, I’ve received such responses as “my accountant said it would raise a red flag” and “I’ve never been audited before and I don’t want to start now”. I believe taxpayers become terrified of taking deductions for working in their homes, even though they would not hesitate to write off the rent for doing the same work in an office complex. In other words, it just seems more appropriate.
The truth is that, with changes in the tax laws over the past several years, the “handle with care” warnings aren’t nearly as persuasive now as they used to be. There are some no-no’s when it comes to taking the deduction. The principal one is that you can’t mix business with pleasure. If the home office is used for both business and pleasure, the IRS won’t allow it. The use must be “exclusive and on a regular basis” for business. A limited exception to this rule exists if you can demonstrate that a room clearly has divided use and that the “business” portion has no activity other than business.
The home deduction is not limited to the room where you have your desk and computer. If you manufacture goods or store inventory or business records in your home, that space is also deductible.
Once you qualify your business portion of your home, you can deduct the expenses necessary to maintain the business space. These include an allocable portion of interest, rent, taxes, insurance, utilities, repairs and maintenance, and other expenses that can be attributed to that space. Also, don’t forget about depreciation. An “allocable portion” can be determined on a square foot basis or on a room basis.
There is very little downside to taking the home office deduction. If you sell your home after having taken depreciation on your office, you’ll have to pay tax on the depreciation you have taken over time. However, this is not usually a significant amount. One other negative – your deduction cannot be greater than the profit generated by the business. The excess deductions are not lost forever, they merely get carried forward to succeeding years.
So give yourself a nice tax break. If you are not deducting a home office, talk to your tax professional to see if you qualify. If you are not working with a tax professional, I would be happy to discuss this with you.
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