There's no place like Home (Office)

There’s a belief that deducting home office expenses on your tax return is a red flag. If you use your home for your self-employed business, don’t be afraid to take the deduction. By deducting expenses for your home workspace you’ll pay less tax. “You will save on federal and state taxes,and also on social security taxes, providing an additional 15 percent savings.”

In recent years the Internal Revenue Service (IRS) has relaxed the home office rules and made them simpler. Only three rules remain:

Rule #1: Exclusive Use
The part of your home used for business must be used exclusively for business.
If Lily Legal writes her briefs at the dining room table but also has dinner parties there, she must forgo any deduction for the dining room.

If Victor Visual and his artist wife share the same studio-in-the-home, then neither gets the deduction because neither has exclusive use. (It seems unfair, but it’s true.)

Note: Daycare businesses and inventory storage are two exceptions to the exclusivity rule.

Rule #2. Used on a Regular Basis
The part of your home used for business must be used on a regular basis for business.
Art Sargent has a rented studio in town. He also has great natural light in a back room of his house. The room is always locked and seldom used. On occasion he brings a potential buyer to view a painting in his home’s back room. This is not regular use, so he cannot deduct the use of that room.

Rule #3. Principal Place of Business
Your home office, or studio, or workshop must be your principal place of business.
The IRS term principal place of business is confusing. Even if you have more than one place of business, as long as the room or area in your home is used exclusively and regularly for business, then your home office qualifies as a principal place of business if it fits any of the following three criteria:

• It’s where you perform administrative tasks such as bookkeeping or scheduling.
• It’s where you meet clients, patients, or customers.
• It’s a separate structure.

Sally Ceramist rents a neighbor’s garage as her work studio. Her messy studio is inappropriate to use as a showcase so instead she has set up the sunroom in her home as her display area. Potential buyers come there by appointment to view her work. Although her works also show at a number of galleries throughout the United States, Sally can deduct the sunroom as a home office.

Kyla Chiropractor shares an office with an acupuncturist. They alternate days. Kyla does not keep patient records at the office. Each morning she brings from home that day’s patient folders. She keeps all her patient records and her professional library in a small barn on her farmland home. Kyla can deduct the barn.

What Can You Deduct?
Your home may be any kind of residence: house; apartment; condominium; cooperative; houseboat; mobile home. All expenses for the portion of your residence used for business are deductible including rent, repairs, utilities, security system, and upkeep expenses. For homeowners, deductions include mortgage interest and real estate taxes. If, for instance, 20 percent of your home is used for business, then you can deduct 20 percent of all these expenses. Sam Grubbs, enrolled agent (EA), of Columbus, GA reminds that, “Even though the home office deduction could be small if you have a large house and only use a small portion as a home office, the increased mileage deduction may make reporting worthwhile.”

Deductions for the costs for a legitimate cleaning service or a housekeeper for whom you pay all payroll taxes are legitimate. Lawn care, unless there is a portion exclusively used for your business, is not an allowable deduction.

Other Expenses
Many sole practitioners assume that because the expense takes place in the home office – things like business phone or Internet service – they must be treated as home office expense. That is incorrect. You may deduct a phone used in your residence even if you do not have a home office. Also, home office deduction size and phone use need not match even if your home office use is 10 percent and phone use is 80 percent for business. “However, a phone is handled differently,” states Leonard D. Rea, EA, Sturbridge, MA, “You cannot deduct the cost of the first line into the home, but you may deduct business long distance charges on that phone.”