NFIB

Taxes: Home Office Deductions
03/ 28/ 2002

According to recent data, about thirty million Americans are engaged in some type of freelance or sole proprietor enterprise. Although being your own boss can take place in a number of settings, the most common place of business is at home. In today's Workshop, Edith Helmich looks at some home office deductions that could save you money on taxes.

Working for yourself means that many workplace benefits (group insurance, sick leave, unemployment compensation, etc.) are not available. On the other hand, there are a number of tax deductions for the self-employed that help compensate for the absence of those benefits. If your gross income from the business use of your home is less than your total business expenses,those business expenses that are not deducted because of the limit can sometimes be carried forward to the next year. Being aware of the possible tax deductions and claiming as many as possible can make a significant difference in your tax liabilities.

The Internal Revenue Service (IRS) defines a home as a house, apartment, condominium, mobile home, or boat. It can also include structures on the property, such as an unattached garage, studio, barn, or greenhouse. Deductible home expenses for property that is used regularly and exclusively for business purposes may include a portion of real estate taxes, deductible mortgage interest, rent, casualty losses, utilities, insurance, and depreciation. Expenses may be prorated from a total cost factor that includes non-business expenses.

Service fees such as telephone lines are fully deductible if the business telephone uses a second line, but not deductible at all if the telephone number is on a single line that is also used for personal calls. Cell phone charges for phones and service fees fall under the same use requirements. Long distance business call charges or fax transmission fees are deductible regardless of the phone that is used. Maintenance and upkeep costs are deductible for areas that are used regularly and exclusively for business. Janitorial service expenses or waste management/garbage services that can be attributed to business needs are allowable.

Business furniture and equipment are deductible and some items may qualify for a full-deduction the year of purchase if the amount does not exceed $20,000. In 2001, the limit will increase to $24,000.

Prorated deductions for storage areas have special requirements and are limited to those wholesale or retail home businesses that use product samples regularly stored in clearly identified storage areas.

Multi-purpose areas do not qualify for the prorations, i.e., a dining room frequently used as an office during the day does not qualify as expense deductible space. Likewise, expenses that benefit the entire structure or property and that would have been incurred with or without the business presence are not eligible for a deduction. Examples include a new roof, lawn care expenses, central heating or air-conditioning replacements, exterior painting, and other like expenses.

Records, such as canceled checks, receipts, and other evidence of paid expenses, must justify home business deductions. Typically, these records should be maintained and made available for audit for the latest date of 3 years from the tax return due date or the date filed.

Useful IRS sites for additional information include: Publication 587, Business Use of Your Home (Including Use by Day-Care Providers); Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship); Form 8829, Expenses for Business Use of Your Home; Tax Topic 509, Business Use of Home.

Disclaimer: Before using this information or claiming deductions on a federal tax form, all documents and tax questions should be reviewed by a qualified attorney, accountant or representative of the IRS.

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