09/ 26/ 2008
by Charles R. McConnell
Winter is fast approaching and you know what comes along with that: tax time. Whether filing as a wage earner working for someone else or the proprietor of your own business, it pays to be ready before the tax deadline arrives. It's especially important for the person who operates from an office or shop in the home to have all pertinent information assembled as soon after the first of the new year as possible. Careful determination of legal deductions for that home office or shop can help save money on taxes.
Once upon a time it was widely believed that taking a home-office deduction was akin to waving a red flag at the Internal Revenue Service, blatantly inviting an audit. Fortunately this is no longer so. Sure, an audit remains a possibility, but the home-office deduction, applied correctly, is no more of a red flag than other elements of a small business' tax return. Self-employed individuals, as well as certain others who work from home, can take the deduction for "regular and exclusive" use of space in the home. However, errors in taking the deduction can catch the attention of the IRS.
The most common error made in taking the home-office deduction is deducting dual-use space area that is used for both business and personal purposes. The dual-use-space deduction won't fly; the area in question must be used exclusively for business. It has to be a dedicated area used only for performing work or meeting with clients or customers. One catch: if the IRS happens to think that the area claimed is too large for your kind of business, they may ask questions or challenge the deduction.
To calculate the deduction, first determine the square footage dedicated solely to business use and find that as a percentage of the total livable area of the structure. It's not necessary to have distinctly separate rooms for your business space, although doing so is less complicated than designating portions of rooms for business. Much reference is made to home office, but in addition to office space, space in which manufacturing occurs or inventory is stored also counts. After the percentage of space dedicated to business is known, proceed to determine deductible expenses.
Part of the total cost of owning and maintaining your home can be applied to the home-office deduction. Expenses could include:
- gas, electric and water
- home-heating fuel oil
- mortgage interest or rent
- repairs and maintenance
- certain property improvements
- property taxes (school, town, county, etc., and in some communities, a separate sewer-line assessment)
- trash pickup and snow removal
If you use 8 percent of your home exclusively for business and if the total of all-of-the-above expenses for the calendar year is $10,000, you have a home-office deduction of $800. Also, there is an added advantage in that you can claim depreciation on the business portion of the home (a residence alone cannot normally be depreciated).
Other business expenses are separately deductable elsewhere on Schedule C of your Federal Income Tax Return. Related to the home, however, it is an error to claim local telephone service as a business deduction. Per IRS regulations, the first telephone line into the home is not deductible. A separate line installed specifically for business is of course deductible, as are itemized long-distance business calls made on the basic home telephone.
Your surest approach in learning what you can or cannot do in determining deductions for your home office or shop is to secure one or two good publications that cover the home-office tax situation in detail. You can readily download IRS Publication 857, Business Use of Your Home, at www.irs.gov. As government publications go, this one is fairly reader-friendly. Also available are non-governmental publications such as Home Business Tax Deductions: Keep What You Earn by Stephen Fishman (Nolo Press, 2006),
There's no real reason for remaining apprehensive about taking a legitimate deduction for an office in the home as long as the guidelines for doing so are followed to the letter.
