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Walter & Shuffain, P.C.

Certified Public Accountants & Business Advisors

Member of the Alliott Group

May 2011 Tax Tip:
Maximizing the Home Office Deduction

If you are an individual who works from home (either as an employee or self-employed), you might be entitled to deduct expenses for using your home for business purposes. If you are an employee, the business use of home must be for the convenience of the employer and is reported as a miscellaneous deduction subject to the two-percent floor of adjusted gross income on Schedule A. If you are self-employed, the deduction is reported on Form 8829 - Expenses for Business Use of Home. In order for these expenses to be deductible, the portion of your home that is used for business must be used exclusively and on a regular basis for business:

  1. As the principal place of business (ie. You conduct most of your income-earning activities and perform your administrative and management functions in the home office).
  2. As a place of business that is used by patients, customers, clients, etc in the normal course of business, or
  3. In connection with your business if you are using a separate structure that is adjacent to, but not attached to, your home (ie. garage, barn, etc.).

The amount of the home office deduction is based on the portion of your home that is used exclusively for business. This is calculated by taking the percentage of square footage used for the home office over the square footage of the entire house multiplied times the expense.

Both direct and indirect expenses of a home office are deductible. Direct expenses are ones that you would not incur if you did not conduct business out of the home office; such as a second phone line used exclusively for business. Indirect expenses are ones that would be incurred regardless of the home office; such as utilities, insurance and depreciation.

Any deduction must be used to offset gross income from the business activity. The deduction cannot exceed the gross income from the activity reduced by the home expenses that would be deductible in the absence of any business use (mortgage interest, real estate taxes, etc) and the business expenses not related to the use of the home. The business related expenses are deducted in the following specific order:

  1. Expenses that are required by the business but not allocable to the use of the home (ie. office supplies).
  2. Expenses that would be deductible even if the home was not used as a place of business (ie. mortgage interest and real estate taxes).
  3. Household expenses that are allocable to the business use (ie. utilities and insurance).
  4. Depreciation.

Unused expenses under 2 through 4 above will be carried forward to the next year because they are not allowed to create a loss.

Questions?

If you would like more detailed information, please do not hesitate to contact us.