If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home on your tax return.
Individuals claiming home office deductions on Schedule C are required to figure those deductions on Form 8829, Expenses for Business Use of Your Home. However, please remember that if you are an employee claiming unreimbursed job-related expenses, you must use Form 2106, Employee Business Expenses, if applicable, or include the amount directly on Schedule A.
Qualifying for a home office deduction requires the owner to meet two tests. First, the home office must be the principal place of business for the activity. It is not a requirement that the activity be full-time. A home office is determined to be a principal place of business if it is used for substantial managerial or administrative purposes such as scheduling appointments, ordering supplies and keeping records. There can be no other fixed location for such activities.
Second, the space used must be used regularly and exclusively for the activity. You are not required to dedicate a full room to the activity but the space allotted cannot be used for personal purposes. In 2007, the United States Tax Court did hold that keeping some personal papers in a home office will not void the exclusive use test.
An office in the home deduction cannot exceed the gross income derived from the home-based activity. Any unused losses can be carried forward until used.
Claiming a home office deduction does not eliminate the home sale exclusion of income for a homeowner when the home is eventually sold. Depreciation claimed after May 6, 1997 must be recaptured at 25 percent at the time of the sale of the home. In simplier terms, if you deduct depreciation, then you must add back the amount depreciated over the years when the home is sold.
Will the deduction of a home office cause the Internal Revenue Service to audit the tax return? While there is no statistical evidence to support a bona fide answer, you should be aware of the requirements to claim an office in home deduction and document the use of such home office. In doing so, you may want to discuss insurance coverage with their homeowner’s carrier. You should make certain that your coverage is sufficient to obtain the insurance liability of the office in the home.
The following is a list of pro-ratable deductible items which can be used on Form 8829: mortgage interest, real estate taxes, insurance, repairs and maintenance, utilities and of course depreciation.
For all of you who home school your children, please don’t try to use this deduction, it is strictly for business and not educational use. I can assure you that the IRS will send you back to tax school.
S. Raines, Sr. Financial Advisor/Tax Preparer
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