Rules for Home Office Deductions
Hello Ben Smith here. I’m a CPA and your Prosperity Advisor at Etrends Group. How do you deduct part of your home? The easiest way to do it is with a home office deduction. I’m going to go over the rules for a home office deduction today. Hopefully it helps you out and maybe you can rearrange your life a little bit to capture this deduction. So there’s a few rules:
- The exclusive test and that is that your home office has to be used exclusively for business. This is probably the test that trips the most tax payers up. They have a difficult time setting aside maybe a part of their home and only use it for business. Well do a little planning and you can probably get there. Exclusive means you can’t watch TV at night in the room, you can’t use it as a puzzle room for your kids, it’s just for business. Alright, you go in there and you do business, that’s it, exclusive.
- Regular is the second test. It has to be used regularly for business. Let me give you two examples: one that qualified as regular and one that did not. The first, it qualified as regular. There was a contractor who used his home office one hour in the morning and a couple hours at night. He did billing, followed up with clients and made phone calls, made notes, did payroll, things like that and he did that in the morning and evening, so maybe 2-3 hours a day. That was regular. Another tax payer tried to deduct a home office, but he only used it once very 2 weeks to have a management meeting. That was not regular according to the courts, so it needs to be regular. Test number 3, it has to be for business okay so it’s not for checking your stock portfolio unless that’s your business. It’s not for clipping coupons or whatever. Just because what you do in there might be to your financial benefit doesn’t mean it’s for business, so it has to be for business.
- It has to be your principle place of business. That sounds scarier than it is. If you do administrative tasks, that qualifies your home office as a principle place of business. For instance, if you were a doctor and you saw patient’s at a clinic pretty much every day, that’s okay. If you use your home office for administrative tasks, taking notes, billing, managing the business, whatever, all those activities if they’re done at your home office that qualifies your home office as your principle place of business.
Now, who takes advantage of the home office deduction?
Generally it is sole proprietors, people who are filing schedule C’s on their individual income tax returns as well as partners in partnerships who have properly structured their partnerships. They can take the home office deduction on their individual income tax return. You can actually also have a home office maybe if you’re doing rental properties.
Here’s the thing, there’s also an opportunity to gain or get home office deduction even though it’s not called a home office deduction, it’s essentially the same if you are operating as a corporation. The way you do it is you don’t take your home office deduction on your personal income tax return, you take it on your business tax return and you have to do it through employee reimbursements. So in other words, your corporation as the employer reimburses you as the employee for expenses that you as the employee incur in maintaining an office at home. So it’s a great way to do it. It’s also actually a relatively easy way to do it. It’s not as difficult as doing it like you normally would as a sole proprietor. You don’t have to fill out a whole extra form on your tax return in order to take advantage of this deduction if you own a corporation.
Let me give you one other benefit for having a home office. It’s going to increase your vehicle expense deduction. That’s because when you have a home office all the sudden the miles that you drive from your home office to other places of business become deductible. If you don’t have a home office, those miles are commuting miles and they are not deductible. So now you’ve captured a home office deduction and you’ve captured additional vehicle expenses that you can deduct. Your home office deduction is a great deduction.
If you need help sorting it out or figuring it out, come see me. I’m more than willing to answer your questions and maybe even strategize with you how we get there. Just with a little bit of planning you can probably do it.
By the way there’s other things you can do. For instance, the exclusivity test is not applicable to the storage of inventory. So if you sell on Amazon of Ebay or something like that, or you have your own online store, you can store inventory in your home and the exclusivity test is no longer applicable. Maybe if you’re selling clothing you could use your closet, use a garage space, you could do a number of things and still use those spaces for personal use as well.
I’m your Prosperity Advisor. That means I’m here to help you prosper. Here to lower your taxes. Here to help you find other ways that you can prosper in your life. Maybe reduce the expenses, maybe helping plan for retirement. There’s many things that I can do to help you become financially independent, so come see me.