Practice Management

Home Office Tax Deduction

By chucknewton

I am not a tax expert, but his is what I understand about the home office tax deduction.

There are two ways to show the IRS that a home office qualifies for tax deductions on your tax return. You must show on your tax return that you use your home office exclusively meaning it is your "principal place of business (as it is in my case), or regularly, meaning it is the place where you meet with your clients in the normal course of your business.

In order for the home office to qualify as your principal place of business you must spend most of your working hours in your home office and most of your taxable business income must come from activities in your home office.  If it comes into dispute, you must be able to show the IRS that your home office is your most important place of doing business or that you spend more time working in your home office than anywhere else.  If your home office is a structure not attached to your home, such as a stand-alone garage, chances are you can take the tax deduction on your tax return with ease if you satisfy the exclusive use tax test and regular basis tax test discussed earlier. A detached structure does not have to qualify as a principal place of business or a place for meeting patients, clients, or customers.

If your home office qualifies for a deduction, you can deduct on your tax return real estate tax, mortgage interest, utilities, operating expenses, and depreciation. You cannot deduct on your tax return the total that you incur for all of the above expenses.  You must allocate the expenses to business and personal use on your tax     return using one of two methods.  The first is to calculate the percent of the square footage of your home office of you entire house.  Then you deduct the resulting percentage to your tax deductible expenses.  Alternatively, if all of the rooms in your house are about the same size you may base your deduction percentage on a comparison of those rooms used in your home office.  So, if your house has 5 rooms and you use 1 room for a home office, you can deduct 20% of your total expenses from your taxes.

Also your deductions on your tax return for utilities, maintenance, and insurance costs, depreciation, or rent, may not exceed the net income derived from your home office after mortgage interest, real estate tax, and casualty losses are subtracted. If you have no income for the tax year no tax deduction is allowed on your tax return. You may carry forward to future tax years any tax deductible expenses disallowed in the current tax year.

Full post as published by Chuck Newton on February 03, 2008 (boomark / email).