Many people have heard about the office in the home tax deduction and have questions about claiming it on their personal tax return. I am always of the mindset that if you have a legitimate claim for any deduction you should claim it unless if by not claiming a deduction you would owe a lesser amount of tax. It can happen.
The IRS has determined that the office in the home deduction abuse is widespread and as such usually raises a red flag. So let’s take a look at a few simple requirements to determine if you have a legitimate claim.
• Is the area you use as an office used EXCLUSIVELY on a regular basis as your principle place of business or to conduct administrative or management activities for your business? The area cannot be a dual purpose room. You can’t use your dining room table as your “desk” and your buffet as a “file cabinet”.
• If not used for administrative or management activities then is the area you use as an office used EXCLUSIVELY on a regular basis for meeting and conducting business with customers or clients?
• Are you providing day care?
• Do you use the space to store inventory or samples used in wholesale or retail trade?
If you can answer yes to one or more of these questions then you may have a legitimate deduction. How much of a deduction you get and the resultant tax savings derived is based on a number of factors.
• The first question is whether you are an employee or self-employed. If you are an employee your office in the home must be for the convenience of your employer. Also, the answer to this question will determine which form the deduction appears. For an employee, the deduction first appears on form 2106 Unreimbursed Employee Business Expenses and then transfers to Schedule A Itemized Deductions under the Miscellaneous section which is subject to the 2% AGI floor.
• Next you need to determine the square footage of the room. This will be used as the numerator to determine your deduction percentage. The denominator is the total square footage of your dwelling.
• Next, get a total of all the expenditures of your dwelling for the calendar year. The items you should include are:
o Rent
o Mortgage interest
o Real estate taxes
o Homeowner’s or renters insurance
o HOA fees
o Monthly condo/co-op fees
o Utilities
Electricity
Water
Sewer
Trash
Gas
Telephone
Cable
Internet
Fuel oil
o Lawncare service
o Maid service
o Repairs / maintenance
o Homeowners’ warranty policy
• The total of all these expenditures are multiplied by the fraction of office square footage over total dwelling square footage to determine your deduction.
The IRS has determined that the office in the home deduction abuse is widespread and as such usually raises a red flag. So let’s take a look at a few simple requirements to determine if you have a legitimate claim.
• Is the area you use as an office used EXCLUSIVELY on a regular basis as your principle place of business or to conduct administrative or management activities for your business? The area cannot be a dual purpose room. You can’t use your dining room table as your “desk” and your buffet as a “file cabinet”.
• If not used for administrative or management activities then is the area you use as an office used EXCLUSIVELY on a regular basis for meeting and conducting business with customers or clients?
• Are you providing day care?
• Do you use the space to store inventory or samples used in wholesale or retail trade?
If you can answer yes to one or more of these questions then you may have a legitimate deduction. How much of a deduction you get and the resultant tax savings derived is based on a number of factors.
• The first question is whether you are an employee or self-employed. If you are an employee your office in the home must be for the convenience of your employer. Also, the answer to this question will determine which form the deduction appears. For an employee, the deduction first appears on form 2106 Unreimbursed Employee Business Expenses and then transfers to Schedule A Itemized Deductions under the Miscellaneous section which is subject to the 2% AGI floor.
• Next you need to determine the square footage of the room. This will be used as the numerator to determine your deduction percentage. The denominator is the total square footage of your dwelling.
• Next, get a total of all the expenditures of your dwelling for the calendar year. The items you should include are:
o Rent
o Mortgage interest
o Real estate taxes
o Homeowner’s or renters insurance
o HOA fees
o Monthly condo/co-op fees
o Utilities
Electricity
Water
Sewer
Trash
Gas
Telephone
Cable
Internet
Fuel oil
o Lawncare service
o Maid service
o Repairs / maintenance
o Homeowners’ warranty policy
• The total of all these expenditures are multiplied by the fraction of office square footage over total dwelling square footage to determine your deduction.
If your home office was 125 square feet and your dwelling is 2,500 square feet then the percentage of applicable expenses you're eligible to write off is 5%. If your total expenses are $20,000 then your home office deduction is $1,000. If you are self employed this deduction applies directly against your taxable income. If you are an employee, as stated earlier, this deduction is added to your itemized deduction in the miscellaneous section and is subject to the 2% AGI floor. If your Adjustd Gross Income is more than $50,000 then there is no benefit.
