The technological revolution has given rise to the personal computer, the internet, email, file sharing and video conferencing. Put all these together and you have the makings of a home office. This is a place where you can do all the things you do at work, but now in pajama bottoms. Not only is this arrangement much more convenient for workers, it also allows many of them to take a tax deduction for the use of their homes as well.
However, not all employees are able to write off their home-office expenses. This article will give you four tests that you must pass before you can deduct your home-office expenses. It will also show you what and how much you can deduct.
Test 1 - Is the space used only for business? The first test that must be applied to any home office is whether the workspace is used exclusively and regularly for business. Both of these criteria must be met in this test before any deduction can be taken. Put simply, if the workspace is used for both business and personal use, it is not deductible. Furthermore, the space must be used on a regular basis for business purposes; a space that is used only a few times per year will not be considered a home office by the IRS, even if the space is used exclusively for business purposes.
These criteria will effectively disqualify many filers who try to claim this deduction but are unable to prove regular and exclusive home office use. However, it is not necessary to partition off your workspace in order to deduct it, although this may be helpful in the event you are audited. A desk in the corner of a room can qualify as a workspace, as long as you count only a reasonable amount of space around the desk when computing square footage.
The only exception to the exclusive-use test applies to filers who provide daycare services for children or part of the home is used for storage of inventory. In this case, the home would regularly be used for daycare, but not exclusively, because those receiving care are only there during the day. Therefore home daycare expenses are computed by portioning out not only the square-footage of the home versus the area used for daycare but also the number of hours the area is used for daycare versus the number of hours in the year (8,760/yr). Utility rooms such as laundry and storage rooms may be deductible under certain conditions as well.
Test 2 - Who says you have to work from home? The second major test that must be met is whether your home office is solely for your convenience or the convenience of your employer. If your employer has provided a place for you to do business at its own location, then you cannot simply set up a home office for your own convenience and deduct its expenses. Your employer has to mandate that you must work from home before your expenses become deductible. There cannot be an alternative location available.
Both employees and independent contractors may have to prove this to the IRS via expense receipts and documentation from their employers stating that there is no workplace provided to them outside their homes.
Test 3 - Do all of your businesses comply? Filers who have more than one home-based business must be careful when claiming the home-office deduction. If any of their different lines of business don't meet the above criteria, then no home office deduction can be taken for any of them. It's an all-or-nothing proposition; the home office expenses incurred for each separate line of business must meet the above criteria on a standalone basis, and if one line fails, then all others fail as well.
Note: People who do not qualify for the home-office deduction may still deduct all other standard business deductions. For more information on these deductions, go to the IRS website and download the instructions for IRS Form 2106 and Schedule C.
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Sat Mar 02, 2013 9:51 am
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