Tax Planning – ‘Tis the Season!
Business Use of Your Home
We will continue this series of tax
planning with the Business Use of the Home deduction.
A home office is an excellent idea for many businesses as it keeps the
overhead low. This is important for new
businesses as they get established. This
is also a great benefit for employers who need office space for employees when
space is scarce. Home offices have
helped in the green initiative by allowing commuters to remain at home reducing
the amount of vehicles on the road. What
are the tax benefits of having an office in home?
Let’s take a look at the
Business Use of
Your Home AKA…Office in Home.
Office space: The area used for your office does not need
to be an entire room. The office can be
an area in the home as long as it meets the requirements. Also, it can be a separate structure.
Requirements
o Business use of the office
must be exclusive and regular.
o The office must be a
principal place of business.
o If the office is not a
principal place of business, then it can still qualify if it is used as the
ordinary place for meeting clients or for the administration of the business;
(there is no other fixed location used for substantial administration)
o If the taxpayer is an
employee, then the office must be used for the convenience of the employer.
TIP: Keep a log of your business activities and the expenses; draw a floor plan of the home highlighting the office area(s) and take photos to record your business use – place this information in your tax folder for that year or store it in digital form in case of an IRS tax examination.
If your business is taxed as a proprietorship,
If your business is taxed as a proprietorship,
- use Form 8829 to claim the deduction on Schedule C.
- Farmers claim the deduction on Form 8829 filed with the Schedule F
- and if you are an employee claim the deduction on Schedule A as an Employee Business expense.
- If taxed as a partnership or corporation, there is not a separate form.
The deductions
associated with a home office are subject to special limits. Expenses must be allocated
between the portion of the dwelling used as residence and the office.
The Simplified Method: The IRS has
implemented a simpler option for figuring deductions for the business use of
your home. IRS Revenue
Procedure 2013-13, Jan. 14, 2013.
- The IRS provides a simplified method as an alternative to calculating the actual expenses. The deduction is figured by multiplying $5 by the allowable square footage. The maximum square footage under this method is 300 which limits the deduction to $1,500.
- You are not allowed to deduct any actual expenses related to the use of the home including depreciation. You can switch between using the simplified method and the actual expenses method if you chose; however, you will need to use the appropriate optional depreciation table to figure depreciation.
- Insurance
- Mortgage Interest
- Repairs
- Rent
- Security system
- Utilities
- Depreciation
Comparison between methods
Simplified Option | Regular Method |
|---|---|
| Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes | Same |
| Allowable square footage of home use for business (not to exceed 300 square feet) | Percentage of home used for business |
| Standard $5 per square foot used to determine home business deduction | Actual expenses determined and records maintained |
| Home-related itemized deductions claimed in full on Schedule A | Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F) |
| No depreciation deduction | Depreciation deduction for portion of home used for business |
| No recapture of depreciation upon sale of home | Recapture of depreciation on gain upon sale of home |
| Deduction cannot exceed gross income from business use of home less business expenses | Same |
| Amount in excess of gross income limitation maynot be carried over | Amount in excess of gross income limitation may be carried over |
| Loss carryover from use of regular method in prior year may not be claimed | Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year |
(Chart taken from: IRS Small Business & Self Employed: Simplified Option for Home Office Deduction, 2014)
References
If the home is a personal single-family residence, depreciate
the part of your home as nonresidential real property over 39 years (31.5 years
if it was used for business purposes prior to May 13, 1993.) If your residence is an apartment in a residential
rental apartment building you own, depreciate over 27.5 years. I recommend contacting your tax accountant
for assistance in determining the depreciation method best for your
situation.
Whether you own or
rent, the home office deduction could be a great deduction. Now is the time to evaluate the use of your
home office and determine whether or not you qualify. Then, gather the data, keep good records and
get the deductions you have earned. There
are many nuances to the business use of your home deductions. It is important to get it right. If taxes are too taxing for you, let the
professionals jump in…it is what we do.
Don’t record unplanned history in April 2015, plan now to create a
better tax outcome.
For more
information, please see IRS Publication 587:
2013 Publication 587
References
Internal Revenue Service. (2013, December 11). Business
Use of Your Home (Including Daycare Providers). Retrieved from Publication
587: http://www.irs.gov/pub/irs-pdf/p587.pdf
Internal Revenue Service. (2013). Expenses for
Business Use of Your Home. Retrieved from Form 8829:
http://www.irs.gov/pub/irs-pdf/f8829.pdf
IRS Small Business & Self Employed. (2014, February 3). Retrieved from Simplified
Option for Home Office Deduction:
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction
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