Archive for Home Office
Okay I’m taking another case to IRS appeals regarding the home office deduction. In preparation I reviewed IRS Publication 587: Business Use of Your Home and I pulled some relevant quotes.
“You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. To determine whether your home is your principal place of business, you must consider: the relative importance of the activities performed at each place where you conduct business, and the amount of time spent at each place where you conduct business.”
Your home office will qualify as your principal place of business if you use it exclusively and regularly for administrative or management activities of your trade or business. And you have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
The publication is clear that the two prong test which must be satisfied in addition to the “regular and exclusive test” are 1) the relative importance of the work being performed and the allocation of time spent between the two locations and 2) conduct of “Substantial” management activities.
Examples 2, 3 and 4 of IRS Publication 587 all discuss a very important point: the availability of a “Fixed Location” from which to conduct managerial or administrative functions.
IRC Sec 280A (c) (1) (c) commentary states, “For purposes of subparagraph (A) , the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.” Sub paragraph A identifies the principle place of business as a condition allowing the deduction for allocating costs connected with the business use of home.
However the conference report for P.L 105-34 (1997) (the law that reversed Soliman) supports the conclusion that an office in home deduction is possible even when the taxpayer has another fixed office at which (s)he also performs INSUBSTANTIAL administrative and management activities. The key for the home office deduction to be considered when another professional office is available is that the administrative and management activities performed at the taxpayer’s professional office must be INSUBSTANTIAL.
On a personal note I have conflicting thoughts about the Home Office Deduction. I don’t take one for myself mostly because it is such a pain in the proverbial hinder to tabulate and report. For my client’s that are entitled to it I usually encourage them to leave out depreciation expenses mostly because it requires precise bookkeeping to accurately recapture depreciation when the property is disposed. Also through people I communicate with at the IRS excessive home office deduction expenses are flagged in the Automated Collection System for an Automated Under Reporter Correspondence Audit.
The home office deduction is something that you can choose not to take and sometimes that is the best choice. If you are legitimately using dedicated space in your house for your on-going business with a profit motive or you are required to keep an office in your house for the benefit of your employer and you can substantiate with documentation only then should you consider this deduction. Otherwise I’m generally not in favor of this deduction for many reasons that I’d be willing to talk with you about, call me. Keep in mind you can always report legitimate office and supply expenses to run your business without claiming the Home Office Deduction on IRS form 8829.
Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly: as your principal place of business, or as a place to meet or deal with patients, clients or customers in the normal course of your business, or in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.
Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses. There are special rules for qualified daycare providers and for persons storing business inventory or product samples. If you are self-employed, use IRS Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer. For more information see:
The IRS has uncovered a number of schemes that claim to allow deductions for personal living expenses. Taxpayers should consider these points before investing in a possible abusive scheme:
Any investment scheme or promotion that claims to allow a federal income tax deduction for normal personal expenses should be considered highly suspect
A business must truly exist prior to claiming expenses
In order to be deductible, the expenses must be ordinary and necessary expenses paid or incurred in carrying on a trade or business
Personal, family and living expenses are not deductible business expenses
Forming an S corporation, partnership, or any other pass-through entity does not cause personal, living and family expenses to become deductible; nor do incorporation, the existence of board minutes, and partnership agreements authorizing personal, living or family expenses cause these expenses to become deductible
Examples of misuse of the law:
TRAVEL – Deducting travel, meals, and entertainment under the guise that everyone is a potential client.
AUTO – Excessive car and truck expenses when the asset has been used for both business and personal use.
PAYMENTS TO FAMILY MEMBERS – Deducting payments to family members for routine household tasks that are not ordinary and necessary to the operation of the business, such as taking out the trash, mowing the lawn, washing the car, answering the telephone, etc. Also payments to family members that are excessive in relation to the services performed.
BUSINESS USE OF HOME – Abusive promoters often advise taxpayers to deduct excessive costs associated with the operation of the home. The promoters claim that the “exclusive use” restriction can be avoided by placing business-related items in each room of the house. A deduction for the business use of a home is limited to that area of the home that is used regularly and exclusively for business purposes (Internal Revenue Code Section 280A). For example, merely placing a calendar or file cabinet in a room does not satisfy the “regular and exclusive business use” requirement.
EDUCATION EXPENSES – Some schemes advise taxpayers that they may claim up to $5,250 per year in educational expenses for each family member. There are specific requirements that preclude virtually all investors in this scheme from qualifying for this deduction (Internal Revenue Code Section 127).
MEDICAL REIMBURSEMENT PLANS – Abusive promoters assert that taxpayers can make their family’s medical expenses 100 percent deductible merely by employing their family member(s). In order for the medical expenses to be deductible under a self-insured medical reimbursement plan, a bona fide employer-employee relationship must exist. In addition, the plan has to meet other requirements (Treasury Regulation Section 1.105-11).
RECORD KEEPING – Taxpayers in these schemes are advised to maintain detailed records of all expenses incurred. The existence of such records does not negate the requirement that expenses be “ordinary and necessary” in relation to a legitimate business activity. The expenses must also satisfy any other deductibility requirements (Internal Revenue Code Section 274).
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.
If you use a portion of your home for business purposes, you may be able to take a home office deduction whether you are self-employed or an employee. Expenses that you may be able to deduct for business use of the home may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting and repairs.
You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively as your principal place of business for any trade or business or as a place to meet or deal with your patients, clients or customers in the normal course of your trade or business.
Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction will be limited if your gross income from your business is less than your total business expenses. If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.
There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
If you are self-employed, use IRS Form 8829 to figure your home office deduction and report those deductions on line 30 of Schedule C, Form 1040.
If you are an employee, you have additional requirements to meet. The regular and exclusive business use must be for the convenience of your employer.
For more information see IRS Publication 587, Business Use of Your Home
If you plan to run your small business out of your home you may be temped to “write-off” many of your household expenses. But how do you know what is deductible and what is not?
Generally, expenses related to the rent, purchase, maintenance and repair of a personal residence are not deductible. However, if you use part of your home for business purposes you may be able to take a home office deduction.
Expenses that can be deducted include the business portion of
real estate taxes,
In order to claim a business deduction, you must use part of your home:
Exclusively and regularly as your principal place of business,
as a place to meet or deal with patients, clients or customers in the normal course of your business,
or in connection with your trade or business where there is a separate structure not attached to the home;
or On a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility.