Home Office Deductions - Capturing Expenses
Yesterday, I wrote about the first step in deducting your home office expenses to cut your taxes - determining the percentage of your home that is used for your business. In yesterday’s post, I said:
- You must be able to prove that the portion of your home is used regularly and exclusively for your business (daycare homes don’t have to adhere to the “exclusively’ part), and
- How to calculate the percentage of your home used for your home office.
Today, I’ll give you the list of home office expenses you can deduct. Of course, for all of these expenses, you must have documentation. The expenses you can deduct fall into two categories: Direct and Indirect.
Direct Expenses. These are the expenses that directly relate to your home office. For example, if you painted the office, that would be a direct expense. Or if you carpeted the area, that would also constitute a direct expense.
Indirect Expenses. Expenses you pay for your home and which can be allocated to your business are indirect expenses. Your mortgage payment, utilities, insurance, and home repairs are examples of indirect expenses.
Form 8829 lists the expenses you can deduct for business use of your home:
- Casualty losses
- Mortgage interest and real estate taxes
- Homeowner’s insurance
- Rent
- Repairs and maintenance
- Utilities
The indirect expenses will be multiplied by the percentage of your home’s square footage (from yesterday’s calculation). The direct expenses can be used in total. For example, if you painted and carpeted your home office, you can deduct the full amount of this expense, but utilities are indirect and you can only deduct the percentage (10%, based on yesterday’s example) of the total expense.
Completing Form 8829 is more complex than this list suggests, but I’m providing it so you know the kinds of expenses you need to keep records on. For example,keep your utility bills, rent payment receipts, and all expenses relating to any losses you might have had from casualties (fire, flood, etc.).
Home Value and Depreciation. Finally, you will need to get information on the value of your home and the land it’s on, using fair market value.
No Losses. An important point to remember: Your home office deduction cannot be used to show a business loss. It can only be used to bring you to a “no profit” position. Here’s what I mean: Let’s say your profit before the home office deduction was $1000. You can only take $1000 of home office deduction, no more. You can’t take $1500 of home office deduction, even if you could justify it, to get a $500 loss.
Yes, this stuff is complicated and you may not be able to get all of the deduction you could take. That’s why people sometimes give up. But here’s how I look at it:
If I have good records and I keep everything possible, I can take the information to my CPA or tax preparer. Sure, I’ll have to pay for someone to help me fill out the forms and get the deduction, but if I’m legitimately using a part of my home for an office, I’m entitled to the deduction in the same way as someone who rents an office for business use.
The key is to keep good records (that is, accurate and complete) and make sure you are abiding by the IRS requirements (the “regularly and exclusively” thing).
Remember, I’m not a CPA or tax attorney. My purpose is to give you information so you can gather the right stuff to take to your tax preparer.
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1 opinion for Home Office Deductions - Capturing Expenses
Sheryl Schuff, CPA
Feb 15, 2009 at 10:06 pm
Jean,
The requirement that an area be used “exclusively” for business can indeed be the trickiest part to meet for the home office deduction. but the IRS regulations themselves are not as specific as you might think.
Most people (including professional tax preparers) use the IRS publications for guidance and examples. That’s a good thing, but sometimes it’s not enough.
The IRS says it will consider the facts and circumstances of each case and its policies have been greatly affected by the court cases that have been brought and settled in this area.
Your advice is great! Keep good records and get professional help to determine if you qualify for the deduction.
One thing I’d add would be to hope (and/or pray if that suits you) that the proposed legislation gets passed that would make the home office deduction much easier to take.
Sheryl
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