The Trouble with Home Offices
Posted on August 3, 2010
“Home office” is one of the deductions that is narrowly defined and that many do not completely understand. What we stress to our clients is this extremely important point: The area CANNOT be used for anything else and, the equipment in the area CANNOT be used for anything else.
You convert a spare room in your house to an “office” and during the week from 8:00 to 5:00 you use it for business. At night other family members may use the computer to google information for a report or check their Facebook profiles. Or perhaps a family uses the computer to keep track of home checking or does home banking over the weekend. This would eliminate it from being a home office. “A specific portion, of the taxpayer’s home must be used solely for the purpose of carrying on a trade or business in order to satisfy the exclusive test.” (emphasis added)
Please be very careful when making this claim. It will get the attention of the IRS because they are well aware of the deduction being abused. If you do qualify, keep track of your mortgage interest, real estate tax, property insurance, utilities and maintenance and repair. These will be added to the expense based on the square footage of the area compared to the total square footage of the home. You will also need to know the value of the structure, which is not necessarily what you paid for it. In most situations, when you buy a house, you buy a structure and the property (i.e., land) it is built on. You need to know the value of the structure alone. The structure value will be depreciated over time which is added to the expense of the home office. The reason for this is that according to the IRS, land is not depreciable. In other words, it does not decrease in value.
Our advice is to talk to your tax preparer or tax consultant to get all of the details before making this claim. There are some exceptions to the rules, but not very many. On a personal note, I have a home office which is used almost exclusively for business, but it is used on occasion for family interest. I have never claimed a home office. I am not saying this to elevate myself above those that do, but only to let you know how seriously I do take this topic. Also our tax clients that make this claim know how much detail we go into on questioning them on this deduction.
For further questions or any new questions, you know where to find us.
Paul Spears
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