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The Home Office
By Peter Jason Riley
The home office has been a contentious subject in my profession for a number of years. With recent legislation, the home office has clearly returned to its rightful place as an allowable deduction for many folks with home based businesses. If you use a room (or rooms) in your home exclusively as your office, you will most likely qualify for the home office deduction. To qualify as a deductible home office the space must generally be:
- The principal place of business
- The place where the taxpayer meets with clients, customers or patients
The use of the room can be as an office, storage area for equipment and supplies, record keeping for the business, marketing, etc. The home office is a fairly straightforward deduction to calculate on Federal form 8829. It simply utilizes a formula based on the square footage of the business portion (the home office) of your home vs. the total square footage of the house or apartment and then applies that percentage to all associated costs. The costs can include rent, mortgage interest, real estate taxes, condo fees, utilities, insurance, repairs, etc. If you own your own home you can even depreciate that portion of your house for an additional write-off.
For example:
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| | Business use (square footage) | 250 |
| | Total square footage of home | 1250 |
| | Business use % (250/1250) | 20% |
| Mortgage Interest | $7,500 | |
| Real Estate Tax | $2,500 | |
| Utilities | $1,820 | |
| Water & Sewer | $820 | |
| Insurance | $400 | |
| Repairs | $225 | |
| Total home expenses | $13,265 | |
| | Potential home office deduction: ($13,265*20%) | $2,653 |
Other rules that come into play here include the "exclusive use" requirement. This rule states that the home office must be used only for the business Ð no "mixed use" allowed. In other words the studio cannot be a part of a larger room such as the living room unless the business part is partitioned off in some way.
Day Care Services Ð Taxpayers who use their personal residences on a regular basis in the business of providing qualified day care services do not have to meet the "exclusive use" test. However, this deduction is available only if the taxpayer has applied for, has been granted, or is exempt from having a license, certification, or approval as a day care center under the provisions of applicable state law. In the case of a day care center the home office percentage is adjusted by the amount of hours the home is used in the year.
For example (these %'s are based on an actual return):
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| | Business use (square footage) | 875 |
| | Total square footage of home | 1250 |
| | Business use % (875/1250) | 70% |
| Hours used for day care | 2058 | |
| Total hours available | 8760 | |
| Business use (2058/8760) | 23.49% | |
| | Day care home office % (70%*23.49%) | 16.44% |
| Mortgage Interest | $7,500 | |
| Real Estate Tax | $2,500 | |
| Utilities | $1,820 | |
| Water & Sewer | $820 | |
| Insurance | $400 | |
| Repairs | $225 | |
| Total home expenses | $13,265 | |
| | Potential home office deduction: ($13,265*16.44%) | $2,181 |
The home office can be a powerful write-off in that it allows the taxpayer to deduct a part of what were non-deductible personal expenses.
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