Gold Medal Software 2/Gold Medal Software Volume 2 (Gold Medal) (1994).iso/accounts/sba93_4b.arj/F210.SBE

Text File | 1993-10-01 | 6KB | 131 lines

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         │ DEDUCTIONS FOR OFFICE-IN-THE-HOME EXPENSES │
         └────────────────────────────────────────────┘

If you use part of your residence for business purposes,
you MAY be able to deduct part of your office-in-the-home
expenses.  However, the rules are pretty stringent, and the
general rule is that office-in-the-home expenses are NOT
deductible for tax purposes, unless you meet a number of
quite technical requirements.

There are several types of situations under which you may
be able to claim deductions for part of your rent (if you
rent) or expenses related to ownership of your residence
(if you own your home), as well as other occupancy expenses
that would be allowable as business expenses, were it not
for the home-office deduction limitations.

  . EXCLUSIVE USE FOR BUSINESS TEST.  If you use part of
    your residence exclusively for business purposes and
    on a REGULAR basis, you may be able to claim office-
    in-the-home deductions if you also qualify under one
    of the following tests:

     . PRINCIPAL PLACE OF BUSINESS--You use a portion
       of your home as your principal place of busi-
       ness (note that the 1993 U.S. Supreme Court
       decision in Commissioner v. Soliman held that
       to be the "principal" place of business, your
       home office must be the MOST IMPORTANT place
       where the business is carried on, which means
       considering both the relative importance of
       the activities performed at each location and
       the time spent at each place); or,

     . USE AS A PLACE TO MEET OR DEAL WITH CLIENTS, ETC.
       --You use your home as a place to meet clients,
       customers, patients, etc.; or,

     . SEPARATE STRUCTURE NOT ATTACHED TO DWELLING UNIT
       --Your home office is a separate structure that
       is not attached to your house or living quarters.

  . NON-EXCLUSIVE USES THAT QUALIFY.  Two special excep-
    tions are made where part of a home is regularly, but
    not exclusively, used for business purposes:

     . STORAGE OF INVENTORY--A wholesaler or retailer
       who uses part of a home to store inventory that
       is held for sale. (Only, however, if the dwel-
       ling unit is the taxpayer's SOLE fixed location
       of the trade or business.)

     . DAY CARE FACILITY--Part of the home is used for
       day care of children, physically and mentally
       handicapped persons, or individuals age 65 or
       older.

If you can show that a portion of your residence qualifies
as a home office, you have gotten over the first hurdle.
But note that, even if you don't meet any of the above re-
quirements, these rules will NOT disallow your deductions
that are otherwise allowed for tax purposes, such as in-
terest on your home mortgage, real estate taxes, or casu-
alty losses from damage to your residence.  Also, business
expenses that are not home-related, such as business sup-
plies, cost of goods sold, wages paid to business employ-
ees, and other such operating expenses, are not affected
by the limitation on home office-related deductions.

If the business use of your home qualifies under one of the
above tests, then you MAY be able to deduct part of the
home office expenses that are allocable to the portion of
your home that is used in your business (in addition to
home mortgage interest, property taxes and casualty losses).

For, example, if 15% of your home is used exclusively and
regularly as your principal place of business, you could,
possibly, deduct up to 15% of your occupancy costs, such as
gas, electricity, insurance, repairs, and similar expenses,
as well as 15% of your rent (if you rent) or depreciation
expense on 15% of the tax basis of your house (if you are
an owner).  The IRS and the Tax Court don't agree on the
deductibility of certain other types of expenses, like lawn
care.

DEDUCTIONS LIMITED TO INCOME.  Note, however, that the
amount of qualifying home office expense you can actually
deduct for the year is limited to the gross income from
your home business, reduced by ALL your regular operating
expenses of the business (wages, supplies, etc.) and an al-
locable portion (15% in the above example) of your mortgage
interest, property taxes and casualty loss deductions.  If
you still have net business income after taking those de-
ductions, then you may deduct the allocable portion of your
home office expenses, up to the amount of such net income.

Any portion of your home office expenses that are aren't
deducted due to the income limit in one year can be carried
over to future years until usable (if ever).

CAUTIONARY NOTE:  The downside of taking home office deduc-
tions is a potential tax bite when you sell your home.  For
example, if 15% of your home has been used for business and
you sell your home for a gain, you will have to pay tax on
15% of the gain, even if you reinvest in a new house, or
even if you qualify for the once-in-a-lifetime $125,000 ex-
clusion of gain (for persons over age 55) when you sell the
house.  Thus, a few hundred dollars of home office deduc-
tions now may result later in many thousands of dollars of
tax on the "business" part of your house when sold for a
gain a few years down the road.

NEW TAX FORM:  Beginning with 1991 tax returns (filed in
1992), taxpayers who claim deductible expenses for business
use of their home may no longer simply answer a "Yes I
did/No I didn't" question on their Schedule C.  Instead,
they will take no home office deductions on Schedule C,
but will have to fill out a new Form 8829, on which they
must report all such expenses and determine the amount al-
lowable as deductions.  The Form 8829 asks such hard ques-
tions as how many square feet is your home, and what is the
square footage of the room or area used as an office.  The
net amount on Schedule C is now a "tentative" profit or
loss number, before deduction of any expenses for business
use of a home.  This has the effect of placing all such de-
ductions under an IRS spotlight, and will doubtless inhibit
a great many people from taking ANY home office deductions.