AOL File Library: 2,401 to 2,500/aol-file-protocol-4400-2401-to-2500.zip/AOLDLs/PC Business Library/Small Business Advisor/SBA964.exe/F301.SBE

Text File | 1996-08-23 | 12KB | 334 lines

@Q01
      CAN YOU DEDUCT EXPENSES FOR AN OFFICE IN YOUR HOME?

  If you use part of your residence for business purposes, you
  MAY be able to deduct part of your office-in-the-home expenses,
  such as part of your rent (if you rent) or depreciation of
  your house (if you own), as well as other occupancy expenses
  that would be allowable as business expenses, were it not for
  the home-office deduction limitations.  However, the rules
  are fairly stringent, and the general rule is that your office
  in the home expenses are NOT deductible for tax purposes,
  unless you meet several quite technical requirements.
  NOTE:  This series of questions and answers assumes that your
  home-office use relates to your own business, and does not
  deal with whether, as an employee, your work at home qualifies
  as being for the convenience of your employer.

    QUESTION:  Do you use a portion of your residence
               EXCLUSIVELY for business purposes AND
               on a REGULAR basis?
@YN
01\Q02
02\Q05

@Q02

  So far, so good.  Since you use part of your residence
  EXCLUSIVELY for business and on a REGULAR basis, you may
  be able to claim office-in-the-home deductions if you also
  qualify under one of several other alternative tests.  One
  of these tests is the determination of whether your home
  office is your PRINCIPAL place of business for a particular
  business you carry on.

    QUESTION:  Do you use a portion of your home as your
               PRINCIPAL place of business?

@YN
01\Q09
02\Q03

@Q03

  You're down, but not out.  Even if your home office is not
  your principal place of business, you may still qualify for
  deducting home office expenses if you use your home office to
  meet with customers, clients, or patients on a regular basis.

      (But remember, you still must use your home office
       EXCLUSIVELY and REGULARLY for business purposes.)

    QUESTION:  Do you use your home office regularly to meet
               with customers, clients, or patients?

@YN
01\Q09
02\Q04

@Q04

  Hmmmm....Not good.

  But there are several other possibilities we haven't
  considered yet.  One important one is where your home office
  is a separate structure that is not attached to your house
  or living quarters.  Under this test, you still must use the
  office exclusively and regularly for business, but it need
  not be your principal office or be used to meet clients,
  customers, or patients.

  It simply must be used "in connection with" your business.

    QUESTION:  Is your home office in a separate structure,
               not attached to your house or living quarters?

@YN
01\Q09
02\Q05

@Q05

  You may still be able to qualify for a home office deduction
  if you run a retail or wholesale business out of your home,
  and use part of your home on a regular (but NOT necessarily
  exclusive) basis to store INVENTORY.

    QUESTION:  Do you use part of your home on a regular
               basis to store inventory from your retail
               or wholesale business?

@YN
01\Q06
02\Q07

@Q06

  This looks promising, in your case....You MAY qualify for
  the home office deduction for storage of inventory, but only
  if your home is the SOLE fixed location of the business.

    QUESTION:  Is your home the SOLE fixed location of the
               business (the business for which you are using
               your home to store the inventory)?

@YN
01\Q09
02\Q07

@Q07

  Your chances of qualifying for home office deductions don't
  appear to be very good, based on your responses so far....

  However, there is one last, long shot possibility, if you
  regularly use part of your home to provide certain day-care
  services.

    QUESTION:  Do you use part of your home regularly to
               provide day care services for children, persons
               age 65 or older, or persons who are physically
               or mentally incapable of caring for themselves?

@YN
01\Q09
02\Q08

@Q08

  CONCLUSION:

  Unfortunately, it doesn't look like you meet any of the
  tests for claiming expanded home office deductions.  Thus
  you can't write off any of the rent paid for your house or
  apartment (or depreciate your house, if you own it), nor
  can you write off any part of various occupancy expenses,
  such as electricity, gas or other utilities.  However, you
  may deduct the cost of business telephone calls as expenses
  of your business--but no part of the charges (including
  taxes) paid for basic local telephone service for the first
  telephone line in your residence can be deducted.

  But note that, even though you don't meet any of the
  requirements for a qualified home office that we have asked
  you about, these rules will NOT disallow your deductions
  that are otherwise allowed for tax purposes, such as
  interest on your home mortgage, real estate taxes, or
  casualty losses from damage to your residence.  Also,
  business expenses that are not home-related, such as
  business supplies, cost of goods sold, wages paid to
  business employees, and other such operating expenses,
  are not affected by the limitations on home office-related
  deductions.

  Also, look on the bright side.  Since no part of your
  residence is considered to be a qualified home office, you
  shouldn't lose your right to defer all the gain on sale of
  your residence if you sell your home at a gain and reinvest
  within the required period in another home.  Nor, if you are
  55 or over, and qualify for the once-in-a-lifetime exclusion
  of up to $125,000 of gain on the sale of a home, will you
  lose any part of this exclusion on account of your having
  used part of your house for business.

@STOP

@Q09

  CONCLUSION:  You've made it through the maze, and may actually
  qualify to deduct some of your home office expenses.

  Now that you can apparently show that a portion of your
  residence qualifies as a home office, you have at least
  gotten over the first hurdle.

  Since the business use of your home qualifies under one of
  the above tests we have put to you, 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 qualifies as a home office
  or 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 a year is limited to the gross income from your
  home business, reduced by regular operating expenses (wages
  supplies, etc.) and an allocable 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
  deductions into account, then you may deduct the allocable
  portion of your home office expenses, up to the amount of
  such net income.

  CAUTIONARY NOTE:  The down side of taking home office
  deductions 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
  exclusion of gain (for persons over age 55) when you sell
  the house.  Thus, a few hundred dollars of home office
  deductions claimed now may result later in thousands of
  dollars of tax on the "business" part of your house when
  sold for a large gain a few years down the road.

@STOP

@HELP

@H\01

Hints regarding  the exclusive business
use test:   You should  have  your home
office set  up in a room,  or a portion
of a room (preferably with some kind of
partition)  that only  contains typical
business  furniture,  and not  personal
use items  such as  a dresser,  TV set,
bed, etc.

@H\02

Note that if your business is carried on
in one or more locations,  proposed  IRS
Regulations  require you to  consider  3
factors as to principal location:

  . the relative  amount of  business
    income  earned at  each location;

  . the business facilities available
    at each location; and

  . amount of time spent on  business
    activities at each location.
@H\03

              ┌─────────┐
              │ EXAMPLE │
              └─────────┘

An example  that would  qualify  for the
home office deduction would be a  doctor
who has a regular main office  downtown,
but who  also has a  home office,  which
he or she uses EXCLUSIVELY and REGULARLY
to meet some patients, even though it is
not the principal office.

@H\04

              ┌─────────┐
              │ EXAMPLE │
              └─────────┘
A situation  that might  qualify for the
home office deduction would be a partner
in an accounting  firm who does  most of
her work in  the firm's business office,
but who sets up her office in the garage
(UNATTACHED  to the  house) next  to her
home,  where she  works on  evenings and
weekends (provided that the home  office
is used  EXCLUSIVELY  and  REGULARLY for
business).

@H\05

Note that the storage space test is not
for people  who are engaged  in service
businesses, such as doctors, lawyers or
dentists.  Also, space that is used for
storing  things other  than  inventory,
such as books, files or equipment, does
not qualify.

@H\06

Note that  this  requirement  refers to
your sole FIXED business location,  and
that  the storage use  must be regular,
but not necessarily exclusive.

@H\07

If you use part of a home on  a regular
(but not necessarily  exclusive)  basis
as a day-care  facility  for  children,
persons  over  65,  or persons  who are
physically   unable  to  take  care  of
themselves,  you ought to  qualify  for
treating  that  part of  your home as a
home office  under a  special exception
provided under the tax law.

@H\08

More on  home phone  expenses  (whether
or  not  you  have   a  qualified  home
office):   Note that if you choose more
expensive  touch-tone services,  rather
than  rotary  dial service  (on a first
phone  line),   the  entire  touch-tone
charge is NON-deductible.   But certain
other additional expenses, such as call
waiting / forwarding or extra directory
listings,  can be deducted  if you show
they are valid business expenses.

@H\09

PLANNING TIP:   Any portion of your home
office expenses that are aren't deducted
due to the income limit in this year can
be carried forward to future years until
usable (if ever).  If you have qualified
home office  expenses which  you  cannot
utilize because of the income limit this
year, keep a record of them, and perhaps
you will be able  to deduct the  carried
over expenses next year (or thereafter),
if the business becomes more profitable.

@END