Software of the Month Club 1997 March/Software of the Month Club 1997 March.iso/pc/dos/lg/sba/f210.sbe

Text File | 1996-08-23 | 6.1 KB | 133 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 business
       (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
    exceptions 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 dwelling
       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
requirements, 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 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
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, 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
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 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:  On recent years' tax returns, 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 take no home
office deductions on Schedule C, but instead must fill out
a Form 8829, on which they must report all such expenses
and determine the amount allowable as deductions.  Form 8829
asks such hard questions 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 deductions under an IRS spotlight, and
will doubtless inhibit a great many people from taking ANY
home office deductions.