Cream of the Crop 1/Cream of the Crop 1.iso/BUSINESS/SBA62.ARJ/FSBA.EXE/F210.SBE

Text File | 1992-04-30 | 6KB | 108 lines

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            │ DEDUCTIONS FOR OFFICE-IN-THE-HOME EXPENSES │
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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 re-
lated 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; 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 quali-
fying 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:  Beginning with 1991 tax returns (filed in 1992), tax-
payers who claim deductible expenses for business use of their home
will no longer simply answer a "Yes I did/No I didn't" question on
their Schedule C.  Instead, they will deduct no home office deductions
on Schedule C, and will have to fill out a new Form 8829 on which they
must report all such expenses and determine the amount allowable as
deductions.  The 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 will be a "tentative"
profit or loss number, before deduction of any expenses for business
use of a home.  This will place all such deductions under an IRS
spotlight, and will doubtless cut a lot of people out of taking any
home office deductions.