Tax Deductions Related to a Home Office
posted Mar 19, 2012 by Norman LeBlanc, CPA
As you continue pulling together your 2011 tax information, a brief discussion of what is, or is not an office is a common question for filers.
In general, expenses relating to the residence of a taxpayer are considered personal and therefore not deductible for taxes. Exceptions to this rule are when a taxpayer operates a trade or business out of his or her home but the standards for deductibility are strict.
Deductions are only allowed if the office area of the home is used exclusively and regularly as the principal location of the taxpayer’s trade or business. ‘Regular use’ requires frequency and repetition; taxpayers should be able to provide evidence of such use. This will be achieved if patients, clients or customers meet and deal with the taxpayer within these confines as part of the normal course of business. Alternatively, if the taxpayer’s type of business does not have an established location, such as a landscaper, the home office would be considered regular and exclusive if it is the sole area used for billing, planning, other administrative and managerial functions of the business.
Deductions are broken down into three categories; direct, indirect and unrelated:
Direct expenses are those expenditures made for or in relation to the area of the residence used for business purposes. Examples would include carpeting, wall painting, lighting fixtures and other repairs or maintenance limited to the home office area. Direct expenses are deductible in full, subject only to the income limitation.
Indirect expenses are payments related to the entire residence, such as insurance, depreciation, utilities, real estate taxes, or mortgage payments. These deductions will be limited to the amounts allocable to the trade or business. Traditionally, the square footage of the business area divided by the total square footage of the residence will provide the applicable ratio. Other methods may be available, provided they are reasonable under the facts and circumstances.
Unrelated expenses have nothing to do with the business or the home office area of the residence. Expenses to repair bathtub plumbing or paint the hallway would not be allowed.
There is an income limitation on the deductibility of expenses. Using a tiered system, deductions are disallowed if they exceed the income generated by the business being run out of the home office. Unused amounts may be carried forward for deduction in future years.
- A taxpayer who has a home office but is also considered an employee is permitted deductions only if the home office arrangement is for the convenience of the taxpayer’s employer.
- A taxpayer may not deduct expenses related to the first telephone line into a home. A separately maintained line is necessary for deduction.
- Special rules apply to daycare facilities.
If you have any questions about your home office and deducting expenses on your 2011 tax return contact any member of the KLR Tax Services Group.
KLR’s tax professionals are CPA’s and attorneys who have specialized training and experience in the Boston market place in all matters of Federal, State and Local Tax Issues. They have expertise in tax strategies for individuals and families, estate gift & trust services, voluntary disclosure issues, transfer pricing, M&A assistance, cost segregation studies and research & development tax credits.