@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 expen- ses, such as part of your rent (if you rent) or depreciation of your house (if you own), as well as other occupancy expen- ses 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 pur- poses, 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 quali- fies 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 particu- lar 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 EXCLUS- IVELY 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 consid- ered 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 connec- tion 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 pro- vide 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 re- quirements 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 inter- est on your home mortgage, real estate taxes, or casualty losses from damage to your residence. Also, business expen- ses 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 lim- itations on home office-related deductions. Also, look on the bright side. Since no part of your res- idence 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 actual- ly qualify to deduct some of your home office expenses. Now that you can apparently show that a portion of your resi- dence 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, insur- ance, 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 (wa- ges, 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 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 claimed now may result later in thousands of dollars of tax on the "business" part of your house when sold for a 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 regu- lations require you to consider the fol- lowing factors as to principal location: . the relative amount of business income earned at each location; . the business facilities available at each location; and . the amount of time spent on busi- ness activities at each location. @H\03 ÚÄÄÄÄÄÄÄÄÄ¿ ³ EXAMPLE ³ ÀÄÄÄÄÄÄÄÄÄÙ An example that would qualify for the home office deduction would be a physi- cian who has a regular main office down- town, 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 ÚÄÄÄÄÄÄÄÄÄ¿ ³ EXAMPLE ³ ÀÄÄÄÄÄÄÄÄÄÙ 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 location of your busi- ness, and that the storage use must be regular, but not necessarily exclusive. @H\07 If you use part of your home on a regu- lar (but not necessarily exclusive) basis as a day-care facility for chil- dren, 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 telephone expenses (whe- ther 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, call forwarding, or extra dir- ectory 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). So if you have quali- fied home office expenses that you can't 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