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New Office-in-Home Rules May Allow You to Take this Tax Deduction

Beginning January 1, 1999, the office-in-home deduction is available not only to those who meet the old guidelines but also to self-employed people who have no other location where they conduct substantial administrative or management activities for their business.

© 1999, by Jan Zobel, EA

If you're one of the many small business owners who works out of your home but haven't been able to deduct home expenses due to strict IRS guidelines, new tax laws effective January 1 may change your eligibility.

Prior to January 1, in order to deduct a home office you had to have a regularly and exclusively used space that was either the primary place of work for this business, a place where you met with clients or customers, a separate structure not connected to the house, or the sole storage place for business inventory or product samples.

This meant that people who used their homes for administrative work only, even if a separate room was set up exclusively for the business, were not able to take the potentially valuable home office deduction. Consultants who work primarily at clients' offices, plumbers whose principal place of work is at the job site, and psychotherapists who see clients elsewhere but do their billing at home were among the millions of small business owners unable to take this deduction.

Beginning January 1, 1999, the office-in-home deduction is available not only to those who meet the old guidelines but also to self-employed people who have no other location where they conduct substantial administrative or management activities for their business.

In order to deduct business use of your home under the new rules, you must still have a space that is used regularly and exclusively for your business. The home office does not need to be a separate room, but must be a clearly definable space in which no personal activities take place.

One rule that hasn't changed is that home office expenses cannot be deducted if you have a loss from your business or if the home office expense would create a loss. However, any expenses you're unable to claim this year due to having a business loss can be carried over to next year's return.

You may wonder whether it's worth bothering to claim a home office since, if you own your home, you can already deduct the mortgage interest and real estate tax you pay. There are three tax benefits to taking the home office deduction. First, when you deduct personal expenses (i.e. mortgage and real estate tax) as business expenses, they not only reduce your income tax but also your self-employment tax. Second, by claiming a home office, you're able to deduct rent, utilities, insurance, and depreciation which you can't otherwise take as expenses.

The third and perhaps most valuable benefit is that having a home office allows you to deduct more car expenses. Without a deductible office-in-home, you generally cannot claim the miles you drive from home to your first business stop of the day and from your last stop of the day back home. This is considered non-deductible commuting mileage.

If you qualify for and decide to take the home office deduction, calculate the percentage of your home used for business. Add together your rent or mortgage interest, utilities, maintenance, real estate taxes and insurance and multiply the total by the percentage you use your home for business. If you own your home, add in depreciation on the business portion of your home. The end result is your allowable office-in-home expense. You should keep in mind that deducting a home office now may have tax ramifications when you sell your home.


As you can see, there are lots of hoops to jump through in claiming the office-in-home deduction. Despite the problems, this is a valuable deduction to take if you qualify.


The above article is excerpted from Jan's recently revised book, Minding Her Own Business: The Self-Employed Woman's Guide to Taxes and Recordkeeping (Adam Media Corporation) which is available for only $8.76 at Amazon.com.

 
 
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