| THIS IS A TRICKY ONE-and the
only one I will explain in-depth
To claim a rental deduction, you must use the portion of
your home as the "principal" place of business activity
conducted at home and as a place for meeting or dealing with
clients in the ordinary course of your business. Your home
office will qualify as your principal place of business if
you spend most of your working time there and most of your
business income is attributable to your activities there.
It must be regularly and exclusively used for this purpose.
The IRS uses their "theory of relativity" when
it comes to qualifying your home office deduction. They use
2 steps to determine whether a home office is the principal
place of business:
1. The importance of activity at that location and
2. The time spent at that location
In 1998 the IRS did not consider administrative or management
activities as qualifying evidence. HOWEVER, in 1999 the IRS
loosened up the reigns it has on us small business owners.
A home office will meet the principal place of business test
if it is used "exclusively" (there's that word again)
and regularly to conduct administrative or management activities
and you can show that there is no other fixed location where
you conduct substantial administrative or managerial activities
for your business [J.K. Lasser's Your Income Tax 2002 - This
book is "our bible" and I and my accountant friends
highly recommend it.]
Lastly, the amount of your home office deduction must be
directly proportionate to the total square footage of your
home and cannot exceed gross income derived from the home
office activity. If it exceeds this limit, the excess can
be carried forward into the next year, if there is sufficient
gross income in that year.
EXAMPLE:
- Figure the square footage percentage.
1,500 total sq. ft./1 rm. is 10 X 11 (110 sq. ft.)
The room uses 8% of the total square footage.
This percentage then becomes the basis of indirect expenses
you can also deduct: homeowners/renters insurance, security
systems, repairs, maintenance, et cetera.
- Figure the home office deduction based on the percentage
derived in Step 1. ($2,400 annual rent X 8% = Home Office
Expense)
- Say you gross $30,000, and annual home office deduction
is $2,400, you can deduct all of the home office deduction.
For tax purposes, business use of home is computed on IRS
form 8829 and the deductible portion is recorded on the
IRS Schedule C if you operate as a sole proprietor.
NOTE: If you are a homeowner you may not want to use the
home office deduction. If you do, there will be a capital
gain assessed on the percentage of the sale of the home. (The
same percentage you used to calculate your home office deduction.)
Please consult with your tax professional.
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