Thursday, February 4, 2010

Home Office Deduction Are you taking Advantage

Web site www.firsttaxsolution.com
Generally, you cannot deduct items such as mortgage interest and real estate taxes as business expenses. However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. Even then, your deduction may be limited. Use this section and Figure A, later, to decide if you can deduct expenses for the business use of your home.

To qualify to deduct expenses for business use of your home, you must use part of your home:

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Exclusively and regularly as your principal place of business (defined later),
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Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
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In the case of a separate structure which is not attached to your home, in connection with your trade or business,
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On a regular basis for certain storage use (see Storage of inventory or product samples, later),
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For rental use (see Publication 527), or
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As a daycare facility (see Daycare Facility, later).

Additional tests for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests discussed above plus:

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Your business use must be for the convenience of your employer, and
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You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.

If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

Exclusive Use

To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.

You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.

Example.

You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Your family also uses the den for recreation. The den is not used exclusively in your profession, so you cannot claim a deduction for the business use of the den.
Exceptions to Exclusive Use

You do not have to meet the exclusive use test if either of the following applies.

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You use part of your home for the storage of inventory or product samples (discussed next).
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You use part of your home as a daycare facility, discussed later under Daycare Facility.

Storage of inventory or product samples. If you use part of your home for storage of inventory or product samples, you can deduct expenses for the business use of your home without meeting the exclusive use test. However, you must meet all the following tests.

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You sell products at wholesale or retail as your trade or business.
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You keep the inventory or product samples in your home for use in your trade or business.
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Your home is the only fixed location of your trade or business.
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You use the storage space on a regular basis.
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The space you use is a separately identifiable space suitable for storage.

Example.

Your home is the only fixed location of your business of selling mechanics' tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.
Regular Use

To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use. You must consider all facts and circumstances in determining whether your use is on a regular basis.
Trade or Business Use

To qualify under the trade-or-business-use-test, you must use part of your home in connection with a trade or business. If you use your home for a profit-seeking activity that is not a trade or business, you cannot take a deduction for its business use.

Example.

You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities related to your own investments. You do not make investments as a broker or dealer. So, your activities are not part of a trade or business and you cannot take a deduction for the business use of your home.
Principal Place of Business

You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. To determine whether your home is your principal place of business, you must consider:

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The relative importance of the activities performed at each place where you conduct business, and
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The amount of time spent at each place where you conduct business.

Your home office will qualify as your principal place of business if you meet the following requirements.

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You use it exclusively and regularly for administrative or management activities of your trade or business.
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You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. However, see the later discussions under Place To Meet Patients, Clients, or Customers or Separate Structure for other ways to qualify to deduct home office expenses.
Administrative or management activities. There are many activities that are administrative or managerial in nature. The following are a few examples.

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Billing customers, clients, or patients.
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Keeping books and records.
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Ordering supplies.
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Setting up appointments.
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Forwarding orders or writing reports.



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