Home Office

If you do qualify, you compute your home office deductions on Form 8829, and report them above-the-line on Schedule C.

New principal place of business rules for home offices used, in 1999 or later, for management or administrative activities. Under a provision in the Taxpayer Relief Act of 1997-which will go into effect in 1999-a home office will qualify as the taxpayer's "principal place of business" if the taxpayer uses the home office to conduct administrative or management activities of the business, so long as the taxpayer doesn't have another fixed location where the taxpayer conducts substantial administrative or management activities of the business. However, according to IRS, the office must be used exclusively, and on a regular basis, for the administrative or management activities.

Space for storing inventory or product samples. If you're in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly to store inventory or product samples. The space doesn't have to be used exclusively for business purposes. And you can do business at the fixed locations of your customers (e.g., retail stores, if you're a wholesaler), and non-fixed locations, such as flea markets or craft shows.

Exclusive and regular use requirements. As noted above, when you claim to be using your home office under any of the tests outlined above (except the "storage space" test for retailers and wholesalers), the home office must be used exclusively and on a regular basis in connection with your business. (For storage space used by retailers or wholesalers, the space must be used regularly for business purposes, but doesn't have to be used exclusively for those purposes.)

The exclusive use requirement means that you must use your home office solely for the purpose of carrying on your business. Any other use of the home office will result in loss of all deductions for your home office expenses.

What you get if you qualify for home office deductions. If your home office is your principal place of business under the rules noted above, the costs of travelling between your home office and other work locations in the same trade or business, regardless of whether the other work location is regular or temporary, and regardless of its distance, are deductible transportation expenses, rather than nondeductible commuting costs.

If your use of your home office qualifies under any of the rules discussed above, you may take business expense deductions for the following:

"Direct expenses" of the home office-e.g., the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.;

The "indirect" expenses of maintaining the home office-e.g., the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest, real estate taxes, and casualty losses.

Amount limitations on home office deductions. The amount you may deduct as home office expenses is subject to limitations based on the income attributable to your use of the home office, your residence-based deductions that aren't dependent on use of your home for business (e.g., mortgage interest and real estate taxes), and your business deductions that aren't attributable to your use of the home office.

Any home office expenses that can't be deducted because of the above amount limitations may be carried over and deducted in later years.

Computers and related equipment. If your use of your home office qualifies under any of the rules discussed above, you may deduct the cost of computers and related equipment that you use in the home office, and the deductions are not subject to the "listed property" restrictions that would otherwise apply.

Effect of home office deductions on later sales of your principal residence. You should be aware that, if you claim any home office deductions with respect to a portion of your principal residence, when you sell the residence, any profit attributable to the portion used as a home office may not be eligible for the otherwise available $250,000/$500,000 exclusion for gain on the sale of principal residences.

Be sure to consult with a tax advisor for proper planning and implementation of tax savings ideas to be sure they are right for you.

C. David Pitzer, CPA, PC
118 Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711

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