IRS Has Strict Rules For Figuring Home Office Deductions
I split my bedroom between office space and sleeping quarters. It's the only place where I work. I've been told I have to use the room for business only if I'm going to try to take a home office deduction. Is this true?
K.S., Carmel, IN.
It's okay to claim a home office deduction for the part of your bedroom that qualifies as office space, you don't have to set aside an entire room for your workspace. There must, however, be a clear definition of what space is used for work and what space is used for personal purposes.
If you're an editor, for example, and sit up in bed at night with manuscripts on your lap, you can't justify claiming part of your bedroom as office space because the part you use as an office is also the exact place where you sleep. If you work at a desk on one side of the bedroom and sleep on the other side of the room, you may think you have office space that is separate from personal space, but if you use the desk to write letters to your mother and pay the personal bills, think again.
As difficult as this may be to believe, the IRS has provided some rather complicated rules for determining eligibility for home office deductions.
The area you use for your home office must be used exclusively and on a regular basis for business purposes. The IRS is very big on exclusivity and regularity. And if you are someone's employee, the work at home arrangement must be for the convenience of your employer.
Exclusive use of your office space for business means the space can't do double duty: It's either business space or it's personal space. If it's used for both, the IRS considers it all to be personal space.
Regular business use of the space means there needs to be an ongoing business use of the space. If you're sick for a day and stay home from the office, but you're well enough to do some work at the desk in the corner, your corner office doesn't qualify as a home office. Or, if you have an empty room that you used once to create a work of art, but the rest of the time you do your sculpting in your sunny studio, the room does not qualify as a home office even though its only use was for business.
In addition to the regular and exclusive tests, which weed out most of those who attempt to claim the home-office deduction, the IRS has specific rules about what you can do in you office if you're going to call it a place of business. There are three rules that qualify your home office space for a deduction. You need to meet only one of these rules:
The area must be the principal place where you carry on your business, or
The area must be used as a place where patients, clients, or customers meet with you in the normal course of your business, or
The area must be used in connection with your business (although not necessarily where you conduct business or meet clients) and is a structure separate from your home (a shed or warehouse used to store inventory, for example).
The home office deduction is reasonably straightforward if you conduct a business solely from your home and have an area set up exclusively for your office. You can share space with regular household activities, as long as you only conduct business in the business area of the house. For example, you might set up a desk in the laundry room and do your work there. You don't have to hang a curtain to separate the two areas, just don't fold laundry on your desk, and keep your business papers off of the washing machine.
One more rule: you can't claim a deduction for your home office expenses to the extent that any part of that deduction gives you a loss for your business. So if your business grossed $40,000 and your business expenses were $38,000, leaving you with $2,000 of net business income, your home office deduction is limited to $2,000, even if the actual expenses were more than that. Unused home office expenses can be carried over to next year's tax return.
If you are self-employed, fill out Form 8829, "Expenses for Business Use of Your Home" if you plan to claim the home office deduction, then carry the amount to your Schedule C where you report your other business income. Employees report home office deductions as a miscellaneous deduction on Schedule A.
New law alert: You may have heard of changes in the tax law liberalizing the rules for the home office deduction. Under new law, a taxpayer can take a deduction for a home office if the office space is used to conduct administrative or management activities of a trade or business and there is no other place where these activities can be done. This rule was designed for employees who don't have an office at their regular job. A home care provider, for example, might spend the day going from one patient's home to another, performing medical services. Previously, if this person was an employee, there would be no home office deduction allowed. Under the new law, if there is an office in the home where the caregiver takes care of paperwork relating to the job, a deduction will be allowed.
Before you employees get excited about taking a deduction for your home office, consider the fact that this change in the tax law doesn't take effect until 1999, so you won't see a tax result until the Spring of 2000. By that time we may not even have an IRS anymore. Or perhaps, as a cost-cutting measure, the IRS will instruct all of its employees to work out of their homes and take advantage of the more liberalized home office deduction.
copyright © 1998 - Gail Perry