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Are you self-employed? Do you work out of an office in your home? If the answer is yes, you may be entitled to home office deductions. That’s the good news. The tricky news is that you must satisfy strict rules to qualify for those deductions.
If you fall within the parameters, you are allowed to deduct the “direct expenses” of your home office. Direct expenses include the cost of improvement, maintenance, and depreciation of things like furniture and fixtures. Additionally, “indirect expenses” related to maintaining your office space can also be deducted. Examples include the allowable share of utility costs, depreciation, and insurance for your home. Indirect expenses can also include the applicable portion of mortgage interest, real estate taxes, and losses.
Also, if your home office is your “primary place of business,” you may be qualified for additional deductions. These deductions may include traveling between your home office and other work locations as they can be covered deductible transportation expenses, as opposed to nondeductible commuting costs. Lastly, self-employed business owners can deduct the cost of computers and other business-related equipment that you use in your home office, for the year that they are purchased and first used.
Are you worried about qualifying for deductions?
You can deduct your business expenses if you meet any of these three tests:
Test 1: Principal place of business. Your home office is your principal place of business if it satisfies one of two tests.
- “management or administrative activities test”
- This means that the administrative or management activities of your business happen primarily in your home office
- “relative importance test”
- meaning your home office is the most important place where you conduct business, in comparison to all the other locations where you may conduct business.
Test 2: Meeting place. If you use your home office exclusively and regularly to meet or deal with patients, clients, or customers, you may qualify for deductions. However, clients must physically come to your home office.
Test 3: Separate structure Home office deductions also apply even if the business space is in a separate structure on your property. Examples of this can include an unattached garage or workshop.
You may also be able to deduct the expenses of storage space for inventory or product samples. If your business involves selling products retail or wholesale, and your home is your sole fixed business location, you can deduct home expenses incurred for the space that you use to store products.
What are the limitations to deductions?
The amount of deductions that you can take because of using your home is office does have several limitations:
- the income generated because of the use of the office,
- residence-based deductions (such as mortgage interest and real estate taxes) that aren’t dependent on use of your home for business
- business deductions that are not connected to the use of your home office.
The good news is that any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.
What happens if I sell the home?
It is vital to know that if you choose to sell — at a profit — a home that contains (or contained) a home office, there may be tax implications. We can explain them to you.
Pin down the best tax treatment
Proper planning can be the key to claiming the maximum deduction for your home office expenses, and JLK Rosenberger can assist with your plan. For additional information, please call us at 949-860-9890 or click here to contact us. We look forward to speaking with you soon.