Increase Your Pay Check

By Rohn Engh

A “home” office can be in a house, apartment, loft, condominium, trailer, mobile home, or boat. The term also includes any separate structure that is part of your residence, such as a garage or barn. You can deduct the expenses directly related to your home office, such as utilities, insurance, property taxes, etc. You must, however, meet certain requirements for your home work space to qualify as a “home office,” and be eligible for these deductions. (See below).

The home-office rules apply to sole proprietors, partners, and owners of an S corporation. The home-office rules do not apply to C corporations.

Regular and Exclusive Use: To be eligible for the home office deduction, a specific part of your home must be used regularly and exclusively for business. It can be a separate room or even part of a room, as long as the space is used for the business and nothing else. A TV set can be in the office if it is used in connection with stock photography. Your office cannot double as a guestroom, poolroom, kids’ playroom, or anything else, even when you are not working.

(An exception to the exclusive rule: If the home is the sole fixed location for a retail sales business, and if the person regularly stores inventory in the home, the expense of maintaining the storage area is deductible even if storage isn’t the exclusive use of the space.)

A BIG CHANGE

Your Principal Place of Business: The home-office rules changed in January 1999. Until 1999, you were not able to deduct any expenses for a home office unless used exclusively and on a regular basis as your “principal place of business,” or a place of business used regularly by your patients, clients or customers in the normal course of business.

Up to 1999, the Supreme Court defined principal place of business as, “the most important, consequential, or influential location,” with the main emphasis on where you do the work that produces the income. This meant that consultants, contractors, plumbers, caterers, musicians, independent travelling salespeople and others who do their income-producing work at customers’ and clients’ homes and offices, were not, in most cases, eligible for a home office deduction. The fact that your home office was essential to your business, or that you did all of your paperwork there, or even that it was the sole base of operations, according to the past law this was not enough to make it deductible. However, a law change in 1997, put into effect in 1999, makes it possible for you to deduct home-office “space” expenses that previously were not recognized by the IRS. The law now eliminates the “principal place of business” requirement. This is often referred to as the Soliman Decision. You will be allowed a home office deduction if your home office is the only place (“the sole fixed location”) where the business owner conducts “substantial” administrative or management activities for that business.

You are allowed a deduction for your home office even if you have another business location, and even if you earn the major portion of your income away from the home office, as long as you do a substantial amount of your paperwork, research, ordering supplies, scheduling, or appointments at your home office. Note that you don’t have to do all of your administrative or management work at home. The key word here is “substantial.” (Using the home office to do only occasional or minor paperwork will not qualify it for the deduction.)

Separate structure: If your home business is located not in the home, but in a freestanding structure such as a studio, garage or barn, you don’t have to meet the principal-place-of-business test. You are allowed deductions for upkeep of the space even if it is not your principal place of business. But the space still must be used regularly and exclusively for business, to qualify.

What’s Deductible: Deductible home-office expenses include a percentage of your rent if you rent your home or apartment, or a percentage of the depreciation if you own your home; and according to percent of spaced used, an appropriate percentage of home utilities, property tax, mortgage interest and insurance. You can determine the percentage based on any reasonable allocation. Most people use either square footage or number of rooms in the house.

Home repairs, such as a new roof or furnace, are also partly deductible (though if they are major, they must be depreciated).

The IRS specifically prohibits deductions for landscaping and lawn care, even if done solely to enhance the business (unless you are in the landscaping business).

Carrying A Business Loss Forward: If your home business shows a loss for the year, part of your home office expenses are not deductible for that year. You may deduct all of your regular business expenses, e.g. phone, postage, stationery (other than expenses for the office space itself), and may deduct interest and property taxes on the office, regardless of profit and loss. But the remaining home office expenses (including rent or depreciation, insurance, utilities) may be deducted for the year only to the extent that there is no loss. Any expenses you cannot deduct due to this limitation can be carried forward to the next year, and deducted again only up to the point where they do not create a loss for the year.

Homeowner Deductions -- Caution: If you are eligible for the home-office deduction, you might run into tax complications when you sell your house. In computing profit on the sale, you are required to reduce your home’s cost basis by the amount of the depreciation allowed (whether you take the depreciation or not!), which will increase your profit, and possibly your taxes, on the sale.

For more information, see IRS Publication 587, “Business Use of Your Home.”

Expense category: Home office expenses must be reported on Form 8829, “Expenses for Business Use of Your Home.” Note that you do not report home office depreciation, utilities, property taxes, or other home office expenses on the expense category tax form normally used for your business deductions. All home office expenses are reported on Form 8829.

Source: “422 Tax Deductions For Self-Employed Individuals,” by Bernard B. Kamoroff, C.P.A. ($16.95 plus $3 p&h) Bell Springs Publishing, Box 1240, Willits, CA 95490 (216 pages; ISBN 0-917510-11-9) 1 800 515-8050; Fax: 1 707 459-8614. (Ask about their monthly tax update for this year.)

Rohn Engh is director of PhotoSource International and publisher of PhotoStockNotes. Pine Lake Farm, 1910 35th Road, Osceola, WI 54020 USA. Telephone: 1 800 624 0266 Fax: 1 715 248 7394. Web site: http://www.photosource.com/product s

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