John Ritchie asked: If you are working from home, you may or may not have an area of your home that you refer to as your office. It may be that you make your phone calls from the bedroom and complete your paperwork at the kitchen table and see customers or clients in the family room.
On the other hand you may have a separate room in your home which is furnished with a computer, printer, desk, comfortable office chair, phone, filing cabinets etc. from where you conduct all aspects of your business.
While from the point of view of maintaining an efficient office the latter option is probably preferable, many of us don’t have the luxury of an extra room that can be set aside for a home office and we end up working under circumstances much closer to those mentioned in paragraph one.
Regardless of how your “office” is set up at home, you may be able to deduct a portion of the operating expenses of your home and treat them as office expenses.
To qualify for these deductions you must use your home or portions thereof regularly and exclusively as your principal place of business for your home based business. Regular and exclusive use means that you can’t just point to a desk in the corner and call it your office. It must be broken in by regular use. This does not mean you have to use it every day, but it must happen frequently enough to show that you are actively engaged in your home based business.
If you think that the regular use of your office might be questioned, keep a log book (see Record Keeping article issued earlier in this series ) recording your home based business activities and business visitors for each day the office is used. You are not required to commandeer an entire room or a separate structure to meet the exclusive test. A portion of a room is acceptable.
Whatever space you do set aside, however, must be used exclusively for your home-based business. You can set aside more than one area of your home for business. For example, one room may be used as an office and another for meeting or entertaining clients. Your principal place of business is where: (1) you conduct the most important activities for that home based business and (2) you spend the most time.
If you meet with clients or deliver goods or services to customers, your principal place of business could be where those meetings or deliveries take place. However, if your home based business has no fixed location, you may deduct expenses for a home office if you use your home to conduct substantial management activities and complete necessary paperwork.
You can have more than one principal place of business if you have separate business activities. For instance, you may be employed and work in your employer’s place of business all day, then return home to run your own home based business on evenings and weekends. Or you may own a business that operates in rented office space and also conduct a second home based business from your home. Your home office expenses will be deductible, because your home is the principal place of operating your home based business. It does not matter if your businesses are closely related or share the same clients, as long as different tasks are involved. Do not bring work home from your employer or another business that does not qualify for the home office deduction, or you could lose the deduction for your home based business activities. You will fail the exclusive use test.
If your business is selling products, you may deduct expenses allocated to areas of your home regularly used for storing your inventory and product samples. Your home must be the only location for the business of selling your products. The exclusive use test does not apply to storage areas, but the space must be a specific, identifiable area. Suppose, for example, that you use a cupboard in your hall to store your inventory. Even if you use the space to store linens as well, it will be deductible as part of your home office.
Deductible office expenses include a portion of the following expenses:
Rent,
real estate taxes,
mortgage interest,
utilities,
home insurance.
If clients or customers regularly visit your home, the costs of lawn care, landscaping, and driveway repairs may also be included.
Repairs to other parts of the house and family living expenses (such as food) are not deductible.
However, a pro rata share of repairs that benefit the entire home, such as roof repairs or painting the outside of the house, may be claimed. The same is true for the business portion of the cost of installing and maintaining a home security system.
You may also include a deduction for depreciation on your home, but as this could well lead to a recapture tax upon the later sale of your home, you should obtain advice from your tax advisor before considering this.
The percentage of your home used for business is computed by dividing the square footage used for business by the total square footage of your home. Your home office deduction is figured by multiplying the total of your allowable household expenses by the percentage of the home being used for the home business. e.g. Total Square Footage of house is 1500 sq ft. Total Area used for business is 150 sq ft. making the percentage of the home being used for your home based business 10%. Thus 10% of total allowable household expenses can be used for home business deduction.
In most countries, the home business deduction cannot be used if your home based business already has a loss for the year. Neither can it be used to create a loss for the year. Usually however, any part of the deduction not used can be carried forward to future years. Verify with your Tax Advisor as these rules do differ widely between countries and also frequently change when tax authorities update legislation. If claiming the home business deduction you will need to record the following information:
Total Sq Footage of Home,
Sq Footage of Home Office Area(s),
Utility Costs,
Insurance,
Repairs & Maintenance,
Mortgage Interest,
Property Taxes,
Rent,
Although this sounds complex it is one of the most advantageous tax deductions available to home business owners and should not be overlooked. Should your home based business operate at a loss, you will probably be able to offset the loss against any other income that you have earned, thus reducing the amount of Income Taxes that you will be required to pay.
So now you should be able to see the very real advantage of operating a home based business.
Note: Taxation legislation differs between countries and each country may change their rules at any time. The information provided in these newsletters is accurate at time of publication. You should however seek specific information from your Tax Advisor or Taxation Department as it relates to your own situation each year that you are required to provide Income and Expense Statements.
Other topics in this series are as follows:
Number 1, Record Keeping,
Number 2, General Expenses,
Number 3, Purchase of Goods for Resale,
Number 5, Home Entertainment Costs,
Number 6, Motor Vehicle Expenses,
Number 7, Depreciation Costs,
Number 8, Business Meals,
Number 9, Salary Payments to Children,
Number 10, Travel Expenses,
Number 11, Demonstrators Samples & Promotional Tools,
Number 12, Gifts,
Number 13, Here Comes the Tax Man,
Number 14, Capital Items,
John Ritchie, A.I.B., A.I.C.B, F.I.C.B, email:brlynt@gmail.com
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