Posted by Flynn Financial Group Inc

Breaking Down Home Office Tax Deduction

Breaking Down Home Office Tax Deduction

Are you afraid to take a home office deduction because you’re worried it might trigger an audit? This fear is common among small businesses. But there’s really no need to worry especially if you think you deserve it. Let’s break down everything you need to know about this deduction and to determine if you qualify for it.

The first thing you need to know is that a home office deduction generally does not trigger an audit. Since the 1990s, the rules have changed which is why it’s now easier for people who work out of their homes to qualify or these write-offs. You, therefore, by all means, should take it if you qualify.

To qualify for the home office deduction, you must have:

    •    Exclusive and regular use: A portion of your home must be exclusively and regularly use for your business.

    •    Principal place of business: Your home office must be either:

    •    The principal location of that business

    •    Or a place where you meet your customers or clients regularly.

You do have to take note of some exceptions to these rules including daycare and storage facilities. 

What Exclusive Use Means

To qualify for these deductions, the biggest roadblock you must overcome is the fact you must use a portion of your home for your business exclusively and regularly. A separate room or group of rooms must become your office. A section of a room can be your office if the division is clear, perhaps due to a partition, and can show that activities made personally are excluded from the business section.

The exclusive-use requirement is clearly mandated by law and is seriously followed by the IRS. For example, a room in your home is set aside for a full-time business and you work in it 10 hours a day, or maybe 7 days per week. If you ever allow your children to do their homework there, the exclusive-use requirement is already violated and the chance for home-office deductions will be forfeited.

Now, when the law said exclusive-use rule, it doesn’t mean you’re no longer allowed to make a personal phone from the office or you must rush outside whenever a family member needs a moment of your time. There are IRS auditors who can be very strict or not strict in this matter but some advisors would say, for as long as personal activities invade the home office no more than they would be permitted at an office building, you meet the spirit of the exclusive-use test.

What Regular Use Means

Regular use has no specific definition of what it constitutes. Obviously, if an otherwise empty room is being used only occasionally and its use is incidental to your business, you won’t pass this test. Now, you’d probably pass if you work in the home office a few hours or so each day. This test is applicable to the circumstances and facts of each case required by the IRs.

What Principal of Business Means

Another important requirement in addition to passing the exclusive-and regular-use tests is that your home office must be either:

    •    That business’ principal location, or

    •    A place where you meet with customers or clients regularly.

You don’t have to meet the principal-place-of-business or the deal-with-customers test if, for instance, your home office is in a separate structure that is unattached such as a loft over a detached garage. You can qualify for home business write-offs as long as you pass the exclusive- and regular-use tests.

If you happen to do most of your work elsewhere and your business has just one office in your home, here are the things you need to remember:

    •    It’s required for the office to be the principal place of business, not your principal office.

    •    As long as the home office is used to at least conduct your management or administrative chores and you don’t make use of any other fixed location substantially to conduct those tasks, you’d surely pass this test with flying colors.

    •    If you work for another company but also have your own part-time business based in your house, even if you spend much more time at the office where you work as an employee, you can still pass this test.

    •    Claim home office deductions for individuals who conduct most of their income-earning activities somewhere else is even easier thanks to this rule.

Flynn Financial Group Inc
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