Posted by The TaxAdvocate Group, LLC

Tax Savings on Your Home Office

Tax Savings on Your Home Office

If you’re worried that a home office deduction will trigger an audit, then you might miss some significant tax savings this tax season. In the late 1990s, changes in the rules were made making it easier for people who work out of their homes to qualify for these write-offs. So don’t hesitate to take it if you find out you qualify.

In order to qualify for the home office deduction, you generally need to meet the following:

  • Exclusive and regular use - A portion of your home must be exclusively and regularly used for your business.
  • Principal place of business - Your home office must either be your business’ principal location or a place you meet with your customers or clients regularly.
  • Exceptions - There are some exceptions to these rules that we will further discuss below such as for daycare and storage facilities.

Exclusive Use

It’s important that your office is generally in a separate room or group of rooms. The office must be a section of a room with a clear division that also shows personal activities are excluded from the business section. This is clearly stated by law and the exclusive-use requirement is seriously taken by the IRS. For instance, you have a room in your house that you set aside for a full-time business and you work in it every day for 10 ten hours, and seven days in a week. You will only violate the exclusive-use requirement and forfeit the chance for home-office deductions if you let your children use the office to do their homework.

The exclusive-use rule doesn’t mean:

  •  You’re not allowed to make a personal phone from the office.
  • You have to rush outside whenever you need to give a moment of your time to a family member. 

Regular Use

Regular use doesn’t constitute any specific definition. Obviously, you’d fail this test if occasionally you use an otherwise empty room and its use is incidental to your business. You’d more likely pass if you work in the home office a few hours or so each day. In each case the IRS challenges, this test is applied to the facts and circumstances.

Principal Place of Business

You are not just required to pass the exclusive and regular-use test for your home office, it must also be either:

  • That business’ principal location, or
  • A place where you meet with customers or clients regularly

If for instance, your home office is in a separate, unattached structure such as a loft over a detached garage, meeting the principal-place-of-business or the deal-with-customers-test is no longer necessary. You can qualify for home business write-offs provided that you pass the exclusive and regular use tests.

Now, what if you only have one office for your business in your home but most of your work is done elsewhere?

You first need to keep in mind that it is required for your office to be the principal place and not your principal office. 

You must at least use the home office to conduct administrative or management chores and you don’t make any significant use of any other fixed location to perform those tasks. 

You can pass the test if you are an employee of another company but also have your own part-time business based in your home even if you spend much more time at the office doing your work as the company’s employee.

For individuals who conduct most of their income-earning activities somewhere else, this rule makes it much easier to claim home office deductions.

What qualifies as a business?

The question here is, what does a business constitute? In terms of the regular-use test, whether your operations qualify as a business depends on the situation, the more that the activities are substantial with regards to time and effort invested and income earned, the higher the chance that you will pass the test.

It’s a prerequisite that you make money from your efforts but for this tax break’s purposes, it’s not necessarily enough to only make a profit.

You can’t claim home office deductions if you use your den solely to take care of your personal investment portfolio because your activities as an investor don’t qualify as a business.

If you’re using a home office solely to actively manage several rental properties they own, you may qualify for home office tax status but as a property manager instead of an investor.

The TaxAdvocate Group, LLC
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