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Don't flush that home office deduction

20110901iabiz With the rise of the Internet and the wonderful business computer tools now available, more entrepreneurs make do without fancy rental office than ever before. But not everyone who works at home qualifies for a home office deduction. A Florida accountant learned that the hard way in Tax Court recently.

The accountant worked out of a home office. When you take a home office deduction, you get to deduct some otherwise non-deductible home expenses attributable to your business space.  The catch: the space has to be used "exclusively" for your business. And they mean it.  From the Tax Court:

Petitioner argued that he also used the hallway and the bathroom adjacent to this bedroom exclusively for his accounting business. Petitioner testified, however, that his children and other personal guests occasionally used the bathroom. Accordingly, the hallway and the bathroom were not used exclusively for business purposes.

Jean Murray explains what you need to know about your home office deduction:

  • The space you deduct must be used (1) regularly AND (2) exclusively for business. A bedroom or part of bedroom that you don't use for anything else might be deductible, but not a bathroom that's also used for personal reasons. (I'm still trying to figure out how a home bathroom could have a business purpose.)
  • You can deduct the percentage of the space compared to your home's total living space.
  • You can deduct direct expenses related to the home office, like a separate phone line.
  • You can also deduct indirect expenses, like roof repairs, using the percentage.

If you are a Schedule C entrepreneur, you compute the deduction on Form 8829.  If you are an employee, it gets more complicated, so check with your tax advisor or IRS Publication 587.

- Joe Kristan

Flickr image by dfwcre8tive2009 under Creative Commons license.

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