Guest Blogger, Sal Curcuru, CPA and Partner in Cucuru & Associates, shares his expertise in this 3 part Tax Law Update. In Part 1 below, he explains the do’s and don't's of home office deductions. Stay tuned in the following weeks for Part 2: Allowable Immediate Deductions for Equipment, Furniture, and Machinery; and Part 3: Allowable Deductions for personal property under Section 179.
The Tao of Home Office Deductions
By: Sal Curcuru, CPA, JD, MBA
When you qualify to take a home office deduction, the business portion of the following expenses (which are usually not deductible) become deductible:
- utility costs
- home insurance premiums
- the lower of the cost of your home or its fair market value (this is done through depreciation deductions)
A few caveats:
- the home office deduction is limited to the income from the business (or job) for which you are using the home office
- home office deductions for employees are only allowed if the employee’s home office is used for the convenience of the employer
- If your employer provides you with an office at work, but you choose to work at home, you can’t take a home office deduction because you are working at home for your own convenience.
- If your employer does not provide you with an office at work (or the availability of the employer’s office is too restrictive), your home office is more likely to be for the convenience of your employer and be deductible.
Requirements of the Home Office Deduction:
A home office must be used REGULARLY and ***EXCLUSIVELY***as:
- your principal place of business
- a place where you meet with customers or clients
- connected with your business if your home office is in a separate structure
If there is any personal use of your home office, it is not being used exclusively for business and the home office deduction is not allowed. There are only two exceptions to the exclusivity rule:
- you are running a daycare out of your home
- the home office is being used to store inventory
If you are running a daycare or using your home office to store inventory, you can take a home office deduction even if the home office is not being used exclusively for business (but the home office deduction is reduced by the percentage that it is being used for personal reasons).
Principal Place of Business Requirement
There are two ways to meet the principal place of business requirement:
- You meet the facts and circumstances test (ie. the nature of the work performed at each location and the amount of time you spend at each location is considered).
- You perform managerial or administrative work out of your home office, and you do not perform substantial administrative or managerial work at another fixed location.
Example: Doc is a cardiologist who has a home office where he:
- does billing work
- reads medical journals
- schedules appointments
- does some bookkeeping work for his business
Under the facts and circumstances test, the IRS looks to Doc’s business and the nature of the work he performs at each location. Doc is a cardiologist and performs surgery and consults at hospitals. Since the work of a cardiologist is primarily surgical and consultative, Doc cannot take a home office deduction because his primary work is done at hospitals.
However, Doc can take a home office deduction because he performs managerial and administrative work out of his home office (and doesn’t do such work at other locations).
This fact scenario is based on the Soliman v. Commissioner case. In this case, the Supreme Court agreed with the IRS and disallowed a home office deduction under the facts and circumstances test. Congress responded by changing the law to allow home office deductions for administrative and managerial work done in a home office.
A very important advantage of having your home as your principal place of business is that commuting expenses become deductible. Normally, your commute to your first business stop (and from your last business stop to your home) are nondeductible. When your home is your principal place of business, commuting expenses from your home office to your first business stop (and from your last business stop to your home office) become deductible.
A Place where You Meet with Customers/Clients
You must actually meet with customers/clients at your home (i.e., teleconferencing or videoconferencing does not count).
Connected with Your Business if the Home Office is in a Separate Structure
The “connected with” requirement is a much less stringent requirement to meet than the principal place of business requirement. A separate structure can include a detached garage or barn. The reasoning for the less stringent standard is because a separate structure is less likely to be used for personal reasons (e.g., you are more likely to watch TV or have company in your den than you are to watch TV or invite company to your detached garage).
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.
For more information, visit the Curcuru & Associates, CPA, PLC website.