Jul 21, 2017
Here's what to know about your taxes If you are planning on using your home office or any part of your home for business purposes or if you already do, it is time to address the tax issue. You have probably heard all sorts of different things about claiming a home office deduction and other deductions. As understanding of tax laws varies from person to person, some inaccuracies can occur. Let's take a look at the truth about the tax issues involved with running a business from your home.
The Taxpayer Relief Act of 1997
softened the requirements to determine if the costs tied to a home
office can be deducted. However, you can't deduct every single item
used in your home office. The costs required to maintain your home
office can only be deducted if nuanced IRS guidelines are adhered
The home office must be exclusively used for running your business. Many homeowners are aware of primary residence rules as they relate to capital gains taxes, but exclusive use is something a little more complex. This means if you use the office for personal activities, family activities or anything else unrelated to your business, you can't use it to reduce your taxes.
The bottom line is that the home office will only qualify as a “principal place of business” if the following is true:
If the above statements are not applicable to your business, home office deductions will not apply.
If your home office is in a distinct room, a group of rooms or a
portion of a room in which division is clear due to the
presence of a partition, it is possible to show that your personal activities do not
occur in this space. This is often the most challenging portion
of qualifying for home office tax deductions. Aside from meeting
the definition of “exclusive,” the space must be regularly used for
As an example, if your home office is sometimes used by your kids to do their homework, you will have violated the strict exclusive-use requirement, and the space won't qualify for home office tax deductions. However, if you make the occasional phone call from your home office, you will still qualify, as your space meets the spirit of the exclusive-use test.
The bottom line is that if personal activities breach the home office space more than they would at the typical office building, the exclusive-use test will not be passed.
Though there is no exact definition as to what qualifies as “regular use,” simply using an otherwise empty room of your home on occasion for business purposes does not meet the regular use test requirements. Yet using the home office for at least a few hours per day will likely suffice to meet the regular use requirements.
Aside from passing the regular-use test and exclusive-use test,
the home office must serve as the principal location of the
business or a place where one regularly meets with clients. This
means even an employee that has a part-time business based in his
home can pass this test although he spends the majority of his time
at his employer's office.
The key question is what constitutes a business. One's efforts must generate money, yet the specific circumstances of how money is made are of the utmost importance. If these money-making activities are substantial in regards to time and effort, there is a greater chance the principal place of the business requirement will be met.
A great deal of nuance goes into the tax laws that apply to at-home businesses, and it's best to speak with a tax professional to understand what laws apply to your own space.
About The Author:
Ryan Tollefsen is the founder and team leader of Unity Home Group. Ryan specializes in negotiating offers, marketing, managing the team, setting goals and achieving them.
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