Home Office Benefits
by Sandy Botkin,
CPA,
Tax Reduction Institute
Beginning in 1999,
Congress liberalized the home office rules to such an extent that
many home based businesses and especially network marketing
businesses can legally, morally and ethically claim the benefits of
the deduction. In fact, when I analyzed the numbers, the benefit of
claiming this deduction can result in thousands in your pocket every
year. Thus, if you have an accountant that states that this
deduction isn’t worth it, they don’t understand its immense benefit.
Requirements of a Home
Office: To be eligible for the home office deduction for your
home-based business, you must meet several requirements:
-
Use your home as
your principal office.
-
Use your home
regularly for business.
-
Use an exclusive
portion of your home for business.
Principal Office
requirement: Recently, Congress liberalized this in order to allow
most home based businesses and network marketing businesses this
deduction. To constitute a principal office, you must render
significant management or administration for your business out of
your home AND not have another office where you render significant
services. Significant management or administration means doing the
paperwork for the business in a set spot of your home.
Example: Kara runs a
network marketing business out of her home. She reviews all
applications for her business in her home and inputs all her
business expenses into Quicken in her home. Her home qualifies as
per principal place of business for her networking business.
Caution: If Kara
has another office that is used for her networking business, she may
not be qualified for the home office deduction unless she does NOT
render any significant services from the other office.
What is regular use? You
must also work your business regularly out of your home. Although
there is no hard and fast rule as to what this is, case law
generally requires 45 minutes a day, four to five days a week out of
your home. Thus, if you only work one hour a week, this may not be
enough.
What constitutes
exclusive use? You must use a portion of your home exclusively for
business. This does not mean that a whole room must be used for
business. In fact, you can use part of a room. However, the part
used for business must be used exclusively for business. Thus, if
there are fiction or cookbooks in the home office book shelf, get
them out. If you have a computer in your home office, don’t play
games on the computer, etc.
One big question that I
get at most seminars is, “whether IRS will visit my home and see if
I am playing games on the home office computer or have non-business
books in the home office bookshelf?” The answer is: Yes, they can.
However, if IRS does choose to visit your home, they will generally
give you between four and twelve weeks advance notice!
Having a home office
allows what type of deductions? The home office deduction applies to
the real estate and not the furniture. Thus, if you qualify for the
deduction, you may deduct part of your utilities, depreciate part of
your home, deduct part of any cleaning service, part of any home
owner’s fees, part of any burglar alarm monitoring fees etc. No, you
may not deduct any part of your guard dog!
However, even if you
don’t qualify for the deduction, it does not apply to any furniture
that you use for business. Thus, the desk that you use, the chair,
the bookshelf and file cabinet all can be depreciated to the extent
that you use these items for business. They have nothing to do with
the home office deduction. In fact, you may not be eligible to claim
a home office deduction and still deduct your furniture and
equipment to the extent used for business.
Cautionary Limits:
The home office deduction, unlike any other type of business
deduction, is limited to the net income from your business.
Example: Keith has a net
income from his home based business of $600 per year not including
any deduction attributable to a home office. If the home office
deduction is $5000, he may only deduct $600, which is limited to his
net income from his business.
Tip: Take
the home office deduction anyway even if your net income from your
business doesn’t justify it. You may carryover any excess to future
years forever!
There are more issues
involved in dealing with a home office. I invite all readers to
check out pages 99-110 in my workbook that accompanies my program,
“Wealth Building Tax Strategies For You Home Based Business.”
In short, the home
office deduction can be worth thousands each year in your pocket. It
is one of many reasons why everyone should have a home-based
business. With the right knowledge, you can make tax day- payday!
Sandy Botkin is a CPA,
attorney and former trainer of IRS attorneys nationwide. He lectures
all over the nation on tax planning for self-employed and corporate
taxpayers and can be seen in the big events with Donald Trump,
Anthony Robbins and many others. He has been written up in Newsweek
and in many other magazines. He is also a syndicated writer and
noted author of this famed tape series “Tax Strategies for Business
Professionals” and “Tax and Financial Strategies for Residential
Real Estate.” To find out more about Sandy and his products, check
out his terrific small business web site at:
www.taxreductioninstitute.com. |
