Your Home Office: Tax Matters

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Article By Betsy Dee, small business owner in San Francisco

The Home Office Deduction: It’s Okay to Take It. Really.

In 1999, Congress clarified the rules on this once controversial deduction and now allows more taxpayers to take it. But if you’re going to do business out of your home, get to know the rules with our Official Do’s and Don’ts List for Your Home Office.

Setting up shop at home? Know the tax implications

Your home office deduction is allowed if the space you’re claiming is used exclusively for an office or to store inventory.

DO make it strictly business

Be sure you’re using the space as the principal place of business for meeting clients or customers and/or business administration.

DON’T use it for leisure

Your home office cannot be used for anything other than business purposes (this includes watching television, sleeping, helping your kids with homework on the computer—even paying personal bills online, if you can believe it).

DO take the related deductions you’re entitled to

Take a portion of your rent or mortgage interest, property taxes, utilities and repairs as part of your home office deduction. The deductible portion is based on the square footage of the area used for business as a percentage of the total square footage of the home. Use the Deduction Calculator

DO claim your eligible deductions in more than one schedule

Take the part of the mortgage interest and property taxes that aren’t deducted as home office expenses as part of your itemized deductions on your Schedule A.

DON’T take the deduction if you pay the ATM

If you generally have to pay the Alternative Minimum Tax (ATM) when you itemize deductions, look carefully at how a home office deduction could alter your AMT status. (You may want to forego the home office deduction.)

DO your homework on capital gains tax

If you include home depreciation as part of the home office deduction, if you sell your home at a profit, you’ll have to pay a capital gains tax on the total amount of depreciation deductions you took while you were living there. (The good news: This tax does NOT apply to any other deductions you took.)

Corporations, Partnerships and multi-member LLCs

Individual owners of S corporations, partnerships and multi-member LLCs can take a deduction for home office expenses if they qualify.

DO know what you’re entitled to claim—and where

Claim the deductions for your home office on your personal return if you’re a shareholder and your home office is your only business office. Form 8829 is used to calculate the deductible amount. List it as a “Miscellaneous Itemized Deduction” on your Schedule A.

DO know the law

By definition, real estate earnings and losses are considered "passive" investments unless you are "actively" and materially involved in the investment.

So if you’re an S corporation, you may be able pay rent to a shareholder for use of a home office. The income and expense would then be treated as rental activity and entered on Schedule E of Form 1040. If the shareholder is active in the S corporation, the activity is considered non-passive and is not subject to passive loss limitations.

DON’T worry. Help is out there

For more information about Passive Activities, visit the TurboTax Support Web Site. And be sure to visit IRS Publication 925: Passive Activity and At-Risk Rules.

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