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If you work for yourself at home, you are eligible for a break on your taxes if your house, apartment, or other living quarters is your principal place of business.
You must also use your home office exclusively for business. This means that you cannot work at the kitchen table or in a den that your family uses at night. There are a few exceptions to this rule, including day care centers, which tend to take over the house.
The standard definition of "principal place of business" is where you spend the majority of your time and make most of your money. You have to earn the bulk of your income from your home office to qualify. If you do most of your business, therefore earning most of your money from a client's office, or perform the majority of your tasks outside the office, or don't go into the office for the majority of the week, you will most likely not be eligible.
Under the Taxpayer Relief Act of 1997, the home office deduction will be available for people who use their home office for substantial administrative or management activities. For example, an aircondition repairman, who spends 30 hours a week in his clients homes, and only about 10 hours a week in his home office doing administrative work, would be eligible under these new guidelines.
In order to qualify, you must still meet the principal place of business test, and you can not have another fixed location of business where you conduct substantial administrative or management activities. These changes go into effect in 1999.
If you are eligible for the home office tax break, deductions include, but are not limited to:
Whether or not you qualify for the home office deduction, you can still deduct all business expenses that are not for the use of your home, even if those expenses are for items used in the home or for expenses incurred in the home. They are deductible in full and not subject to the allocation rules for home office expenses. These expenses include, but are not limited to:
It's not always a good financial decision to take the home office deduction. If you are a home owner and plan to sell your house at some point, taking the home office tax deduction over the years may mean that you have some taxes to pay when you sell. When you sell your house, there are usually significant tax advantages because you can defer tax on any gain as long as you roll the proceeds over into a new home of equal or greater value within 2 years. At age 55, you also become eligible for a one-time exclusion of up to $125,000 in gains as long as certain other conditions are met.
If, however, you run a business at home and take the home office deduction, you have turned part of your house into a business property. When you sell, you will have to pay tax on at least some of the depreciation you've taken on the portion of the house the IRS now considers your business. This may be true even if you lose money on the sale of the house, unless the loss exceeds the depreciation.
Because of all this, some tax experts say the home office deduction is not worth it for some people. You'll have to run the numbers for yourself and determine whether the home office deduction is worth your while.
If you rent, taking the home office deduction is probably worth your while.
For more information on the home office deduction:
