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Your Home is Your Business

Article by Sondra P. Gaylord, Enrolled Agent

Myth: Taking an office-in-home on your tax return will "raise a red flag". Reality: Take what is real.

Do you actually have an office in your home?
If you can answer yes to all these questions, you have an office in your home:

  • You are self-employed.
  • You have no other office for the business you are considering using as your deduction. To clarify, you can  have multiple offices but the MAIN and CENTRAL (sorry to shout) office must be in the home for your office in home to apply.

    Case in point for clarification:

    Mary C. might practice taxes from her home...see clients, hold her client base in that computer, get her mail there, have her business bank account there...but additionally, she might go to her significant other's frequently. While there, she sees clients, keeps a second computer and stores files. Since her MAIN office is in her home, this bullet applies and if all the other bullets apply, she has an office in her home and she is eligible.

  • The office in home must not be a separate structure. It must be under the same roof as the residence.
  • You spend a lot of time there setting up appointments, doing the bookwork and actually conducting your business.
  • You keep inventory in this office space.
  • You earn money from that office (the cash register rings in that office).
  • You see clients, customers or patients regularly in that office.
  • You keep that area of your home separated and exclusively for that business, even if it is a part of a room in a rented apartment.
  • Your main motive is to make a profit.

Why you might want a home office

  • The deductions against your profit can lower your taxes
  • Home mortgage interest and property taxes are deductible
  • Utilities are deductible
  • Fix-up and maintenance, including cleaning are deductible
  • Rent, and if you own your home; depreciation
  • Business mileage from your home office is deductible

Questions and Answers

Q. Is it all 100% deductible?
A. No. It goes by a percentage based on the square footage.
Q. It doesn't sound like a lot of money. Is it?
A. It can be. For many businesses like contractors, sales people and anesthesiologists it is worthwhile because of the mileage. At $.36 per mile from home (in 2003 and 37.5 in 2004) to the site you provide your service can be worth thousands of dollars in deductions.
Q. I've heard that when I sell my house I have to pay tax on the depreciation. Is that true?
A. Yes but only after 5/7/1997 and it is usually no big deal.
Q. I converted my stand-alone garage to an office. It is still on my property so it qualifies right?
A. Unfortunately no. To be perfectly clear, your office must be under the same roof as your home.
Q. How can I tell if my hobby is a real business?
A. Generally (and entire books are written on this distinction), with a business, profit is the first motive and pleasure is secondary.
Q. What is the Federal Tax Code Section that governs these rules?
A. The Federal Tax Code Section is 280A.
Q. I work for a big company that encourages telecommuting from home. Do I qualify for a home office?
A. I have only discussed the self-employed on this page. An employee on payroll has a much more difficult set of rules, hoops and hurdles to justify a home office.

About the EA

Sondra Gaylord (my Mom) is an Enrolled Agent in Youngstown Ohio who often uses dog illustrations to explain complex taxation concepts. To learn more about her practice see: http://www.planningforlife.info/sondra.htm

To see more of her illustrations:

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