May 072014
 

According to the Tax Foundation,

Americans will pay $3.0 trillion in federal taxes and $1.5 trillion in state taxes, for a total tax bill of $4.5 trillion, or 30.2 percent of income.”

Now that we have made it past Tax Freedom Day 2014 on April 21st, as we can now ‘earn a dollar’, it is also time to plan how we can ‘save a dollar’, perhaps on our taxes. Here is a good question:

Should you declare that den a home office for your small business?

Let’s discuss those 7 tax benefits sitting right now on your home office bookshelf.

[1] “All or nothing” or “Exclusive use” Test

U.S. IRS mandates an “all or nothing” test. “Exclusive use” means only for business, which means absolutely no personal purposes may be conducted in the den. The den or portion of your home must be dedicated for nothing else but business in order to qualify for a home office deduction.

In Anderson, Tax Court Memo 2006-33, the Tax Court held that “taxpayers who lived in a bed and breakfast they owned and operated couldn’t deduct expenses relating to those parts of the Inn used for both business and personal purposes.”

If one uses one’s den as both a business center and for periodic family recreational gatherings, one will fail the “exclusive use” test. To qualify the den for the home office “exclusive use” tax deduction, one should make sure only business purpose items (including furniture and office equipment) are in the den and only business is conducted in the den. Nor can one claim as a deduction, an adjacent room employed as ancillary business use in support of the “exclusive business use” den, because of the “mixed use” of personal activity in the adjacent room to the den.

[2] Your Den as Headquarters for Multiple Businesses

If the den is used for more than one business, the IRS does allow a den home office deduction, if each and every business satisfies the den home office “exclusive use” test. Do note, however, the IRS says if any one of the businesses deductions claimed fails the “exclusive use” test in whole or in part, one forgoes the entire den home office deduction, even if one of the businesses actually satisfies the “exclusive use” test for the den home office deduction.

[3] Your Den as a Principal Place of Your Trade or Business

The den home office qualifies as a principal place of business, when it is used exclusively and regularly for administrative or management purposes of one’s trade or business. And, when there is no other fixed location whereby one can conduct their business administration and management other than in the den home office. IRS deems business administration and management purposes as billing customers, clients or patients, keeping books and records, setting up appointments, forwarding orders, writing reports, or managing websites and public and media relations, etc.

tax_benefits_office

[4] When the Bulk of Your Business is Done Away from Your Den

The bottom line here is that one can still qualify for the den home office deduction, even when the bulk of one’s business is performed outside the home den, including substantial non-administrative or non-management business purposes at a fixed location of the business outside the den home office (such as meeting with customers, clients or patients at such fixed location [other than hotels, cars, or temporary project sites] of one’s trade or business conducted outside of the den home office). This is particularly a useful clause of sheltering some of one’s income from tax through the den home office deduction, when one sells or provides goods and services outside the den home office.

[5] Renting or Owning a Home Office Den

If one owns a home in which the den resides, one can deduct a business use portion of real estate taxes and mortgage interest on IRS itemized Schedule C, balanced against non-business use portion of real estate taxes and mortgage interest on IRS itemized Schedule A.

If one rents their home in which the den resides, one can deduct a qualified “exclusive use” business portion of rental expenses, including utilities and lessee repairs made and costs held. Renters can find that an “exclusive use” den home office deduction can generate a substantial tax benefit.

[6] Furnishing and Equipping a Home Office Den

One can elect to recover costs of den home office furniture and equipment in the year of purchase with a deduction under IRS Code Sec. 179, provided the “exclusive use” den home business office is established in service during that tax year. This deduction is an alternative to recovering the cost over time through depreciation deductions.

[7] Carry-Forward Benefits of Your Home Office Den

Finally, a ‘carry-forward tax benefit’ is allowed for an “exclusive use” den home office deduction that is disallowed by the IRS gross income limit. Deductions carried over for up to five tax years continue to be allowed only up to the income from the trade or business from which the expense is recognized. This ‘carry-forward tax benefit’ allowance is whether or not the dwelling unit is used as a residence during the tax year [IRS Code Sec. 280 A(c)(5)].

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