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Enter the home office deduction through the back door

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in Leaders & Managers,Management Training,Small Business Tax,Small Business Tax Deduction Strategies

Typically, if you have a downtown office and take work home on nights and weekends, you won’t qualify for a home office deduction. Reason: The home office isn’t your principal place of business.

But don’t give up! You still might be able to deduct certain expenses connected with that home office.

Strategy: Write off furniture or business equipment used in the home office. The tax law permits you to deduct those costs, even if you don’t otherwise qualify for home office deductions. In fact, the entire cost may be deductible this year under Sec. 179.

Similarly, you may qualify for deductions by using part of the home to store products or samples. It isn’t necessary to actually set up an “office” in the home.

Background: Home office expenses are deductible only if you use part of the home regularly and exclusively as either your principal place of business or a place where you meet or deal with customers, clients or patients in the normal course of business. For employees, the home office must also be used for the convenience of the employer.

The tax rules were liberalized a few years ago to enable taxpayers to deduct home office expenses when they use the office for administrative or management activities and have no other fixed place where they conduct such activities.

For instance, a sales rep who usually travels to various business locations may qualify by establishing a portion of the home as a place to perform administrative duties. By and large, however, deductions aren’t available if the employer has a regular business location.

The twist: Even if you don’t qualify for regular home office deductions, you can still deduct the cost of supplies, equipment, furniture, etc. purchased as a company employee. Furthermore, you may elect the enhanced Sec. 179 expensing allowance for purchases that normally must be depreciated over a period of years.

Generally, you can write off the entire cost of the purchases (up to $250,000 for 2009), subject to the 2%-of-AGI limit for unreimbursed employee business expenses.

And that’s not all. Suppose you use part of the home to store products you sell at work. The tax law permits deductions attributable to the storage unit if the home is the sole fixed location of the business. This tax break was recently expanded to include the storage of samples held by a taxpayer for business use.

Tip: If a separate structure is used for business-related activities, you can write off home office expenses attributable to its business use. For example, goods may be stored in a backyard shed. This structure doesn’t have to be the principal place of business or the sole fixed location of the business.

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