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The Home Office Deduction

Updated on December 17, 2011

Is Your Home Working for You?

It seems that many are familiar with the fact that there is a home office deduction available under current IRS tax code, but many don't know how to use it correctly or how beneficial it can be to your overall tax liability.

In 1999, Congress made the home office deduction a lot more friendly so that home based business including network marketing business can take this deductions much more easily.  Any thorough analysis will reveal that this deduction can literally put thousands of dollars in your pocket every year.  If anyone ever tells you that it is not worth the deduction don't listen to them.


The Requirements

There are some requirements to legitimately use the home office deduction.  You want to make sure you understand the rule, because most of them are pretty specific and you either qualify for this deduction or you don't.

1. You use your home as your principle office

To qualify under the principle office use there must be significant administration or management for your business conducted out of your home.  In addition, you must not have another office where significant services are rendered. 

What this means is that you do paperwork for the business in a specified place within your home. 

For example, let's say you have a network marketing distributorship and you review your applications, manage your distributor list, and update Quicken with your business income and expenses.  In this example your home qualifies as a principal place of business.

The danger you can run into is that you may not qualify for the deduction if you have another office that is also used for this business.  The key is that you do not render any significant administration or services from this other office.

2. You Use Your Home Regularly for Business

Let's take a moment and define what "regular" use of this office would entail.  There is no hard and fast definition of regular use, but it is determined that you must work this business regularly out of your home.  The general consensus supported by case law is that you use this office 45 minutes a day and four to five days a week.

3. You use an exclusive portion of your home for business

What does "exclusive" mean?  First off, this term does not mean that a whole room is being used for business.  A portion of a room, a corner in the house, or some other identifiable area is being used exclusively for this business is what is necessary.

When we talk about being used exclusively that means exactly what it says.  Let's say that you have a table and a book shelf that you deem as your home office and your business is health products.  If you have Danielle Steele books in the bookshelf then it is not exclusive!  If you have a computer that you are using then don't play games or watch movies on it.  Exclusive means exclusive.  So now the big question, will the IRS come to your home and check.  The answer to that is "they can" and if it is not exclusive it will be disallowed.

What's Deductible?

The key to understanding what is deductible with the home office deduction is that it applies to the real estate and not the furniture.  Qualifying for this deduction will qualify you to deduct part of your utilities, cleaning services, burglar alarm monitoring fees, home owner's fees, while also allowing you to depreciate part of the value of your home.

I was recently on a site where people ask questions about tax issues and the question was asked if their guard dog was deductible.  The answer to this question is no.

Even though, as mentioned above, that the home office deduction applies to the real estate and not the furniture, furniture that is used for the business may be deductible under another classification.

The Limitations

There is a limitation on this great deduction.  It is limited to the net income of your business.  In other words you cannot create a loss with this deduction.

If for example the net income of your business is $1,500 and your home office deduction is $2,000 then you can only deduct $1,500 bringing your net income to zero.  The good news is that you can carry excess deductions to future years.

Disclaimer

This Hub does not intend to be an all inclusive nor exhaustive writing on this deduction.  It is highly recommended that you educate yourself on this deduction as it can provide a great deduction.

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