Home Office Deductions
by: Dan Walker

Home office expenses are either direct or indirect expenses. Direct home office expenses are expenses that apply 100% to your business. Indirect home office expenses are expenses that must be allocated between personal and business.

Direct Home Office Expenses
Examples of direct home office expenses:

• Business telephone equipment and monthly costs (if telephone is used 100% for business.)
• Business expenses in the home such as supplies, pens, pencils, calendars, copy paper, etc.
• Business equipment such as computer, copier, fax machine, printer, etc. (be sure to capitalize and depreciate major purchases of equipment - see API's article on depreciation.)
• Business furniture used in the home office.
• Business fixtures such as artwork on the wall of your home office.

Indirect Home Office Expenses
Examples of indirect home office expenses:

• Mortgage Interest
• Real Estate Taxes
• Utilities - gas and electric bills can be allocated between business and personal
• Insurance
• Repairs and Maintenance
• Casualty Losses
• Depreciation

1. Take the square footage of your office in home.
2. Divide that by the total square footage of the home.
3. Multiply / times the total bill (both personal and business).
4. Equals your deductible business portion of office in home expenses.

QUALIFYING FOR HOME OFFICE EXPENSES

Home office deductions are not easy to qualify for. Home office deductions are allowed for the portion of a residence used exclusively as the taxpayer's principal place of business.

Principal Place of Business
Taxpayers need to satisfy the principal place of business requirement in one of two ways:

1. Taxpayer can satisfy the Statutory Administrative/Management Activities Test or
2. Taxpayer can satisfy the Supreme Court's Comparative Analysis Test

Under the Statutory Administrative/Management Activities Test, the principal place of business test is met if a portion of the home is used for the administrative or management activities of the taxpayer's business, but only if there is no other fixed location where the taxpayer conducts substantial administrative or management activities for his/her business. Examples could include paying bills, billing clients, writing reports, setting up appointments, maintaining the books, etc. If you are performing these same functions at another business location, you will still meet this test but only if you are not performing a "substantial" portion of these same functions at that other location.

Let's look at an example: A building contractor builds houses during the day in a subdivision. At times, he needs to be at home to pay bills, order supplies, perform billings in progress, phone subcontractors, etc. The contractor meets the home office test for "principal place of business."

Under the Supreme Court's Comparative Analysis Test, the qualification is more difficult. The taxpayer must look at the relative importance of the activities performed at each business location and the amount of time spent at each location where business activities occur. A famous tax court case involving Dr. Soliman, an anesthesiologist, proved this is a more difficult test to meet. Dr. Soliman was denied the home office deduction because comparatively, the functions he performed at the hospital involved his principal business while home office duties paled in comparison. The Statutory Administrative/Management Activities Test is a far easier test to meet for most taxpayers.

Exclusivity
The other test that a taxpayer must satisfy for the home office deduction is that a portion of the home must be used exclusively and on a regular basis for business. For example, if the taxpayer uses part of his kitchen for business, the deduction will be denied because the room is not exclusively used for business. However, rooms do not always have to be divided by a wall to allow for exclusivity, but the room must be distinctly separated in other ways.

TAKE THE DEDUCTION IF YOU QUALIFY!

What is surprising is that many taxpayers that do qualify for home office deductions are afraid to take them. Many taxpayers are afraid that the home office deduction on their tax return is going to be a red flag and create an audit. You should never be afraid to take a legitimate deduction on your tax return. Being afraid to take a legitimate deduction on your tax return is like being afraid to drive your car during commute hours because of the increased likelihood of an auto accident. Don't overpay your taxes, take every legitimate deduction that you're entitled to.

And if you want to feel really comfortable with your tax return, check out TaxInsurance.com, by the Audit Protection Institute, or call (888) 999-4274. The company offers the first tax insurance plans available that cover the cost of your tax professional if they have to represent you in an audit, plus the additional tax and other charges the IRS assesses.

In addition, you might want to try TaxInsurance.com's IRS Risk Evaluator, to find out your own risk of an IRS audit and your potential for additional penalties and taxes.

Daniel V. Walker

BIO

Mr. Walker co-founded Audit Protection Insurance Services, Inc. and has been the driving force behind the creation of the tax insurance policy, an innovative and first of its kind product. As Chief Executive Officer of Audit Protection insurance Services, Inc., Mr. Walker has positioned the company for an aggressive nation-wide expansion to capture this emerging market. Prior to co-founding Audit Protection insurance Services, Inc., Mr. Walker’s background is as a tax audit specialist. He is a Certified Public Accountant and a former tax auditor. He owned and operated his own CPA firm for 13 years. For many years, Mr. Walker has been researching IRS audit statistics. He is known as an expert in the industry and conducts numerous seminars for tax professionals. He has represented many clients before IRS Tax Auditors and IRS revenue agents. His percentage of successful defenses has been extraordinary. He has an MBA degree from Golden Gate University and BS in Business Administration.