WORK FROM HOME : Home Business Tax Help

As would be expected in a struggling economy, more Americans are looking to work from home to supplement family income part-time or, in some cases, on a full-time basis.

As a result, questions are being raised about the true tax-saving benefits that might accompany the home office deduction. Although this special tax write-off is a distinct advantage for many, others will find that the actual tax dollars saved will not justify the effort to make the claim.

Home office tax help - #1. Following are the basic rules:
To qualify: Regardless of the size of your business, you must first be prepared to demonstrate that an area has been set aside in your home exclusively for your business operation. A desk and file cabinet in the sewing room won't make it.

And, you must be prepared to show that the area is used on a "regular basis" either as: A) your principal place of your business, or B) a place to meet or consult with clients, customers or patients etc. A regular basis doesn't mean conducting business three or four times a year.

Liberal trends in qualifying for the home office deduction: In recent years, many have found the qualifying rules to be a bit more relaxed, especially for those who use their home office regularly and exclusively for handling the important administrative and management activities of their business.

In the past, you could only qualify for the special deduction when your home office was used to carry on regular day-to-day business operations - the so-called "focal point" test. With the newer guidelines, you can qualify if the home office is used regularly to handle the important paperwork of your business as long as there is no other fixed location available to do so.

This liberal provision could even work for employees who do administrative work at home - if it is "for the convenience of the employer." This, of course, could be difficult for most employees who generally have other office or work space available to carry on such administrative duties.

Other bonus benefits for those who qualify: If you qualify for the home office deduction, you will be eligible to write off auto and transportation costs for travel between your residence and other work locations. In addition, computers and certain equipment that you use will be allowed greater flexibility for depreciation options, like "first-year expensing."

Home office tax help - #2. Crunch the numbers first:
Before you decide to take the deduction, run a calculation to determine the amount of the write-off available and see if it is worth going through the exercise.

For example, let's say that you plan to set aside for home office use 180 square feet of room space, which accounts for about 6 percent of the square footage of the entire home. In very general terms, this means that your yearly tax write-off will be 6 percent of the amount that you pay for: utilities, insurance, repairs and depreciation on your home.

If this total isn't enough to generate a reasonably attractive tax deduction, why waste your time? (NOTE: Depreciation is calculated by applying a 39-year life against the cost basis in your home after removing the cost of the land. That is, 1/39th of the adjusted building cost each year.)

Finally, evaluate the tax consequences if you decide to sell your home: For years, many entrepreneurs have been leery about claiming the valued home office deduction out of fear that it might adversely compromise the "home-sale" exclusion when the home is eventually sold.

Remember, the $250,000 exclusion - $500,000 if you're married - is only available when you sell a home that has been used as your "principal residence" for two out of the last five years prior to the sale.

Good news on the definition of principal residence: Recent interpretations by the IRS have made it clear that, at the time of sale, the area that you designate as home office space does not have to be set apart from the personal residence by definition, as long as the office space and the residence are within the same dwelling unit.

Hence, at the time of sale, many will be pleased to observe that most of the gain will be excludable, including the gain attributable to the area used in the business. The only thing that will have to be accounted for will be the depreciation that is allowed with the home office; and some would argue that this "recaptured depreciation" is a small cost to pay especially with tax dollars being paid at a later date.

By TOM STEMMY, For The Capital

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