Can I Take a Home-Office Deduction? (And Other Tax Tips)

Tax accountants are most often asked to provide common tax information and advice. Below are three tax subjects I’ve researched just recently as a tax accountant and CPA. They may also help you as you are completing your personal and business returns.

Tax Tip #1: Can I take a home-office deduction?

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction. The home office deduction is available for homeowners and renters alike. Many people are afraid to take this deduction because they’ve been told that it can trigger an automatic audit by the IRS. But if you qualify for it, you should definitely take it. The following is a list of six things the IRS wants you to know about the home office deduction:

1. In order to claim a business deduction for your home, you must use part of your home exclusively and regularly: a) as your principal place of business, or b) as a place to meet or deal with patients, clients or customers in the normal course of your business, or c) in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

Note: A home office will usually be in a separate room. However, it can be a section of a room if the division is clear and you can show that personal activities are excluded from the business section.

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

Note: Examples of home office deductions include:

a) Direct expenses (money spent to repair or maintain the business space)

b) Indirect expenses (a portion of the utilities, homeowners insurance, homeowners association fees, security and general repairs and maintenance for the home as a whole)

c) Interest and property taxes (A home office converts part of those expenses from personal itemized deductions to business write-offs. This is beneficial if you are self-employed since it will reduce what you owe in Social Security taxes.)

d) Deducting rent, or depreciating (if you own your home).

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction.

Note: If you are an employee, then your business use must be for the convenience of your employer, and you must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer. If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home. You will report the allowable deductions on Form 1040 Schedule A.

Tax Tip #2: Do I need to report foreign bank accounts?

The government has taken steps to crack down on U.S. taxpayers attempting to hide money abroad. According to IRS publication 4261, any U.S. person (this includes individuals and business entities) who has a financial interest in or signature authority, or other authority over any financial account(s) in a foreign country is required to file a “Report of Foreign Bank and Financial Accounts” (the “FBAR” for short) if the aggregate maximum value of these accounts exceeds $10,000 at any time during the calendar year.

To report the account(s) you will need to complete Form TD F 90-22.1 and mail it in to the IRS on or before June 30 of each calendar year for accounts maintained during the previous calendar year. So for tax year 2010 the form is due June 30, 2011.

A person who is required to file an FBAR and fails to properly file in error may be subject to a civil penalty not to exceed $10,000. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Willful violations may also be subject to criminal penalties.

Tax Tip #3: Are my Social Security benefits taxable?

Social Security benefits received might need to be included in your taxable income amount. Taxpayers are classified into five categories depending on their level of “Modified Adjusted Gross Income” (MAGI). MAGI is defined as:

Adjusted Gross Income (AGI) + tax-exempt interest and other exclusions from income* + 50% of Social Security benefits

Taxpayers must include in income the lesser of 50% (or 85%, depending on income) of social security received or 50% (or 85%, depending on income) of the excess MAGI over the threshold (which is the base amount of your filing status). Per the official IRS website, the 2010 base amounts are $32,000 for married couples filing jointly; $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year; and $0 for married persons filing separately who lived together during the year. A quick way to see if you social security income is taxable is provided on page 3 of IRS publication 915.

*Note: The other exclusions from income that must be added back as referred to above are:

a)
Any income you excluded because of the foreign earned income exclusion

b) Any exclusion or deduction you claimed for foreign housing

c) Any interest income from series EE bonds that you were able to exclude because you paid qualified higher education expenses

d) Any deduction you claim for student loan interest or qualified tuition and related expenses

e) Any employer-paid adoption expense you excluded

f) Any deduction you claimed for annual (non-rollover) contribution to a regular IRA

Jan Fleming is a tax accountant and CPA.

More from this contributor:

Do I Need to File a Tax Return and When is My Tax Return Due?

What Exemptions Can You Take on a Tax Return?

Ten Questions to Ask Before Renting a Property