Business & Tax Insights
By Mark Buescher, C.P.A.
Throughout Madison County and North Florida, there are many individuals that are self-employed. If you look around, there are florists, farmers, insurance salesmen, plumbers, small contractors, consultants, and even health care providers, to name a few. Our area is loaded with self-employed individuals and small businesses. These individuals represent the backbone of our local economy, employ hundreds of people, and pay a large portion of our overall taxes.
However, like all segments of our economy, the self-employed have been hit hard during the economic downturn. Sales have been squeezed, government and banking regulations have increased, and taxes are on the rise. The self-employed need every break they can get.
One of these breaks is the home-office expense deduction. If you’re self-employed (or in some cases even an employee of someone else) and work out of an office in your home, you may be entitled to favorable “home office” deductions. However, the rules can be quite tricky and there are strict requirements that must be met.
The first requirement is that you have part of your home that you use regularly and exclusively for business purposes. It doesn’t have to be a separate room, but it must be a clearly defined area. The exclusive use requirement is very important. The area must be reserved only for business use, which means if you also use it for personal activities, it will not qualify. The only exceptions, to the exclusive use test are if you store business samples or inventory at home, or if you run a home daycare business.
The other requirement is that your home office be any one of the following: your principal place of business; a place where you regularly meet customers, clients or patients; or a separate building, not connected to your home. Keep in mind, your office must meet only one of these tests to qualify.
Your principal place of business. To meet this test, your office must be where you conduct most of the management and administrative activities of running your office. You may travel to meet customers at their business or confer with patients in the hospital, for instance, but your principal place of business is where you do most of the work actually managing your business.
A place where you regularly meet customers, clients, or patients. Even if you run the business from elsewhere, a home office can qualify if you regularly use it for meeting with customers, clients, or patients.
A separate building, not connected to your home. A freestanding garage or workshop will qualify for this test if it is used exclusively and on a regular basis for business.
If you have an area of your home that qualifies, you can generally deduct a percentage of your total costs, including mortgage interest, insurance, taxes, utilities, and possibly some depreciation. The percentage is calculated as the area used for business divided by your home’s total area. For the self-employed, however, home office deductions are limited to the net income of the business.
What if you are not self-employed and you are an employee of someone else? Are the rules the same? Yes, but with an added requirement. An employee’s home office must be for the convenience of the employer, which should be documented in writing. Furthermore, deductions for employees, other than mortgage interest and taxes, are available only to the extent they exceed two percent of adjusted gross income.
As with most tax laws, these rules can be a bit complicated. However, proper planning can be the key to nailing down the optimum tax treatment for your home office expenses.
Mark Buescher, CPA is owner and principal of Buescher and Ruff, LLC, a local full service accounting firm in Madison, specializing in tax preparation, business consulting and tax planning. Tax laws contain varying effective dates and numerous limitations and exemptions that cannot be summarized easily. For details and guidance for your specific situation, contact your tax advisor.