Sunday, April 15, 2007

Office in the Home Deduction..Not a Red Flag if You Qualify.

This article was written by Dick Ginnaty, CPA

For years the office in the home deduction has been identified as a red flag for drawing the attention of the IRS in the audit selection process. In my experience that has not been true. The deduction should be taken if you qualify.

To qualify, the home office (it can be a part of a room) has to be the principal place of business for the particular activity (full or part time). It also, and this is critical, has to be regularly and exclusively used for the business. Occasional or most of the time, or usually doesn’t qualify.

If you qualify than you can deduct a percentage of the following expenses against your business income: mortgage interest, property taxes, insurance, utilities, association fees, cleaning fees and regular gardening service, and the cost of the home. The percentage is determined by the ratio of the square footage of the home office over the total square footage of the house. Renters also qualify. They just substitute rent for the mortgage interest, property taxes, and portion of the cost in the above allocation.

In listing the cost of the home above, I don’t want you to become too excited. The original cost of the home and any improvements have to be depreciated over 39.5 years straight line after deducting the cost of the land.

In addition, the home office deduction can only reduce your related taxable business income to zero. Any excess home office deductions are carried over and are usable in future years against future business income.

The home office deduction is a legitimate deduction if you qualify, so don’t hesitate to use it.

Good luck and here’s hoping it “all adds up” for you.

(If there is any area in accounting or tax that you think needs to be addressed in this newsletter please e-mail Dick at and if it is of general interest, he will address it in future articles)