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Small Business Home
Office Deductions
Many parents dream of working at home in from a small home
office. A small business operated from a home office can
provide a lot of advantages. Not only can parents can be home
when their children arrive home from school, they also can
save on the expenses of commuting. Other savings and benefits
include saving money on wardrobe expenses not to mention the
cost of lunches, coffee and other purchases which can be
avoided from working from a home based office. However, you
may not be aware that if you run a small business out of your
home, you may be eligible for a small business home office
deduction. With that said, it’s important to note that your
small business home office deduction does have strings
attached.
It's important to keep in mind that, the IRS is charged with
keeping a steady flow of cash coming in to the US government.
When the IRS perceived that the whole “small business home
office deduction” was having a negative effect on cash flow,
they decided to make an example of someone.. That someone was
Nader E. Soliman, an anesthesiology who practiced in Maryland
and Virginia during1983, the year in question.
Dr. Soliman practiced at three different hospitals and none
of them offered him an office. In a nutshell, Soliman tried to
deduct his home office which he had established in a spare
bedroom which he used exclusively as an office. While Dr.
Soliman didn’t meet his patients in his home office, he did
spend 2-3 hours a day working. The IRS flatly refused to honor
his small business home office deduction. Dr. Soliman and his
tax advisors took the issue to the Supreme Court and the
result was Commissioner v. Soliman (91-998), 506 U.S. 168
(1993).
The standard adopted from this decision is as follows:
"[The] test . . . provides that where management or
administrative activities are essential to the taxpayer's
trade or business and the only available office space is in
the taxpayer's home, the `home office' can be his `principal
place of business,' with the existence of the following
factors weighing heavily in favor of a finding that the
taxpayer's `home office' is his `principal place of business:'
(1) the office in the home is essential to the taxpayer's
business; (2) he spends a substantial amount of time there;
and (3) there is no other location available for performance
of the office functions of the business."
Cornell Law School
You may, at this point, be wondering WHY all the fuss about
the small business home office deductions. Upon closer
inspection, you can see that the small business home office
deductions can amount to a significant tax savings.
If your small business home office qualifies, the small
business home office deduction will allow you to write off
100% of expenses that are directly related to the home-office
space. This includes:
- painting
- cleaning
- the premium for a home-office rider on your homeowner's
insurance policy
- your office telephone line and utilities, if you have
separate hookups.
You are also allowed to deduct a percentage of indirect
expenses that relate to your entire residence. These include:
- mortgage interest,
- property taxes,
- association fees,
- rent if you don't own your home,
- depreciation if you do (over 39 years),
- utilities,
- security monitoring,
- garbage pickup,
- general maintenance and repairs,
- insurance
The one caveat to the small business home office deduction
is it can't put your business in the red. But even if the
deductions do exceed your income, they are far from wasted.
According to Smart Money, any amount that puts you below the
break-even point can be carried over to the following year.
If you plan on taking the small business home office deduction
make sure you qualify. Use the following tests to determine if
you can use the small business home office deductions
- You must use the area exclusively and regularly as your
"principal place of business".
When the IRS says “principal place of business” they mean
BUSINESS. Your venture must be profitable (you can’t use the
small business home office deduction to cause a loss, and
you can’t use the deduction for your hobby.) You should know
that the IRS has already determined that the following do
NOT qualify as business activities eligible for the small
business home office deduction: Investment activities. a
hobby or not-for-profit activity and managing rental
properties are not considered by the IRAS as a trade or
business activity
- Use the space as a place of business which is used by
patients, clients, or customers in meeting or dealing with
the business owner in the normal course of his trade or
business.
- The area used for business must be used exclusively for
business. An area which has a couch, TV, bed, or other
personal furnishings is an area may fail to meet the
exclusive use test. Some IRS publications go so far as to
say that if a personal telephone call is made from the
business phone or if the personal check book is balanced
while sitting at a desk in the office, then the office is
not being used exclusively
If you’re thinking you can take the small business home
office deduction because you were able to successfully sell
your boss on the idea of you working from home, you’d better
not plan on taking the deduction. The Soliman case makes it
EXTREMELY difficult for an employee to claim the small
business home office deduction. As long as you have an office
at work to call “your principle place of business” then you
can forget about taking the deduction.
A final note to consider if you plan on taking the small
business home-office deductions: to defend yourself in case of
an audit, take pictures of your office (with the TV or bed
safely out of the frame) to back up your claim that the space
is used only for business. Stash the photos in your permanent
tax file in case you’re ever questioned.
Of course, this article has been written to give you a “bird’s
eye view” of the small business home office deduction. Before
taking the deduction, you should consult a tax professional
with ANY questions you may have. After all, you don’t want
your claim to fame being similar to that of Dr. Nader E.
Soliman.
About The Author
 Kathy Hendershot-Hurd is a Small Business Internet and Blog Consultant. She is the founder of
Virtual Impax and she is the author of the book:
Beyond the Niche: Essential Tools You Need to Create Marketing Messages that Deliver Results
Visit the book's blog at
Beyond Niche Marketing.
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