|
|
|
|
Home / Services / Calculators / Newsletter / Archives Office at Home The IRS has issued proposed regulations that will eliminate a huge tax that has kept many home-based workers from claiming the office at home deduction. When taxpayers sell their principal home the exclusion from tax did not apply the the office at home area. For example, if a taxpayer had a home that cost $245,000 with $50,000 value of the land, the taxpayer could depreciate the balance of $195,000 over 39 years. If the taxpayer used 10% of his home for business the deduction would be $500 per year. In the third year, the taxpayer sell his home for $350,000. Under the old rules 90% of the sale would be for the sale of the residence and tax-free. The remaining 10% of $35,000 would be for the sale of the office, resulting in a total gain of $11,500 ($35,000 - [$25,000 - $1,500]). This would result in a taxable capital gain of $10,000 and ordinary income of $1,500. For most taxpayers this would result in an additional tax of $2,375. Under the new rules there would be no capital gain and the ordinary income would equal the depreciation after May 6, 1997. These new rules do not apply to a home office that is located in a separate building from the home. In addition, if your are self-employed, the home office deduction reduces your self-employment tax as well as your income taxes. The recapture is only subject to income taxes. Therefore, the self-employed save 43% by taking the deduction and repay only 25% when they sell. These rules are retroactive to 1999, 2000, and 2001. If you determine that you use your office at home exclusively and regularly and as your principal place of business, or as a place where you meet, not just talk to over the phone, customers, clients, and patients, or as the sole fixed location of the taxpayer's business that sells products and stores these products at his home, please contact us to determine if you should amend you prior years returns. The principal place of business test is met if: the office is used by the taxpayer to conduct administrative or management activities to the taxpayer's trade or business and there is no other fixed location trade or business where the taxpayer conducts substantial administrative or management activities of that trade or business. Family members walking through the home office enroute to another room will not violate the exclusive use test. However, if family members watch television in the home office, the exclusive use rule will not be met. The home office deduction cannot put your trade of business into a loss, but it can reduce your profit to zero. These rules are detailed and complex and will increase your chance of being audited. If you wish to explore the option of filing amended tax returns, please contact our offices. (March, 2003 Newsletter)
James E. Newland, CPA 939 Center Road Eastlake, Ohio 44095 440-951-9799 |
|
Send mail to
webmaster@newlandcpa.com with questions or comments about this web site.
|