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Monday, September 25, 2023

Office-in-home deduction rules have changed (effective for tax years beginning after December 31, 1999). Office-in-home expenses generally include mortgage interest paid on your home loan, property taxes, as well as certain other “operating expenses” such as insurance, utilities, maintenance, and depreciation. All of these are apportioned according to the percentage of your home being used as an office.

Do not assume that because your business is based out of your home that you are automatically entitled to take this deduction. In order to qualify for office-in-home deductions, your home office must meet these requirements:  

(a) That part of your home that you designate as your office must be used exclusively and on a regular basis for business, and

(b) Your home office must be your “principal place of business,” which means that it is the principal fixed location where you conduct substantial administrative or management activities of the business.

Such administrative or management activities would include: making Amway product sales to retail customers, calling on IBOs or potential IBOs for business purposes, scheduling meetings or making appointments, keeping product or business support materials, hosting functions, and performing business bookkeeping and bill paying activities.

The office-in-home deduction is calculated by dividing the number of square feet of your home office by the total number of square feet in your home to arrive at a percentage, which is then applied to the expenses mentioned above.

The I.R.S. classifies office-in-home deductions into two categories. The first is mortgage interest and property taxes. These are deductible in the year paid regardless of whether or not your business is profitable. The other category is operating expenses. These include insurance, maintenance, utilities, rent and depreciation. Operating expenses are deductible only to the extent that your business is profitable. If you’re not profitable in a given year it’s still worthwhile to compute and report these amounts because amounts disallowed due to lack of profitability are carried over to a future year when you do become profitable.

IRS has published a new simple method for taking the office In Home deduction.

You may now take a $5 per square foot deduction limited to up to 300 square feet, without regard to any of the above methods of calculation for Office In Home.

There is no recapture of depreciation previously taken when selling your home when using this method.