Today, working from home is quite common. However, merely having a home office or space within the home used as an office doesn’t mean an automatic tax deduction for the expenses of operating it. And today, even fewer will be eligible for the home office expense deduction. Under the Tax Cuts and Jobs Act (TCJA), employees can no longer claim the home office expense deduction. For employees, even employees of their own commercial or residential snow removal or ice management business, home office expenses have long been a miscellaneous itemized deduction. Unfortunately, thanks to the TCJA, employees who work from home won’t be able to deduct any home office expenses. Of course, anyone who runs a business from home or are otherwise self-employed and using part of their home for business purposes may still use the home office expense deduction.
QUALIFYING THE QUALIFIED
For those still able to take advantage of the home office expense deduction, qualifying is relatively straight-forward. In general, part of the house must be used:
- Exclusively and regularly as the principal place of business,
- Exclusively and regularly as a place where patients, clients or customers are met in the normal course of business,
- On a regular basis for certain storage, or
- In the case of a separate structure which is not attached to the home, in connection with the snow removal business.
Unfortunately, while appearing relatively easy to meet, the IRS strictly interprets some of these requirements. First, as mentioned, the home office expense deduction applies only to a business. Managing investments is not a trade or business in the eyes of the IRS.
Using the space labeled as a home office exclusively for business is, as mentioned, a basic requirement. Space being used as the principal place of business and used “regularly and exclusively” is defined as follows:
Regular use: A specific area in the home used for business on a regular basis. Incidental or occasional use is not regular use.
Exclusive use: A specific area in the home used only for business. While it is not necessary for the space to be physically partitioned off, the requirements are not met if the area is used both for business and for personal purposes. A home office that doubles as a guest bedroom is clearly not used exclusively for business purposes.
In addition to regular and exclusive business use, the home office must be the principal place of business.
PRINCIPAL PLACE OF BUSINESS
The principal place of business requirement is fairly broad and doesn’t mean “only.” In fact, the home office will qualify as the principal place of business if it is used exclusively for administrative or management activities – and if there is no other fixed location where substantial administrative or management activities of the snow removal or ice management business are conducted.
Of course, if there is more than one business location, the relative importance of the activities performed at each place where business is conducted must be considered along with the amount of time spent at each site.
Examples of activities the IRS and the courts consider as administrative or managerial in nature include:
- Billing customers or clients,
- Maintaining books and records,
- Ordering supplies,
- Setting up appointments, and
- Forwarding orders or writing reports.
THE HOME SALE COMPLEXITIES
Capital gain of up to $250,000 ($500,000 for married couples filing jointly) can be excluded or ignored when a principal residence is sold. However, to qualify, an ownership test must be met.
An individual or couple are eligible if the home has been owned and used as the main home for at least two years out of the five years prior to the date of sale. If, however, the property was used partly as a home and partly for business and the home office isn’t a separate structure, gain doesn’t have to be allocated between the home part and the business part.
Naturally, no part of the gain relating to depreciation allowed or allowable (after May 6, 1997), will qualify for exclusion, even where the home sale itself qualifies for the exclusion. The depreciation recapture (so-called Section 1250 gain) is taxed as ordinary income but at a rate no more than 25 percent.
The rules are different if a separate structure is used for business. Deductions for business storage are allowed when the home is the only fixed location of the business. Exclusive use isn’t required to qualify for the deduction.
However, gain resulting from the sale of a separate structure cannot be excluded because the property must have been owned and lived in for at least two years during the five-year period ending on the date of sale.
However, if the business use was in a separate structure and the use test was met, an allocation of the gain on the sale must be made. Any resulting gain must be reported as well as any recapture of depreciation allowable or taken.
Every snow removable contractor thinking about qualifying for and claiming the home office expense deduction has two options.
The first option is the regular method, which requires computing the business use by dividing the expenses of operating the home between personal and business use. Direct business expenses are, obviously, fully deductible with the percentage of the home’s floor space used for business applied to indirect total expenses.
Although expenses for the non-business portion of the home are not deductible, expenses for such things as the business portion of real estate taxes, mortgage interest, rent, casualty losses, insurance, depreciation, maintenance and repairs, are deductible home office expenses.
The so-called “simplified method” reduces the paperwork and recordkeeping burden. The simplified method uses a flat rate of $5 per square foot for business use of the home. There is a maximum allowable deduction based on up to 300 square feet, that places a ceiling the total amount deductible as a home office expense at $1,500.
Choosing the simplified method requires completing a short worksheet and entering the result on the annual tax return. With either method, self-employed snow removal professionals file Schedule C, Profit or Loss from Businesses and compute this deduction on Form 8829, Expenses for Business Use of Your Home.
An increasing number of snow and ice removal professionals are working at home or operating a business from their home and now they have the option of a new “safe harbor” deduction for home office expenses. Whether space in the home is used as a home office for a business that is based there, or if the home office is used to supplement the business’s primary place of business, a tax deduction may be available.
Regardless of the method used to compute the home office expense deduction, business expenses in excess of the operation’s gross income are not deductible.
THE TAX-SAVING HOME OFFICE DEDUCTION
Obviously, the tax deduction for maintaining a home office and the related expenses provides a valuable tax-saving opportunity for snow and ice contractors, business owners and other self-employed individuals who work from home. While the TCJA eliminated many deductions formerly claimed as miscellaneous itemized deductions on personal income tax returns, but the home office expense deduction continues to apply to the self-employed or to a snow removal business.
The IRS continues to encourage all small business owners to explore the guidelines surrounding the home office expense deduction and the options available. They are reminding business owners that the home office expense deduction applies only to a business, or on the tax returns of self-employed snow and ice management professionals.