If you’re just now thinking of claiming a home office on your 2006 tax return, chances are it’s too late, at least without bending the rules on exclusive use. But it’s a new year, and some owner-operators could save a little money come April 15, 2008, with this tax break.
That’s especially likely for independents with a partner active at home in the business.
SO WHAT DO I NEED TO HAVE? An office used exclusively and regularly for business throughout the year. Even if you’re gone much of the time and have no one working there, if the use is exclusive and regular, it’s valid, notes Gary Aitken, who serves owner-operators through his namesake accounting business in Indianapolis.
CAN MY FAMILY USE THE COMPUTER FOR OTHER THINGS? No, not even at night or on the weekend. “Exclusive” means 24/7, all year long, every square inch. “If you have a television set in there, and you watch TV sometimes, then that would disqualify the room,” Aitken says.
DOES IT HAVE TO BE A SEPARATE ROOM? No, just space you can measure. However, a room (versus claiming too much open space) is ideal in the unlikely event of an IRS audit, notes attorney Stephan Fishman in his book, Deduct It.
WHAT’S THE PAYOFF AT TAX TIME? You get to deduct a prorated share of expenses related to the home, such as insurance, utilities and rent. For example, a 10 ft. x 10 ft. room (100 square feet) occupies 5 percent of a 2,000-square-foot house, so you can take 5 percent of applicable costs.
SO IF MY PERCENTAGE YIELDS $1,000, DOES THAT MUCH COME OFF MY TAXES? No, only part. If you’re in the 15 percent tax bracket, you save about $290 – 15 percent, or $150, on income tax, plus 14 percent, or $140, on self-employment tax (after accounting for Schedule C deduction). Aitken notes that if you itemize deductions on Schedule A, mortgage interest and real estate taxes must be reduced by the amount you claim for the home office, so those items are a wash.
IF MY OFFICE DOESN’T QUALIFY, CAN I STILL DEDUCT SUPPLIES AND EQUIPMENT? Yes. Keep records of all such spending, which goes on Schedule C and reduces your income. You also can depreciate big-ticket stuff, such as a computer.
2006 TAX TWEAKS
IRA CONTRIBUTION. If you’re 50 years or older, the limit for contribution to an Individual Retirement Account rose from $4,500 in 2005 to $5,000 in 2006. You have until April 15 to put the money aside and reduce your taxable 2006 income.
BUSINESS MILES. The Internal Revenue Service rate for business use of a personal vehicle reached 48.5 cents a mile in late 2005, when post-Hurricane Katrina fuel was high, but it’s been bumped down to 44.5 cents a mile for 2006. This can apply to business-related trips to the bank, supply store or parts yard. For 2007, it’s back to 48.5 cents.
PER DIEM. The base per diem stays at $52, but the amount that can be deducted rose from 70 percent to 75 percent (or $39 a day) for 2006 and 2007. It tops out at 80 percent in 2008.