Jon_Are

Any tax experts? Question about a home office deduction

Hi,

I started a home-based business in 2004. I have a dedicated office space, but did not generate any income in '04.

From what I read, the home office deduction cannot be used if the business had no income. Is this true?

(I know that various start-up expenses are allowed - I'm asking specifically about the Home Office Deduction, in which you deduct a portion of the home's gas, electricity, etc. based on the square footage of the office in relation to that of the home)

Thanks,

Jon

Brandon_T

Jon,

My limited knowledge of the home office deduction is that can be a bad idea, especially if you plan on selling your home in the next 5 years or so. I am a sole proprietor and don't take the home office deductions. When it comes time to sell your home there are tax issues if you take this deduction, however I could be a moron and be totally wrong. Good Luck.

Brandon

ps where are you close to in MI?

Marc_Sulinski

Why do you say this? Is it because of selling your house and not having to pay taxes on the gain if you have lived in your house for 2 of the last 5 years? If this is the case, all you have to do is rotate which room is considered your "office" every year or so, and you will be considered to be living in all of your house for 2 of the last 5 years.

Brian Perry

I would be careful...home office deductions are one of the biggest triggers for an audit, and if you have no income it would look even more suspicious. After all, people could just register a "business" with no intention of ever selling anything. (Not implying that's the case with you, of course.)

Todd Henry

Jon,

CNN/Money had a great article on the deduction.

http://money.cnn.com/2005/02/10/pf/t...fice/index.htm

To answer your question, you can't dedcut more than you made from the business.

Todd

Jan Strnad

I've taken a home office deduction for about fifteen years. It's very helpful but I HAVE been audited twice. However, because I'm scrupulously honest regarding my income taxes (it doesn't pay, IMO, to be anything else) I've actually received credits from the IRS after both audits.

Your home office deduction can not be used to reduce your tax burden by more than you made. In other words, you might use it to reduce your taxable income to zero, but not below. If you had no business income, there's nothing to reduce. If you made $500, a home office deduction could reduce that amount to zero, but not below.

So the question becomes, is it worth risking an audit (if you've fudged elsewhere) to avoid paying taxes on a few hundred dollars? I don't fudge elsewhere, so I take this legitimate deduction and don't sweat the increased risk of audit.

If you have substantial income from your home business, the home office deduction lets you deduct a portion of your mortgage or rent, a portion of your utilities, and 100% of any improvements you made specifically to that area. Figure the square footage of your office space (it does not have to be a separate room, but can be a certain area within a larger room); say it comes to 7% of your home's total square footage. Now 7% of your mortgage or rent and 7% of your utilities are deductible.

I am not a tax professional! So take everything I say with a grain of salt.

Jan

Jan Strnad

aka J. Knight,
author of Risen and Boo.

Jon_Are

Thanks for all the input.

I am not at all concerned about the audit aspect - like Jan, I wouldn't deduct anything that is not legit and I don't have a receipt for.

So I guess the bottom line is, there is no point in taking the deduction if I've had zero income for the year?


Jon