If you have a computer in your home, you probably have a home office. It may be very basic: a computer and printer on a folding table, some old grocery cartons for filing. You may not need anything more than this. In fact, if this works well for you, stop reading. There is nothing in the rest of this article that will interest you at all.
If your needs are a little more demanding, then you might consider upgrading your existing arrangement. How much home office you need depends on what you do with it.
We can identify four basic types of home office which may be mixed and matched and combined in any number of ways.
Work office: If you work at home, either for your employer or because you are self-employed, you will often need a very functional office with lots of computer capabilities, broadband connectivity and ample storage for papers and files. If clients visit you in your office, a separate entrance is often a necessity — and some zoning regulations require it (others prohibit it — Ah, the zany world of zoning.)
Household management office: This is the household administration, bill-paying and investment management center. It usually needs reasonable computer capability and connectivity and some storage for household records.
Homework center: There may be one of these shared by all children or one for each child. It is not uncommon today to see a small homework center in each child's bedroom.
Kitchen planning area: This is actually a variation on the management office, but this office is devoted to meal preparation planning, grocery shopping and recipe storage.
Over 50 million Americans currently work at least part time from their homes, and millions more have created work stations for paying bills, tracking finances and investment finances and investments, pursuing hobbies, and e-mailing family and friends. Homework centers with considerable computer power are becoming more common as they become more necessary. Many school programs now assume a child has access to a home computer.
A functional home office in a closet by TGO.
So, if we decide on a home office, it's typically a matter of scratching out some space in another room — a corner of the room, space underneath a stairway, or a little-used closet (is there such a thing?) can be converted to compact workspace. In a pinch, a computer armoire that opens to reveal a home office, and closes to hide it out of sight behind attractive cabinet doors can be turn a corner of any room into a very compact office. If you have study, den or unused bedroom, then the space problem is easier, but not completely solved because these rooms are usually not configured as offices and need to be adapted.
A neat, compact office under the stairs. Photo courtesy AristoKraft.
Fortunately, home office spaces do not have to be big to be workable. Thanks to the personal computer, it's possible to create an effective work center in just a few square feet. The minimum work surface should be 60" wide and 30-32" inches deep: about the size of a typical office desk. You will need ten square feet of uninterrupted floor space in front of the desk to get you in and out of your chair. If you plan for filing cabinets, you will need 3' of drawer pullout space in front of the cabinets. You will need ample electrical power. You may want to install receptacles at desk level so you
Wall cabinets over the work surface provide accessible storage for supplies. This elegant office assembled from Wellborn cabinets.
don't have to route power cords around your work surface or have a tangle of cords at your feet.
The IRS was once pretty stingy with home office deductions. Very stringent rules had to be met to deduct the office at all. Starting with tax year 1999, however, the home-office deduction requirements are more relaxed.
If your home office qualifies, you can depreciate the cost of building your home office and deduct a percentage of the cost of many home-related expenses. These expenses typically include utilities, rent, insurance, mortgage interest, real estate taxes, and some casualty losses, repairs, and improvements (if they relate to the part of the house you use for business).
According to the on-line Nolo Law Center, to qualify your home office must meet two basic tests:
Regular and Exclusive Business Use: You must regularly use your office exclusively for a trade or business. Regular means business use on a continuing basis -- not just for occasional or incidental use. A few hours a day on most days is probably enough. Exclusive use means that you use a portion of your home only for business. If you use a room of your home for your business and also for personal purposes, you don't meet the exclusive use test.
Other Tests: In addition to regular and exclusive business use, you must be able to show any one of the following is true:
Your home office is your principal place of business: If your home office is your only place of business, you pass. If you have another business location, your home office must be your principal place, which it is if both of these are true:
1. You conduct the administrative or management activities of your business at your home office, and...
2. You have no other fixed location where you conduct those activities.
You meet clients in your home office : If your home office isn't your principal place of business but you regularly meet with clients there, then you can take the deduction.
Your office is a separate structure: You can deduct expenses for a separate, freestanding structure that you use regularly and exclusively for your business. But be sure you use the structure only for your business: You can't store garden supplies there or use it as a guest house.
Required by Your Employer: Employees have still one more test to pass. Home office space is not deductible for you unless it is required by your employer. If the office is not an employer requirement, but only for your convenience, then it is not deductible no matter how much work you do there. At minimum get a letter from your employer stating that you must maintain a home office as a condition of employment and detailing what functions the home office is to be used for.
Self-employed taxpayers have more to gain from a home-office deduction than employees. Employee expenses are subject to a 2% of Adjusted Gross Income floor. This means you can deduct only those expenses above 2% of your adjusted gross income. The self-employed have no such restriction, but do have one that applies only to you. The home-office deduction cannot exceed the net income of your business. In other words, you cannot use the home-office deduction to generate a business loss, but you can carry any unused home-office expense to future tax years where it can be used to offset income in those years.
Obviously good record keeping and documentation are very important. Here are some steps you can take to help establish your legal right to deduct home-office expenses.
• Photograph your home office and draw a diagram showing the location of the office in your home. Keep this information in your tax folder.
• Have your business mail sent to your home.
• Use your home address on your business cards and stationery and in all business ads.
• Get a separate phone line for the business.
• Meet clients or customers at your home office -- and keep a log of those visits.
• Keep track of the time you spend working at home.