Hromas uses a separate room in his home as an office. The room is 500 square feet of the total 2,000 square feet of the house. During the current year, Hromas incurs the following household expenses:
Mortgage interest $ 12,000
Property taxes 1,400
Insurance 450
Utilities
Gas and electric $ 2,100
Cable television 280
Phone ($15 per month for a separate phone number
for the office) 450 2,830
House cleaning 1,820
Long-distance phone calls (business-related) 670
Depreciation (unallocated) 5,600
How much of a deduction is Hromas allowed for the cost of the home office in each of the following situations?
- Hromas is an independent salesperson who uses the room exclusively to call customers who buy goods from him. During the current year, his sales total $83,000, cost of goods sold is $33,000 and he incurs other valid business expenses unrelated to the office of $25,000.
- Hromas is an employee of Ace Computer Company. He uses the office primarily when he brings work home at nights and on weekends. He occasionally uses the office to pay personal bills and to study the stock market so he can make personal investments. His salary at Ace is $80,000 per year. He is not paid extra for the time he spends working at home
- Hromas is an independent salesperson who uses the room exclusively to call customers who buy goods from him. During the current year, his sales total $83,000, cost of goods sold is $33,000 and he incurs other valid business expenses unrelated to the office of $25,000.
Because Hromas uses the office exclusively and on a regular basis as a principal place of business, he is allowed to deduct the costs associated with the home office. However, the home office deduction cannot exceed his income from the trade or business less the costs unrelated to the office. In addition, to the $25,000 of expenses unrelated to his office, he can deduct $180 for the extra phone line and the long distance phone calls of $670 as business expenses. Therefore, he is limited to a maximum home office deduction of $24,150 ($83,000 – $33,000 – $25,000 – $180 – $670).
The costs of the home office must be allocated on some reasonable basis. The square footage of the office is 25% (500 ÷ 2,000) of the total square footage and provides a reasonable basis to allocate expenses that are related to the house. The cost of the cable TV is not deductible. In addition, only the $15 per month cost of the office phone number is deductible. The long-distance business calls do not have to be allocated.
Interest ($12,000 x 25%) $ 3,000
Property taxes ($1,400 x 25%) 350
Insurance ($450 x 25%) 113
Gas & electric ($2,100 x 25%) 525
Cable TV -0-
House cleaning ($1,820 x 25%) 455
Depreciation ($5,600 x 25%) 1,400
Total home office costs $ 5,843
- Hromas is an employee of Ace Computer Company. He uses the office primarily when he brings work home at nights and on weekends. He occasionally uses the office to pay personal bills and to study the stock market so he can make personal investments. His salary at Ace is $80,000 per year. He is not paid extra for the time he spends working at home.
For an employee to deduct the cost of a home office, the exclusive and regular use tests must be met. In addition, the office must be for the convenience of the employer and required as a condition of employment. In this case, Hromas does not meet the exclusive use test (office work and personal work done in the office). In addition, the office is clearly for his convenience, not the employers, and there is no indication that Hromas must maintain the office in order to retain his job. Therefore, no deduction is allowed for the home office. He would be able to deduct all of the mortgage interest and property taxes as itemized deductions.
