Thinking of Deducting Home Office Expenses? Read This First

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By Greg Smith

Greg SmithNot everyone qualifies for the home office deduction. First and foremost, according to the Internal Revenue Service, employees are not eligible, unfortunately. An article written by CCH Tax Group states that the home office deduction has always been a tough one for employees to claim, “but now it is impossible.” They further say that in the past employees could claim the deduction only if the employer required them to work at home.

However, I recommend you speak to a CPA to see if any changes might be made as a result of COVID-19 and the mandatory shut down many businesses have experienced.

Here are tips from the IRS:

  • The home office deduction form 8829 is available to both homeowners and renters.
  • There are only certain expenses taxpayers can deduct including mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent.
  • Taxpayers must meet specific requirements to claim home expenses as a deduction. The deductible amount of these types of expenses may be limited.
  • The term “home” for the purpose of this deduction includes a house, apartment, condo, mobile home, boat, or similar property. It also includes structures on the property. These are places like an unattached garage, studio, barn, or greenhouse. It does not include any part of the taxpayer’s property used exclusively as a hotel, motel, inn, or similar business.
  • There are basic requirements for the taxpayer’s home to qualify as a deduction. There must be an exclusive portion of the home used for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take the deduction only for that room as long as it is used both regularly and exclusively in the business. The home must be the taxpayer’s principle place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction. Expenses that relate to a separate structure not attached to the home will qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for the business.

Again, it is very important to check with your tax preparer regarding this and other deductions.

What is the Difference Between Bookkeepers, Accountants, and CPAs?

Many times, these terms are used interchangeably by small business owners, but there are distinct and important differences. Sometimes people balk at paying for these professional services, but the investment is well worth avoiding getting sideways with the IRS or Oregon Department of Revenue. Do-it-your-selfers many times make errors especially when it comes to payroll and the timely submission of reports and payments.

This is something the IRS and Oregon Department of Revenue take very seriously, and the penalties are severe. Here is a brief summary of what duties bookkeepers, accountants, and CPAs typically perform and the requirements of each:

  • Bookkeepers work for a company to keep track of the finances. They are responsible for accounts receivable and payable, inventory, accurate and timely recording of transactions, monthly, quarterly, and annual reporting, and in some instances, payroll. They can be independent contractors or employees. With regard to training, some bookkeepers have only a high school diploma, but many companies prefer someone with at least an associate degree. Bookkeeping certifications and licensing are available through national organizations. As an aside, bookkeepers are in very high demand and for someone qualified, is it a highly profitable business.
  • Accountants typically can prepare detailed financial statements, audits of a company’s books, and prepare reports for tax purposes. It is important to note that only CPAs, tax attorneys, and enrolled agents are able to represent a taxpayer to the IRS.
  • What can a CPA do? To begin with, they have a much higher level of training and expertise. They have passed required examinations, meet all statutory regulations, and obtained licensing. A CPA can prepare and sign tax returns for businesses and individuals and represent clients before the IRS for audits and other important matters. The national professional association for CPAs is the American Institute of Certified Public Accountants.

Small business owners are busy. Many lack the expertise or simply don’t keep their financial records up to date and are unaware of legitimate and important tax deductions. Depending on the size and type of business, an owner may have a bookkeeper and/or accountant, and then depend on a CPA for more complex matters, tax planning, and preparation of tax returns.

While it is always best to accurately track income and expenses throughout the year, the beginning of the fourth quarter will allow you a short window of time to get your books in order and implement the services of one or more of these professionals.

Especially with all the unique circumstances surrounding COVID-19, it is highly recommended that business owners employ the services of a CPA. Make the appointment as soon as possible so plans can be made to put the business in the best possible position before 2020 tax returns are due. If delayed, not only will this compromise the business, but this is when CPA’s schedules become full and they may be unable to accept new clients.

The level to which a business owner keeps tabs on the company’s finances is a sure recipe for either success or failure.

Make that appointment today.

Greg Smith is the executive advisor for the Umatilla Electric Cooperative Business Resource Center. To schedule a free and confidential business advising appointment, please give us a call at 541-289-3000 or email uecbrc@gmail.com. The center is located at 1475 N. First St.