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1040 home office--shop/sales area question--long answer

updated wed 7 feb 01


Jeremy/Bonnie Hellman on mon 5 feb 01

Hi Brad,

I saved your email from mid January, intending to answer, but never got
around to it until now. Sorry for the delay.

The home office as discussed by the IRS refers to any business conducted
from the home, used "regularly and exclusively" for the business. Your
ceramics business does not have to be a separate room or rooms, but can be a
section of a room, but it MUST be used regularly and exclusively.

The seeming focus by the IRS has to do with the recent history of home
offices and a physician named Dr. Soliman who took his disallowance of his
home office to the US Supreme Court a few years ago. Dr. Soliman was (is?)
an anesthesiologist who performed his services in several different
hospitals, but billed out of his office in his home, and kept his business
records there, plus did other paperwork there. The IRS originally disallowed
his home office deduction because he did not perform his services, the thing
that earned him his fees, in his home office. He did not see patients in his
home office. However none of the hospitals where he worked, provided him
with an office. He took his case all the way to the Supreme Court and around
1997, he got a favorable decision. Actually the history of home offices has
undergone several interpretations by the IRS, but as of now, people are
focused on who is allowed a home office deduction.

If you actually make your product which your business sells or perform your
services in an office in your home, I do not believe there has ever been a
question about whether or not you are entitled to deduct expenses for a
room/s in your home used in your business, whether used for office, storage,
manufacturing, assembling, sales, or meeting with customers or clients.

However, you are correct, that you will get a deduction for the pro-rata
share of expenses for your home office based on the ratio of the business
space to total space. You measure the usable space (not including bathrooms
or hallways) in your home, and take whatever fraction your business uses.
You then take that percentage of your rent (if you don't own) or your real
estate taxes and mortgage interest (if you do own), plus the electricity,
gas, insurance, pest control, trash, etc. that applies to the whole house in
general. You can also deduct expenses specifically allocated to your home
business. The usual depreciation rules apply. If you purchase a chair for
your business, you get to deduct the entire cost of that chair or depreciate
it. However, if you buy living room chairs, you do not get to deduct a
pro-rata share of that furniture, because it is not used in your business.

To deduct business phone expenses, you would need to have a second telephone
line, which you consider to be your "business" line. It does not need to be
a business line as far as the phone company is concerned. If you have only
one telephone line, you may not take a pro-rata share of the monthly fees,
although you can take a deduction for any long distance or toll calls that
were business calls. A cell phone can be a second phone.

I would compute the electric costs of firing your kiln for bisque and gas,
and I would deduct those from your overall electric bill before allocating
the bill.

BTW if you own the home, by declaring you have a home office (or a business
run from certain space in your house), you have removed that share of the
home from being a residence. These days you get to exclude a certain amount
of gain on the sale of your residence, if you meet certain conditions.
However, if you have turned part of your house into a "home office" and if
you have a gain when you sell the house, your portion of the home that is a
business office will not be excluded from tax on the gain.

If you prepare your own taxes using the interview mode of Turbo Tax, you
have a reasonable chance of getting it all right.

To answer your comment that the IRS instructions focus on an office rather
than a shop. When you're reading the tax lit, and they say "office" you have
to think "ceramics space". "Office" is not to be taken too literally. Think
"business space" used regularly and exclusively.

Yes, you should include all rooms and sections of rooms used "regularly and
exclusively" in your business. That includes the pottery workshop (neat
photos, BTW-- be sure to save a copy of those for your business records),
kiln room, sales area, as well as the "office". The ONLY test is that you
use the areas regularly and exclusively in your business.

What I normally do is have clients measure every room including those used
in the business. I like to use a spreadsheet for easy calculation and record
keeping. That gives you the total usable area in the house.

Then you take those business areas (all of them) as the numerator, and the
total area as the denominator and that's the percent you get to deduct.

And now for the usual disclaimer... please do not rely on what I have
written, without a complete understanding of the tax code as it applies in
your individual situation. Your situation may vary, and you should consult
your own tax advisor for your specific situation. Also, there are specific
quirks I may not have addressed here, and traps for the unwary. Sometimes
with a home office, those traps may not bite you until further down the

When I'm discussing whether or not to deduct a home office with a client, we
always consider future plans for the home, if they own the house. We also
discuss the "regularly and exclusively" test. We also discuss specifically
how to deduct each expense.

It is important to understand all long range implications of a home office
in making the decision about deducting expenses relating to it.


> From: Brad Sondahl
> Reply-To: Ceramic Arts Discussion List
> Date: Wed, 17 Jan 2001 23:40:05 -0800
> Subject: 1040 home office--shop/sales area question
> I've finally succumbed to the complexity of byzantine IRS rules and
> started using a tax program to figure my taxes. It points me to
> declaring expenses for a home office, but it looks like this is more
> appropriate to, as stated, a home office, than a whole business run from
> the home. Specifically, it bases the amount of deductions you can take
> on the ratio of the square footage of the business area to the rest of
> the house. This doesn't take into account the sizable energy costs
> which I can estimate accurately for my kiln, but would otherwise only be
> a ratio of our whole electrical bill.
> So, to Bonnie, or other wise and qualified accountants, is there another
> way to declare expenses of running our pottery businesses from our home,
> or is this the only way?
> Like most of us small time operators, I have a single electric meter,
> and even only one phone, and several well defined separate areas used
> solely by my business, for manufacture, storage, and sales.
> Thanks for your advice...
> Brad Sondahl
> --
> For original art, music, pottery, and literature, visit my homepage
> Pottery homepage
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