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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3863
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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New day care business set up and registered on 2012. When the

Customer Question

New day care business set up and registered on 2012. When the county inspectors come the house they said I could use 70 % of the house for business use of home. Income tax preparer says that I could only use the basement where the day care is located which is about 30% of the total sq feet. Can you tell me what could be the correct amount of sq ft I could use as business use of home? I think the county officer where also counting the kitchen are that is up stairs. Also, I do not have income the year of 2012 only expenses, the area was saved only for the daycare and not as a recreational use. Can I take all the prorated utilities expenses/mortgage etc? if so for which %?
Submitted: 9 months ago.
Category: Tax
Expert:  Lane replied 9 months ago.

Lane :

Hi, the county inspectors (how much of the home can be used for the licensed daycare) and the IRS rules around home office deductions are really two different issues (although related) ... hand on just a sec ans I'll get the IRS rules for you

Lane :

An important part of the requirement for the IRS home office deduction is that a portion of your residence be used regularly and exclusively for business purposes.

Lane :

... doesn't actually have to be an "office," it can be a conference room, a lab area, storage room, (a day care facility) or some other type of business usage. If you do have an area that you use regularly and exclusively for business, the tax law permits you to deduct a portion of certain expenses relating to your home. sp for TAX PURPOSES, you have to be sure that your measuring the square feet of areas that are JUST for the day care facility.


 

Lane :

Now, If you pass the qualification tests, which means you have a home office, the next step is determining the amount of your deduction.

Lane :

You've passed the first test (that it's legal to USE the area for your business)

Lane :

What I call the big four expenses (that can be pro-rated to the area - we'll get to that in just a sec - that you use for business) are the following:

Lane :

  • home mortgage interest (or rent)

  • utility bills

  • home repairs and

  • depreciation.

Lane :

The common denominator among these deductions is that the IRS has devised a single test to determine whether you qualify for all of them. If your working space doesn't meet the "home office" tests, these expenses are either non-deductible personal expenses (such as rent, painting the room or repairing the furnace) or deductible only as itemized deductions (such as mortgage interest or real estate taxes.)

Lane :

Now the other big group of expenses that can be deducted are pur business expenses that would be there regardless of whether you're using the home of not:

Lane :

Business Expenses. Costs that are business expenses (ordinary, necessary and reasonable) are deductible even if you don't qualify for the home office deduction. For example, office supplies, postage, and the cost of bringing a second telephone line into your home for business use may deductible. In addition, you may be able to depreciate (or expense) the cost of computers and office furniture you buy to use at home, even if you're not allowed to deduct the cost of the office itself.

Lane :

The "principal place of business" test is significantly easier to meet than it once was. Currently, a home office will qualify as the principal place of business if:



  • the office is used by the taxpayer to conduct administrative or management activities of a trade or business, and

  • there is no other fixed location where the taxpayer conducts substantial administrative or management activities of the trade or business.


The test looks at "administrative" and "managerial" activities. Administrative or managerial activities include: billing for services, keeping books and records, ordering supplies, and scheduling appointments. So, you can meet the test even if you perform substantial non-administrative or non-managerial activities outside your home.


The fact that you may conduct management activities in a non-fixed location, such as a car or hotel room, will not cause you to lose the deduction

Lane :

Now, if you pass the qualification tests, which means you have a home office, the next step is determining the amount of your deduction.


This is a multistage process. First, you must determine which expenses are deductible. Then, you must calculate:



  • the "business use" portion of your home and

  • the length of time your home was used for business during the year.

Lane :

For most types of home office expenses, the amount you may deduct depends primarily on the percentage of the space in the residence that is used for business.


There are two common ways to the business portion of your home:



  • number of rooms, or

  • square footage.


The first method (number of rooms) looks at the number of rooms used for business, divided by the total number of rooms in your house.


The second method looks at the square footage of the space used for business, divided by the total square footage of the house. Most of your home expenses (such as rent or real estate taxes and mortgage interest) must be multiplied by the larger of these two fractions to determine the portion that's deductible as a home office.

Lane :

OH, and b y the way DAYCARE PROVIDES HAVE ANOTHER APPROVED WAY TO DO IT...

Lane :

Day care providers can use "time" method. The IRS provides a special tax break for home day care operators. These business owners can count all the space they regularly use for their day care business as the "business portion of the home" even though the same space is used for personal or family purposes. For example, they may include the bathroom, the kitchen where day care meals are prepared, and the family bedrooms where naps are taken. However, unlike most home business operators, they must prorate these expenses for the hours in which the day care is offered.

Lane :

And remember the law allows you to take use whichever method yields the larger deduction .. so at the onset you should run the numbers all three ways; For example, if you have an eight-room house and use one room as an office, your business use percentage will be 1/8 or 12.5 percent. Alternately, if your home office was 168 square feet and your home was a total of 2000 square feet, your business use percentage will be 168/2000 or 8.4 percent. In this case, you will have a larger deduction if you use the "number of rooms" calculation. And then the time test for Daycare Provider might be even better... it all depends on your situation

Lane :

BotXXXXX XXXXXne, remember to separate the (1) ALWAYS fully deductible business expenses - and take every single one you can that's legitimate, from office supplies to business phone lines) from the (2) the HOME OFFICE expenses that have to be factored by percent of use based on space or time (for you)

Lane :

Hope this has helped

Lane :

Questions?

Lane :

Time rooms or space, do all three

Lane :

you might have your accountant look at these web pages:

Lane :

There is a new simplified method ... IF your objective is making this easier ... but for a daycare, I would be t that ime or rooms would yield the higher deduction

Customer :

Thank you so much.

Lane :

You're very welcome

Lane :

Sorry for the "data-dump," but for days cares tis can be a real help

Lane :

If this has helped, I would appreciate a feedback rating of 3 (OK) or better (excellent, is ideal)… That's the only I get credit for the work.


However, if you need more on this, please come back here, so you won't be charged for another question

Expert:  Lane replied 9 months ago.

 

Just checking back in here.

 

Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.

 

Let me know if you have further questions

 

Lane

 

Customer: replied 9 months ago.

Lane, please clarify this for me. I have a license to operate my business since since January the whole year I tried to get clientele the whole year in the meantime I had a Job with a w2-form. So technically, what area of the space can I take as business use of home. I was thinking to use only the basement because that is exclusively use for the daycare. I do not know if I could still use the kitchen and the bathroom. Please advise me what deduction could I take for business use of home. Will it be for the whole year 12 month?

Expert:  Lane replied 9 months ago.


You can count the whole year, if you were licensed in January.




And since the basement the only room that's used EXCLUSIVELY you can do one of three things:

(1) Take the square footage of the basement divided by the total square footage of the house and use that as the factor to apply against existing home costs.

So if it's 20%, for example, then you can deduct 20% of your home mortgage interest (or rent), utility bills, home repairs and depreciation.




(2) Us the number of rooms to figure what percentage the basement is, of the whole house and use that, or




(3) Use the new simplified method, (called the safe harbor, method), where you multiply $5 per square foot (up to 300 square feet) as the TOTAL home office deduction.



Remember with method's (1) and (2) you are just using that % as a factor against already existing home costs, like utilities and mortgage ... then you'll add the business specific costs, like a dedicated business telephone line.



With the third (simplified, safe Harbor) method, that figures your total home office deduction. The $5.00/sq ft has an assumed other business costs, built into it.


Hope this helps

Lane

Expert:  Lane replied 9 months ago.
Hi,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane
Expert:  Lane replied 9 months ago.
Hi there,

Just following back up one more time, since I never heard back from ya.

Let me know if the answer was helpful.

Thanks
Lane

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