Home Office Expense

[Jalabee]

What is the name of your state? CA

I am living with my fiance and operate a business out of our home. The house is entirely under his name, but we both contribute to the mortgage. We will file separately in 2002; can I deduct a percentage of the mortgage payment on schedule C even though the house is not in my name?

Thanks.

You'd deduct the appropriate amount of mortgage payment on Form 8829 (business use of home) along with other expenses such as utilities, repairs, taxes, and insurance. The total is then carried over to Schedule C.

[Jalabee]

Thanks for the response. Just to be clear, I can deduct this even though the house is not in my name?

Additionally, I see a spot for utilities expenses on both Schedule C and 8829. Since this is for my home, do I just include a percentage of the utilities on 8829, or is it more appropriate to include it on Schedule C?

Finally, what are the capital gains implications when deducting a home business expense? If we have plans to sell the house in the not-so-distant future, is it advisable to deduct the home business expense? I heard that in general, 8829 acts as a kind of red flag to the IRS.

Thanks,

When you say you contribute to the mortgage, exactly what do you mean? Do you pay your fiance or the mortgage company directly?
If you pay your fiance, then that is considered rent and can be deducted as "Other Expenses" on form 8829.

Is it your office or do you both share it?

Each year a home office is delcared the depreciation allowed (whether taken or not) cannot be excluded from any gains from the sale of the home.

Utilities on Schedule C are generally used when renting an office or business location.

The percentage calculated at the beginning of form 8829 applies to
utilities and other indirect expenses claimed on the form.

[Jalabee]

Thanks for the response.

With regards to the mortgage payment and my contribution, we have a combined bank account on which we write a check directly to the bank.

As for who uses the office, I use it 90% of the time; he uses it 10%.

Since I do not own the house, can I just give my fiance a check every month for rent and claim it on line 20 of 8829? So say I give him a check every month for 50% of the rent. Also, the office space takes up about 15% of the home's area. Does that mean that I take 15% of the 50% and include that on line 20? If so, then would I do the same thing for utilities on line 19?

Finally, for charges such as phone (connection & long distance)and internet access (both required for my job, used about 90% for business, 10% for personal), does that get included on Schedule C, or is it on 8829 (and if so, would it be considered direct or indirect expenses)?

Thanks again. It's really great getting your advice.

Since you do not own the home, your portion of the mortgage payment is considered rent. It is up to you and your fiance to determine how much you are contributing. Realize that what you claim as rent, he would have to report as income on line 21 of form 1040. He could then take deductions up to the amount of rent on line 22 of schedule A. He also claims all mortgage interest and property tax on schedule A.

Use 90% of the home office size and 50% of the house size to calculate your expense percentage. For example, if the office size is 120 sq. ft. then enter 108.

Enter your rent on line 20 and any other indirect expenses (utilities, repairs, etc.) on their lines. A direct expense only applies to the office itself and not the entire house. For example, the power for the house is indirect, while if you painted and carpeted only the office, that's direct.

Phone: only a second phone line can be claimed as a business expense. All long distance business calls are deductible from any phone. These are totaled and entered as utilities on Schedule C.

Enter the business cost of the internet on line 48 (back of schedule C) with an appropriate description. The total of line 48 is carried to line 27.

Since you do not own the house, you are not entitled to a depreciation, hence no effect when house is sold. However, if your fiance claims home office also (.1 x.15 x .5), then it comes into play.

The catch to this whole thing is that whatever you claim on form 8829 is considered rent received by your fiance.

[abezon]

Actually, bury your long distance, internet, & cell phone costs in the "Office Expenses" line of Sch. C. These are words that can trigger hightened scrutiny of your return if you list them separately as Other Expenses. If you claim internet & cell phone, be sure to only claim the % that is business use. Keep a log of when you are on the computer/phone for business use & when it's for personal use. (The same way you keep track of your car mileage so you can take auto expenses.)

[Jalabee]

Thank you both. I've researched these areas much more and am getting a much better handle on it.

However, I am a little uncertain of what belongs on schedule C versus 8829. Please let me see if I get this correct. For indirect expenses, such as utilities & rent, it is clear that I should use 8829 (since they have to be deducted based on the percentage of home area used as the office).

For business travel, meals, etc., this obviously belongs on schedule C.

For office expenses, such as long distance (for business), internet connection, office supplies, office furniture, etc., this should also go on schedule C.

How about items like roamer5 mentioned before, like painting and carpeting (exclusively for the office)? They are direct expenses, so does it matter if it goes on either 8829 or C? They both have item lines for "repairs and maintenance." Don't they both have the same impact on my net profit, regardless of where they go (assuming they are only included once, of course)?

Again, thank you very much for your assistance.

Schedule C is not an exact science. Generally try to find the best fit.

Office supplies should be included in Sch C, Office expense (line 18).

Office furniture should be depreciated on form 4562 (just when you thought you had this figured out). However, some tax preparers would just include it with office expense depending upon the amount.

Sch C, Repairs & maintenance (line 21) apply to equipment used in a business, and not the home office. For example, if you're business was carpentry, then this would be expenses for repairing your power tools.

Sch C, Supplies (line 22) apply to items used to produce a product or perform your job. Again, for carpentry this would be nails, sandpaper, etc.

Anything to do specifically with the home office and not the business itself goes on the form 8829. Office furniture, computers, copiers, are considered for the business since they can be placed anywhere.
These items are depreciated (form 4562) and the total amount is carried to Sch C, Depreciation (line 13).