This may seem like a really stupid question, but the exclusive use of space for a home office deduction, does that mean that the business owner can't do any personal business in that space, like make personal phone calls, do personal things on the computer/internet, have personal files in the area, pay personal bills, etc. The only thing I'm finding is that your family can't use the space or the equipment, which for me is the case. And that you have to have a defined space, which I do. My husband is the accountant and thinks my question is ridiculous, which it may be. But a friend of mine in the same situation brought this up to me the other night and since my husband always does the taxes, I never paid attention to that part. I have the defined space and no one else but me uses the space...but I do use the space myself for personal stuff all the time.

Thanks for any insight!

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Pam Deyerle - Transcriptionist in the Richmond, Virginia area
The Perfect Word Transcription Services

I can't tell you an honest answer other than what my accountant tells me.... I changed a bedroom into my office. He said that I can't put a bed in there (daybed or otherwise) and can not have it as a tv room or etc... It has to be for my business only.... If anyone finds out anything different, I am willing to learn also...

I am a certified tax preparer. I went to pull the exact language for you.

Per the IRS website, "Where the exclusive use requirement applies, you cannot deduct business expenses for any part of your home that you use for both personal and business purposes."

I hope this helps.

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Stacey B. Stahl, Owner/Virtual Assistant
CuttingEdgeVirtualAssistant.co m

Thanks, Stacey, but I'm still confused and maybe I'm just being too picky!

This is what TurboTax site says:

"The rule doesn’t mean you’re forbidden to make a personal phone call from the office, or that you have to rush outside whenever a family member needs a moment of your time. Although individual IRS auditors may be more or less strict on this point, some advisors say you meet the spirit of the exclusive-use test as long as personal activities invade the home office no more than they would be permitted at an office building."

http://turbotax.intuit.com/tax-tools.../INF12067.html

This sounds like you can probably do in your home office anything personal that you might do in an out-of-the-home office, say, on a lunch break...pay bills, make personal calls, do personal Internet research, have a friend stop in to say hi and chat, etc.

Never been audited and of course hope I never am, but just trying to make sure I'm doing it right just in case!!

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Pam Deyerle - Transcriptionist in the Richmond, Virginia area
The Perfect Word Transcription Services

The NOLO website has some great info on this topic - here's a short paragraph that might help clarify:

To take deductions for home-related expenses, you must regularly use part of your home exclusively for your trade or business.

Regular and Exclusive Use

Regular use. The IRS doesn't offer a clear definition of regular use -- only that you must use a part of your home for business on a continuing basis, not just for occasional or incidental business. You can probably meet this test by working a couple of days a week from home, or a few hours each day.

Exclusive use. Exclusive use means that you use a portion of your home only for business. If you use a room of your home for your business and also for personal purposes, you don't meet the exclusive use test. However, you can set aside a portion of a larger room to be used only for business, as long as your personal activities don't stray into it.

You'll find the full article here.

I would also recommend the NOLO home business tax deductions book (which VAF reviewed a while ago).

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I want to mention something else too that I think we've discussed here before. If you own your home and you take the Business Use of Home Deduction, you are essentially turning that portion of your home into business use property by depreciating it. When you sell your home, you will have to recover that depreciation and you will not be able to fully exclude the income from the sale of the home (you said you are married so the full exclusion would be a gain of up to $500,000 if you file jointly).

Even if you don't take the deduction, you can still take a portion of your utilities, etc.

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Stacey B. Stahl, Owner/Virtual Assistant
CuttingEdgeVirtualAssistant.co m

Thanks so much for the information and the book link. Looks like they do a new one each year, which is super. Stacey, I didn't know you could take the utility deduction w/o the exclusive use; thanks! I think my space qualifies for that after removing personal files from business file cabinets.

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Pam Deyerle - Transcriptionist in the Richmond, Virginia area
The Perfect Word Transcription Services

I really think it might help you to see a professional tax preparer. I've been doing taxes for over 10 years. I see many people who do their own taxes until something comes up they don't understand then they come to me. I review past years' returns for free and in most cases find other things they didn't know about.

I tell clients all the time that I could learn to change the oil in my car but I'd rather go to someone who really knows what they are doing just in case. It's worth the peace of mind to know things are done right.

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Stacey B. Stahl, Owner/Virtual Assistant
CuttingEdgeVirtualAssistant.co m

Originally Posted by The Perfect Word

Thanks so much for the information and the book link. Looks like they do a new one each year, which is super. Stacey, I didn't know you could take the utility deduction w/o the exclusive use; thanks! I think my space qualifies for that after removing personal files from business file cabinets.

Exclusive use still applies to any utilities (meaning: indirect expenses, also including mortgage interest, insurance on your home, etc. - to contrast: office supplies would be direct expenses and no exclusive use applies [they are fully deductible]) you would deduct.

Also, you can only deduct the percentage of your [indirect expenses] utilities and home mortgage, etc. that corresponds with the size of the room that you use. To figure this percentage, you divide the number of square feet used for business by the total square feet of your home. You then multiply this percentage times [indirect] expenses to get your allowable deduction(s).

The total deduction is also limited by your income/loss (can carry excess over to the next year though)...it's getting late, so I'm for now.

Hope this babbling made a bit of sense.

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Jules, SunRise Virtual Solutions - WordPress Customization & XHTML/CSS Web Sites

Stacey, my husband has always done the taxes, including the 15 years I'm been in business. He's an accountant and does business taxes for several other small companies. He worked for a national tax preparation company many years ago. Indirect/direct expenses I understand, as well as a lot of other things, but this "exclusive use" thing has been tripping me up because I (not my family) do personal things in my home office space...personal files are stored there, playing around on the Internet, personal research on the Internet, etc. He says it doesn't matter, that I'm picking at it too much; I say he's not researching it enough to suit me, so I'm going to research it myself!

My office is in part of our great room and I measured if off years ago for the indirect expenses part.

This year I decided I should really know what's going on myself and know that I feel comfortable with it all.

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Pam Deyerle - Transcriptionist in the Richmond, Virginia area
The Perfect Word Transcription Services