Opinions on Home Office Deduction- SE caterer

[GradyFinance]

I have a 1st year client who will receive a w2 for a portion of the year and she began a home based catering service during 2012.
All of her preparation and cooking for the catering business is done in her home kitchen. She was inquiring about how she can deduct a portion of her utilities (electric and gas) as a business expense since they are not seperate from her home.
Can a home office deduction be used in this instance, even though it is not technically an office, to deduct a portion of the
utility expense? How would the IRS react to this were they to do a deep exam on her return?
Thanks in Advance,
Ed

[AJsTax]

100 % use test

My first reaction to your question is how can she meet the 100% exclusive use of the are for business purposes test? I assume she provides family functions in the same kitchen?

[MAMalody]

It might be possible to have a storage area qualify, however, unless you can specifically identify the increased cost of the utilities in question, I think you are out of luck.

[FEDUKE404]

What's NOT cooking here

How I miss those crazy clients.

For starters, she is getting a W2, so any of her expenses must go to Sch A and also first survive the 2% miscellaneous deductions cut.

If instead (from the OP) she had/has a W2 job, in addition to the catering business, then she is looking at a Schedule C/Schedule SE scenario for that new work. The assignable expenses would go there, of course.

Does "regular" and "exclusive" use ring a bell for anything related to OIH??

I would love to hear how she would determine the exact amounts of electricity/gas used for cooking the catered items, especially since many utilities now have TOD rates. She did forget to ask you about the water used to wash her "business" dishes, you know.

The whole idea of trying to figure out, from a "family kitchen," what is/is not a business item or expense (separate from any OIH issues), could be a daunting experience which also might not go over too well at IRS audit time.

Heaven help her if she is also sniffing around the EITC clouds.

FE

[taxea]

How I miss those crazy clients.

For starters, she is getting a W2, so any of her expenses must go to Sch A and also first survive the 2% miscellaneous deductions cut.

If instead (from the OP) she had/has a W2 job, in addition to the catering business, then she is looking at a Schedule C/Schedule SE scenario for that new work. The assignable expenses would go there, of course.

Does "regular" and "exclusive" use ring a bell for anything related to OIH??

I would love to hear how she would determine the exact amounts of electricity/gas used for cooking the catered items, especially since many utilities now have TOD rates. She did forget to ask you about the water used to wash her "business" dishes, you know.

The whole idea of trying to figure out, from a "family kitchen," what is/is not a business item or expense (separate from any OIH issues), could be a daunting experience which also might not go over too well at IRS audit time.

Heaven help her if she is also sniffing around the EITC clouds.

FE

I always thought it was "regular" and "ordinary" business expense. She would have to keep track of use of equipment by hours to determine the business vs personal percentage of each of questioned expenses. Also products used. Does she keep a separate supply of ingredients or does she share use between business and personal. It could truly get tediously time consuming figuring the business expenses. Might I suggest she rent a kitchen elsewhere. Then her only expense would be the rent, all utilities would likely be included in the rent and she wouldn't have to keep such detailed records of use.

[FEDUKE404]

On further review

I always thought it was "regular" and "ordinary" business expense.....

IRS Home Office Deduction <<<<-----Click on link

EXCERPT:
1. Regular and Exclusive Use.

You must regularly use part of your home exclusively for conducting business.



FE

[Bees Knees]

For starters, the original poster is referring to someone who had a W-2 job for a portion of the year, but now is going off on her own to operate a Schedule C business out of her home.

First issue, as everyone else has pointed out is she cannot deduct office in home expenses because of the exclusive use test. The only exceptions would be storage of inventory, or if this were a day care business, which it is not.

Second issue, a deduction for the increased cost of utilities. In general, Section 280A disallows all deductions otherwise allowable in connection with the use of a dwelling unit which is the taxpayer’s residence. The exception is when the use of a residence qualifies under the office in home tests listed under Section 280A.

This code section does not list out the deductions it is referring to. Instead it says ALL deductions otherwise allowable that are associated with the use of the residence. In other words, the deduction may very well be allowable as a business expense, because it meets the ordinary and necessary requirements of Section 162(a), except that it is not allowable under Section 280A because it is an expense in connection with the use of that taxpayer’s residence. This would include depreciation, taxes, interest, and yes the cost of utilities…ALL expenses in connection with the use of that home.

Then Section 280A gives some exceptions to the above blanket disallow all deductions rule. Section 280A(b) says mortgage interest, taxes, and casualty losses are allowable regardless of the office in home rules, because those deductions are allowable regardless of the business deduction rules of Section 162(a). Notice, utilities are not included in this exception.

Then Section 280A(f)(4) gives another exception for business expenses incurred under Section 162(a)(2) which refers to business travel expenses. These expenses are deductible because they are incurred AWAY from home. Again, notice utilities are not included in this exception.

Bottom line is, utilities can very well be necessary business expenses under Section 162 when incurred in the ordinary course of conducting business. However, when they are incurred at home, Section 280A says NO – NO Business expenses otherwise allowable are allowed, unless you follow the strict Section 280A rules, which this taxpayer obviously is not following.

If you want to deduct a business expense without going through the office in home rules, then that business expense has to be incurred as an expense that is separable from the home. For example, my home office for doing client tax returns does not qualify under office in home rules because I also use it for personal purposes. Thus, I cannot deduct any expenses connected with my home. However, business expenses I incur which are not connected with the use of my home are deductible, such as the cost of my tax prep software, my computer, my printer, the toner, and paper, etc. The cost of electricity to run my computer, however, is not deductible because it is an expense connected with my personal residence. Now, if I started up my generator and ran an extension cord into my office to run the computer while I am preparing tax returns, the cost of gas to run that generator would be deductible, because now I have a separate electrical utility line that is not used to supply electricity to my residence.

[Gene V]

New simplified method for Home Office

I'm sure you probably read this by now.--

http://content.govdelivery.com/bulletins/gd/USIRS-67125f

[taxea]

IRS Home Office Deduction <<<<-----Click on link

EXCERPT:
1. Regular and Exclusive Use.

You must regularly use part of your home exclusively for conducting business.



FE

sorry remembered it after I posted.