Before looking at the PA rules, let’s quickly review the federal income tax rules for claiming a home office.
If a portion of an apartment or residence is used for business, a taxpayer may be able to deduct certain expenses as a business expense on Sch. C of Form 1040. This deduction not only reduces the taxpayer’s income taxes, but also payroll self-employment taxes (FICA & Medicare).
The IRS’s requires that you must use a portion of your dwelling regularly and exclusively to run your business and that you can demonstrate that your dwelling is your principal place of business. Generally, deductions for a home office are based on a percentage, usually computed by dividing the square footage of the business portion of the dwelling to the total square footage of the dwelling.
If you are an employee who wishes to claim a home office deduction (on Sch. A of Form 1040 using Form 2106), you not only must meet the tests discussed above, but you must prove that the home office is for the convenience of your employer (in other words, the employer requests that you work from home) and you must not rent any part of your dwelling to your employer and use that rented portion to perform services for the employer.
Our Jan. 29, 2013 blog discussed that the IRS is allowing a safe harbor method to claim a home office. With simplification, usually comes a cost. That cost is likely a reduced home office tax deduction. For a complete description of the types of expenses that can be claimed for the federal home office deduction, IRS Publication 587 is an excellent resource.
Now, let’s look at some PA rules regarding the home office. PA follows the federal tax rules regarding claiming a home office, with three exceptions.
First, PA does not allow the use of the IRS simplified method. If a taxpayer desires to claim a home office deduction for PA tax reporting purposes, the taxpayer must compute the deduction using actual expenses. Thus, does the taxpayer who uses the simplified federal method forego the PA home office deduction to save tax preparation fees related to computing the actual deduction? Or, does the taxpayer pay a tax preparer to compute the actual home office deduction so it can be used for both federal and PA income tax reporting?
Second, if the taxpayer does claim the home office in PA, the taxpayer will then incur a sales tax liability to PA. What? Why? What does sales tax have to do with the home office? Well, residential users of electric, gas, and oil are not subject to the PA sales tax when purchasing these utilities. However, commercial real estate users are subject to the PA sales tax when purchasing these commodities. What this means is that the taxpayer who is claiming the PA home office has converted a portion of the dwelling from residential to commercial property, and PA requires that the taxpayer compute and remit the use (sales) tax on these utilities to PA. When the tax is paid, the taxpayer has another tax deduction to claim in the following year. The question the taxpayer must ask is whether the tax savings of a home office on a PA personal tax return are greater than the increased compliance cost?
Third, if a portion of the principal residence has been used for other than residential purposes and eligible for the claiming of depreciation expenses, such as an office in the home, the portion of the gain attributable solely to residential purposes may be excluded. The gain attributable to nonresidential purposes does not qualify for the exclusion.
To learn more about your personal income tax situation, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation with an experienced tax professional. You can also schedule a consultation at Click Here.
