One area of confusion when deducting business related expenses is office in the home. Actually, a lot of this problem is with tax return preparers who write off everything but the kitchen sink (ha ha) as a home office expense. I can't tell you how many times I have heard 'but my old preparer let me do it'. Well, my job is to advise my clients on how to do their tax return the right way.
As part of my series of articles on the subject of staying ready for a federal or state income tax audit, here are your guidelines for writing off office in the home expenses for your arts or crafts business:
Arts and Crafts Business Use of the Home
To be able to write off part of your home as a business expense you have to use that part regularly and exclusively for your arts or crafts business. For example, making or storing inventory for your products, or meeting with clients. It also includes that part of your home where you perform all your administrative tasks such as doing your bookwork or calling clients and vendors.
Definition of Arts and Crafts Business Regular Use
You have to use this portion of your home on a continuing basis for your arts and crafts business. For example, if you only use your home office during the busy year-end holiday season, this doesn't constitute regular use even if you don't use that part of your home for any other purpose.
Definition of Arts and Crafts Business Exclusive Use
Well, this is an easy one: you don't use that area of your home for any other activity. For example, let's say you use your family room to make your craft items and your family also watches television in that room. This doesn't meet the 'exclusive' test. On the flip side, let's say you converted your dining room into your home office. While it's technically the 'dining' room, your family dines in your kitchen. It's a-ok to take home office expenses for this room.
Remember: To be able to write off the cost of your home office on the Schedule C, you have to use the area regularly and exclusively as your principal place of business. Just because you have arts and crafts supplies spread out in every spare nook and cranny of your house doesn't mean you can write off your entire house.
Deducting Office in the Home for Artists and Crafters Exhibiting at Crafts Show
A common question is if artists and crafters can write off a portion of their home even though their income is derived partially or wholly from participating in craft shows across the United States. Usually the answer is yes you can! Here are the questions you have to ask yourself:
- Do I use that portion of my home regularly and exclusively to manage my business or conduct administrative tasks? If this answer is yes, you've cleared half the hurdles.
- Next: As yourself if you have any other fixed location where I conduct my business activities. Keep in mind that traveling to various different arts and crafts show throughout the year definitely doesn't qualify as having a fixed business location. If the answer to this question is no, you are good to go for deducting home office expenses for your traveling road show arts and crafts business.
Finally, please note that deducting office in the home is a sole proprietor rather than a corporate issue for the many artists and crafters operating their business out of their home. Why? Because if a shareholder in a closely-held arts and crafts corporation has a home office and 'rents' part of their home to their corporation, it's a wash since as part of this transaction they also have to report the rental income on their Schedule E. Plus, it may end up costing the more money as they may owe sales tax to their state on the rental income.
You deduct this expense for your arts and crafts business on Form 8829. Find out more about Form 8829 and how to prepare it.