2011 Virginia Legislators' Tax Guide: Office Expenses
See IRS Publication 587, Business Use of Home, for more details. What are the rules regarding claiming a home office deduction and what expenses can I claim? | Top The hurdles have been set relatively high in order to qualify to deduct expenses for the business use of your home. Since state legislators are employees of the state, the home office must not only be used as a principal place of business, but it must be used for the convenience of the employer (not the employee.) This term is generally subject to interpretation and there is little case history related to it. It would therefore be advisable to get a letter from your employer stating that you maintain a home office for their benefit. If these hurdles can be overcome, the legislator can deduct a portion of his or her utilities, home insurance, repairs and maintenance and depreciation related to the portion of the home used exclusively as an office. The appropriate percentage is calculated as the square footage of the space used exclusively for business compared to the entire livable square footage of the home. Unfortunately, these expenses are again limited by the net income (wages less other deductible business expenses) derived from your position as a legislator. You must complete Form 8829, Expenses for Business Use of Your Home, to calculate the amount of allowable expenses for business use of your home. This calculation is rather lengthy and complicated and should be figured with the help of a tax advisor. The result of this calculation will be included on line 4 of Form 2106. What if I maintain a separate office in my jurisdiction? What expenses can I claim for that office? | Top If you maintain a separate office in your local jurisdiction, expenses related to that office are included on line 4 of Form 2106. Deductible expenses include rent, utilities, insurance, maintenance and real estate taxes. In addition, if you own any fixed assets such as office furniture or computers, the depreciation on those assets can be calculated on Form 4562 and included on Form 2106. What if I am reimbursed for my home office or outside office expenses? | Top Any expenses for which you are reimbursed cannot be claimed as a deduction. If, however, you are reimbursed for your expenses and the reimbursement is included in your W-2 income, then you can continue to claim expenses as noted above. Can I deduct any costs of my home as a business expense? | Top For tax years beginning after 1998, a home office qualifies as the "principal place of business" when:
Any deduction which meets these two tests is limited to the net business income generated at this location. Any expenses disallowed because of this net income limitation can be carried over to future years and deducted subject to the same net income limitation. Employees may deduct home office expenses only if the exclusive business use is "for the convenience of his employer." This phrase is not really definitively explained in statute. But the question of whether something is for the convenience of the employer generally is determined by all facts and circumstances in each case. If you maintain an office in Richmond throughout the year, you may not be able to benefit from this provision. Because this is a complicated area and individual situations will vary, you should consult with your CPA. Specifically, what can I deduct as a home office expense? | Top If the tests described in the previous answer can be met, and to the extent a separate section of the home or apartment is used for your legislator's duties only and there is no private use whatsoever of that portion, you may deduct the following items: Types of Expenses Home operation expenses are distinguished by three categories and depend on the percentage of your home used for business. The table below describes the method to use for each category.
Is it advisable to try to alter my use of the home to qualify for the office at home deduction? | Top In some cases it is not advisable to deduct these types of expenses. You should consult your CPA as to whether the deduction is advisable in your situation. How do I handle salaries? | Top Salary or wages constitute another deductible expense you may incur. If you hire someone to assist you in legislative matters and to handle constituent contacts, such as a full- or part-time secretary, the compensation paid is deductible. If an individual is on your payroll, you must obtain a federal identification number and pay the proper payroll taxes (the employer's portion is also deductible). For details on the proper accounting and tax reporting of payrolls, contact your CPA for advice. If you have student or volunteer help in working on local legislative matters, and no out-of-pocket expense is incurred by you, then there is no tax deduction. What happens if I sell my personal residence that I have been depreciating and taking the expense for office use of home? | Top If you were entitled to take depreciation deductions because you used your home for business purposes, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Therefore, if you sell your personal residence that you used for business, you may be taxed on the gain attributable to the depreciation taken. Consult your CPA. An example follows: Legislator A sells his or her main residence at a $50,000 gain. The legislator meets the use and ownership tests to exclude his or her gain from income tax. However, a portion of the home was used for business from 1998 to 2002. The amount taken for depreciation was $2,000. The legislator can exclude $48,000 ($50,000 minus the depreciation of $2,000) and the legislator is taxed on the recapture of depreciation of $2,000. If I have a legislative assistant in my home district, but pay him a token amount each month, am I required to go through the process of filing payroll tax returns and withholding payroll taxes? | Top In most situations, all amounts paid for services are subject to the payroll tax laws. In addition, the worker's compensation rules may apply. However, there are some exceptions (such as in the case of an independent contractor). The status of employee or independent contractor is a complex issue. You should consult your CPA to evaluate each situation. Instead of (or in addition to) an office in my home, I maintain a rented office in my district for the purpose of serving my constituency. What expenses can I deduct on my tax return for the cost of maintaining this office? | Top We understand all legislators receive a monthly reimbursement for office expenses amounting to $500 currently for most legislators. This amount has been reported on your Form W-2 as income. This allowance does not meet the requirements of an accountable plan because the expense details are not reported to the employer and any amount in excess of substantiated expenses is not required to be returned. If your office is being used exclusively for legislative purposes, all expenses related to this office — rent, utilities, cost recovery on improvement and equipment, etc. — are deductible as a miscellaneous itemized deduction. You must, however, be careful if the same office is used strictly for political purposes during campaigns (and possibly some office expenses are paid out of campaign contributions). To that extent you would have to exclude those expenses from your own tax return, since you personally have not incurred any out-of-pocket expenses. If campaign contributions for maintaining the office exceed the cost of operating the office, then you incur taxable income. Detailed records should always be maintained, and in this case you should keep a detailed record of all receipts used from sources other than yourself, including the monthly allowance, to determine whether or not your expenses exceeded your income or vice versa. If expenses exceed funds from these other sources, and such expenses are in fact campaign expenses, then these specific expenses are not deductible. (See questions and answers under section on campaign expenses.) If I were reimbursed for my expenses (office rent, telephone, postage, staff, etc.) under an accountable plan, and this amount was not reported on my Form W-2, how do I report this reimbursement? | Top If you report details of the expenses to the Commonwealth of Virginia (your employer), and you are required to return any amount in excess of the substantiated expenses, then the amount received from your employer is excluded from gross income, is not reported on Form W-2, and is not subject to income tax withholding or other employment taxes. (See introduction.) |