*** The Health Care Programs Manual (HCPM) has been replaced by the Minnesota Health Care Programs Eligibility Policy Manual (EPM) as of June 1, 2016. Please refer to the EPM for current health care program policy information. ***
Effective: June 1, 2011 |
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20.25.20.15 - Use of Home |
Archived: June 1, 2016 (Previous Versions) |
Self-employed clients may deduct the cost of using their home from their self-employment business gross receipts. This section explains how this expense may be deducted for MA Method A, MA Method B, MA-EPD, Medicare Savings Programs (MSP) and Long-Term Care (LTC).
If using the client’s tax forms to calculate self-employment income, do not subtract use of home business expenses that are already deducted as expenses from gross receipts on the tax forms. However, add to self-employment income the business expenses that have been deducted on the tax forms but are not allowed as business expenses for purposes of Minnesota Health Care Programs (MHCP). For example, MA Method A never allows depreciation to be subtracted from self-employment gross receipts. Add depreciation to the income if it was deducted as a business expense on the tax forms. See MA Self-Employment Income.
This is an overview of IRS policy for deducting use of home expenses from self-employment gross receipts. This information may be helpful in calculating and verifying self-employment income using business ledgers or other records that show gross receipts and expenses. For more detailed information about deducting these expenses, see IRS Publication 587 Business Use of Your Home.
Qualifying for the Use of Home Deduction.
Types of Expenses that Can be Deducted.
Qualifying for the Use of Home Deduction
Clients may be able to deduct expenses related to the self-employment business use of part of their home if they meet specific requirements. To qualify to deduct expenses for business use of a home, the client must use part of their home for at least one of the following:
l Exclusively and regularly as: 1) their principal place of business, or 2) a place where they meet or deal with patients, clients, or customers in the normal course of their trade or business,
n To qualify as exclusive use the client must use a specific area of their home only for their trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. Clients do not meet the requirements of the exclusive use test if they use the area in question both for business and for personal purposes.
n To qualify as regular use the client must use a specific area of their home for business on a regular basis. Incidental or occasional business use is not regular use.
l For storage of inventory or products, if all of the following are met:
n The client sells products at wholesale or retail as the trade or business.
n The client keeps the inventory or product samples in their home for use in their trade or business.
n The client’s home is the only fixed location of the trade or business.
n The client uses the storage space on a regular basis.
n The space the client uses is a separately identifiable space suitable for storage.
l As a daycare facility, if clients:
n Are in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves, and
n Have applied for, been granted, or been exempted from having, a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law. Clients do not meet this requirement if the application was rejected or the license or other authorization was revoked.
Determine the percentage of the client’s home used for business (business percentage) if a client qualifies for the Use of Home Deduction. Compare the size of the part of the client’s home that is used for business to the client’s whole house. Use the resulting percentage to calculate the business part of the expenses for operating the client’s entire home.
Use any reasonable method to determine the business percentage. The following are two commonly used methods for calculating the percentage.
1. Divide the area (length multiplied by the width) used for business by the total area of the client’s home.
2. If the rooms in the client’s home are all about the same size, divide the number of rooms used for business by the total number of rooms in the client’s home. (Do not count closets as rooms.)
If the client regularly uses part of their home for daycare, determine which part he or she uses for daycare using either of these calculations. Calculate the percentage of time the client uses part of the home for a daycare facility if the use is regular, but not exclusive.
l A room that is available for use throughout each business day and that the client regularly uses in the business is considered to be used for daycare throughout each business day.
l Clients can use the area occasionally for personal reasons. However, a room that clients use only occasionally for business does not qualify for the deduction.
To find the percentage of time clients actually use the home for daycare business, compare the total time used for business to the total time that part of the home can be used for all purposes. For example:
l Compare the hours of business use in a week with the number of hours in a week, or
l Compare the hours of business use for the year with the number of hours in the year.
If a client’s gross income from the business use of their home equals or exceeds their total business expenses (including depreciation), they can deduct all of their business expenses related to the use of their home.
If a client’s gross income from the business use of their home is less than their total business expenses, their deduction for certain expenses for the business use of their home is limited. Their deduction of otherwise nondeductible expenses, such as insurance or utilities, that are allocable to the business, is limited to the gross income from the business use of their home minus the sum of the following.
1. The business part of expenses they could deduct even if they did not use their home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)).
2. The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. Do not include a client’s deduction for half of their self-employment tax.
Types of Expenses that Can be Deducted
The extent to which expenses may be deducted depends on the type of expense. Deduct expenses as follows:
l Deduct expenses only for the business part of the home in full (subject to the Limit on Deduction).
Examples: Painting or repairs only in the area used for business.
Exception: These expenses may be only partially deductible in a daycare.
l Deduct expenses for upkeep and maintenance of the entire home based on the percentage of the home used for business (subject to the Limit on Deduction).
Examples:
n Insurance,
n Rent
n Security system,
n Utilities,
n Real estate taxes
n Interest on mortgage, and
n General repairs to keep the home in good working order over its useful life.
l Expenses only for the parts of the home not used for business are not deductible.
Examples:
n Lawn care, or
n Painting a room not used for business.
Deb is a licensed child care provider. Her home has 2,000 square feet. She uses 1,000 square feet for child care 50 hours per week. Deb's family also uses the portion of the home used for child care.
Deb pays $1,500 each month for her mortgage, $300 each month for insurance, $75 each month for electricity, and $30 each month for lawn care.
Action:
1. The square footage of the home is 2,000 square feet.
2. The portion of the square footage used for child care is 1,000 square feet or 50% of the total square footage.
n Deb uses that 50% of the house’s square footage, 30% of the time:
7 days/week X 24 hours/day = 168 hours/week.
50 hours divided by 168 hours = 30% of the time.
n 15% of the allowable costs listed as a business expense can be used as a deduction:
30% multiplied by 50% = 15%.
3. Allow the following deductions from Deb’s gross self-employment income:
$225 for the mortgage ($1,500 X .15).
$ 45 for the insurance ($300 X .15).
$11.25 for the electricity ($75 X .15).
4. The lawn care expense is not deductible because it was for part of the home not used for the business.