Today, we’re going to talk about the home office deduction.
As we near that dreaded time we face yearly… tax time, I want to share some information that I believe will be beneficial for you.
The amount of people that work out of their home in one form or another is staggering.
Many businesses have started downsizing office space and have their employees manage their work from home.
There are many more freelance agents that work from their home. Also, there are business people who sell that manage their administrative chores from their home.
But, if we were to look at home based workers on the basis of who is taking the home office deduction on their yearly taxes, we would assume that there are far less home based workers than there truly is.
Why is this?
Many people have been led to believe that if they claim the home office deduction that it is a red flag at the IRS and will result in an audit.
Other people just simply do not realize they can take the deduction.
So in today’s post, I am going to share 15 things you should know about the home office deduction.
1: The home office deduction does not trigger an audit
While no one actually can say exactly what will “trigger” an audit, many tax professionals will tell you immediately that if you deserve this deduction, you absolutely should take it.
The work environment has changed in the last decade.
There has been a large percentage of people working from their homes either as an employee or as a small business owner.
There is no reason in the world you should assume that it will trigger an audit, and even if you are audited, if you have all your “ducks in a row,” you have nothing to be concerned about.
To qualify for the home office deduction, a portion of your home must be used exclusively for your business.
This means that it cannot be used as a study area for the kids or something on those lines when you are not using the space.
3: Must be used on a regular basis
This is somewhat unclear because there are no clear definitions as to what regular means.
I understand it to mean that you work at general defined times within this space.
It is really up to you to determine this regular basis.
4: Must be your principal business location
I see this as meaning that when you see any address listings for your particular home based business, your home’s address would also be the address for your business.
It also may be where customers or clients come to meet with you.
5: It does not have to be your principal office
This may seem to be an oxymoron with #4, but what this means is: if you are a salesman who does much of their work from their vehicle, or you own a construction business and are usually on job sites, your home can possibly still be a deduction.
The idea is that your home office is where you do the majority of your administrative and management tasks.
6: Must check qualification each year
Qualifications for the home business deduction must be made each year.
It has been discovered that some home based business owners qualify 1 year, but they do not qualify the next year even though it seems like everything is the same.
7: Unattached structures
Home based business owners who use an unattached structure (garage, small office, etc…) can pass the tests much easier than a person using a room or partition in the home.
This is because the IRS assumes there are less chances that an unattached structure will be used for anything other than your business.
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8: Employee home office deduction
If you bring work home from the office from time to time, you will not qualify for the home office deduction.
But for employees who use their home as an office for their employer’s convenience, they can claim this deduction.
This would be if your employer just doesn’t have the office space and requests that you work in your home.
It would be wise to see if your employer will reimburse you for doing so and then they can file the home office deduction in their taxes.
9: Exceptions to the exclusive rule
There are some exceptions to the exclusive rule I mentioned in #2.
If you have a childcare business, the area you use for that business can be used for family activities when the childcare is done for the day.
Also, if you store products in your basement that you sell in your business, you can still use that space for other things.
These are just a couple of exceptions.
There may be more, so you will want to check with a tax professional.
10: The simplified home office deduction method
Prior to 2013, home office deductions meant extreme paperwork and saving receipts.
In an effort to make it easier, the IRS made a simple method of taking the deduction.
You simply figure the square feet your home office uses and you will receive $5 for each square foot of space used as a deduction.
So, let’s just say you have 100 square feet of office space, your simplified deduction would be $500.
The maximum square footage allowed is 300 or $1,500 deduction.
You will want to consider this closely as you could be losing a lot of deduction money by taking the simplified method.
11: Calculating the percentage of your home used
I already mentioned that you need to know the square feet of your home office space.
To do the longer forms on the home office deduction, you will need to know the percentage of your home used as an office.
To do so, you take your office square footage divided by the total square feet of house.
An easy example would be, your office space is 100 square feet and your home is 1,000 square feet.
So you would be using 10% of your home as office space.
You will need this as you figure everything out in the complicated home office deduction forms.
12: Repair or maintenance on home office space
Any repairs or maintenance that needs to be done to keep your office space in good working order are also deductible.
Be sure and keep receipts.
13: Indirect expenses are also deductible
You remember the part about figuring the percentage?
You will use that in this area.
Your utility bills and similar indirect expenses can also be deducted in your home office deduction.
We will use the earlier example.
Your monthly utility bill is $100 and you get 10% office space.
So for each month, you have a $10 deduction, or $120 for 1 year.
14: Deducting mortgage insurance and interest
Just like the indirect expenses above, you can also deduct the percentage of your mortgage insurance and interest.
It may not seem like much, but every dollar adds up.
Home based workers who rent and use part of their living area as an office can also deduct that percentage from their monthly rent payments.
So using the earlier example, if you pay $1,000 a month for rent, you would have a deduction of $1,200 over 1 year’s time.
Talk with a tax professional
It is wise that you talk with a tax pro about everything I told you here today.
Disclaimer: I am not a tax professional. I am providing this information for your service and education, but I cannot guarantee everything is perfectly correct. I suggest you consult a tax professional or a CPA to make sure you can take this deduction and what tax avenue is best for you.
Just remember that you pay a lot in taxes on a daily basis. Every time you purchase something, you pay a tax. I would say that it seems that every time we blink, we pay a tax.
We should take any, and all deductions available to us.
Do not fear the home office deduction. If you work from your home, you deserve it.
I would like to hear from any of our readers if they have taken this deduction. Did you get audited because you took it?
Can you offer any tips or advice for people who may be considering taking the home office deduction? We appreciate your response. You can post all comments and questions below. Thank you.
About the Author
Greg Boudonck is a freelance writer and the author of over 50 books. He writes on many different topics, but business subjects are one of his primary areas of writing expertise. See Greg’s biography here.