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Deducting
home office expenses is one of the most talked about
and least understood deductions made available by
the IRS. Many people don’t take the deduction
or don’t take the full deduction because they
feel it’s too risky or may raise a red flag
that will send the IRS to their door. However, the
deduction was written into the law for a reason. The
IRS understands that many business owners operate
out of their homes, and you are entitled to take a
portion of your home expenses against your income.
As long as you follow the rules and document your
expenses, there is no reason for you not to take the
deduction. In fact, it could cost you thousands in
additional taxes if you don’t take the deduction.
Here are the facts:
Who can take the deduction?
Anyone who uses their home office
regularly and exclusively for business. Regularly
means often, rather than occasionally. Exclusively,
means that you can have absolutely no personal use
of it during the year and if you so much as use the
desk in your office to play a video game, your deduction
goes out the window, though the burden of proof would
fall onto the IRS that the office space is exclusive.
If your home office is your principal place of business,
meaning that there is no other location where you
perform administrative and management functions, then
you can claim the deduction. If you have another dedicated
office space, you should not claim the deduction.
What can I deduct?
You can deduct your rent or mortgage interest, real
estate taxes, homeowner’s insurance, utilities,
and repairs and maintenance. Repairs and maintenance
can include security systems, home warranties, cleaning
services, housecalls, etc. Keep in mind that any expense
directly related to the office space can be fully
deducted.
How much can I deduct?
You can deduct the amount attributable to the home
office. To determine this amount you can use one of
two methods: square footage method or the rooms method.
Calculate the amount of square footage of your office
and divide it by the total square footage of the home.
Then calculate the number of rooms you use for business
and divide it by the total number of rooms in the
home. Use the higher percentage and apply that against
your expenses. However, keep in mind, that your home
office expenses cannot be used to create a loss. If
you’re already operating at a loss, you won’t
be able to take the deduction, but you can carry the
losses forward until you do have a profit. Expenses
directly associated with your office space can be
deducted 100%.
How do I take the deduction?
If you
file your business return on a schedule C on your
1040, then you will need to attach Form 8829 to your
income tax return which itemizes your home office
expenses. If your business is a partnership or corporation,
then there is no separate form to file. You simply
need to list the expenses on your return with your
regular business expenses.
Please contact us today for a free consultation to see how we can help you with your tax and accounting needs!
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