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Is your home office deductible?

Many eligible taxpayers avoid this deduction because they've heard it's complicated and likely to trigger an audit. There are lots of rules, but here's the plain-English translation.

By Stacy Johnson Feb 6, 2012 8:32PM

This post is from Brandon Ballenger at partner site Money Talks News.

 

Starting today we kick off a series on tricks to save you time, money and hassle with your annual chore from Uncle Sam.

 

We're going to start with a hack that could save you hundreds in taxes -- deducting a home office.

 

Are you a telecommuter or self-employed? In the video below, Money Talks News founder and CPA Stacy Johnson breaks down the basics of that tricky home office deduction. If you’ve ever passed it up because you thought it was too complicated or feared an audit, check out this video, then read on for more. (Post continues below.)

A home office deduction could be worth plenty, so if you're eligible, be sure you take advantage of it. Here’s a closer look at how to know if, and how much, you can deduct when you work at home.

 

Exclusive use

 

IRS Publication 587 says "To qualify to deduct expenses for business use of your home, you must use part of your home … exclusively and regularly as your principal place of business." That sounds straightforward, but there are some key terms that aren’t spelled out. The first of these is "exclusively," and here’s how it works:

  • The space can be as small as a desk or as big as a room -- there’s no size requirement, and there don’t have to be walls or partitions marking it off. It just has to be a "separately identifiable space" and used exclusively for business.
  • The space cannot be used for personal purposes. Even if you do all your accounting in the dining room, eating there nixes the deduction.
  • You can ignore the previous point if the business use is "storage" or "daycare," but there is an entirely different set of requirements you have to meet. Storage space has to be for product inventory you intend to sell, and your home has to be "the only fixed location" of your business. So you don’t qualify if you’re just storing extra business equipment, or operate in a commercial space and keep spare stock at home. Daycare centers have to meet state licensing requirements -- you can’t claim the deduction just because your kids are always running in and out of the office.
  • Like independent contractors or sole proprietors, employees can deduct home office expenses, but there are additional restrictions. Your use has to be for the company’s convenience (because it lacks space, for instance) instead of yours (it's easier to work from home). You also can’t double-dip by renting the space to your employer and claiming the deduction.
Primary or principal place

 

The other major tricky term is "principal." Here’s what the IRS means by that:

  • It’s OK to have more than one place of business and claim the deduction. But you can claim the home office only if it’s where you do the majority of the work, or certain kinds of work.
  • If your home office isn’t where you spend the most time or do the most important part of your job, it’s still a valid deduction if you use it "exclusively and regularly for administrative or management activities" such as billing, record keeping, ordering, writing reports or booking appointments. So people like plumbers, whose job is to visit other people’s homes and businesses for a living, can still potentially claim the deduction.
  • There are several situations that don’t automatically disqualify your home office, including: having somebody else handle the administrative stuff, handling those kinds of tasks minimally outside the office or while traveling ("places that are not fixed locations of your business") or primarily using your home office for administrative tasks even though another place in your business has ample space for them.
  • Another big exception for doctors, dentists, attorneys and many other professionals: If part of your home is used exclusively and regularly to meet with clients, patients or customers, it still qualifies for the deduction without it being your primary place of business. But telephone or video calls and occasional visits don’t count -- you have to meet in person, regularly.
  • It’s OK to take a partial deduction if you met the requirements only for part of the year -- just make sure you get the math straight.
Figuring the deduction

 

If you think all the allowances and exceptions are messy, at least the IRS has a flow chart for that.


The hard part is doing the math, which isn’t quickly summed up. If you use tax software, you have a leg up. If not, you may need to consult a free home office deduction calculator or a tax pro -- or a little patience.


If you file Schedule F (Form 1040) or are an employee or business partner, use this home office deduction worksheet to figure things out. If you’re self-employed and file a Schedule C (Form 1040), use this example instead.

 

Whatever you use, you’ll definitely need to know the total square footage of your office space and home, because you can deduct only the percentage of expenses in your home that the business uses. So if you have a 2,000-square-foot home and use a 200-square-foot spare bedroom as a home office, you can deduct up to 10% of the rent or mortgage payments, utilities, insurance and so on. Stuff that’s only for the business area, like paint, can be fully deducted.


Bottom line? Don't shy away from this deduction if you're eligible. Take the time to figure it out and save some money, but document everything. This is an area of the tax law rife with abuse, so the IRS does keep a watchful eye.


More on Money Talks News and MSN Money:

VIDEO ON MSN MONEY

5Comments
Feb 8, 2012 11:13AM
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@ gozo man. Interesting comment. But your wrong. Anyone can start a home based business, use it as a write off,  and be successful. No, this is not where I come in trying to sell you something. I am a real person, with a real business, and I did it all with a computer, and a trashy apartment I rented for 210.00 a month. No heat, no AC, just an internet connection and the will to work 80 hours a week. The problem with the 1%, is they only use 1% of their brain.
Feb 10, 2012 4:19PM
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I like how Gozo immediately assumes - I don't need to say what they say about assumptions. It's cliche - but true.

 

Sunny Thai is right - how about instead of taking your anger out on those of us who are working our butts off FOR ourselves, get angry at those who are lazy and take advantage of the system.  Not everyone in this world is stupid, dumb, or evil. I'm SICK  and tired of the cranky judgmental attitudes.  Do the world a favor, and understand we expect realism, but leave out the drama.

 

So you are going to make the good, hardworking people pay over and over? First because there are repercussions from people who take advantage, second because there are bigots like you who treat everyone like the few who are lazy, and third by taking away the tax breaks hardworking business owners can get?  I bet in the same breath you'd complain the government isn't doing enough for the small businesses (which, is debatable).

 

Wow....you are really bright. Stick it to the man, just be angry....someone needs to spike your wheaties with some happy pills.

Feb 10, 2012 5:40PM
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Ok, this is a question I've had for a l-o-n-g time now. How does the IRS know whether my office space is a "separately identifiable space", or if it is used "exclusively for business" and not for personal purposes? I mean, really? Do they come out to your house and pay you a visit or what?  I have a seperate room that I devote to my business. I work from that space daily, but I also use the same room for personal projects. I never claim the deduction, but I have always wondered how in the heck the IRS knows what you do inside your own home?
May 7, 2012 6:37AM
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This is very common question about home and office taxes because most of property owner does not know their property are tax deductible and they paid higher tax then accurate tax value. In this terms your article help to many of property owner for evaluating value of property tax. Now most of property owner calculate value of property tax value with the help of property tax calculator tool for this reference you can visit............... property-tax-calculator.com
Feb 8, 2012 6:14AM
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Another example of how the 99% are unable to cheat uncle sam, like the rest of the 1% does.

 

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