Home Office Deductions: The Do's and Don'ts

Posted on February 4 2014

If you regularly work from a home office that is set aside for business purposes, you may be eligible to claim home office deductions. These small business tax deductions directly reduce your business profits for the year, which significantly decreases your tax burden on your income tax return. If you plan to deduct home office expenses, you will need to file with Form 1040, not Form 1040 EZ, and you will need to provide additional information on Schedule C and, depending on your situation, Form 8829.

Do you qualify to claim deductions for your home office?

Exclusive use: The main hurdle taxpayers come across in claiming deductions is that the home office needs to be exclusively used for business. If the office is used during the day for business operations but it is used for family purposes during other times, this home office does not qualify for any tax deductions. If the office is used for other purposes, a partition can be used to divide the portion used for business from the portion used for other purposes. Then, part of the office can be claimed as a small business tax deduction.

Primary location: The office also needs to be the primary place of business. This criteria can still be met if services are provided at the client's location, as long as bookkeeping is done in the home office. Alternately, the home office can be claimed if clients or customers are met in theoffice during a business day. If the office is a standalone building on one's property, it can be claimed even if it does not meet this requirement.

For employer's convenience: If you are on payroll with a traditional employer rather than being self-employed or owning your own business, you may need to work at home for your employer's convenience. You cannot deduct your home office if you typically work in a traditional office but bring some work home on occasion.

Regular use: Lastly, the home office must be used regularly. The IRS does not offer a specific definition for this criteria, but if the office is only used once a year to prepare taxes, it likely does not constitute regular use. However, if the office is used for business approximately the same number of hours each week, it should qualify.

Option 1: Deduct Direct and Indirect Costs of Home Office

Direct costs: Itemize all of the direct costs of maintaining and operating a home office on your tax return. Repairs and maintenance to the space fall into this category, so if the office is painted, the cost can be deducted. Dedicated utilities for the office, such as a second phone line or long distance calls made on primary landlines, can be deducted. However, the deduction cannot come from the basic cost of a singular homelandline.

Indirect costs: The bulk of the deduction will come from indirect costs, which are costs paid for the whole home. A percentage of these can be deducted, based on the percentage of the home that the office occupies. Divide the square footage of the office by the total square footage of the home to determine the correct percentage. Deduct this percentage of mortgage interest, property taxes, homeowners insurance, utilities, and repairs that apply to the whole home.

Depreciation: Lastly, you can deduct depreciation on your home, assuming you are a home owner. The calculations for this part are complex, but onepricetaxes will walk you through each step to ensure you are deducting the correct amount.

Option 2: Use the New, Simplified Method for Computing Your Home Office Deduction

The IRS has recently made a change that can simplify the process of taking a home office deduction. Rather than adding up the direct and indirect costs, which requires careful record keeping that may be tedious for small business owners, it is now possible to take a simplified deduction of $5 per square foot. The maximum deduction with this method is $1,500, which would be for an office of 300 square feet.

The advantage to using the simplified method is that receipts do not need to be saved for every individual expense. Additionally, it is much easier to show the source of the information used for your calculations in an audit, given that the only information needed is the square footage of the home office. Remember that you can add the AuditGuard protection to make it easy to defend your tax return in the event of an audit.

Receive the Benefit of Home Office Deductions This Year

If you work in a home office, don't hesitate to claim it as a tax deduction this year. Start filling out your tax return online with onepricetaxes today and answer the simple questions to calculate the correct amount for your tax deduction. 
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