The home office tax deduction is a special deduction offered to self-employed individuals or employees who use their home for business. In order to claim a deduction an individual must use part of his/her home as a business office, meaning an area reserved for work. Within this office area, the individual can meet with patients or clients or go about performing services for income. But to be able to take the deduction, you need to meet the full requirements.
Are You Eligible for the Deduction?
In order to legally receive this deduction, a person must use an office area for business purposes in a “regular and exclusive” manner. Unfortunately, many people misunderstand this requirement of the Home Office Tax Deduction and therefore make a mistake by taking the deduction on their taxes when they don’t meet the standard —one that can ultimately result in an adverse audit finding.
How Much Can You Deduct?
It really depends on the percentage of the home that you use for business purposes.
The most common mistake is that some consumers deduct dual-use areas — that is, an office space that is used for both business and personal purposes. This is not the correct way to do it. The area must be exclusively used for business and not for any other purpose. This should be an area that is used for work or client meetings and cannot be used for any family or leisurely gatherings.
How Does it Work?
There are two options starting in 2013. The regular calculation involves determining the square footage that is for exclusive business use and then you can pro-rate various business overhead expenses based on that square footage. It’s a simple math calculation that all tax software or your accountant can guide you through. Your tax return will include Form 8829 (Expenses for Business Use of Your Home) which will itemize your expenses and calculate the deduction.
In addition to counting the square footage and determining a percentage of rent, taxpayers can also deduct pro-rata insurance costs, utilities, repairs, security system expenses, office supplies, local or long distance telephone costs and the depreciation of furniture.
The second option allows you to deduct $5 per square foot of home office up to 300 square feet without detailing all the expenses.
What is Usually Challenged by the IRS?
They could assert that you don’t meet the “exclusive use” standard & therefore deny the deduction. They could also challenge the square footage cited in your tax return as being excessive for your actual business use.
Documentation is critical. Having a floor plan and photos showing the area in use will help. The IRS does not require that you have to have an entirely separate room for business, just that it is readily discernible as separately used only for business. And you need to be able to document that in a way that the IRS accepts.
Is Any Downside to the Deduction?
Some people feel that taking the home office deduction is a red flag for getting audited; others don’t. If you follow the rules and have proper documentation, you’ll need to make your own decision about that. Not doing so means that you are losing a legitimate tax deduction.
If you are in doubt as to whether you are correctly calculating the Home Office Tax Deduction then speak to an accountant or review the IRS Publication 587, which covers home office tax issues.