Home Office Tax Deduction

How and when to take the home office deduction on your taxes can be confusing, but if you meet the criteria, it’s a legitimate deduction so don’t just discard the idea. There has always been scuttlebutt that using the deduction raises your risk of audit. Not true, according to the IRS. So what do you do?

Since there is no way to know for sure, having good documentation is the best way to protect your home office deduction in case it’s questioned. You need to show that you are using the home office “exclusively and regularly” for managing your business and performing administrative tasks.

Proving Home Office Use

The type of documentation that supports this deduction includes:

  • Tracking the home overhead expenses involved, such as rent, mortgage, utilities, etc.
  • Saving receipts for any specific alterations you make to create the home office space
  •  Having a floor plan showing the actual area dedicated to the business, including any areas you use for storage of products or supplies
  • Contemporaneous records of time spent in the home office working vs. being out on sales calls or meetings

The last item is sometimes a bit trickier to document, but a good start is to keep activity notes. If you’re in your home office making calls, meeting with your bookkeeper, ordering materials or doing other administrative tasks, it’s easy enough to note that activity in your calendar at the end of the day.  That way it’s documented the same way that your out of office business activities are.

An accountant can answer specifics about your situation and tax software will help walk you through the calculations if you prepare your own taxes.  And detailed home office information is also available on the IRS website.

The good news is that the IRS may be making this calculation easier in 2013. We’ll keep you posted if they do.

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