You’ve based your business in your home, and you have no other office from which you work, so you’ve been thinking for a long time about taking the home office deduction on your income taxes. But you’ve never done the numbers because someone told you that home office deductions are like raising the “audit me flag” for the IRS.
Unfortunately, fear too often outweighs the facts, causing some taxpayers to miss out on a tax break. If you’re using a portion of your residence only – with emphasis on “only” – for business purposes, the deduction may well be a benefit you can claim.
If your situation qualifies, IRS rules allow you to deduct certain items on a percentage-use basis, including property taxes, mortgage payments, rent, electricity, water and other utilities, maintenance and repair, and other costs, including vehicle expenses.
For example, you have a desk, computer, office phone, files and other office-related items in your basement, but it also doubles as where your family gathers to watch TV, it’s not deductible.
However, if you put up a partition or divider separating your office area from the family’s room, you have a separate office area and are likely eligible to take the home office deduction.
If you have a guest bedroom you’ve converted into use solely as an office, it qualifies. If you use it both as an office and as a place for guests to sleep – even occasionally – you’re not qualified for the deduction.
The home office tax deduction can be applied to a house; condominium; apartment; boat; tree house; and one need not own the residence to quality, as it’s open to renters as well.
The IRS’s “regular and exclusive use” method of calculations and percentages viewed as daunting by many work-from-home taxpayers. Plus, if audited, you must be able to prove that each square inch you claimed for deduction purposes was actually used solely for business.
Recognizing the complexity being foisted on small business owners and the reality that an increasing number of entrepreneurs were operating from home, the IRS developed a second approach apart, informally referred to as the simplified method.
The regular method requires deducting the actual expenses on a percentage basis according to IRS rules. This means keeping detailed records of every aspect of our use of this space as business-only. Documentation is crucial; without it you leave yourself open to IRS examination and the accompanying potential penalties.
The simplified method is to take a $5 per-square-foot deduction for your home’s square feet used strictly for business. This has a cap of 300 square-feet, or a $1,500 deduction. If your business is more than 300 square feet you’re not permitted to use the simplified method.
Consulting with a tax advisor is helpful if you want to explore this deduction or to ensure you’re doing it right.