According to Forbes, an estimated 26 million Americans have home offices, but just 3.4 million taxpayers actually claim home-office deductions. Why? In the past home office deductions often triggered red flags with the IRS. But, with the invent of the internet and as the number of people working from home has sky-rocketed, this is no longer the case. SO, why not get everything you can out of home office tax deductions.
Here are the 6 requirements for home office tax deductions, straight from the IRS website:
1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
- as your principal place of business, or
- as a place to meet or deal with patients, clients or customers in the normal course of your business, or
- in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.
2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.
3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.
6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.
And now, in layman’s terms…here, David Shabaz, CPA helps us understand home office tax deductions a little better:
Advice from David about your home office tax deductions to avoid red flags with the IRS:
– Make sure that your home office is used exclusively and regularly for business (however, you don’t have to be at your home office full-time, if you spend a significant portion of your time with clients –like an electrician or interior designer–yet use your office for billing and other record keeping, it still qualifies.)
– Set it up to “look” like an office so that there is no question
– Take a picture of your home office and include it with your tax records
Also, remember, that by establishing this home office, whenever you make trips to a client, supplier, bank or post office, you will be able to deduct a portion of your vehicle as a business expense, just remember to keep track of the mileage!
What else qualifies for home office tax deductions?
1) Direct Expenses (dedicated things required for your office- 100% deductible):
– Computers, printers and office furniture
– Paint, carpet and shelving
– Office supplies
– A dedicated business cell phone
2) Indirect expenses (pro-rated depending on the size of your home office and amount used for your business):
– Mortgage and utility bills (gas,electric, phone, water, internet)
– Home alarm system
…or, use the new rule for 2013
New (easier!) guidelines for home office tax deductions for 2013:
To simplify the above calculations for indirect expenses, the IRS is putting an alternative in place when filing your 2013 taxes called the “Safe Harbor Method”. Simply multiply the square footage of your home office (must still meet above requirements) and multiply by $5.00 (not to exceed 300 square feet).
Here are a few restrictions the IRS has put in place with the Safe Harbor Method:
- The deduction is limited to $1,500 per year, meaning that your home office space should not exceed 300 square feet; the exception to this, however, is dependent upon how many qualified home offices are under the same roof.
- The option chosen, whether the “safe harbor” method or the conventional (actual expenses) method must be consistently applied to all the Taxpayers’ qualified businesses.
- Taxpayers who share a home, regardless of filing status, may each claim the safe harbor deduction provided they have separate and distinct home office areas.
- Taxpayers who have more than one qualified home office, i.e. in more than one home, may use the safe harbor method for only one home office space.
- A taxpayer cannot opt for the safe harbor method if he or she derives rental income from the same home as the qualified business use.
- The safe harbor method is not applicable for those Taxpayers reimbursed by an employer for home office related expenses.
In addition, business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.
However, if you feel that your business would receive larger tax benefit from the original itemized deduction method, you may still choose this.
And as always, check with your tax professional about what is best for your small business!