Taking a home office deduction has triggered many an audit for American taxpayers, so it’s important to understand the law and know if your home office qualifies for the home office deduction.
Best of all, you can prepare yourself before you even start your home business so you can get every penny possible back.
What is the home office deduction?
The more people work at home, the most often they try to claim a home office deduction on their income taxes. The home office deduction allows taxpayers who work at home and maintain a home office to get a significant reduction in income taxes, as long as certain standards are met.
What are the criteria for the deduction?
There are three primary criteria you must meet to take the home office deduction. For someone operating a work at home business, the first one is the hardest to meet.
The first criteria that the IRS uses to determine if you are eligible for the home office deduction is the question of how the space is used. To qualify, you must use your home office exclusively for your home business. If you use a corner of the family room for the home office, this can be hard to prove.
When the IRS talks about exclusive use, it means exclusive and regular use. That is, the only activities that should take place in the space should be those related to your business. You should only conduct work activities there. If the kids use the computer for gaming, or you pay bills at your desk, or print family menus there, it doesn’t qualify.
As well, the home office should be used regularly for your home business. Let’s say you primarily work on a laptop in your car but your home office is your home base. But if you rarely actually use that home office, you likely won’t be able to claim it on your taxes as a home office deduction.
If you run a daycare from your home, there is an exception given to the exclusive use criteria because while the home is used regularly for business, it’s not used exclusively for business.
The second criteria concerns why the home office is used as a home office. That is, if you work from home at your own business, you will meet this criterion. Most home businesses will meet this particular point, but if you work for an employer and you sometimes work at home, it can be hard to prove this particular requirement, especially if the employer also provides an office or space for you to work away from your home.
The third criterion applies to people who have more than one home business. If you have more than one home business, every single one of them must qualify for the home office deduction in order for you to take the deduction. That is, if one of the businesses does not qualify, but the others do, you can’t take the home office deduction on any of them.
What can you take?
When you qualify for the home office deduction, you can get tax deductions on the portion of your house that is used as a home office; for example, if you use 200 square feet for your home office, and your home is 1,600 square feet, you can get credits for 8 percent of the utilities, property taxes and other expenses related to your home.
In addition to the home office deduction, you can still take regular business deductions, like those for supplies, phone lines, internet service and the like.
How to make home office deductible
If you work at home full time, it makes sense to take some time figuring out how to create an environment that lends itself to taking that home office deduction. If your desk is in the family room, but you use it exclusively for the business, consider partitioning off the part of the room that is just for your business. That way, you create a home office that is used exclusively and regularly for your home office.
In addition, keep all receipts for computer purchases, furniture purchases and any other purchases that are used for your business. All of these are deductible in addition to the home office.