Do you work at home? Do you know if you qualify to take a home office deduction? Sadly most Americans aren't claiming their home office on their taxes. According to Forbes.com, “… an estimated 26 million Americans have home offices, but just 3.4 million taxpapers claim a home office deduction”.
Why aren't people claiming a home office deduction? Most people remember when a home office was a red-flag that could trigger a tax audit. That's no longer true. So many people are using their homes as their primary place of business, that there's no reason not to claim the deductions as long as you meet the rules.
Rules to Take a Home Office Deduction
You must use the area exclusively and on a regular basis, as your principal place of business or a setting where you meet with clients. This means you can't claim your dining room if you also have meals there. You also can't deduct a guest bedroom.
It's a little harder to decide when you are running a business from home on a part-time basis or handle administrative tasks at home and work work in customer's homes, as plumbers do. The same rules work apply. Do you consistently work in your home office one day a week? And is that office space used solely for the business?
Recently I discovered the home office above. It's part of the family den and the short wall on the right defines clear boundaries on where the office starts.
How to Pick the Right Home Office Deduction
As of 2013, there are two different ways to calculate your home office deduction.
- The regular method requires you to pull together lots of paperwork and calculate your deduction according to a set of rules outlined below. For many small business owners, this extra work is a challenge and the simplified option addresses this.
- The new simplified home office deduction option doesn't change the criteria for claiming a deduction. It simply provides a standard deduction of $5/sq ft up to 300 square feet. You can get more information on the IRS wbsite, which compares the two choices.
What Home Office Deductions Are Allowed
- Direct expenses are those dedicated to your home office and nothing else. One hundred percent of these costs can be deducted. For example – paying someone to paint the room, office furniture, buying a computer and office supplies.
- Indirect expenses must be pro-rated based on the size of your office. For example, my home office is 240 sq ft. That represents 7.9 percent of my home's total square footage, so that percent needs to be multiplied against:
- Mortgage interest but not the principal, property taxes and insurance.
- Utility bills including the electric bill, water bill, trash pickup, a security system and the Internet unless it's used exclusively for business.
- Phone bills are a bit tricky. You can't deduct the standard monthly charge on the first phone in your home. If you only have a cell phone, it's recommended that you talk to your tax advisor.
- Home repairs to the house unless they only benefit your home office, in which case it's a direct expense.
More Home Office Tips
In case you're interested in more ideas for your home office, here are just a few other articles. If you've got a home office story you'd like to share, email me with your ideas.
- What's In Your Home Office?
- Home Office Decorating Ideas for Any Budget
- Home Office Organization Sheds Pounds
- Organizing a Small Office Space, A Homeowner's Story