How to deduct your home office on your tax return form
Published 12:00 am Wednesday, March 9, 2005
Working from home is full of perks. You can sit at the computer in your flannel pjs and fuzzy slippers instead of a business suit. You can whip up a home-cooked lunch instead of standing in line at the local deli. You can throw in a load of laundry and it will be done by the time you finish that Excel spreadsheet. You have an office space that you don’t have to dish out rent for every month.
And one of the best perks is that you can deduct the expenses of running a home office from your taxes.
What’s so great about a home office tax deduction is that any kind of business deduction – whether it’s for your home-office or basic business expenses – reduces your net business income. In turn, you have less self-employment tax to pay on your net business income.
The law applies to anyone working at home for the convenience of the employer or someone who is self employed full- or part-time. “For the convenience of the employer” means that your employer doesn’t have work space and expects you to work primarily from home.
If you use part of your home for business and you meet the requirements of the law, deductions are based on what percentage of your home is used for the home office. You can deduct a percentage of the cost of home-related expenses such as utilities, rent, depreciation, mortgage interest and real estate taxes.
“Home” is loosely defined by the Internal Revenue Service (IRS) as a house, condo or apartment. It can be a mobile home or boat, as long as you can cook and sleep there. Whether you rent or own – it doesn’t matter.
You must meet two requirements:
1. You must regularly use part of your home exclusively for a trade or business on a continuing basis. A few hours a day might not be enough. And the area must only be used for business, not for business and personal purposes.
2. You must be able to show one of the following:
a. You use your home as your principal place of business
b. You meet patients, clients or customers at home.
c. You use a separate structure on your property exclusively for business purposes. It doesn’t have to be a full room – it can be part of a room where you keep your business equipment and supplies. For example, it can be a studio or a converted garage or barn.
DOCUMENT YOUR DEDUCTIONS
You may be required to document your office deductions. Here’s how to establish your right:
* Keep an appointment book of clients or customers and the date and time of all meetings. That way, you can document your work even if you are audited by the IRS.
* Have your business mail sent to your home.
* Use your home address on business cards, stationery and ads.
* Get a phone line for your business that is separate from your home one.
* Keep track of the time you spend working at home.
* Photograph the office. Draw a diagram showing the location in your home.
Remember: The rules explained above apply to home-related expenses, such as utilities and rent. Anyone operating a business can deduct expenses like postage, advertising, travel, equipment, and a separate telephone line.
Don’t overlook home-business tax-saving deductions. For more information, visit www.irs.gov, or consult your accountant or tax adviser.