| Do you work from home, full or even part-time? Did | | | | can add up to a lot of money. Add up your utility costs |
| you know you may be able to use part of your utilities, | | | | at $200 or $300 per month, plus your homeowners |
| rent, insurance, home mortgage interest, and more to | | | | insurance, repairs and maintenance, property taxes, |
| save money on your income tax return? | | | | and mortgage interest, and so on, then multiply it by |
| Today over 50% of small businesses are | | | | 2.5%, and you'll find that the actual deduction can be |
| home-based, and may qualify for a significant tax | | | | several thousand dollars. |
| advantage. Just because you work from home | | | | Who can claim the Home Office Deduction? |
| doesn't automatically mean you're entitled to claim a | | | | In general, all home based business owners may |
| home office deduction. Even if you qualify, there's a | | | | deduct various expenses incurred in operating a |
| right way and a wrong way to claim the Home Office | | | | business from home. However, for the purposes of |
| Deduction. Many taxpayers over-use and abuse it, | | | | this article, and specific to what is typically identified as |
| risking an IRS audit. Many others under-use or even | | | | "the Home Office Deduction", our focus is on Sole |
| overlook the deduction, and pay too much tax as a | | | | Proprietors. Approximately 80% of all small businesses |
| consequence. | | | | operate under the Sole Proprietor structure, so it's |
| When April 15th comes around, it definitely pays to | | | | most likely you fall in this category and file your |
| "know the code". In fact, this one section of the IRS | | | | business taxes on a Schedule C as part of your |
| tax code, properly applied, can legally save you many | | | | regular Form 1040 tax return. On the other hand, if you |
| hundreds or even thousands of dollars in taxes. | | | | have incorporated, or formed an LLC, you may be |
| We can 'break the code', so to speak, by simply | | | | required to use other tax forms in compliance with |
| answering the basic questions... ("What?" "When?" | | | | other sections of the IRS tax code. Be sure to consult |
| "Why?" and "How?") | | | | with your accountant for more details. |
| What is considered a "home office"? | | | | How do you actually claim the deduction? |
| The IRS states that a home office is a room, or | | | | The tax form required to file for a home office |
| portion of a room in your home that is used to | | | | deduction is IRS form 8829. The form can be a bit |
| exclusively and regularly to conduct business. I want to | | | | intimidating, so make sure you understand it completely |
| highlight three important words in that sentence: | | | | or seek the help of your accountant to ensure |
| "portion", "exclusively", and "regularly". | | | | accuracy. |
| Portion: The area used for your desk and computer | | | | Do you have to do business with customers at home |
| area is considered your home office; you don't have to | | | | in order to claim the deduction? |
| use an entire room. If you do, that's great-claim it!-but | | | | Bottom line, your home must be your "principal place of |
| you can properly claim only a portion of it. | | | | business", but not necessarily where you meet |
| Exclusive: The area must not be used for personal | | | | customers. The IRS considers the principal place of |
| activities such as paying bills, playing video games, etc. | | | | business to be where you spend most of your time |
| Many contractors or network marketing business | | | | and where you earn your money. For instance, a |
| owners who work from home use a portion of an | | | | plumber or interior decorator's principal place of |
| extra bedroom as their 'office'. That portion of the | | | | business would typically be customer locations. |
| guest bedroom may in fact be claimed, but only if it is | | | | However, the law allows you to treat the home office |
| used exclusively for business. | | | | as your principal place of business if you use it to do |
| Regularly: The area claimed for the home office | | | | substantial administrative chores, such as keeping your |
| deduction must be used day-in and day-out for | | | | books, ordering supplies and scheduling appointments, |
| business use. Note that other work areas around the | | | | and you have no other fixed location for your business, |
| home may be utilized on an occasional basis... the | | | | such as a storefront or office somewhere else. |
| kitchen table, for example. But only an area used | | | | Is there anything else to consider? |
| exclusively and regularly is deductible according to the | | | | Do consider the fact that claiming home office |
| IRS tax code. | | | | expenses may bring with it the possibility of an audit. |
| Which household costs can you include in the | | | | The IRS has been vigilant in checking on Schedule C |
| deduction? | | | | business deductions in general, so it is vital to ensure |
| There are two types of household expenses which | | | | your information is as accurate as possible. Let's face |
| can be included in the Home Office Deduction: (1.) | | | | it, if you are a home business owner, then you are, by |
| direct costs, such as a fax line, and (2.) indirect costs | | | | your very nature, a doer. You love challenges and are |
| that may be shared between your home and business | | | | eager to roll up your sleeves and take on the day to |
| (electricity, insurance, rent, property taxes, etc). Indirect | | | | day responsibilities of growing the business and serving |
| costs are allocated according to the percent of the | | | | your customers. Unfortunately, lack of time and lack of |
| total area of the home you are using exclusively and | | | | expertise can mean that government required |
| regularly for business purposes. | | | | paperwork and record-keeping details get pushed to |
| For example, if your home contains 2000 square feet | | | | the back-burner. This can be costly; it never pays to |
| of total living space, but your office space takes up | | | | "wing it" with the IRS! |
| only 50 square feet, then 2.5% of your indirect | | | | There are other factors to consider as well; this article |
| expenses may be claimed as a 'write-off' against your | | | | is only designed to present a brief review of the topic. |
| gross receipts to arrive at your bottom-line taxable | | | | To find out more specifics about the home office |
| income. | | | | deduction, see IRS Publication 587 at the IRS website. |
| That 2.5% may sound like a little, but in real dollars it | | | | |