Claiming home office tax deductions was once considered a great way to treat yourself to an audit. Thankfully the IRS has simplified the rules and home office deductions are more common and simpler to claim than many people realize.
Good thing too, as the number of people working from home has grown exponentially over the last decade.
If you’re a small business owner who could be taking this deduction but you aren’t, you’re missing out on a great money-saving opportunity. That said, there are still some pitfalls, so here are the ins and outs of claiming home office IRS tax deductions.
If you remember just one thing from this article, let it be this: the office space has to be 100% dedicated to and routinely (not just occasionally) used for business. Here is a checklist of what you can and can’t use the space for:
Let’s be honest, countless people bend these rules each year when claiming home office deductions. On the plus side, as long as your return doesn’t get flagged for an audit (either by triggering an algorithm or at random), the space will never be inspected by an auditor. However, if you are flagged for an audit and the auditor determines you’ve violated the rules for the year in question, he/she can audit back taxes indefinitely in search of other incidences of this and other violations. Before you decide to join those many taxpayers bending these rules, you have to ask yourself, “Is it worth the risk?”
So if you have determined that you do meet the qualifications above then there are two ways to go about claiming your home office deductions.
Another method that is a little simpler is if all the rooms in your home are roughly the same size you can just divide the number of rooms you use for your business by the total number of rooms in your home.
This difference is much like the standard mileage rate (with which most of us are familiar) and actual vehicle expenses (which many are not) options for business use of a personal vehicle. To determine which one is best for you, calculate the benefit of both for the tax year and claim the one that provides the biggest deduction.
If you use the percentage of home method, all these expenses qualify for the deduction:
*If you sell your home at a profit, you will have to pay capital gains tax on your accumulated depreciation deduction. Since home prices tend to rise over time, many filers decline to take depreciation expense.
Because of all the things that potentially go into the indirect category, that can be the largest source of deductible expenses and make the percentage of home method the more generous overall. For this reason, many filers claim the home office deduction using the percentage of home calculation even though the rate per square foot method is much simpler.
It really all comes down to if you truly have a dedicated space in your home for you to conduct your business. In this day and age home offices are quite common and you shouldn’t hesitate to or worry about claiming the expense if you meet the qualifications. The IRS allows these deductions for a reason and home-based businesses should take advantage of every possible savings.
Of course, the ultimate arbiter of all things tax-related is the IRS. Read the agency’s general guidance on the home office deduction and more detailed instructions for claiming business use of your home. To claim this deduction, you’ll use Schedule C and/or Form 8829, Expenses for Business Use of Your Home.
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Jacob Dayan is the CEO and co-founder of Chicago-based companies Community Tax and Finance Pal, both of which provide tax resolution, tax preparation, bookkeeping and accounting services on a national scale. He previously worked on Wall Street as an options analyst and as a foreign exchange trader. Jacob holds a Bachelor’s degree in Business Administration from the University of Michigan’s Ross School of Business.