I don’t know about you, but I seem to be meeting more and more people who work from home. You certainly can’t beat the commute and the low overhead, but being able to save on taxes is the icing on the cake. I can’t speak for everybody, but I think that saving money on taxes is way better than being able to work in your underwear!
For any business, expenses directly attributable to that business are deductible. For example, the supplies you buy at Office Depot, the lunch with the prospective client, the miles you logged to get to and from a client, all of these are deductible. When it comes to claiming a “home office deduction”, there are hoops to jump through (yes, even in your underwear!), to be able to fulfill the requirements, so I’ll lay some of them out.
Trade or business-a home office deduction can only be taken for a trade or business activity. You can’t claim it for something personal, such as trading stocks/managing investments for yourself.
Regular and exclusive use-whatever room or separate area of your home is used for your business must be used only for that business. For example, if you operate your business from your dining room table, but also use that dining room for family meals, it’s not being used ‘regularly and exclusively’ for the business, and a deduction wouldn’t be allowed for the dining room. If you have one bedroom in your home that’s your dedicated office, and you and the family use all the other rooms for personal use, that one bedroom would qualify.
Principal place of business-if you conduct your business at more than one location, you must consider the relative importance of each location you operate from, to determine if the home office is your principal place of business. If the home office is where you regularly carry out your administrative activities (and you have no other fixed location to do it), the home office will qualify.
There are other requirements for determining whether your home office qualifies for the deduction, but I can’t give away everything for free!
Say you’ve jumped through all the hoops and you’ve determined that your home office qualifies for the deduction, so what are you actually able to deduct? Good question you ask!
Deductible items can be direct and indirect. Direct expenses are ones that are paid just for that home office space, such as a light fixture repair in that one room. Indirect expenses are the most common, and are expenses that apply to the entire home, and need to be allocated. Some common ones are mortgage interest, real estate tax, rent, and utilities. Indirect expenses are allocated based on what percentage of your total living space is used regularly and exclusively for business. For example, if you rent an apartment that’s 1000 square feet, and the one bedroom you use for biz is 250 square feet, 25% of your indirect expenses would be deductible as the home office deduction.
As I mentioned at the beginning, there are a bunch of hoops to jump through, and I just barely touched on some of them. If you work from home, and haven’t previously thought of taking a home office deduction, now’s the time to start thinking about that, as well as other tax planning. Speak with your favorite CPA (hopefully that’s me) for more details.
Please leave a comment about your own home office deduction experience, or leave a comment to let me know that you like this article, and please pass it along to somebody you know, for whom it might be helpful. Let me know if you have a topic you’d like me to write about in the future. Nice underwear!