IRS Audit, IRS Audit Help, IRS Tax Problems

IRS Deduction for Home Office

February 28, 2013 - IRS Audit, IRS Audit Help, IRS Tax Problems

Can you really save a bundle in taxes when you work from your home?   I know many very successful business people who do work from their home. I work from my office space in my home. This blog is all about the basics of what you need to know qualify for this deduction. You will know what you need to do to protect your deduction.     Basic Qualifications There are some basic qualifications. First, are you in a BUSINESS? A hobby is not a business. A hobby is usually an enjoyable activity. There is certainly nothing wrong with enjoying what you do. I have heard that if you enjoy what you do, it is not really work. But what makes your activity a business?   Is your business one that will allow you to support yourself and your family? Do you spend regular time and effort in pursuing the profit in your activity?  Are you making the decisions that help generate a profit? The Internal Revenue Service wants to see a profit reported on your tax return in three out of five consecutive years.   When you have a true business and you operate that business from home, the next question is, do you have a space in your home that you use REGULARLY and EXCLUSIVELY as your PRINCIPAL place of business? Regular means steady or consistent. Exclusive means only business is conducted in this space. The spare bedroom you have converted to your office cannot also be used as the guest bedroom or the playroom or any other personal activity. Principal means you have no other fixed location where you conduct the majority of your administrative or management activities of your trade or business.   No Walls Neccessary Your office space does not have to have a wall, or physical partition. Your workspace can be located in a corner or section of a room. The next question in deciding if you WANT to take this deduction has to with how much space in your home is business and how much space is not. Measure your work space. Measure your whole home. Divide the square footage of your workspace by the square footage of your whole home. If your work space is 10-foot by 12-foot, you have a 10 x 12 room or 120 square feet. If you live in a 1500 square foot home, your business percentage is 8 percent, 120 divided by 1500. You have to do the math to see if this deduction is worth taking.   If you own your own home and pay mortgage interest and real estate tax, you may choose to itemize your deductions. When you have a qualifying home office, you can deduct the business percentage of expenses not otherwise allowable as itemized deductions. Some of those expenses include home insurance, utilities and depreciation.   It is important to know that if you operate more than one business from your home office, BOTH activities must meet all of the qualifying rules or you get NO deduction for business use of your home.   Pictures Please Do you remember hearing “A picture is worth a thousand words.”? I recommend you take pictures of your home office space. Keep those pictures with your other records including your square footage calculation. Keep your monthly utility receipts for each year. Keep them for at least 7 years in case of a tax audit.   I’ve just touched on the basic points of this complicated deduction. If you have a question about your own particular situation, you will want to consult with a tax professional. Leave a comment on this site to continue the discussion.   Always to your lowest legal tax,   Nellie T Williams, EA