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The Home Office Deduction

If you use a part of your home for business - perhaps to perform paperwork; to store records, inventory or samples; or even to meet customers - you may be able to claim a tax deduction for some of your expenses of maintaining the home.

Now, you may have heard that the home office deduction is either one of the greatest money-savers available to American small business, or that it is a major red flag that will make you audit bait for the IRS.

As a general rule, you should never shy away from taking a deduction you can legally claim. The same holds true when it comes to the home office deduction. Nevertheless, we recommend that you keep meticulous records of all your expenses and be prepared to back them up.

There are also those who have dangerous misconceptions about the way the deduction works. Perhaps you have heard about folks who furnish their entire home in rare antiques and write them off as a "business expense." Or people who think the deduction entitles them to pass on the cost of a new stove, billiard table, or hot tub to the government. And, on the other hand, there are people who think that unless they claim a home office deduction, they can't claim any deduction for business expenses or assets used in their home.

This discussion seeks to clear away the misconceptions and provide you with a special calculator to estimate your potential home office tax deduction. However, before tackling the tax issues, there are also a number of non-tax aspects you may want to consider, such as "Is it legal to operate a business from my home?" or "Do I have to have any special permits from my town to do so?"

Not one deduction, but many. In reality, when we speak of the home office deduction, we're really talking about a group of smaller deductions. These deductions - which may include such items as a portion of utility bills, mortgage interest, repairs, and depreciation - are totaled up to get an overall deduction that is reported on IRS Form 8829, Expenses for Business Use of Your Home. In addition, if you qualify for the home office deduction, you may also qualify for some special, more liberal rules for deducting auto expenses. The common denominator among these deductions is that the IRS has devised a single test to determine whether you qualify for all of them.

Some deductions are available even if you don't qualify for the home office deduction. A commonly held misconception is that you need to qualify for the deduction in order to claim any expenses associated with a home or a home-based business. This is simply not true.

For example, home mortgage interest and real estate taxes would be allowed as an itemized deduction on Schedule A of your tax return in any case, even if you can't take a home office deduction. Office supplies, postage, and the cost of bringing a second telephone line into your home for business use may also be deductible. Moreover, you may be able to depreciate the cost of computers and office furniture you buy to use at home, even if you're not allowed to deduct the cost of the office itself.

Business Tools

Among the Business Tools are Form 1040, Form 8829 and Schedule A. They are in Adobe Portable Document Format (.pdf), and you will need the free Acrobat Reader to view and print the file.

Having said that, we're ready to discuss the details of the home office deduction and to help you calculate your deduction amount.

  • Determine whether you qualify for the deduction. The requirements for claiming the deduction are fairly strict, so review this discussion carefully.
  • Research key factors that affect the size of your deduction. You will first need to become familiar with what these factors are. You will then need to collect and organize certain information in order to maximize your benefits under the deduction.
  • Compute your home office deduction using our special calculator. This tool automatically performs many of the complicated steps involved in figuring a home office deduction. Using it, you can quickly get a good picture of what the deduction may be worth to you. You can also bring the profile with you when you meet with your tax professional to simplify things and save time. For best results, you should input the most accurate information possible on our electronic form.
  • Review examples of what various costs that small business owners may save - and in some cases what they may not save - by claiming this deduction.
  • Claim your deduction(s) on the correct form. There are different forms that you must use to claim a home office deduction depending on whether you are self-employed, or are claiming home office expenses associated with working for someone else. Be sure that you are using the right form.