So you want to take advantage of home office tax deductions on your tax filing? With more and more Americans conducting work from home, this is a method for lowering your tax liability. If you are a self-employed individual, and you use a portion of your home for work-related activities, you could deduct home office expenses.
While this is an available deduction, it is one that brings some risk and could flag the Internal Revenue Service to audit your tax return. You will want to understand the IRS requirements before you claim a home office deduction.
Standard Home Office Requirements
Before you claim any home office deduction, you must have an area inside your home used regularly and exclusively for work-related activities. In other words, a fax and computer in the corner of a bedroom used occasionally for sending out marketing pieces will not qualify as a home office in the eyes of the IRS.
Another key word in this requirement is “exclusive”. The area designated as a home office must have exclusive use as a home office. It is a principal place of business or a location designated to “meet or deal with patients, clients or customers in the normal course of your business”, according to the IRS. On the other hand, a “separate structure not attached to your home” may also qualify as your home office.
Not long ago, the IRS expanded its definition of business activities that can be considered in determining whether a taxpayer’s home office is their principal place of business. Today, if a home office is used “exclusively and regularly for the administrative or management activities of your business”, it does qualify. In addition, administrative activities such as billing operations, managing your books and business records, ordering office supplies, or setting up business meetings and appointments also qualify. Just be sure these activities are ones taking place in this location.
Employees or Schedule C Taxpayers
In the past, Independent Contractors, and employees who work from home could claim the deduction. With 2017’s Tax Cuts and Jobs Act, the deduction is no longer available for employees. This change affected all employee business expenses but was offset by a significant increase in the standard deduction.
Limits on Write-offs
The law places caps on the amount you can deduct from the business use of your home. Generally, your home office deductions can’t exceed your home-based business income. Also, if you have to pay Alternative Minimum Tax (AMT) when you itemize deductions, the home office deduction may be a contributing factor. Finally, if you depreciate a portion of your home as part of your home office deduction and later sell your home at a profit, you will pay a capital gains tax on the total amount of the depreciable deductions.
Home Office Deductions
Once you meet the IRS requirements, there is a long list of items you can deduct including:
Office equipment
A portion of real estate taxes paid
Mortgage interest
Rent
Home utilities
Insurance
Depreciation
Painting and general upkeep expenses
Repairs
Landscaping, only if you receive clients or customers at your home for business
Note: These apply proportionally to the size of the office in relation to the size of the home.
If you are self-employed, a good reference to use is IRS Form 8829, which is called, “Expenses for Business Use of Your Home” to compile and calculate all home office deductions. Furthermore, you will need to report these deductions on Form 1040 Schedule C, Profit or Loss From Business.
In 2013, an alternate, Simplified Method, was put in place making it easier to claim the deduction. You must still meet the “regular’ and 'exclusive” requirement for Expenses for Business Use of Your Home, but you don’t need to depreciate the home or keep track of the various expenses. Instead, you merely list the square footage of your space and you will receive a $5 per square foot deduction up to 300 sq ft or $1,500. This amount often exceeds the actual expense method, and you don’t have to pay capital gains due to depreciation when you sell your home.
Tread Carefully
As a taxpayer, you want to be sure to get every tax deduction you deserve. But there is some risk to this endeavor which is an increase in the likelihood of an IRS audit. In fact, the IRS has increased its vigilance in identifying home office deduction fraud, so you will want to be sure and remain compliant.
ATBS has been filing on behalf of self-employed contractors and employees of companies since 1998. Every year our trained staff is judicious in ensuring you get every legal tax deduction you deserve. Our excellent relationship with the federal government, our team of tax resolution specialists, and our staff of CPAs and Registered Tax Return Preparers translate to knowing more than any other firm how to file for the most tax deductions you legally deserve.
Let ATBS help you with your taxes – call us today at (866) 920-2827.