One of the benefits of being self-employed and working from home is that you may qualify for some additional tax advantages. In some instances you are allowed to deduct some expenses if you use part of your home for business purposes. While there are some good tax breaks available, you first have to understand and make sure that you meet the IRS requirements.
What is Considered a Home Office
The IRS states that a home office is a room, or portion of a room in your home that is used to exclusively and regularly conduct business. This definition would also consider separate outside or attached structures. Keep in min that the area where you are conducting business must be used exclusively for that purpose. A room that serves dual purpose won’t do.
For example, if you are using a spare bedroom as a home office where you keep files, a desk, and computer, yet when guests stay over they use it as a bedroom, this won’t qualify as an exclusive business use and therefore ineligible for the deduction.
The Place of Business
To qualify, you need to not only meet the requirement of regular and exclusive use, but you must meet the place of business requirement. This defines the place of business as the principal location of conducting business, or a place where you regularly meet with clients or customers.
In this case, you want to be sure that the portion of your home that you wish to deduct is your primary place of business, or that you regularly use that space to meet with clients. If you can pass both of those tests, you are likely to qualify for the home office deduction.
What Can be Deducted?
The home office deduction isn’t just a flat calculation. It actually is a combination of many individual deductions which can be either direct or indirect expenses. Direct expenses are those used exclusively for your business such as a dedicated fax line, office equipment, or dedicated utilities.
Indirect expenses are those that may be shared between your home and business. This includes things such as electricity, homeowners insurance, property taxes and so on. With indirect expenses you can only deduct the amount that represents the percentage of the home that your home office is.
For example, if you own a 2,000 square foot home and your dedicated home office is 100 square feet; your home office percentage is 5%. This would mean that you can deduct 5% of your indirect expenses for your home office deduction.
How to Claim the Deduction
In order to file for a home office deduction you need to file IRS form 8829. Here is an example of the 2006 form. The form can be a bit intimidating, so make sure you understand it completely or seek the help of an accountant to ensure accuracy.
Some Things to Consider
While the home office deduction has many benefits, it doesn’t come without a few pitfalls. The first thing to consider is the increased likelihood of an audit. The IRS has been vigilant in checking on home office deductions, so it is vital to ensure your information is as accurate as possible.
The second thing to consider is if you are thinking about selling your home. Generally, if a homeowner meets the requirements, they are allowed to exclude up to $250,000 or $500,000 if married in capital gains when selling their home. If you have a home office, it is important to realize that the depreciation deductions as a result of the business use of your home won’t be entitled to won’t qualify for the capital gains exclusion.
