The Office of Advocacy of the U.S. Small Business Administration reports that 53 percent of all small businesses are home-based.
If you run your business from home – even a part-time business – you could save big bucks at tax time by taking the home office deduction. As long as you have entered into your business with the intent to make a profit, rather than to pursue a hobby, you may qualify for the home office deduction.
Here’s a guide to help you navigate the home office deduction.
How To Qualify For The Home Office Deduction
The space you allocate for a home office can be a separate room or even one corner of room.
No matter how large or small your home office, the IRS says that it must be used “regularly” and “exclusively” for activities related to your business.
Regular use means that you must operate your business out of your home office.
Exclusive use means exactly that: Non-business related activities cannot be conducted in your home office space. No kids on your computer. No in-laws staying for vacation in the room you allocate as your home office. All activities must be strictly related to running your small business.
It’s a stiff rule, and a hard one for some home-based businesses to meet. But if you want to take the home office deduction, you’ve got to follow the rules.
What Expenses To Deduct
To calculate expenses that are deductible for your home office, you must figure the percentage of space your office occupies in your home.
To do this, simply divide the square footage of your office by the square footage of your home. Here’s an example. Your home is 2,000 square feet. Your home office is 200 square feet. That means your office occupies 10 percent of you home.
It also means that you can deduct 10 percent of many household expenses, including:
Some household expenses can’t be included in your home office deduction. For instance, swimming pool maintenance and landscaping expenses are excluded. Also, you can’t deduct a percentage of any improvements you make to your home, although you can deduct a percentage of repairs.
Beware One Complication
If you have a home office, you can deduct depreciation. But watch out for a complication when you decide to sell your home.
Any gain you receive from selling your home can often be excluded from your personal taxable income. But you can’t exclude the part of the gain equal to the home office depreciation that you claimed over the years.
Don’t Fear An Audit
Many self-employed people believe that claiming the home office deduction raises a red flag for an audit.
The IRS adamantly contends that home office deductions don’t trigger audits.
What can trigger an audit are mistakes you make in calculating your home office deduction. The forms and instructions are complicated. Recordkeeping can be tricky. There’s plenty of room for misunderstandings and innocent errors.
Tax Forms To Use
For sole proprietors, the expenses related to maintaining a home office are deductible on line 30 of Schedule C.
But before you can claim the write-off, you must complete Form 8829, Expenses for Business Use of Your Home.
If you move during a tax year, file a separate Form 8829 for each home office you maintained.
Where To Get Help
Claiming the home office deduction can save you money at tax time. But it can also be a headache and a hassle to complete the forms.
AFS can help. AFS Members can get online advice from a certified public accountant (CPA) – at no additional charge. Through the AFS Web site, ProTax offers complete and confidential answers to your questions in one business day.
The IRS can help too. At the agency’s Web site,
www.irs.gov, you can download Publication 587, “Business Use Of Your Home.” The document covers:
Requirements for a legitimate home office deduction
Expenses that can be deducted
How to calculate and report your deduction
(Posted August 2006)
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