Home Office Tax Deduction Tips

Spending time on your home office/business deductions can be worth it, as long as your deductions are credible and as exact as possible.

The AP recently reported on the increasing number of people who are taking tax deductions for their home offices.  Since quite a few people are now running their businesses out of their houses, garages and apartments, business deductions for home offices have become more standard. However, you could still get audited by the IRS if you don’t adhere to the rules.

Here are some things to keep in mind when taking tax deductions for home offices (via IRS Publication 587 for Business Use of Your Home).

  1. If your home is your “principal place of business,” then you can take the home office deductions. You can still take the home office deductions if you rent space elsewhere. The IRS simply wants to make sure that some part of your home is dedicated to business activities.
  2. If you “meet patients, clients or customers in your home,” then you can take the deductions. Even if your home is technically not your “principal place of business,” you can still take the deductions if you demonstrate that your home was used for work-related activities.
  3. If you home office is a “separate structure” from the rest of your home, you can take the deductions.  “Separate structure” doesn’t have to mean a separate room or enclosed space like a garage; it simply means a space that is solely used for business and not personal use.  For instance, if you use your dining room as your desk during the day and to eat on at night, then you couldn’t deduct your dining rooms as your workspace.
  4. If you use your home for providing daycare, you can deduct business expenses for that part of your home, even if the space is also used for personal use.Under state law, you must have a license, certification, registration or approval to run a daycare center or group in order to take the deductions.
  5. To get the Business Percentage of your home, compare the square footage of the space used for business to the total square footage.  Example 1: If your home office is 240 sq. ft., and your home is 1,200 sq. ft., then your business percentage is 20%.  Example 2: If you use one room as a home office, and you have five rooms of similar size in your house, then your business percentage is 20%.  This percentage is used to calculate your deduction.
  6. If your gross income from your home business is less than your total business expenses, your deductions are limited.  To deduct otherwise nondeductible expenses (such as insurance, utilities and depreciation of your home), you’ll need to take your gross business income and subtract 1) mortgage interest, real estate taxes, and casualty theft and losses that are related to your business and 2) business expenses that related to activity in the home, such as business phones, supplies and equipment depreciation.
  7. Beware of deducting exorbitant sums. Home office deductions are closely monitored by the IRS.  Suspicious deductions could get you audited, so make sure that you can back up your claims as much as possible.  This means keeping receipts, invoices and detailed records of your expenses

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