by Jay E. Reiner, Managing Member, Jay E. Reiner CPA PLLC
If you want a great commute and low overhead, working from home is a good thing. Being able to save on taxes by doing that is just icing on the cake.
If you’re in business for yourself, the expenses you incur that are directly attributable to your business are deductible. For example, the supplies you buy at Staples, the lunch with the prospective client, and the Metro fare to get to that lunch are deductible.
There are additional hoops to jump through when claiming a home office deduction, so I’ll lay some of them out, and also tell you about the newest way to claim the deduction.
Trade or business - A home office deduction can only be taken for a trade or business activity. You can’t claim it for something personal, such as trading stocks/managing investments for yourself.
Regular and exclusive use - The room or separate area of your home that is used for your business must be used only for that business. For example, if you operate your business from your dining room table, but also use that room for family meals, it’s not being used ‘regularly and exclusively’ for the business, and a deduction wouldn’t be allowed. If you have one bedroom in your home that’s your dedicated office, and your family uses the other rooms for personal purposes, that one bedroom would qualify.
Principal place of business - If you conduct your business at more than one location, you must consider the relative importance of each location you operate from, to determine if the home office is your principal place of business. If the home office is where you regularly carry out your administrative activities (and you have no other fixed location to do it), the home office will qualify.
Employee - If you work for somebody else, there’s a potential to claim a home office deduction, but the office must be used for the convenience of your employer, not your convenience. For example, if your employer’s main office is in California, but you’re the Virginia sales rep and there’s no VA office, you may be entitled to a deduction. If there’s an office in VA but you choose to work at home, no deduction.
Say you’ve jumped through all the hoops and you’ve determined that your home office qualifies for the deduction; what are you actually able to deduct? Good question!
Deductible items can be direct and indirect. Direct expenses are ones that are paid just for that home office space, such as a repair in that one room. Indirect expenses are the most common, and are expenses that apply to the entire home, and need to be allocated. Some common ones are mortgage interest, real estate tax, rent, and utilities. Indirect expenses are allocated based on what percentage of your total living space is used regularly and exclusively for business. For example, if you rent an apartment that’s 1000 square feet, and the one bedroom you use for biz is 250 square feet, 25% of your indirect expenses would be deductible as the home office deduction.
As you can imagine, there’s a bunch of recordkeeping involved to be able to claim the deduction, and you may not want to go through the hassle. You could still be in luck, since IRS changed the rules, effective for the 2013 tax year. There’s a new, simplified method of computing the home office deduction, which is $5 per square foot of home office space, to a maximum deduction of $1,500. You have the option of picking whichever method gives you the larger deduction, but given the housing costs in this area, the new method may not be improved, since it would probably yield a lower deduction than the old method. Regardless of which method you choose, you need to maintain sufficient records to uphold the deduction in case of audit.
Saving money on taxes is a great thing, but what would be even better than claiming the home office deduction is if your office is big enough to host a future Business After Business!
If you want a great commute and low overhead, working from home is a good thing. Being able to save on taxes by doing that is just icing on the cake.
If you’re in business for yourself, the expenses you incur that are directly attributable to your business are deductible. For example, the supplies you buy at Staples, the lunch with the prospective client, and the Metro fare to get to that lunch are deductible.
There are additional hoops to jump through when claiming a home office deduction, so I’ll lay some of them out, and also tell you about the newest way to claim the deduction.
Trade or business - A home office deduction can only be taken for a trade or business activity. You can’t claim it for something personal, such as trading stocks/managing investments for yourself.
Regular and exclusive use - The room or separate area of your home that is used for your business must be used only for that business. For example, if you operate your business from your dining room table, but also use that room for family meals, it’s not being used ‘regularly and exclusively’ for the business, and a deduction wouldn’t be allowed. If you have one bedroom in your home that’s your dedicated office, and your family uses the other rooms for personal purposes, that one bedroom would qualify.
Principal place of business - If you conduct your business at more than one location, you must consider the relative importance of each location you operate from, to determine if the home office is your principal place of business. If the home office is where you regularly carry out your administrative activities (and you have no other fixed location to do it), the home office will qualify.
Employee - If you work for somebody else, there’s a potential to claim a home office deduction, but the office must be used for the convenience of your employer, not your convenience. For example, if your employer’s main office is in California, but you’re the Virginia sales rep and there’s no VA office, you may be entitled to a deduction. If there’s an office in VA but you choose to work at home, no deduction.
Say you’ve jumped through all the hoops and you’ve determined that your home office qualifies for the deduction; what are you actually able to deduct? Good question!
Deductible items can be direct and indirect. Direct expenses are ones that are paid just for that home office space, such as a repair in that one room. Indirect expenses are the most common, and are expenses that apply to the entire home, and need to be allocated. Some common ones are mortgage interest, real estate tax, rent, and utilities. Indirect expenses are allocated based on what percentage of your total living space is used regularly and exclusively for business. For example, if you rent an apartment that’s 1000 square feet, and the one bedroom you use for biz is 250 square feet, 25% of your indirect expenses would be deductible as the home office deduction.
As you can imagine, there’s a bunch of recordkeeping involved to be able to claim the deduction, and you may not want to go through the hassle. You could still be in luck, since IRS changed the rules, effective for the 2013 tax year. There’s a new, simplified method of computing the home office deduction, which is $5 per square foot of home office space, to a maximum deduction of $1,500. You have the option of picking whichever method gives you the larger deduction, but given the housing costs in this area, the new method may not be improved, since it would probably yield a lower deduction than the old method. Regardless of which method you choose, you need to maintain sufficient records to uphold the deduction in case of audit.
Saving money on taxes is a great thing, but what would be even better than claiming the home office deduction is if your office is big enough to host a future Business After Business!
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