Home Office Income Tax Deductions
If you have a home office, the IRS allows you to take deductions whether you’re self-employed or an employee. You must use that office exclusively and regularly for business needs and not for other purposes such as a den or bedroom, although certain businesses like daycare have different rules. IRS home office deductions are taken on Form 8829 and reported on Schedule C. For employees with a home office, IRS Publication 587 offers guidance on those deductions shown on Schedule A of your 1040 tax return.
Qualifications - If you use a portion of your home regularly and exclusively for the management or administration of your business, then that area of your home dedicated for this use can qualify for a tax deduction. However, if you are an employee, you may not have another fixed location where you conduct a substantial amount of your trade or business such as an office location outside of your home in order to take advantage of this deduction.
Activities — The IRS considers many different administrative and managerial activities when helping to determine if the dedicated space in your home qualifies for a deduction. These activities include, but are not limited to, setting up appointments, ordering supplies, accounting and bookkeeping, billing and writing reports and articles.
Deductions — As a self-employed person, you are permitted to deduct a portion of the expenses related to your home, including real estate taxes, utilities, deductible mortgage interest, insurance, repairs and maintenance and casualty losses. You will need to know the total square footage of your home and the square footage of your home office to make this calculation. By dividing the total square footage into your home office square footage, you get a percentage to calculate your deduction. For example, if you have a 2,000 square foot home and 240 square foot office, than 12 percent of your expenses are part of your allowable deduction.
Warnings — If you are an employee, your home office may not qualify if working at home simply makes it easier for you and your supervisor, warns Kay Bell writing for Bankrate.com. You may need to prove that your company does not provide space for you at its location.
Considerations — To obtain square footage for you home, your tax bill or deed should have that information; confirm the accuracy of that number and the square footage of your home office before coming up with a percentage. Seek tax professional guidance for showing depreciation, a deduction that Royce E. Chaffin and Steve Busby of the University of West Georgia says could have consequences when you sell your home.