How To Take Advantage Of The Home Office Tax Deduction
If you use your home for business purposes, the home office deduction will lower your taxes substantially. Many taxpayers have overlooked this deduction in the past, because they thought it was too much work, or didn’t know that they qualified.
The good news for 2013 taxes is that the IRS has made this tax deduction much simpler to use. Instead of calculating the percentage of utilities allocable to the office, the amount of paint you used to update this space, or the amount of home mortgage interest allowed, the IRS is giving the option of choosing a standard deduction amount. You may still use the old method of calculating a percentage of all your expenses, but the new option is much easier to use.
Before you get too excited about the home office tax deduction, let’s clarify the rules for use of a home office. You need to qualify for what is known as “exclusive” and “regular” use tests. These two words are very important to the IRS in determining your eligibility. You must:
- Use your home office as your exclusive place for conducting business. If you have an office or desk elsewhere, you do not qualify for this deduction. However, as with many tax related deductions, there is an exception to this rule, which we will discuss later in the article.
- This area must be used exclusively for business purposes. It cannot also serve as a playroom, kitchen, den or other household use. It must be a separate, identifiable space, but does not need to be partitioned. The only exclusion to this is if you have a daycare facility or use part of your home for storing inventory or product.
- You must conduct your business on a regular basis. A business operated on an occasional business, or a non-business use does not qualify. For example, if you use a home office for conducting volunteer charity work, it is not a qualified use.
If you have more than one business, and use your office for both businesses you can deduct the space only once–no double dipping allowed with the IRS. If one of the businesses has another principal office, you can deduct the home office for the other business without a principal place of business.
For example, if a person has an accounting business with the principal place of business elsewhere, they cannot deduct business use of the home for this business, even if they do some of the work at home. . But if they had another separate consulting business, they could deduct use the home office, if the majority of business transactions, recordkeeping, calls, and client visits for the consulting business were held in the home office.
Home Office Tax Deduction Exceptions:
As with every IRS rule, there is an exception to the home office tax deduction. Here are some of the exceptions connected with home office use:
- Even though you have a principal place of business, you can still use the home office deduction if you use your home on a regular basis to meet with clients.
- If you have a separate structure, located on your home property for business needs, even though you have an office elsewhere, you can deduct the expenses. Remember – it must be used exclusively and regularly for business. For example, a gallery owner, who use the structure to store, and/or make frames or other materials, can deduct this area as business use of the home.
- You may use a space for storage of materials, and deduct that space, if there is no other storage space available. Remember the exclusive use test – this space must only be for storage and inventory or business materials.
How to Calculate The Home Office Tax Deduction
For 2013, there are two ways to do this– complicated, and easy.
With the easier, new simplified option, you simply measure the square footage of your home office space. That’s the only figure you need to measure for the 2013 tax year. You can now use this figure as a basis for your deduction. You are allowed $5 per square feet, up to 300 feet, with a $1500 maximum per year. So simply multiply the square footage of the area by $5.00 (240 sq. ft. x $5 = $1200). The IRS made this simplified option to reduce the recordkeeping burden on small businesses. A great advantage of this over the previous method is that you can deduct your full mortgage interest on Schedule A. You no longer have to take out the percentage used for business use of the home, as was done previously. It’s nice to know the IRS is always looking out for you.
For the traditionalist, you may continue to keep track of utilities, maintenance, mortgage interest or rent, and deduct the business percentage on your Schedule C. For this you would take the total square footage of your home, and divide it by the percent used for business. The business percentage is what you use to calculate the business usage for the home office.
More information is available about the Business Use of Your Home in IRS Publication 587. A great YouTube video, put out by the IRS, explains the new simplified option:
That’s our article for today. If you have any questions or comments please leave them in the comments section below. And if your looking for a fast and efficient way to set up your home office click here.