Working from a home office has become an increasingly popular choice for professionals. Not only is there the highly desirable option to wear sweatpants while dialing in for a conference call, but the tax deductions associated with a home office can save you significant cash when tax season comes along. However, not all home offices are created equally. Read on to see whether your home office qualifies for deductions in the eyes of the IRS.
Determine use of the office space.
One of the first aspects the IRS will consider is how often and for what purpose you use your home office space. The space must be used regularly for business, not just once in a while. Furthermore, you must designate a space in your house to solely be used for the purpose of business. Hence, working off a dining room table or desk in a bedroom won’t quite make the cut.
In addition, your home office must be the primary location where you conduct business, meaning that there is not another fixed location where you work.
Employee, employer – does it matter?
In short, yes, it does matter. The IRS behaves much more favorably toward business owners or self-employed professionals when it comes to home office tax deductions. If you are an employee, you must find a way to prove that your employer uses your home office for their convenience. The best way to demonstrate this is through a clearly stated business contract.
Decide what can be claimed.
The IRS divides home office expenses into two categories: actual expenses and simplified expenses. Actual expenses refer to any costs directly connected to the maintaining of the office itself, e.g. renovating or repairing the space. Be sure to keep all receipts for home office repairs just in case you need to back up your claims down the road.
Simplified expenses indicate the costs of the rest of your home that indirectly apply to the home office as well. In other words, heating and air conditioning, electricity, mortgage interest, general home repairs, etc. would all be considered simplified expenses,
If you’re having trouble wrapping your head around the idea, here is a quick example to break it down a bit easier:
- Your house is 1,500 square feet and your home office is 150 square feet, meaning that your office takes up 10 percent of the entire house.
- Your overall mortgage interest, utilities, maintenance, and homeowners insurance adds up to $5,000 in a given year.
- The simplified interest of your home office would be 10 percent of $5,000, or $500.
- In addition, you had to spend $300 re-carpeting your home office, an actual expense. This is added to the simplified expense amount of $500, bringing your grand total to $800.
Don’t miss out on home office and additional easy tax deductions for your business. Have any questions about whether your home office qualifies for a tax write-off? Give Yeater & Associates, CPAs a call today at 970-378-4830 so we can help you through tax deductions and more!