Nearly 14 million Americans now conduct business in some form out of their homes. Yet most don’t claim the potentially valuable home office deduction. The most common reasons why home-based contractors and part-time or full-time home business owners leave money on the table are that they don’t know about the home office deduction, are intimidated by the tediousness of keeping records and the complexity of filling out the IRS forms on which to claim it, or fear that claiming the deduction will trigger an audit.
Well, now home-based entrepreneurs have an “Easy” button they can push. Starting this year, they have the option of claiming the home office deduction based on a simple calculation of the square footage of office space they use. Simply multiply the total square footage by $5, and that’s your deduction (assuming you use the space exclusively for business) – up to a maximum of $1,500.
Many businesses will be better off doing it the long way (IRS Form 8829) because a full accounting of their home office expenses will generate a larger deduction. But for other sole proprietorships that don’t incur a lot of direct office expenses and/or don’t have the time or accounting budget to compute a home office deduction, the new simple option will be worth taking advantage of.
Home Office Deduction FAQs
Some frequently asked questions about home office deductions are answered below:
What if I don’t have a separate office, but instead use an area in my bedroom or living room to handle my business affairs?
You can claim a partial home office deduction. If, for example, you have a desk, a bookshelf, and a filing cabinet in your bedroom that you use exclusively for business, then compute the total area your work space takes up as a percentage of your home or apartment’s total square footage.
How do I prove that I actually had a home office during the tax year for which I’m claiming the deduction?
Take photographs of your home office every year and keep them with your tax records. Doing so establishes proof that it exists and may prevent a visit from a nosy IRS agent if selected for a correspondence (mail) audit.
What if I use my home office partly for my business and partly for my own personal use?
Try to find another place to do non-business activities! If you can’t, then you’ll have to estimate the percentage of time that the office is used for business. If it’s used only half the time for business, then you get only half the deduction you’d normally be entitled to.
If you’re claiming that your office is used 100% for business, then make sure it appears that way if you are ever audited. Don’t allow anything that could be deemed a “non-business” item to appear on your bookshelf or your hard drive.
How much time do I need to spend at my home office to be able to claim the deduction?
There’s no particular time requirement. You do not need to operate a full-time business or put in 40 hours a week in order to have a bona-fide home office. However, the IRS says your home office must be a “principal place of business.” What does this mean? It means that if you do the bulk of your business outside your home office, your home office deduction could be thrown out.
A few years ago, an IRS revenue ruling held that a plumber who did paperwork and took customer calls at home could not deduct his home office, because the essence of his job was to perform work at customers’ homes. You can make sure you pass the “plumber test” by doing at least half of your business at home and/or demonstrating that the home office is integral to the work you do.
What if home-based businesses are prohibited in my neighborhood?
The IRS doesn’t keep track of, or care about, local zoning restrictions. You can still claim the home office deduction even if you are operating your home business “illegally.” You may not even run into any trouble with the local authorities if you keep quiet about it. A former zoning official advises not hanging a sign out front, don’t list your home street address on websites, and don’t attract attention by having a lot of deliveries or on-site client visits. A freelance writing business, for example, can be virtually undetectable. By contrast, if you want to run a hair styling or day care business from home, you’ll need to make sure it’s allowed in your community.
Will I be audited if I claim a home office deduction?
As long as all your numbers add up (this is where accountants come in handy), you probably won’t be. It’s true that the self-employed in general are more likely than wage earners to be audited. But rarely is anyone audited solely on the basis of having claimed a home office deduction. Many home-based business owners foolishly avoid claiming the home office deduction because they fear the IRS. If your deduction is legitimate and you can back it up, then by all means take it!
Are there limitations on the home office deduction?
The key limitation on the deduction is that you cannot use it to create or deepen a business loss. In other words, your business must be generating net income. However, there is a loophole that will allow you to carry over the unusable deduction to future years when you have ample profits. The unused home office expense write offs remain viable year to year until you claim them to offset income.