What You Can and Can't Deduct When You Work From Home
By: Donna Fuscaldo
Article
From HouseLogic.com
Working from home can offer many
advantages including tax deductions. Just take care what you try to write off
for your home office on your return.
Passing the IRS litmus test
To meet IRS guidelines, your home
office must be your principal place of business, or the place you see clients
in the normal course of business. Parts of your home you use to store products
or equipment for your business also count. That doesn't mean that all your work
has to be done from home. If you're an outside salesperson, you probably spend
most of your work time elsewhere. But if you do you billing and return customer
calls primarily from your home, your home office should qualify.
You can also qualify for the deduction if your employer requires you to work from home, as long as you don't charge your employer rent. One big catch is that you must maintain the at-home office for your employer’s convenience, not your own, such as to complete reports at night or on weekends. Self-employed workers use IRS Form 8829 to calculate the deduction, which they list on Schedule C.
You can also qualify for the deduction if your employer requires you to work from home, as long as you don't charge your employer rent. One big catch is that you must maintain the at-home office for your employer’s convenience, not your own, such as to complete reports at night or on weekends. Self-employed workers use IRS Form 8829 to calculate the deduction, which they list on Schedule C.
Measuring your home office
The amount you can deduct for your
home office depends on the percentage of your home used for business. Your work
space doesn't need to be a separate room—a table in a corner qualifies. But it
has to be an area that's used solely for business. The tax break also covers
separate structures on your property, like a detached garage you've converted
to an office. Unlike an office inside your home, a separate structure doesn't
have to be your main place of business to qualify for a deduction. That's
because the IRS believes your family is less likely to use a separate structure
as a part-time play area or den, says Mark Luscombe, principal analyst for tax
and consulting at CCH.
To calculate what percentage of your house the home office occupies, divide your home office's square footage by the total square footage of your home. If your home is 3,000 square feet and your office is 150 square feet, for example, you'd use 5% to calculate your deductions. Not sure how big your house is? Check the documents you received when you bought your home—there's probably a detailed rendering—or measure the outside of your home and multiply length times width.
To calculate what percentage of your house the home office occupies, divide your home office's square footage by the total square footage of your home. If your home is 3,000 square feet and your office is 150 square feet, for example, you'd use 5% to calculate your deductions. Not sure how big your house is? Check the documents you received when you bought your home—there's probably a detailed rendering—or measure the outside of your home and multiply length times width.
What can you deduct?
Once you've figured out what
percentage of your home you use for business, you can apply that percentage to
different home expenses. These include:
- Mortgage interest
- Real estate taxes
- Utilities (heating, cooling, lights)
- Home repairs and maintenance (painting, cleaning service)
- Home owners insurance premiums
Just take each expense and multiply
it by your home office percentage (the 5% mentioned above). That's the amount
you can deduct as a business expense. So if you spend $150 a month on
electricity, you can deduct $7.50 as a business expense. That adds up to a $90
deduction per tax year.
Save bills or cancelled checks to prove what you spent in case of an IRS audit. Take an hour a week to file them away. Also, only repairs can be expensed; improvements must be depreciated.
Save bills or cancelled checks to prove what you spent in case of an IRS audit. Take an hour a week to file them away. Also, only repairs can be expensed; improvements must be depreciated.
Don't forget depreciation
Depreciation is based on the idea
that everything—even something like a home—wears out eventually. To figure home
office depreciation, start by calculating the tax basis of your home: generally
the purchase price plus the cost of improvements, minus the value of the land
it sits on. Next, multiply the tax basis by the percentage of your home used
for work. This gives you the tax basis for your home office.
Usually, depreciation deductions for
a home office are figured over a 39-year period. There are caveats. For a crash
course, read IRS Publication 946 or talk to a tax pro.
Keep in mind that depreciation deductions on your home office increase the amount of profit on a home sale that is subject to taxes. There’s an exclusion of $250,000 of profit if you’re a single filer, $500,000 for joint filers. Consult with a qualified tax professional on how depreciation deductions affect your tax liability when you sell.
Keep in mind that depreciation deductions on your home office increase the amount of profit on a home sale that is subject to taxes. There’s an exclusion of $250,000 of profit if you’re a single filer, $500,000 for joint filers. Consult with a qualified tax professional on how depreciation deductions affect your tax liability when you sell.
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This article provides general
information about tax laws and consequences, but shouldn’t be relied upon as
tax or legal advice applicable to particular transactions or circumstances.
Consult a tax professional for such advice.
