It used to be that claiming a home office as a tax reduction was viewed as a sure trigger for an IRS audit. Today, it is estimated that 26 million Americans have home offices; however, only 15% claim home office deductions. Tax advisors now recommend that those who qualify for a home office deduction take it, saying that the deduction no longer sets off alarms for Uncle Sam.
To qualify for a deduction, a home office must be used regularly and exclusively for work. A table with a laptop in your bedroom would not qualify. Although your workspace does not need to take up an entire room, it does need to have clearly defined boundaries.
If you are someone who performs work at other locations – say, a house painter or a maid service – you can still claim a home office deduction if you use an exclusive space in your home for administrative duties, like bookkeeping and invoicing. However, if you regularly bring work home from your office in another location, you can only claim a deduction if you work at home for the convenience of your employer.
There are two types of expenses you can claim for a home office deduction: direct and indirect. Direct expenses allow you to write off all of the costs of your home office, including computer equipment, office supplies, furniture and a phone used only for business purposes.
Indirect expenses include items like mortgage payments, property insurance, utility bills, a home alarm system and Internet service, which are prorated according to the actual square footage of your office. For example, if your home office is in a 300 sq. ft. room and the entire square footage of your home is 3,000 sq. ft., you would be able to deduct 10% of these indirect expenses.
For the 2012 tax year, you will still need to fill out a Form 8829 for your home office deduction. However, the IRS just announced that for 2013 and beyond, it is simplifying the process considerably by allowing home business owners to claim $5 per square foot of a home office, with a maximum allowable write-off of $1,500. If you choose this option, you will not be able to depreciate the part of your home that is used for business.
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