Home Office Tax Deduction
Posted on 01. Jul, 2009 by Stefani in Tax
After having the home office tax deduction come up in three separate conversations in the same week, I’ve realized that some people are really misinformed when it comes to the rules on who gets to deduct expenses for a home office. So, I’ve decided to write a post to hopefully shed some light and clear up some misconceptions surrounding this tax deduction.
I, like many tax practitioners, used to believe that taking this deduction would be an automatic audit trigger, but after doing research and talking to other tax pros, I’ve determined that that is no longer the case. Nowadays, to get the IRS to take notice, you have to deduct expenses for a home office and have a loss on your schedule C in the same year. But, one should keep in mind that this is the IRS, and frankly, they can audit you for just about any reason they want.
What are the requirements to be able to take the home office deduction? First, the home office, which doesn’t have to be a whole room, it can be part of a room, has to be used:
a) Exclusively (Yes, this means that this space can only used as your home office; it can’t double as the family’s TV room!)
b) Regularly
c) For your trade or business
and (Of course there’s more, we’re talking about taxes here, you didn’t expect it to be that easy, did you?)
The part of your home that you use as your home office has to be used as:
a) Your principal place of business or
b) A place where you meet with clients, patients, or customers in the normal course of your trade or business or
c) A separate, free-standing structure, such as a guest house, studio, barn or garage.
Contrary to popular believe, the home office deduction can be utilized by business owners as well as employees. For an employee to be able to deduct expenses for a home office, the employee:
a) Must be using the home office for the employer’s convenience
b) Must itemize deductions on schedule A
c) Cannot be renting the home office to their employer
So, now that you know what the requirements are to be able to deduct expenses for a home office, exactly what can be deducted? You can deduct expenses for things such as:
a) Mortgage interest
b) Rent
c) Real estate taxes
d) Casualty losses
e) Homeowner’s or renter’s insurance
f) Utilities
g) Repairs (only if it directly benefits the area used for your home office)
h) Depreciation (if you own your home)
i) Telephone (but not for the first line coming into the home)
I should note that on June 25, 2009, the Home office Tax Deduction Simplification and Improvement Act of 2009 was announced. This act should help streamline the reporting requirements and ease the burden of proof in claiming this deduction.
There are other rules for those that use their home for storing inventory or product samples, rental activity, or running a daycare facility. But, in the sake of keeping this post relatively simple and uncomplicated, I’ve decided to leave those out. Don’t fret, should you have specific questions regarding the home office deduction, drop me an e-mail at stefani@stefaniwhylie.com, and I’ll try to answer your questions as soon as possible.
Disclaimer: (C’mon, you knew it was coming!) Since every tax situation is unique and I am in no way aware of what your exact situation is, please, please consult your tax professional before deducting expenses for your home office (or any other expense for that matter), especially if you’re unsure exactly what the requirements are and how they will affect you. Also, this post was meant to give you a very brief overview of the requirements surrounding this deduction. Depending on your specific situation, this can get much, much, much more complicated. So, again, please consult your tax professional beforehand. Of course, you can always read IRS pub 587 in its entirety.
Mike Harmon
01. Jul, 2009
Nice writing style. I look forward to reading more in the future.