Tax Breaks For Working At Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home.
- The home office deduction is available for homeowners and renters, and applies to all types of homes, from apartments to mobile homes.
- In addition to directly related out of pocket expenses such as internet access, deductible expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.
- Rather than allocate actual expenses and figure depreciation, as an alernative, beginning with returns for 2013, the write off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500 (300 feet).
- The rule only applies to home-ownership and maintenance costs, including deductible mortgage interest, real-estate taxes, insurance, repairs and utlities. Other expenses related to your business such as advertising, supplies and wages, still need to be itemized.
- People who use this alternative cannot depreciate a portion of the home used for a trade or business. However, allowable mortgage interest, real estate taxes and casualty losses are still available as itemized deductions.
Requirements for your home to qualify as a deduction
- Regular and Exclusive Use. You must regularly use part of your home exclusively for conducting business. For example, if you use an extra bedroom to run your online business, you can take a home office deduction for the extra bedroom. PLUS
- Principal Place of Your Business. You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.
If are an employee and use your home for business
- You may qualify for a deduction for business use if you meet the tests noted above PLUS
- Your business use must be for the convenience of your employer (not your convenience) PLUS
- You must not rent any part of your home to your employer and use the portion that you rent to your employer to perform services as an employee for that employer..
Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Tehnically you are supposed to keep track of the use of such items as computers and supplies for business purposes and for leisure purposes during the course of the year. However, as a practical matter, the IRS permits an estimate of the percentage of time spent on the equipment which is work related.
Renter versus Homeowner
Home-office write-offs are simpler and may be more meaningful for renters than for homeowners.
- People who own a home can claim a portion of utility and repair bills as well as depreciation on the part of the house that is use exclusively as an office.
- To determine what portion of expenses such as electricity and gas you can deduct, figure out what percentage of your home's square footage you use for business. If the office makes up 12% of your home, you can deduct 12% of your house expenses including mortgage interest, cleaning, repairs and insurance. (You can likely deduct the entire mortgage interest because it is mortgage interest instead of only a part because of your home office. Check with your accountant).
- When the house is sold, the depreciation may need to be "recaptured".
- Note that It is widely believed that a home-office deduction is a red flag that triggers an IRS audit. (For tips about surviving an IRS audit, including using your health condition, click here.)
- People who rent can simply determine what portion of the premises is used solely as office space. Then multiply the portion by the amount of the rent and utilities. For example, if the office is 10% of your space, and you pay $500 a month ($6,000 a year): you can deduct .10x$6,000 = $600
To learn more
See IRS publication 587 which is available at: www.irs.gov/publications/p587/index.html