Planning is Peace of Mind

Home Office Tax Deduction for Small Business Owners

People have widely assumed that claiming a home office tax deduction is a sure way to trigger an IRS audit. It is estimated that today 26 million Americans have home offices and that because of this assumption only 15% claim home office deductions. Many 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.

In order to qualify for a deduction, a home office must be used regularly and exclusively for work. Although your workspace does not need to take up an entire room, it does need to have clearly defined boundaries. For example, a table with a laptop in your bedroom would not qualify.

If you perform your work at other locations – for example, a contractor or house cleaner – you can still claim a home office deduction if you use an exclusive space in your home for administrative tasks, 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.

You can claim two types of expenses for a home office deduction: direct and indirect.

Direct expenses allow you to write off all of the costs of your home office, including office supplies, computer equipment, furniture, and a phone used only for business purposes.

Indirect expenses include items like mortgage payments, property insurance, a home alarm system, utility bills, 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 has 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.

If you’re a small or mid-size business owner, call us today to schedule your comprehensive LIFT (legal, insurance, financial and tax) Foundation Audit. Normally, this session is $1,250, but if you mention this article and we still have room on our calendar this month, we will waive that fee. We can also make referrals to trusted tax advisors if you need one.

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