Taxes: The Home Office Deduction

Are you about to do your taxes,  Freelancer friend?  Read this post first and find out if you are able to deduct expenses for your home office.  The IRS sets a high bar for this deduction,  but if you pass the qualifiers,  it’s all yours.  Tele-commuters and outside sales reps might also deduct home office expenses.

1.   The space must be used exclusively and regularly for business purposes only and not for your personal life.  The space must be used regularly for business  and not just a few times a year.   Those who live in small apartments are at a disadvantage because no room can be consigned to business only.   However  if you use the space regularly for business,   it is not necessary to partition it off to demonstrate that you have established a separate workstation.   A desk in a corner of a room qualifies as a workstation,  along with a  “border”  of a few square feet.  Outside sales reps who must store product samples and marketing collateral at home can also include storage space square footage in the home office deduction.

2.   Does your home office exist primarily for your convenience,  or for the convenience of your employer or clients?  If your employer or clients have provided a location at which you may regularly conduct business,  then you are not allowed to deduct home office expenses.  To take the deduction,  you must have no other work space available  (you and your computer at Starbucks is not a disqualification).  Employees and independent contractors may have to give documentation to the IRS.  A letter from the employer stating that there is no office space provided for you and/or receipts for un-reimbursed business expenses and supplies will suffice.

3.  If you have more than one home-based business,  all businesses must meet the first two tests:  you cannot have any office space made available to you by a client or employer and you must devote that space  exclusively and regularly to business.  If any entity for whom you work provides regular office space for you,  then you are not allowed to claim the home office deduction and it’s an all or nothing proposition.   However,  disqualification from the home office deduction does not mean you cannot deduct other business expenses.  You are still eligible to file Schedule C  (Freelancers/Independent contractors)  or Form 2106  (outside sales reps and other employees)  to deduct other un-reimbursed expenses incurred while doing business.

Are you ready to complete Form 8829 Expenses for Business Use of Your Home?  To get started,  measure the number of square feet used at home exclusively for business purposes  (maybe measuring storage closets and the area of your desk,  plus a  “reasonable”  border,  instead of an entire room)  and divide that number by the total square feet in your home.  If your office is 12′ x 12′,  you have 144 square feet of office space.  Let’s say your apartment has 750 square feet of space.  Divide the area of your office by the area of your apartment: 144/750 equals 0.192,  or 19.2%.

That figure represents the percentage of your home that is devoted to business,  the percentage of the year’s home expenses you may charge off to the business and deduct.  There are direct expenses and indirect expenses to calculate.  The fraction applies to indirect expenses,  i.e. the total year’s utilities,  rent/mortgage,  taxes,  home insurance,  etc.  For example,  if you spent $800.00 on last year’s electricity,  you may deduct 19.2 %  x  $800.00 or $153.60 for that category.  Expenses incurred solely for the benefit of your workstation are the direct expenses.  Office supplies,  postage and office furniture are direct expenses.  Add your direct and indirect expenses.

The final test is,  does your home office deduction exceed the revenue generated/income?  Your home office deduction cannot exceed the money generated.  So if your business earned $1000.00 and your home office deduction adds up to $1200.00,  you may only claim $1000.00 for your home office deduction.  But that extra expense does not get wasted.  You may carry it forward to add to a future home office deduction in a year when revenue exceeds expenses.

The bottom line Form 8829 number is recorded on Schedule C  (Freelancers /Independent contractors)  or Form 2106 and Schedule A  (outside sales reps and other employees).  Employees must itemize deductions  (hence Schedule A),  to which the home office deduction is added to other un-reimbursed business expenses and all other Schedule A deductions.  Those deductions must exceed 2% of your adjusted gross income.  For more detailed information specific to your situation,  speak with an accountant or tax attorney.

Thanks for reading,

Kim

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