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Work from Home? Possible Tax Deduction:

If you work from home you may be entitled to a tax deduction.  This deduction ordinarily benefits self-employed persons, but is available to employees as well.  Though it is available to employees, most will not see a tax benefit as the deduction is subject to a 2% of adjusted gross income reduction.  A future article will explain a way for certain employees (S-corp shareholders) to take advantage of the home office deduction.

In order to qualify for the home office deduction you must meet certain criteria.  The office space must be used exclusively and regularly as a principal place of business.  Let's break down these components separately.  Exclusive use means that the home office is not used for personal matters.  So an office that doubles as a spare bedroom does not qualify.  The regular use condition is satisfied if you use the space continually and in the normal course of business.  Occasionally meeting clients at home does not qualify.  Meeting the principal place of business requirement is more ambiguous but there are two main factors used to determine eligibility.  First, the importance of activities performed must be essential to the business.  The second factor, used if the first one is not clear, is the time spent in/at each place.

If you are an employee there is an additional requirement that the home office must be for the convenience of the employer.  This is a difficult test to meet, and lots of employees will not qualify.  Each situation should be evaluated specifically as there are exceptions but here is a quick reference that answers the basic question.  If you have space to conduct your business (i.e. office space) provided by your employer, you do not qualify.  The opposite is also true, if your employer does not provide office space; the home office is for the convenience of the employer.

If you meet the criteria and are eligible for a home office deduction how much is it worth?  As with most situations with the IRS there isn't just one solution.  There are two possible ways to calculate what your deduction may be.

  • Simplified Method – You receive a $5 deduction per square foot of office space; with a maximum of 300 square feet. With this method the record keeping requirements and allocations discussed below are eliminated.
  • Standard Home Office Deduction – There are three main components to the home office deduction
    1. Indirect expenses – these are taken based on the business use square footage percentage; the percentage of your home that the office occupies. These expenses impact the entire home.
      1. Utilities
      2. Insurance
      3. Repairs & maintenance
      4. Property taxes
      5. Landscaping & snow removal
    2. Direct expenses – related to the home office only.
      1. Repairs & maintenance for the office only
    3. Depreciation –this is a deduction for the decrease in value of your home over time. This deduction is allowed on the same percentage basis as indirect expenses.

As you can see, the amount of work to calculate and maintain the records for the standard home office deduction are quite substantial.  Also keep in mind that when you eventually sell the home any depreciation allowed for the period used for business must be taken into account for the purpose of determining taxable gain on the sale.  You can determine each year whether to take the simplified or the standard home office deduction.

We recommend taking advantage of every tax deduction available to you.  Not everyone qualifies for the home office deduction but if you do, it can be very advantageous.  With a little planning it is much easier to track and record everything needed.  If you have questions related to your specific situation, please contact your tax advisor.House2

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