The question I’m most often asked this time of year is, “Should I take a home office deduction?” My answer is that one should never shy away from a deduction to which they are entitled.
In order for space in your home to be eligible the following MUST BE TRUE:
1. You must use the space regularly and exclusively for your business. The IRS takes the position that if you balance your personal checking account at your business desk you have not used the space exclusively for your business. There are more relaxed rules if you use your home as a daycare facility or if you store inventory.
2. You must use the space to meet with clients or it must be your principal place of business. The IRS doesn’t want you to be able to take the deduction if you also rent office space.
If you are not self-employed you can still take a deduction if your employer does not provide you office space and forces you to keep a home office. They will need to provide you with written evidence of these facts.
If you’ve managed these hurdles you get to deduct a percentage of rent or mortgage interest, taxes, insurance, repairs, utilities, HOA fees, and depreciation. You can fill out form 8829 and carry the totals over to your Schedule C. The question is do you want to deduct them?
Remember that mortgage interest and taxes are already deductible on your schedule A; you don’t get to double-dip. All direct business expenses such as a second phone line are deductible on Schedule C. Also keep in mind that depreciation is really a deferral of taxes; you pay tax on all your home business depreciation when you sell your home. An employees’ deduction will then be reduced by 2% of their Adjusted Gross Income (AGI).
Don’t avoid a home office deduction because someone said the high audit risk. Don’t take a deduction to which you are not entitled. Take the deduction if it makes good financial sense. I usually recommend that one year you calculate your taxes both with the home office deduction and without to determine if the savings justify the cost of filling out the additional forms and keeping the required records.
Remember, these are your tax returns. Please contact me if you have any questions.
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