Home Office Tax Tips
If you have a home based business, eBay, or online business, one of your biggest tax deductions may be your home office. Here are some tax tips to help you get the most out of your home office.
Qualifying for the home office tax deduction:
Your home office qualifies for the home office tax deduction if it is your principal place of business, and you use it regularly and exclusively for business.
To pass the ‘place of business’ test, your home office must be the principal place you conduct your business, or a place where you regularly meet with clients or customers, or it must be a separate structure not attached to your home.
Regular and exclusive use means that you spend at least 10-12 hours per week conducting business in your home office, and that you don’t use this room for other purposes. For example, if you use part of the room as a laundry room or children’s play room you may not qualify for the home office deduction.
A good example of a home office that would qualify for the home office
tax deduction is a spare bedroom that is used only to operate your home
based or online business out of. A poor example of a home office – and
one which probably would not qualify for the home office tax deduction
- is using your dining room or kitchen as a home office.
Expenses that you can deduct as part of the home office tax deduction:
Expenses that can be deducted include mortgage interest, real estate
taxes, utilities, insurance, repairs, security, and depreciation.
If you itemize deductions, chances are you are already deducting your
mortgage interest and real estate taxes. However, deducting the
business use of these expenses on the home office deduction schedule
reduces your business income, which reduces your self employment tax.
This results in much greater tax savings than just deducting these
expenses on the itemized deduction schedule.
Only the business use percentage of these expenses can be deducted.
The business use percentage is calculated by dividing the square
footage of the office space by the square footage of the home, or by
dividing the number of rooms you use for business by the number of
rooms in your home.
Direct expenses, such as repairs made solely to the room used for your
home office, or telephone lines installed just for business use, can be
deducted in full.
Indirect expenses, such as mortgage interest and real estate taxes
should be allocated between the home office deduction and your itemized
deductions to get the greatest tax benefit.
Your home office tax deduction is calculated on Form 8829, Expenses for Business Use of Your Home.
Home office deduction limitations:
Deduction limited to profit: Your business must earn a profit to take
the home office tax deduction. If your home office expenses are larger
than your business profits, you must carry the excess expenses forward
to future years.
Depreciation recapture: In addition to mortgage interest, real estate
taxes, utilities, etc., you can also take a deduction for the
depreciation of your home on the home office tax deduction schedule.
However, when you later sell your house, you will be required to pay
tax on any depreciation you deducted on the home office schedule. This
is called ‘depreciation recapture’, and it is taxed at capital gains
rates. The other home office expenses are not subject to recapture
when you sell your house.
I hope these home office tax tips are helpful to you. Remember, the
home office tax deduction could be one of your greatest tax
deductions. There are many people who will tell you that the home
office tax deduction is a red flag. Being self employed is a red flag
in itself, but you wouldn’t not have a business because it’s a red
flag, so you shouldn’t not take legitimate business deductions, such as
the home office tax deduction, just because you fear being audited.
Related Posts:
Why You Should Deduct Your Home Office
It’s Tax Season! Are You Ready?
