There are more and more people working from home, staring their own businesses and freelancing from home than ever before. As the state of the business world changes, and the focus turns to home-based, small and local businesses, and so too should your tax preparation. If you have a home office—one that you use for your own business, then you may be able to take the home office deduction, one that can save you a bundle on your taxes every year. Of course, it’s just as complicated as every other deduction, so always check with your accountant. In the meantime, here is a look at some of the deductions you can take when you have a home office and just how you can take them, according to the IRS.
Simplify Your Deduction
Any year prior to 2013, the method for calculating the home office deduction was very complicated. However, in 2013 (for taxes filed in 2014 or this year) the IRS has offered a simplified home office deduction. Instead of calculating every little deduction that is related to your home office, this simplified method allows small business owners and anyone working in a home office to multiply a rate that was prescribed by the IRS by the square footage of your home office. This is instead of the notoriously difficult task of record keeping that is normally associated with a home based office.
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The Standard Method
If you have a larger deduction, or want to make sure you’re getting every penny, then you’ll still want to use the original method of calculating your home based office expenses. The expenses vary, but in general, they include mortgage interest, utilities, insurance, depreciation and repairs, and all of those amounts are based on the percentage you use that home office for business use. So if you have one full room, or a portion of one room, that you use primarily for business use, you’ll need to calculate the percentage of your home that office is, and then use that percentage of your interest, insurance, utilities and other expenses.
When You Can Deduct
The first rule, when it comes to taking the home office deduction, is actually pretty simple. To know if you qualify for the deduction, you need to regularly use a part of your home exclusively for the task of conducting business. If you just occasionally use your home computer to check your work email, for example, that doesn’t qualify as regular and exclusive use. However, if you have an extra room that you regularly use to work from home, then you can take that deduction.
There is a second, slightly more complicated rule, in terms of the home office deduction. You have to be able to show that you use your home as your principal place of business. The home computer scenario works well with this one also, as just using your home computer to log in to your work email, or to do a few spreadsheets, or even to prepare a big PowerPoint presentation for work still doesn’t qualify. In order to qualify, you have to be able to show that your home office is the principal place that you do business. So if you meet clients at your home, but if you also carry on your business at another location, you can still deduct your expenses for your home office space, as it’s being used solely as a principal place of business.
What if you use a freestanding building on your personal property? What do you do if you have a home studio in your backyard, or a garage or barn that you’ve converted into an office space? The same rules apply here. If you use that space regularly and exclusively for conducting, then you can still deduct your expenses. The qualifier here is that since it’s an external structure, it doesn’t have to be your principal place of business. It can simply be the place where you meet your clients and customers.
What if you use a part of your home for business, but you are an employee and not a small business owner? You can still take the deduction here as long as you can show that your business use of your home office is being used for the convenience of your employer and that you don’t rent any part of your home to your employer. Basically, that means that if your employer pays you an extra amount to use your home office, then you are technically renting part of your home to your employer, and thus cannot take the home office deductions. But if your employer doesn’t offer you any extra money for using your home office, and you can show that the work you are doing there is for the convenience of your employer, you can deduct away.
Deborah Flomberg is a theater professional, freelance writer and Denver native. Her work can be found at Examiner.com.