“Hey, I don’t have a home office,” many of you are saying, “so I don’t have to worry about this. Next!”
But give us a second. You may not know this, but you could have a home office on your hands and could be missing out on a major tax break if you ignore this deduction. So how do you know if you actually have a home office, and what can you do with it once you’ve established you have one? Let’s take a look.
Does Your Space Qualify for the Home Office Deduction?
More than half of small businesses in the US are home based, but most of them don’t claim their home office on their taxes. This is because they don’t know what actually qualifies for the deduction.
There’s a reason to be wary, of course. The IRS is strict about small businesses claiming a home business when they don’t actually have an office. But if you’re careful and make sure to keep proof (pictures help), you’ll be fine.
So what qualifies? There’s a surprisingly small amount of criteria for you to meet. For one, you must operate out of a space that’s mostly dedicated to your business.
Example: If you operate out of a closet—only use that closet for your business, not miscellaneous closet-stuff—then that counts. However, if you store linens and bathroom items inside and regularly go in there, it does not count.
There’s another one you can see as well. If you’re an online seller who dedicates an entire space of your house for your products, you can take the home office deduction as well. So if you devote a garage or room wholly to storage for your business, you can count that as your home office on your taxes.
Again, in the case of an audit, you’ll want evidence, so take as many pictures as possible. Measure the space you actually use so you can claim it.
One caveat: you can’t claim a home office deduction that totals more than the income you made from your business.
We strongly suggest checking with an accountant if you have any questions at all about whether your home office qualifies.
Home Office Deduction Benefits
One great thing about the home office deduction is it lets you claim a bunch of payments you wouldn’t be able to otherwise. The home office deduction lets you claim the actual space for your home office, but it also lets you claim tax deductions revolving around expenses like:
- Rent/Mortgage interest
- Property taxes if you own your home
- Utilities like electricity, Internet, gas, etc.
- Homeowner/renter insurance
- Repair costs
Keep in mind you can only claim the amount you use for your business. For instance if you’re claiming your internet bill as a business tax deduction, you likely can’t claim the entire bill since you are more than likely to use it for personal use, too. But even taking a portion of your bills as tax deductions will greatly decrease your tax liability and your bottom line when April rolls around.
So head over to Form 8829 and see if you qualify for a home office deduction. If you need further clarifications of the rules and restrictions of the home office deduction, read the Form 8829 Instructions. Note that if you have multiple homes you’re claiming for the deduction, you’ll want a separate form for each one.
Always consult an accountant or financial professional should you have any questions at all about tax deductions specific to your business.
This article was originally published by Outright.com
Published: February 20, 2014