If you own your own business and claim it on your taxes (like you should) then you’ve probably come across the option to claim your own home office as a deduction. However, many an article and tax adviser has warned that home offices are almost an automatic trigger for a tax audit. As a result, many sole proprietors choose to just not claim the deduction at all. This is a mistake.
First off, you should never feel you can’t claim a deduction you are legally entitled to. If you truly do use a room in your home as an office, you should claim it in your itemized deductions. That said, you need to be prepared to explain how you arrived at your figures and be able to document them.
It is true that the IRS does scrutinize the home office deduction. This is because many a Schedule C business run from a home has claimed it with quite a bit of liberal perspective, i.e. their deduction numbers were well outside of reality reducing their taxes owed far too much.
There are certain principles to follow and remember for a successful home office claim. The foremost is that the room needs to be used for the business. That doesn’t mean you park your kids toys in there, a couch with a TV for social time, or your treadmill. The room has to be off-limits from normal, personal activities and stuff just like your office would be at work. Okay, you can have a personal plant and picture or two on the desk.
Next, the use of the room needs to be exclusively and regularly for the business. This means that you’re using the room for your business almost every day, not one weekend in the year. Further, the location needs to be your primary business location. For those who work off the Internet, this requirement is easy to meet. However, for those who actually have a workplace elsewhere, not the case. If you have hanged your shingle out in an office elsewhere, you can’t claim your home office as well.
For those who meet with clients, customers, or patients, the home office has to be the primary meeting place. Again, if you’re a doctor with a clinic, for example, you can’t claim your home office when everybody you treat meets at a clinic office a half hour away.
If you use a room for storage for your business, or you rent it out, or in the case of business childcare the room is utilized as a daycare room, then the property can be used on a regular basis, but it can be shared with other uses.
In terms of calculating the home office deduction, it should be consistent with how much the room takes up from the total house or living structure. So, if your home office takes up 15 percent of the total space, then the structure costs included should only be 15% as well. A good method for figuring this out is to get a hold of what the total square footage of the house is. The property deed typically has this information. Then determine the square foot of the office. Divide office square footage by the total home square footage to get your percentage to apply. Then, for all bills and house costs included, apply the percentage and claim that as the cost of your home office deduction. Make sure to keep copies of your bills and a spreadsheet showing how you 1) applied the math, and 2) got the bottom line deduction figure.
When reporting the deduction for the home office, you will be required to fill out Form 8829 – Expenses for Business Use of Your Home. The information will then be transferred as a deduction to your Schedule C – Profit or Loss From Business attached to your filed IRS Form 1040. Quite a bit more detail and information on the topic can be found at IRS Publication 587 – Business Use of Your Home. This manual can be downloaded via the Internet from the IRS’ website at www.IRS.gov or by getting a hardcopy mailed to you by phoning 800-TAX-FORM (800-829-3676).
IRS Publication 587, Business Use of Your Home
IRS Form 8829 Instructions
IRS Schedule C, Profit or Loss from Business
IRS Schedule A, Itemized Deductions