Many small business owners and home workers express a bit of concern regarding the home office tax deduction, thinking that it will result in their tax return being flagged and audited. There is no evidence of higher audit rates for home office deduction claimers that I can find. If you are entitled to the deduction, you should definitely claim it. It is a deduction that is easily documented and the new safe harbor rules are make documentation even easier.
WHO CAN CLAIM THE DEDUCTION?
If you are a small business owner and you use a part of your home EXCLUSIVELY and REGULARLY for your business, you can qualify. The kitchen table doesn’t count. It has to be an area that is used only for your business. If you are an employee and have an office at home for the convenience of your employer, you may be able to take this deduction as an unreimbursed employee expense on your Schedule A (itemized deductions).
(NOTE: If you provide daycare services in your home, this is a bit more complicated as providers can get credit for space used even part-time in their business).
WHAT CAN YOU CLAIM?
You can claim a part of your heating, electric, phone, internet, etc. depending on the ratio of office size to your total home area. For simplicity sake, let’s say your office space is 200 sq ft and your home is 2000 sq ft. If your utility bills totaled $1500, you could claim 10% of them as a deduction (200/2000 * $1500 = $150). If you own the home, you are probably already deducting your mortgage interest and mortgage interest on your Schedule A. However, renters can deduct a part of their rent. And what about hazard insurance? Part of that is deductible too. Also, depreciation on the space used, carryover of unclaimed deductions from prior years, casualty losses and so on.
Offices use supplies so don’t forget to deduct your toner, paper, computers, printers, staplers, etc.
You might even be able to deduct part of your landscaping or home maintenance. If you meet with clients in your home then you may have expenses to improve or maintain the appearance of the home or office. That $6000 you spent on landscaping the front of the house and adding a sprinkler system could be partly deductible. (Talk to your tax preparer to make sure, this can be a gray area.)
The safe harbor rules mentioned above make claiming this much easier as you simply check a box on the deduction form and claim $5 a square foot. Record keeping is kept to a bare minimum.
Finally, don’t forget to keep track of your driving expenses. When you leave your office on a business purpose; to meet a client, to deposit a client’s check, to purchase supplies, etc., those miles are deductible and at over $0.50 per mile, this deduction adds up fast. BUT YOU MUST KEEP WRITTEN RECORDS of mileage and business purpose.
So, verify that you are eligible for the deduction. If you are, by all means, claim it.