Are you one of the millions of Americans who has an office at home?
If so, you probably know that some of the money you spend there is tax deductible.
Here's what you might not realize: Your office can turn ordinarily non-deductible expenses -- things like utility bills and homeowner’s insurance—into deductible dollars and cents.
The home office deduction is harder to claim than you may think. It’s not enough to toss a desk into your den and use your computer there to occasionally check work email.
In order to deduct your home office expenses, you must use your office exclusively and regularly as your principal place of business, or you must use it as the primary place where you meet with patients, clients, or customers. In other words, if your spouse uses your den to watch CNBC (Stock Quote: GE) at night, or if your kids do their homework at your desk, your expenses aren’t deductible.
In order to claim them, your office must really be your office and it must be the primary location of the administrative and management activities for your business. Finally, if you are an employee, and not a business owner, you can only deduct the costs of your home office if your employer requires you to work there. If your employer gives you an office in town but you choose to work from home anyway, this deduction is not for you.
So which costs are deductible? You can deduct the kinds of costs that would usually be associated with a free standing building, like insurance, a security system, electricity, telephone and Internet service. Even better, you can take a depreciation deduction for your office furniture, your computer and even the physical structure of your office itself. (What is depreciation? It’s a deduction that corresponds to ordinary wear and tear that decreases the value of your business assets. It allows you to claim the cost of your big ticket purchases over time. For instance, if you install special equipment in your home office, you can’t deduct the cost immediately, but you can recover it on your Form 1040 over a number of years. Depreciation is complicated, and you should probably seek the assistance of a tax advisor to claim it, but if you’re a real do-it-yourselfer, you can check out IRS Publication 587.
The home office deduction is not without limits, of course.
First, if you are deducting a cost that corresponds to your entire home, like the cost of heat or insurance, you can only deduct the portion that is associated with your office. To calculate that amount, you should compare the square footage of your office to the square footage of your home. If your home is 1,000 square feet, and your office takes up 100 square feet, you can deduct 10% of the cost of your utilities, insurance, etc.
Second, if you aren’t making a profit, you can’t take a deduction for money that you would have spent anyway by simply maintaining your home. Unfortunately, your deduction for these kinds of expenses is limited to the amount of income you earn by using your home as a location for your business.
If you’re working from home sweet home, congratulations, you’re the envy of a lot of other people. With some careful planning, you can turn the added convenience of your office into a true tax benefit. And chances are high that you have a lot of other deductible expenses as well, so be sure to check out the complete archive of Daily Deductions.