Work from Home? A Home Office Deduction is for you.

If you work from home, or use part of your home for your business, you can decrease your tax burden by claiming home office deductions. To be able to deduct home office costs, the IRS requires that the use of part of your home is done regularly and exclusively for business purposes in order to claim the home office deduction.

Need to know more about this method of offsetting taxes? Practical Taxes, your choice for affordable tax preparation in Billings, has the answers.

What is a Home Office?

If you are self-employed or a business owner, one of the following should be true about the “business side” of your home:

– It is your principal or main place of business

– It is a place where you deal with customers, clients, or patients on a regular basis, as part of your normal business routine

– It is a separate structure that is not attached to your house (ex. garage, studio) but used solely for your business, and never for personal activities

– It is used to provide day care services for children, the elderly, or handicapped individuals, and meets corresponding local and state licensing requirements.

– It is used as a storage area for inventory or products that you sell in relation to your business, and your home is your only place of business.

If you are an employee, home office deductions can be claimed if you meet the home office requirements as a business owner (mentioned above) and:

– You work from home not for your own convenience, but for your employer’s convenience (ex. your employer does not have his/her own headquarters so you have no choice but to provide your own work space)

– You do not rent the office part of your home to your employer and use it to accomplish your tasks as an employee (in other words, you do not get to receive rent income for doing office work in your own home)

What Expenses are Considered Home Office Expenses?

Direct expenses – These are the costs incurred to maintain your business space such as painting the walls, or treating the windows for privacy and security reasons. Direct expenses are fully deductible.

Indirect expenses – Indirect expenses are the costs incurred for maintaining your entire home such as rent, mortgage payments, real estate taxes, utility bills, general repairs, cleaning services, trash collection fees, security services, homeowner’s association fees, and depreciation. Only a percentage of indirect expenses is deductible based on its proportion to your entire home. Take note that only those costs which benefit your entire home and affect your business space in some way will count as an indirect expense. For example, if you are paying for a cable bill, and you do not have a TV with cable in your business space because it is irrelevant to your business and the cable is strictly for personal enjoyment, then you can’t include your cable bill as an indirect expense. In other words, money you spend specifically for personal benefit (ex. installing a jacuzzi in your bathroom) can never count as a home office deduction. The IRS is also very specific about excluding lawn service payment from being counted as an indirect expense.

How to Claim Home Office Deductions

Regular method. With the regular method, home office deductions will depend on the percentage of your home that is used for your business. To illustrate, if your business space takes up 25% of your house, you can deduct 25% of your expenses. This method is a bit more complicated and time-consuming because of all the records and documents you would need to support your claim.

Simplified option. With the simplified option, home office deduction will be computed by multiplying your office area (in terms of square feet) by $5.00. The maximum allowable area is 300 square feet for a maximum home office deduction of up to $1,500.00. Simple enough as it is, the trade-off for selecting this method over the regular method is the maximum cap it has. If you know for a fact that your deductions are way above $1,500.00, this method will not be beneficial for you.

Practical Taxes can Help

Here at Practical Taxes in Billings, we know that working from home is a great benefit. We also know that working from home can present some unique challenges. But most importantly, we know that you get a good tax deduction when you use your home for business purposes.

If you are unsure of how to do your taxes this year since you have started working from home, don’t panic! We can prepare your taxes so that you receive the biggest refund possible using the home office deduction.

Give us a call at 406-894-2050 to get started.