Home Office Tax Deduction

It takes careful calculation of office space and costs to meet the rules
By Kay Bell, Owner, SKB Editorial Services One of the best tax breaks available is the home-office write-off – if you file your claim correctly. Be sure you:

1. Understand the rules or Uncle Sam will make you pay
2. Keep good records and calculate carefully
3. Don't just ignore depreciation or you'll regret it later

 

Know the home work space requirements

The rules say your home office must be used as your principal place of business or where you personally meet with clients or customers in the normal course of your business.
Try: The official word, including standards for employees who work from home, can be found at the IRS's discussion of the home-office deduction. For further, and a bit easier-to-read, elaboration on the requirements, check out CCH's Business Owner's Toolkit section, including an interactive check list.

Calculate your deductible home-office space

Think that you can claim 25 percent of your total home expenses because you have four bedrooms and one is used as the office? That's not a good tax idea. You need the actual square footage of your both home and your office space to determine the proper deduction.
Try: PowerHomeBiz.com offers a good explanation of this requirement, complete with measurement diagrams to help you accurately figure your allowable work area deduction space.

Determine your expenses

Once you've figured the proper percentage of home-office space, you use that figure to calculate your indirect expenses from working out of your house. These include proportional costs of such things as your mortgage interest or rent, real estate taxes, utility bills and repairs and maintenance. You'll add these amounts to your direct home office costs.
Try: Quicken/TurboTax suggests various expense categories to consider. CCH's interactive home office deduction calculator can help ensure you don't overlook any breaks.

Decide whether to depreciate

When you own the house in which you have your office, you can deduct the business use of the home over a period of years. But when you sell your home, you must recapture that depreciation, i.e., pay what you wrote off via depreciation. Many home-office users opt to forgo the depreciation component to avoid this complex calculation when they sell. However, if you claim a home office, even if you don't take the depreciation deduction, you still must remove that factor from the equation when you sell and pay capital gains simply because you could have claimed depreciation.
Try: CCH has a good handle on home office depreciation considerations, again with a calculator that takes depreciation into account. Another good discussion of the topic is at TheStreet.com.

File the right forms

Make sure you get all the necessary documents so that the IRS won't disallow your deduction simply because you forgot a form.
Try: The IRS details things you need to consider and forms you'll likely use in Publication 587, Business Use of Your Home. You can download Form 8829, Expenses for Business Use of Your Home, and its instructions directly from the IRS Web site. NoLo notes the basic forms you'll need, along with tips on documenting your home office's use. The company also publishes two books, Tax Savvy for Small Business and Deduct It! to help you complete your filing tasks. Tax software like TurboTax Premier Edition or TaxCut Premium will walk you through home office deduction and, of course, so will a tax adviser; find one at the National Association of Tax Professionals or Enrolled Agents.

• Make sure your home office meets the IRS requirements. If it doesn't, all subsequent work to write it off is for naught.
• Use your tape measure. An accurate assessment of your home office space determines how much of a deduction you get.
• Establish a record keeping system to track all home-office related costs. You'll be glad you did if the IRS asks questions.
• Decide whether claiming the home office deduction is worth it, especially regarding depreciation you'll have to recapture when you sell your house.