By A.J. Gross, C.P.A., E.A.
Claiming home office deductions increases your chances of an IRS audit. Is that true? In our experience, the answer is generally no. If you run your business out of your home and maintain a home office, then you should take your deductions. There is no reason to leave money on the table. The first step for claiming home office deductions is to understand the rules.
Exclusive Use: You must use a specific area of your home only for your business. The designated area may be a separate room or an identifiable space within an existing room. You don’t need to visibly separate space within a room with gates or other types of partitions.
Exclusive use for business means NO personal activities are done in the designated business area. If ANY personal activities are done in the business area, then you are NOT able to claim any IRS deductions for the home office.
For example, your son or daughter occasionally completes their homework in the designated business area. This is not a home office for the purpose of claiming IRS deductions.
Another example, there is one personal computer in the household. The personal computer is used for your business. The personal computer is also used for personal shopping and to pay personal household bills. This is not a home office for the purpose of claiming IRS deductions.
Regular Use: You must use the specific area of your home for business on a regular basis. This means you use the office consistently every week. Using the disengaged business space occasionally is not considered regular use.
Principal Place of Your Business: You must show that you use your home as your principal place of business. This means your home office is your only business location. This rule can get tricky if you have more than one business location. Contact us if you have more than one business location.
Write-Offs: If your designated business space meets the Exclusive Use, Regular Use, and Principle Place of Business tests, then you can write-off home office deductions. The most common home office write-offs are mortgage interest, real estate taxes, rent, home owners insurance, repairs, and utilities.
Simplified Method: Starting on January 1, 2013, the IRS provided taxpayers a simpler option for computing home office deductions. Instead of keeping track of your home office expenses, you can use a standard deduction of $5 per square foot of home used for business. If your home office is 100 sq ft, then your home office deduction is $500. (5 * 100 = 500)
A.J. Gross, C.P.A., E.A. is President of ALG Tax Solutions. A.J. Gross can be contacted at AJGross@algtaxsolutions.
This column was printed in the November 2, 2014 - November 15, 2014 edition.