How much of their home office expenses can be deducted is one of the most misjudged tax questions faced by home workers. The reality of home office expense deductibility is much more complex than the common perception.
The costs associated with maintaining a home office can be deducted only if strict IRS guidelines are met – generally that the office is used exclusively and as your principal place for business purposes.
Exclusive Use - The space you are using in your home for business must be exclusively used for your business. You cannot use the same space for other purposes in your home. For example the office cannot also be used as a 2nd or 3rd bedroom for the kids or for guests.
Principal Place - Your home office does not need to be the only place that you do business, but it needs to be the principal place where you do business. Your home office must be the regular place that you do your billing, set up appointments, meet with clients, etc.
There are two ways you can determine your home office deduction. The simplified option is really a mathematical formula. You simply multiply the square feet of your office space by $5 per square foot. The limitation here is you can only use this method up to 300 feet of office space.
The other way to determine the deduction is similar to how most tax deductions are determined. You keep close record of overall expenses used for the home office and determine the direct vs. indirect expenses. You can deduct a percentage of the indirect expenses such as mortgage interest, taxes, insurance, maintenance, etc. while also deducting direct expenses used for the office space in full, such as new carpet for the office. As you can imagine, this is more complicated and requires detailed record keeping.
While tax law has changed some of the requirements as to who qualifies for a home office deduction, if you work at home you should look at the opportunity to deduct your home office. Always seek for an accountants help to make an accurate determination your eligibility and to get the most out of your tax deduction.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.