As tax regulations go, the rules governing deductions for home offices are generally simple and straightforward. If you work at home, there are two underlying tests that must be met in order to claim your work space as a deductible expense on your federal income tax return. If you meet these two qualifiers, you should by all means keep track of your expenses because the tax savings can be substantial.
In fact, beginning with the 2013 tax year, the Internal Revenue Service instituted an option for taxpayers who have a home office that allows a simple dollar value multiplier rather than the complicated formula previously in effect. In 2012, Forbes Magazine estimated that there were an estimated 26 million homeowners who were eligible to claim a home office deduction, but only 3.4 million taxpayers did so. With an increasing number of Americans working from home at least part of the time, it makes good economic sense to chart the expenses associated with that work, and to decrease your tax burden because of your home work.
There are really only two requirements that govern deductions for home offices, so if you work at home on a regular basis, or if you own a business of your own, you might want to consider the benefits of designating a specific area of your home as a workspace. You will likely be able to reap some benefits at tax time.
What Do You Use the Space For? How Often Is It Used?
The primary test for an allowable home office deduction is that the space must be used exclusively for business, and it must be used on a regular basis.
Your home office does not necessarily have to be an entire room, but it must be a defined space that is designed for business pursuits. It cannot be the kitchen table, and it cannot be the desk that your kids also use for their art projects and homework.
Your home office can be used for keeping records for a business that takes you away from your home; such as ordering materials and billing customers for interior design work that you perform in other homes. In that case, you might only have a desk, a chair and some files in a quiet corner of another room. Or you might have sample books and resource materials organized and stored in a closet, with a small work table for drawing plans and proposals. Both qualify as exclusive spaces.
Regular use might be one day a week, a set number of hours each day, or a specific schedule based on the jobs that you perform. If you freelance from your home, it should be easy to keep track of the hours you spend at your home office desk. If your employer allows you to work from home one or two days a week, that is easily verifiable.
If, however, you bring work home from your place of employment on a sporadic basis, or if you work from a laptop in the den while watching television, you probably don’t meet the test for a legitimate home office. In case of a tax audit, you would probably find it difficult to defend your use of the sofa as a designated work space.
Is It Your Principal Place of Business?
Your home office is required to be your principal place of business. If the work you do takes you away from your office to perform specific tasks, that is allowable as long as the planning, record-keeping, scheduling ,and “business” portion of the business is performed from your home office. It is not necessary that clients come to your home, that you have a separate entrance to your office, or that you use an exclusive phone line. You will, however, want to document any expenses that you claim are related to your business.
You can, under specific circumstances, deduct expenses for a freestanding building, studio, barn, or client meeting space, even if it is not the principal place of business. And, in some cases, you may qualify for the home office deduction even if you have another office or facility. Check with a tax adviser if you have any concerns.
Freelancers of any kind benefit greatly from the IRS home office deduction. Writers, designers, artists, business consultants, digital marketers, and service providers who work from home all benefit from the tax laws, and self-employed plumbers, attorneys, tax consultants, and home builders should also explore possible savings. It is not necessary that clients ever visit your home office.
What Are the Paths to Savings?
Prior to the implementation of the new option, record-keeping was the primary drawback to benefiting from the home office deduction. Now, however, based on the new available option, taxpayers may opt for a single lump sum deduction of up to $1,500, based on a formula of $5 a square foot for home office space. The option makes claiming a home office deduction easier than the previous “regular” method, but it may not benefit some homeowners and business operators in the same way. It is always wise to compare methods; choose the one that is appropriate and that leads to the larger tax savings.
You may choose the optional method one year and return to the regular method the next.
No matter which method you choose, however, if you work at home you will want to continue to maintain impeccable records, not only for tax purposes, but also to document your business success. If you have a well-planned, efficient home office, that should be easy.
2 Point Highlight
There are really only two requirements that govern deductions for home offices, so if you work at home on a regular basis, or if you own a business of your own, consider the benefits of designating a specific area of your home as a workspace.
No matter which method you choose, if you work at home you will want to continue to maintain impeccable records, not only for tax purposes but also to document your business success.
