Your home is probably your single largest asset, but if you work from home, it may also be the source of a significant additional tax write-off. It's more common than you might think. More than half of all businesses in the United States are home-based businesses, according the Small Business Administration. In the past, taking a home-office deduction was often very time-consuming, but starting in 2013, taxpayers have a simpler option.
Regular and Exclusive
The Internal Revenue Service only allows you to write off the portion of your home that you use regularly and exclusively for business purposes. Your home office must be either your principal place of business, or you must use that portion of your home substantially and regularly for business. For example, if you conduct a portion of your business away from your home, but you also regularly meet with clients in your home in the normal course of business, that portion of your home qualifies for the home-office deduction.
Your home office can be a separate structure, for example your garage, but it doesn't have to be. It doesn't even have to be a separate room. Your home office can be your computer desk area in the corner of your bedroom, as long as you use that area exclusively and regularly for business. One exception to the exclusive use rule is inventory storage. You can deduct the space in your home that you use to store products or samples that you use in your business or trade, even if you also use that space for other purposes.
Ordinary and Necessary
Just because you get to deduct your home-office expenses is no reason to go hog-wild with your write-offs. The IRS only permits you to deduct ordinary expenses that are common to your trade and necessary to operate your business. For example, you can write off the cost of installing a dedicated business telephone line in your home office, but unless you are in the entertainment industry, the IRS might look askance at a deduction for the cost of installing the latest high-def satellite television system with surround sound in your office.
Beginning with the 2013 tax year, the IRS allows you to use the simplified option for figuring your home-office deduction. Think of it as the home-office equivalent of the standard mileage rate on your car. With the simplified option, instead of tracking and figuring the percentage of your home operating expenses, such as utilities and depreciation, you can use a standard deduction of $5 per square foot of home-office space, up to a $1,500 maximum. Instead of the current complicated 43-line Form 8829, taxpayers will use what the IRS describes as a "significantly simplified form." In addition, the IRS explains, taxpayers "can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A." If you don't itemize, however, you can still claim the simplified home-office deduction.
- Internal Revenue Service: Home Office Deduction
- Internal Revenue Service: Simplified Option for Home Office Deduction
- Internal Revenue Service: Publication 587
- Small Business Administration: What Home-Office Deductions Can Your Small Business Claim and How?
- Internal Revenue Service: Business Use of Home
- Internal Revenue Service: Rev. Proc. 2013-13
- Internal Revenue Service: Work From Home? Consider the Home Office Deduction
- Forbes: Secrets Of Claiming A Home-Office Deduction
- IRS: IRS Announces Simplified Option for Claiming Home Office Deduction Starting This Year; Eligible Home-Based Businesses May Deduct up to $1,500; Saves Taxpayers 1.6 Million Hours A Year
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.