General Business / Taxes

Can I Deduct my Home Office?

If you work at home, as millions of Americans now do, it’s well worth investigating whether you qualify for home office deductions. The 1.5 million tax filers who claimed exemptions for the business use of their homes cut their annual Federal tax bill by an average of some $2000 in 1994 (the last year for which data are available). But before you take those savings to the bank, you’d better understand the rules.

Starting in 1999, the new tax law allows a home-office deduction for an office even if it is used only to administer business records or to manage a buiness, even when all business services are performed elsewhere, provided that the taxpayer has no other fixed location to conduct administrative or management activities. This new provision will be of value to salespeople, consultants, and others who manage their businesses from home but do most of their work at client locations or on the road.

“The 1.5 million tax filers who claimed exemptions for the business use of their homes cut their annual Federal tax bill by an average of some $2000 in 1994”

A home office need not be the only place you work to qualify for a deduction. You can, for example, hold a full time salaried job and still deduct the costs of the home office where you run a business on the side. However, you generally cannot deduct costs associated with a home office where you do work for an employer. In fact, you’ll disqualify a home office used for an independent business if you also use the same space to do employer related work.

The home-office space for which you plan to claim a deduction must be used exclusively for business, that means no family TV watching in the evening or pullout bed for guests. But your office need not occupy an entire room. You can use a room divider, curtain, or bookcase to mark off your separate office space. This is particularly helpful for apartment dwellers, who may not have an entire room to spare.

There are still plenty of opportunities for deductions, however, for those who plan carefully and keep detailed records. If you don’t meet IRS guidelines to claim deductions for home office space, you may always deduct the direct costs of running your home based business, postage, supplies, and the like. Telephone service and computers may also be deductible, but those expenses fall under special rules. If you have just one phone line into your home, you may deduct only those calls specifically attributable to your business. Install a second line, however, and you may deduct the entire cost of that line.

If you intend to claim home office deductions, you’ll need to keep extensive records. A floor plan of your house and photographs of your home office can provide visual evidence if you are audited. You can also buttress your claim by having a separate business checking account. A phone line dedicated to business use, and a log recording business activity. If clients come to the house, keep a diary showing those meetings. And, of course, you will keep canceled checks and receipts for both business expenditures and related household costs.

Provided by M.E. Hansen, All rights reserved. Do not duplicate without permission