Claiming a home office is not a red flag for the IRS like it once was. It’s more common for individuals to claim a home office these days, especially since nearly half of small businesses are operated from owners’ homes. So when working from home it’s important to take advantage of home office tax breaks. However, qualifying can be tricky if you’re unaware of the IRS’s requirements. Here are some guidelines to ensure that your home office is IRS-friendly.
Regular and Exclusive Use
This one phrase, “regular and exclusive use,” is the requirement to which you must pay particular attention. The area in which you conduct business must only be used for business purposes. And the IRS is serious about this detail. In an article on SmartMoney.com, Jess McCuan quotes Martin Nissenbaum in an article entitled “Setting up a Home Office that Qualifies for Tax Breaks.” Nissenbaum is the National Director of Personal Income Tax Planning at Ernst & Young. He said, “Exclusively really does mean exclusively. The rule is clear. You can use the space only for your trade or business. If you happen to have a TV set in there and you watch it while you’re working, fine. But if your kids play there and you use it as a den, you cannot take a home office deduction.”Note: The IRS does consider excessive square footage a red flag when it comes to home office deductions (1,000 square feet might cause suspicion for your in-house accounting practice).
Principle Place of Business
If you spend the majority of your time in a rental space and use your home office to work after-hours, the latter will not qualify as the principle place of business. The home office must be where you conduct the majority of your business (which results in the majority of your income) in order to qualify for a deduction.
If your home office qualifies under the regular-and-exclusive-use requirement, then a corresponding portion of home expenses (utilities, mortgage interest or rent, maintenance costs, and insurance) is deductible.
All home office supplies can also be deducted as long as they are exclusively used for home business purposes. If that stapler you keep on your desk is used for both your work and your kids’ homework, then you can only deduct the home-office percentage of the stapler’s cost.
Business Credit Card
While you may think it’s easier to keep the receipts from your business purchases in order to deduct them later, the delineation becomes clearer when you use a credit card strictly for business purposes.
The IRS is in the Details
In her article entitled “Make Your Home Office IRS-Friendly,” Joyce Rosenberg notes details you should not forget when claiming your home office. She references Jeffrey Chazen, a tax partner at the accounting and consulting firm Richard A. Eisner & Co. LLP in New York who says it’s important to note that you cannot deduct more than your net profit. He goes on to say that if you’ve been depreciating your home office space but then sell your home, you must “recapture” the amount you’ve already received, adjusting your profit to account for that particular tax break.For more specific information on home office deductions, visit the IRS website and download IRS Publication 857, Business Use of Your Home. You should also review IRS Form 8829, Expenses for Business Use of Your Home, also available at the www.irs.gov.ReferencesMcCuan, Jess. “Setting up a Home Office that Qualifies for Tax Breaks.” 6 June 2007. SmartMoney.com.Rosenberg, Joyce M. “Make Your Home Office IRS-Friendly.” 25 January 2007. BoomerGirl.