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Lock Up Tax Deductions for a Home Office
Besides the obvious advantages of working from home-it's a short commute, for one-you stand to benefit from certain tax deductions. For starters, you may be able to deduct a portion of your everyday living expenses.
How it works: You can deduct home-office expenses if you use a specific area in your home regularly and exclusively as the principal place of your business, a place to meet or deal with customers, clients or patients in the ordinary course of business, or a place to store inventory or product samples. In addition, you may be able to claim deductions for a separate structure (e.g., a detached garage) that is used in connection with your business.
However, you are not entitled to deductions if you simply take work home from your principal place of business. Also, if you are a corporate employee, the home office must be used for the "convenience" of your employer and as a condition of employment.
How do you figure out the tax deductions for a home office? The home is treated as two separate properties-one used for personal purposes, the other for business. For simplicity, let's assume you use 10% of your residence as a home office. As a result, you can deduct 10% of your mortgage interest or rent, property taxes, utility bills (gas and electric), cleaning services, private trash removal costs and property insurance as office-at-home expenses. If you are a homeowner, you are also in line for a depreciation deduction based on 10% of the home's business use. Of course, you generally can deduct the full amount of your mortgage interest and property taxes anyway. But you are getting a tax bonus for the other everyday living expenses plus a sizeable depreciation deduction.
The percentage may be based on either the square footage in your home or any other reasonable method.
Example: Ms. Madison uses one of eight rooms in her home as an office. The entire home is 2,500 square feet, while the office is 250 square feet. In this case, the percentage Madison can use for her home-office deductions is 12.5% (1 8) based on the number of rooms or 10% (250 2,500) under the square footage method.
In any event, you cannot use the deductions to create a tax loss. Specifically, your office-at-home deductions cannot exceed the business income derived from the home office less (1) regular business expenses (e.g., supplies, postage, etc.) less (2) the portion of deductions you could claim in any event (e.g., interest and taxes).
Alert: If you are not careful, you might "taint" your home office by using it for personal purposes. We can provide guidance in this area.