With the innovation in technology and the boom in entrepreneurship industry, more and more people are opting to work from the comfort of their home these days. This has obviously led to increasing number of inquiries in regarding home office deduction. But the first mistake people make is, they fail to claim their home office deductions. The major reason being their fear of triggering a tax audit by write offs. However, you need to get over this fear as it has been believed that home offices no longer set alarms off at Internal Revenue Service.
So, let’s get an idea of the requirements as well as limitations pertaining to home office deductions and the best course of action from taking it or not availing the deduction.
You would be eligible for the home office deduction if you have allocated a specific area of your home particularly for business purposes. This use need to be on a regular basis and if you are using the area for any personal usage then you would be not eligible for any deduction. There is a list of possibilities for qualification provided by the Internal Revenue Service that requires you to fulfil at least one of the following:
- The area is being used as a licensed day care center, that doesn’t have to be its exclusive use
- The area should be where you meet your clients, patients or customers. If you are using it only for telephone contacts, then it is not enough
- The areas should be used for the storage of retail or wholesale business inventory, where your home is a fixed location. Although it doesn’t need to be its exclusive use, the use of this purpose needs to be regular
- The area should not be attached to your home, rather it has to be a separate structure that is particularly used for the business purpose
- The area must be the main place of business for any of your trade
If you fulfill any of of the above mentioned criteria, then you are eligible for the deductions. But if you are using the office in the capacity of an employee, then you need to meet the other criteria. This condition is basically defined as the condition of your employment due to the reason that your employer is not providing any other location.
Determining the home office deduction
Let’s take a look at the different ways you can calculate the tax deduction for your home office.
Simplified Method – A simple and straightforward method, it allows you to calculate the square footage of the area used for business purpose. Here you take a deduction of $5 per square foot that is limited to about 300 square feet meaning an annual deduction up to $1,500.
Actual Expense Method – By using this method, you can distribute your actual home expenses on the basis of exact area of your home used for home office. These expenses are electric, heating, depreciation, real estate taxes and mortgage interest.
When you’re preparing your schedule A, you would be able to deduct all of qualified home mortgage taxes and interests by using simplified method. Whereas, with actual expense method, you can only itemize the difference between the amount claimed as home office expense and 100% of these expenses.
With the limitation of non permission to deduct more than the gross income of your business, it has a lot to offer you. However, it is not always a good option to avail home office deductions, for knowledgeable advice, so contact an experienced CPA.