If you’re planning to declare your home office expenses on your tax return, you should ask yourself some important questions. Why? That deduction rings loud bells in your Uncle Sam’s aging ears. He just might be dropping by for holiday dinner.
What is the home office deduction? It can be a respectable money saver if it’s used correctly. But Uncle Sam knows that many people claim a higher-than-legitimate dollar amount for a home office.
To avoid hosting an unwelcomed guest at your dining room table later this year, ask yourself the following:
- Is my home office a designated area in my home, used regularly and exclusively for business?
- If yes, is this area my principal place of business or administrative office?
If you can answer “yes” to both questions, you might be able to claim the home office deduction for costs associated with the percentage of the structure used solely for business. This deduction can include a percentage of the homeowner’s mortgage and interest, insurance, utilities, repairs, and depreciation. Renters can claim a percentage of their monthly lease for the home office deduction, along with other applicable costs.
How does it work? Let’s say that you pay $1,000 per month in rent and that for a year you’ve used one-quarter of your apartment only for business. One-quarter (25%) of $1,000 is $250. Multiply that by 12 months, and you have an annual deduction of $3,000. Also, you get to take the 25% deduction in utilities, renter’s insurance, and so forth. The total quickly racks up.
Sounds ideal. But taking the tax deduction is not without certain risks. You stand an increased possibility of being audited if you claim the home office deduction. Get creative about what you can do to ensure that Uncle Sam sees your home office as devoted solely to business use. Here are some simple, but highly effective suggestions to that end:
- Install a separate phone line dedicated to business use.
- Keep personal paperwork and other personal objects in separate areas of your home.
- Avoid turning your office into a spare bedroom when company shows up.
- Post your business license, professional credentials, and insurance declarations on a bulletin board.
- Mount a plaque with the business name on the office door.
- Decorate the space with an eye to creating an atmosphere suitable to your line of work. For instance, install business-appropriate desks, artwork, storage cabinets, and seating areas. If clients tend to drop by for coffee and a chat, have cups, a coffee maker, and serving supplies handy inside the room.
As usual with the IRS, the rules involving the home office deduction are accompanied by limitations, qualifications, and restrictions. If you’re nervous about claiming the home office expense but feel that it’s a legitimate deduction, consider checking in with us at Law offices of Christy Lee, P.C., for clarification on what’s acceptable. That way, if Uncle Sam stops in for a quick bite, he won’t suffer indigestion over your suspect business activities.