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Questions About Taking a Home Office Deduction

Look here for answers to your questions about taking a home office deduction.

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Taking a home office deduction on your taxes may be one of many perks of working from home. But that doesn't mean it's easy. If fact, rarely is anything simple when it comes to income taxes, especially if you take the home office deduction. And now the IRS has "simplified" the process by giving you another choice with a new standard deduction for a home office deduction.

If all this leaves you with questions about taking a home office deduction, look here for some answers.

What are the IRS rules about taking a home office deduction?

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According to IRS rules, home office expenses can only be deducted when a "specific area of your home" is used "regularly and exclusively as your principal place of business." However, if you use the home office space as a "place to meet or deal with patients, clients, or customers," even if it is not your principal place of business, you may still qualify to take a home office deduction.

That clears it all up, right?

If not, read on for more information on how each of those terms about taking a home office deduction applies in the real world.

More: IRS Rules for Home Office Deductions

 

What is the "simplified" home office deduction?

If you meet all the requirements to take a home office deduction, you then have the choice as to how to calculate it. You can deduct actual expenses such as a portion of your rent or mortgage interest and utilities or you can take a "standard" deduction of $5 per square foot.

More: Simplified Home Office Deduction

What expenses qualify for a home office deduction?

When you look at your home office you may see a whole room filled with equipment, furniture and shelving, that all cost you a pretty penny. And so if you qualify for a home office deduction (and are not using the non-simplified method of calculating it), you are eager to deduct it all.

But when figuring a home office deduction for independent contractors, the IRS separates out those less permanent features from the space itself, though many are still deductible elsewhere. Also home office expenses are categorized as either direct or indirect, and only direct expenses are fully deductible. (see examples of direct and indirect home office expenses.) Read on to find out more about what is deductible and what is not.

More: What Is Deductible

If I qualify for a home office deduction, is it good idea to take one?

As with anything else, taking a home office deduction has its pros and cons. Most who qualify for a home office deductions will want to take it, but you always want to be aware of the potential pitfalls such as an increased likelihood of an audit and a possible increase in your capital gains tax when you sell your home (if you don't use the simplified method). Read on for more information to help with this decision.

More: Deciding Whether to Take a Home Office Deduction

What are the rules for telecommuting employees taking a home office deduction?

If you telecommute and are an employee, the IRS has additional rules for your home office deduction. The key distinction is that telecommuting employees must be working at home for the convenience of their employers, while an independent contractor with a home office has no such requirement. Read on for more information on this caveat as well as filing requirements for employees.

More: Employee Home Office Deduction Rules

What paperwork should I save if I am taking a home office deduction?

Save documentation relating to direct expenses for for your home office and indirect expenses for your entire home. This includes mortgage statements, rent receipts, utility bills, taxes statements and more. Even if you plan to use the simplified method and can't deduct expenses, you'll want to save this information so you can compare and see which is more beneficial for you. Read on for more information.

More: Organizing Your Tax Information

What tax form do I use to calculate home office deduction expenses?

If you are an independent contractor filing a Schedule C, use IRS Form 8829 Expenses for Business Use of Your Home to calculate expenses for business use of your home, if you are deducting actual expenses for your home. (This form is not used to deduct office equipment or furniture, which are deducted on Schedule C, but only to calculate the deduction for use of your home.) If you are using the simplified method to calculate the deduction, you will do this on Schedule C.

If you are a telecommuting employee use Form 2106 Employee Business Expenses to calculate the deductible expenses, then enter the amount on Schedule A. (You must itemize in order to claim this deduction).

More: Useful Tax Forms

 

Disclaimer
I am not a tax attorney, CPA or tax preparation specialist. The information here is meant as a general guide. For specific questions about your own taxes, please refer to IRS publications or consult a tax specialist.

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