If you work from home and you meet the requirements to take a home office deduction, it might seem like a no-brainer to take the deduction on your federal income taxes. Less taxes are good, right?
But be careful. A home office deduction is not always in everyone's best interest. So it is wise to carefully consider the pros and cons of a home office deduction. And if you have any doubts, consult a tax specialist for your specific circumstances.
But some things to consider about taking a home office deduction on your income taxes include:
- Employees vs. Self-Employed - Different rules apply for employed telecommuters and independent contractors. Telecommuting employees are subject to more restrictions than independent contractors. Telecommuters must be working from a home office for the sake of convenience of their employer. Also only the portion of the employee's unreimbursed business expenses (which include the home office) that is greater than 2 percent of the employee's adjusted gross income is deductible.
- Profit and Loss - Your home office may not create a loss for your business. Independent contractors filing a a Schedule C, must first calculate whether their business has a profit or a loss. Then subtract the home office deduction, which may not create a loss.
- Selling Your Home - When you sell your house, having claimed the home office deduction can affect your capital gains taxes. The capital gains tax exclusion allowed from the sale of your primary residence could be reduced by the amount that you have claimed for depreciation on your home office. However, if you have always used the simplified home office deduction, this does not apply. For more details, see IRS Publication 523 Selling Your Home.
- IRS Audit - Taking a home office deduction possibly increases your chance of an IRS audit. Although About.com's tax expert William Perez thinks this bit of conventional wisdom may not be as true as it once was, he notes that filing a Schedule C may increase your chance of an audit. So always keep good records of all business expenses.
For more information regarding home office deductions, see IRS Publication 587 Business Use of Your Home.
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.