If you work at home, you might have to fend off noisy children, distracting phone calls and the lure of the refrigerator - but at least you may be able to claim some tax write-offs. However, the IRS can be choosy about what it accepts as a home office-related deduction, so you'd better acquaint yourself with the rules - before you file.
What qualifies as "home office"?
The IRS' requirements for a home office deduction are pretty well defined. To qualify, your home office must meet these criteria:
- It must be used exclusively and regularly for business; and
- It must be your principal place of business; or
- It must be used to personally meet with clients or customers.
Let's take a quick look at what these requirements mean. First, to meet the "exclusive and regular business" use requirement, a home office cannot be used for any personal or family activities - or for any other business activities that don't meet the home office requirements.
As for the "principal place of business" test, your home office will qualify if it's the main place from which you run your business and you have no other fixed location from which you manage large parts of your business.
Finally, the "meeting with clients or customers" requirement is self-explanatory. If, in the normal course of your business, you regularly meet with people in your home office, then it will likely meet the IRS' test.
While these qualifications may seem a bit rigid, they actually give you a bit of latitude as to where you conduct your home-based business. For example, your home office must be a clearly defined area, but it doesn't have to be a distinct room. And it doesn't even have to be inside your home; it could be in a separate structure, such as a garage or studio, that's not connected to your house.
In any case, if you do have an area of your home that qualifies as a home office, you can typically deduct a percentage of your total ownership costs, including mortgage interest, insurance, repairs, security system expenses, taxes and utilities.
Other deductible expenses
Even if you don't qualify for the home office deduction, you may still be able to claim some expenses connected with your home-based business. In fact, you may even be able to deduct your mortgage interest and real estate taxes as itemized deductions on Schedule A.
Other deductions may include office supplies, postage and a new telephone line. And you can also deduct many of the same items that any small-business owner might claim: professional memberships, subscriptions to publications covering your industry, relevant continuing education classes, etc. Plus, you may be able to depreciate the expense of computers and office furniture. However, the deduction of some of these expenses may be limited, since they cannot be used to create a tax loss.
See your tax advisor
Many people believe that home-based businesses are tempting targets for tax audits, but that's not necessarily so. What might raise a "red flag" in the eyes of the IRS is if you claim deductions and expenses out of proportion to your income. Consequently, if you're running a business from home, you must work closely with a professional tax adviser. A tax adviser can also keep you informed on changes in the laws that may affect you. So, get the help you need - you'll be glad you did.
