A Guide To Home Office Tax Deductions

Whether you’re self-employed as an LLC, taxed as a partnership, or working out of your home at the convenience of your employer or as a simple proprietorship, many of us use a home office to do business. If we want to take appropriate deductions, we are frequently told by our accountant that we should fear being audited, the belief being that taking home office deductions is an audit red flag. If your use satisfies the IRS qualifications and requirements, of course you should take the deductions. That is why they were created and are allowed. If you qualify, you should take them without fear.

There are rules and ways to avoid an audit, and if done correctly, reasonably and accurately and you are actually audited, you can breeze through the audit without fear of great loss. You can take a home office deduction if it’s your principle place of business and you perform management and administrative duties from this location, provided there are no other fixed locations were you can perform these duties. The home office must be used exclusively for business on a regular basis. If you are an employee, you can take this deduction only if you are using this facility at the convenience of your employer and must be able to demonstrate this. Anyone taking this deduction must submit form 8829 along with schedule C with your 1040 tax return.

Here is how to take this deduction without fearing an audit:

1. You should have a dedicated separate business phone number for your home office. In my case, I have a dedicated fax and Internet line as well as outgoing business lines and a dedicated answering device identifying the phone as my business line. That covers all the bases very well.

2. Make certain that your business mail is sent to this location.

3. Make certain you know what deductions you are entitled to and how to compute them accurately. You can deduct depreciation of the business part of your principal place of residence, depreciation on equipment and furniture and your transportation to your job related destinations.

4. Your home office deduction is based upon the square footage dedicated to your home office use. Twenty to twenty-five percent is reasonable. Forty percent is too high unless you are storing inventory on site. This deduction also applies to the percentage of use for expenses applied to the business use such as insurance, utilities, repairs and maintenance of the general home site.

5. Depreciation is for 39 years and is based on original cost plus permanent improvements, or fair market value, whichever is less. If you use fair market value, you increase your chances for audit as it is most always higher than purchase price plus improvements.

6. You can utilize section 179 which allows for $100,000 of equipment, furniture and automobiles (with limitations on autos) purchased in the taxable year to be fully expensed in that year. This is a valuable benefit. However, you cannot use section 179 deductions to create losses.

7. If your use qualifies, you can additionally expense all traveling from your home office location to any job-related site without limitation or further requirements. There is no commuting rule limiting travel deductions between your home and business locations when originating from a home office.

The home office deduction is valid; do not fear using it. And, if required to defend it, you have nothing to fear if you applied the rules appropriately.