You intently study the words as they appear on your computer screen as your fingers continue to methodically click patterns across the keyboard. Your deadline is fast approaching. As you pause to collect your thoughts your gaze drifts to the clock on the wall. You realize that you’ve dedicated about 70 hours’ worth of work into this project … in just this week … Phew! It’s a good thing you were able to convert that extra bedroom into a home office. At least this way you are able to have a home-cooked meal once in a while – even if it means you’ll probably be spending more time than you would like to admit coming up with innovative ways to remove the crumbs from the inside your keyboard. Maybe Uncle Sam will reward your hard work and dedication with a tax deduction.
Business Or Pleasure?
In order to qualify for the home office tax deduction, you must be able to prove that your residential office space is regularly and exclusively used for business purposes. And while the room itself may have multiple functions (and does not have to be sectioned off by any type of physical structure); the IRS needs to know that the specific area being utilized for business is not being used for personal purposes as well.
If you qualify, you may be able to take a deduction on several key expenses, including your mortgage interest, real estate taxes, home repairs and maintenance, rent, home insurance, utilities, garbage removal, security and even snow plowing. The business portion of most of these expenses are not subject to limits, however some are. Your financial advisor can help you optimize your tax savings. But first, here are some key facts you should know about the home office deduction.
3 Ways Home Office Expenses Are Deducted
- Expenses that directly benefit only the portion of your home office that is used exclusively used for business are fully deductible. This includes any repairs you make to the room. Repairs that benefit the entire house, however, are considered to be business and personal expenses. In this case, the IRS considers these to be indirect expenses and would allocate them to the business portion.
- You may already deduct certain expenses, such as mortgage interest and real estate taxes, on a Schedule A form as itemized deductions. To determine what portion of these expenses can be deducted as business expenses, you must complete Form 8829. The IRS will receive copies of both forms.
- Expenses that are not deductible on Form Schedule A as an itemized deduction are deducted on Form 8829 and are calculated based on the business use portion only. For these expenses, any personal use balance that may remain is not deductible.
How ‘Business Use’ Of The Home Is Calculated
There are a variety of options available for calculating the percentage of your home that is being used exclusively for business. Your financial advisor will be able to tell you which one is right for you and your unique situation. That being said, the most common method is to divide the square footage of the room you are using for business and divide it by the total square footage of your home.
If you are looking for something a bit more simplified, by which I mean a method that eases your recordkeeping requirements, you can elect to take advantage of the IRS’s standard deduction. (Just keep in mind that this may not be the best option for your particular situation.) In 2014, for example, the standard deduction came to $5 per square foot (up to a maximum of 300 square feet). Opting to take advantage of this option also saves you from having to distribute your real estate taxes and mortgage interest between your Schedule A form and Form 8829. Instead, you can simply take the full deduction on Schedule A.
Email Rea & Associates to find out how the home office tax deduction can save you money.
By Ted Klimczak, CPA (Medina office)