Working from Home? Claim Tax Deductions!

A recent growing breed of pajama workers in bunny slippers can claim the home office tax deduction.

Refer publication 587 for claiming deductions for Business Use of Your Home . http://www.irs.gov/pub/irs-pdf/p587.pdf

Are you qualified for this deduction?

For the self-employed:

The home office must be the principal place of business, used regularly to interact with clients in the normal course of your trade of business.

For employees:

If you are an employee, the business use of home must be strictly for the convenience of the employer and not merely because it is helpful and appropriate.

Figuring the Deduction

Once you meet the qualifying tests, you will need to figure how much you can deduct.

To find the business percentage, compare the size of the part of your home used for business to the whole house. The resulting percentage determines the business part of the expenses for operating your entire home.

Example:

The area of office is 240 sq. ft and home is 1,200 sq. ft.

So, the office is 20% (240 divided by 1,200) of the total area .

The business percentage is 20%.

Deduction Limit

If the gross income from business use of your home >= total business expenses (including depreciation), you can deduct all business expenses related to the use of your home.

If the gross income from business use of your home < total business expenses, the deduction for certain expenses is limited.

Type of Expenses

Direct Expenses like painting or repairs only in the area used for business are deductible in full.

Indirect Expenses like home insurance, utilities and general repairs are deductible based on the business percentage of your home.

Unrelated expenses like lawn care or painting a room not used for business are strictly not deductible.

Depreciation Deduction

This is an allowance for the wear and tear on the part of home office.The value of land, however cannot be deprecated. To calculate the depreciation deduction for 2011, depreciate the home office part as nonresidential real property under the modified accelerated cost recovery system (MACRS) which uses the straight line method. (Refer publication 946).

Business Furniture and Equipment

Depreciation and section 179 deductions determine if you may be entitled to take deductions on furniture and equipment used in the home office.

IRS defines Listed property like computers , photographic, phonographic and video recording equipment. Special rules apply for this type of property.

More-than-50%-use test

The listed property must be used more than 50% for business or work as employee to claim a section 179 deduction or an accelerated depreciation deduction. This deduction can be claimed for the cost of depreciable tangible personal property bought for use in trade or business.

And the most important of all, Record keeping!

There is no prescribed method of record keeping, but overall the records must show:

·         The part of home used for home office.

·         It is used exclusively for work.

·         Depreciation and expenses for the business part.

Keep your records for as long as they are important for any tax law. This is usually the later of the following dates:

·         3 years from the return due date or the date filed

·         2 years after the tax was paid.

So go ahead, grab a form 8829 and file Expenses for Business Use of Your Home!