My father always said never bring your work home with you. But a growing number of people are choosing to work from home.
According to a survey by the International Telework Association and Council (ITAC), the number of people working from home during regular business hours at least one day per month has increased by nearly 40 percent since 2001. Today, nearly 42 percent of employees work from home at least one day a week.
About 22 percent of self-employed individuals work from home, which is up 18 percent since 2001.
Perhaps all these people have discovered that working from home means more than just putting food on the table. You might get a tax write-off as well.
The fact is, many home office expenses can be deducted from your taxes. Can you cash in? Start by deciding where it is you conduct most of your business.
As an entrepreneur, if you consider you home the multi-functional and faceted brain of operation for the administrative or management activities associated with your business, then you’re eligible to for a tax break. As an employee, the requirements for making a claim gets a little more specific but are nonetheless available.
BREAKING IT DOWN
To deduct a home office on your tax return it must either be:
Your “principal” place of business.
A place where you meet with patients, clients, or customers in normal course of your trade or business
A separate structure which is not attached to your home, in connection with your trade
Used for certain business storage.
Up for rental use.
Used as a daycare facility.
The amount you deduct depends on the percentage of your home used for business. You can determine this by dividing the area of the space used for business by the total area of your home or if the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home.
After you’ve determined the business percentage of your home your ready to access where it is you can make claims. Deductible expenses include: the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting and repairs. However, you may not deduct expenses for lawn care or those related to rooms not used for business.
Tax deductions are not a free-for-all. If your home office gross income exceeds total costs of operation then you’re eligible to deduct all expenses but if your gross income is less than your business expenses, the amount you are able to deduct is limited.
In this case, nondeductible expenses — like insurance, utilities, and home depreciation — that are related to your home business are limited. To figure out how much you can deduct, follow these steps:
Add up the business expenses related to the operation of your home office. These might include the cost of your telephone, Internet access and cable, supplies that you use for your business and perhaps the purchase or depreciation of your business equipment.
Next, add up the expenses of owning your property, including the mortgage interest you paid, real estate tax bill, and homeowners’ insurance premiums. Divide this number by the percentage of the house that you use strictly for business. For example, if you use 25 percent of the house for business, and the expenses of owning your home are $12,000 per year, you’d be able to write off $3,000 worth of expenses.
Add together your business expenses and the expenses that you have from owning the property.
Next, subtract this number from your gross income from your business.
As an employee, you can qualify for a deduction if your home office is used to help your employer. You can’t make a claim if you rent any part of your home to your employer and use the rented portion to perform services as an employee.
Aside from that, the key to employee deductions is record keeping. You must keep records to prove the expenses you deduct in case you’re audited. As long as you’ve got the receipt, and can prove the expense is directly related to your business, the IRS will allow you to keep your deduction.
Employees are allowed to claim the costs of business travel, local transportation, entertainment, gifts, and any other job-related expenses. Deductible travel expenses are defined by the IRS as “the ordinary and necessary expenses of temporarily traveling away from your tax home overnight” while on business. They include the cost of transportation, meals, lodging and other expenses related to your business travel.
Transportation expenses include the cost of transportation by car, air, rail, bus, taxi, or any other means of transportation necessary. However, deducting the cost of commuting may raise some eyebrows at the IRS.
You typically cannot deduct commuting costs, but some local transportation expenses like the costs from one workplace (away from the residence) to another are covered. You can also deduct the cost of going between your house and a temporary work location outside of the area where you live and work.
The key thing to remember as an employee is you are not allowed to take a deduction if your employer reimbursed you for your out-of-pocket expenses or gave you an advance or allowance for your employee business expenses. These are treated under an “accountable plan” where the payment should not be shown on your W-2 Form as pay. You do not include the payment in your income.
For more details, talk to your human resources manager or tax preparer.
Owning vs. Renting
If you rent your home and meet the requirements for business use of the home there is good news: You can deduct part of the rent you pay. To figure your deduction, multiply your rent payments by the percentage of your home used for business. If you own your home, you can’t deduct the fair rental value of your home.
SAYING ‘NO’ TO A TAX BREAK
As enticing as home office deduction might sound sometimes its better to pass up the opportunity. As my grandmother always used to say, “Sometimes the remedy is worse than the disease.”
If you deduct your home office, your office may be considered business property. This means that you will need to pay taxes on the amount the business depreciated when you sell your house. Because of this, a home office deduction might not be profitable for you.
You might save a few hundred dollars every year with the home office deduction, but have to pay thousands of dollars when you sell the house. Not only that, but you’re basically inviting the IRS to audit your business at any time.
Are you willing to take the risk?
For more information on home office deductions, check out the following IRS publications at www.IRS.gov.
-IRS Publication 587, Business Use of Your Home
-IRS Form 8829, Expenses for Business Use of Your Home
-IRS Publication 4035, Home-Based Business Tax Avoidance Schemes
July 22, 2005