If you operate a business out of your home, you may be able to deduct a wide variety of expenses. These may include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance, and cleaning costs related to the space you use.
It can be a tricky area of the
tax code that's full of pitfalls for the unwary. Here are some of the top
mistakes people make:
1. Not taking it. This is
probably the biggest mistake those with home offices make. Some believe the
deduction is too complicated, while others believe taking a home office
deduction increases your chance of being audited. While the rules can be
complicated, there are now simple home office deduction methods available to
every business.
2. Not exclusive or regular.
The space you use must be used exclusively and regularly for your business.
·
Exclusively: If you use a spare bedroom as a
business office, it can't double as a guest room, a playroom for the kids, or a
place to store your hockey gear. Any kind of non-business use can invalidate
you for the deduction.
·
Regularly: It should be the primary place you
conduct your regular business activities. That doesn't mean that you have to
use it every day nor does it stop you from doing work outside the office, but
it should be the primary place for business activities such as recordkeeping,
billing, making appointments, ordering equipment, or storing supplies.
3. Mixing up your other work.
If you are an employee for someone else in addition to running your own
business, be careful in using your home office to do work for your employer.
Generally, IRS rules state you can use a home office deduction as an employee
only if your employer doesn't provide you with a local office to work at.
Unfortunately, this means if
you run a side business out of your home office, you cannot also bring work
home from your employer's office and do it in your home office. That would
invalidate your use of the home office deduction.
4. The recapture problem. If
you have been using your home office deduction, including depreciating part of
your home, you could be in for a future tax surprise. When you later sell your
home you will need to account for this depreciation. This depreciation
recapture rule creates a possible tax liability for many unsuspecting home
office users.
5. Not getting help. There are
special rules that apply to your use of the home office deduction if:
·
You are an employee of someone else.
·
You are running a daycare or assisted living
facility out of your home.
·
You have a business renting out your primary
residence or a vacation home.
The home office deduction can
be tricky, so be sure to ask for help, especially if you fall under one of
these cases.
Things to remember:
Recognizing the home office
deduction complexity, the IRS created a simplified "safe harbor" home
office deduction. You simply take the square footage of your office, up to 300
square feet, and multiply it by $5. This gives you a potential $1,500 maximum
deduction. However, your savings could be much greater than $1,500, so it's
often worth getting help to calculate your full deduction.
Finally, if you are concerned
about a potential future audit, take a photo or two of your home office. This
is especially important if you move. That way if you are ever challenged, you
can visually attempt to show your compliance to the rules.
