Do you have a home office or are considering to set up one one of these days? Do you know that if you are qualified, you can claim a home office deduction from your taxes?
Some people claim that claiming a home office as an expense for their home business (including blogging) can trigger a tax audit but these are just rumors. Besides, if you do it the right way, why be afraid, right?
Here are some important tips on how to set up your home office, claim them as tax deductions and still keep your peace of mind.
Exclusive Working Space
A home office need not be the whole room in a house; even a portion of the room will do as long as you can clearly differentiate between your personal spaces from the business space. Your desk, computer, ethernet cables, filing cabinets and shipping area should all be part of your home office space and you should maintain it like a real office or cubicle. This means that there’ll be no children playing computer games with your PC, printing school assignments with your supplies, nor placing inappropriate furnishings or decorations that you won’t usually see in a real office.
In case you would use a portion of the basement, garage or attic as a storage space for your inventory, be sure that such area is clearly marked. Experts suggest using duct tapes to set the boundaries of your “business areas.”
Deducting Business Expenses
Maintaining a home office will allow you to deduct as expense an amount proportional to how large your home office is compared to your entire home. If your total business space is 500 square feet and your home is 2,000 square feet, your home office percentage is 25% (500/2000). You can use 25% of most of your household expenses as business expense. These expenses include depreciation (if you own the home), mortgage interest, property taxes, utilities, homeowner insurance and rent among others. Keep note that some expenses for activities that take place outside the home (such as gardening and lawn care and maintenance) cannot be deducted because technically a “home office” must be “within” a home.
Please note that if your total income is less than your total expenses, excess operating losses can be carried forward into future tax years since you cannot deduct more than the net profit your business makes each year. In addition, there are tax consequences when you depreciate your home as part of the home office deduction and then sell it someday for a profit.
Maintain Proper Documentation
Keep good records of all of the bills that you received so that in case you get audited, you have a proof of the exact amount that you paid for home expenses. While IRS selects just about 2 to 3% of all ITRs received to be audited each year, it’s still better to be prepared, just in case.