The Home Office Deduction: Do You Qualify?
Have you ever thought of taking a tax deduction for your home office? Well, under certain circumstances, the IRS will permit you to do so. Generally, to be eligible to deduct your home office it must be regularly and exclusively used (I) as your principal place of business (including administrative use) or (II) as a place to meet or deal with clients or customers in the normal course of your trade or business. The IRS has fairly strict guidelines on what it considers to be “regularly and exclusively used.” Specifically, an area used for business must be used on a continuing basis to be considered “regularly used for business.” The occasional or incidental business use of the area will not meet the regular use test. Moreover, the area used for business must be exclusively used for business purposes unless certain specific exceptions are met. Thus, if the area used for business is also used to watch TV or for other personal matters, it will generally not meet the exclusive use test.
Although the guidelines to determine whether or not you can deduct your home office are somewhat strict, if you meet the regularly and exclusively used test, then the benefits can be substantial. Specifically, you may be able to deduct a part of the operating expenses and depreciation of your home. Thus, you may be able to deduct a percentage of your mortgage interest, real estate taxes, home repairs/maintenance, water, sewer and other utilities, rent, security system, insurance and other home related costs. The exact percentage of these home operating expenses that are deductible is generally determined by dividing the square footage of the area exclusively used for business by the total square footage of your house. For example, if your home office is 144 square feet, and your home is 2,200 square feet, then about 6.5% of your home’s operating expenses may be deductible.
There are also other limitations that may affect your ability to take the home office deduction, but because the benefits can be substantial it is worth checking to see if you qualify for this important deduction.
This article was contributed by Craig Habicht, President of Liberty Tax Service in Hagerstown, 301-733-6990.