As tax time readily approaches, there is still time to determine how you’ll define your “home office” this year. It really doesn’t have to be that difficult if you take a little time to do your homework. So here are a few tax tips to consider during the next couple of months as you’re getting your “ducks in a row” for tax time!
Because of complex tax codes and complicated recordkeeping required by the IRS, many network marketing business owners don't take advantage of legitimate, home office tax deductions for their home office or workspace. It can be tricky, for sure! We’ve heard all the variations of what is or is not an allowable deduction and it can be confusing. So do any of us really know what the true legalities of home office deductions are versus the myths? (See 4 Common Tax Myths All Home Business Owners Should be Aware of.)
The first and most important thing is to find a qualified tax consultant familiar with home office tax deductions. It’s important to seek tax guidance before you tackle a home office on your own since this is an area where you don’t want to be guessing or misinformed. Look for an “Enrolled Agent” (EA) who would be capable of representing you in the event you get audited. An Enrolled Agent is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the IRS for audits, collections, and appeals. Like certified public accountants and tax attorneys, they have a broader knowledge base and experience than standard tax professionals. They can tell you exactly what you can and cannot claim based on your individual circumstances. Remember, there is not a “one size fits all” checklist when it comes to “home office” deductions.
Along with finding a qualified tax consultant, you may also want to take a look at the IRS’ home office deduction criteria.
You can easily download IRS Publication 857, Business Use of Your Home. Specifically look at Section 280A(c)(1) of the IRS Code, which states that taxpayers may be able to deduct expenses for a home office if it is the principal place of business of the taxpayer, or used exclusively for business, or used to meet with patients, clients, or customers.
Non-governmental publications are also available on home office deductions. One example is Home Business Tax Deductions: Keep What You Earn by Stephen Fishman (Nolo Press, 2006).
If you use part of your home for business purposes you may be able to take a home office deduction. First, keep in mind that to take the deduction, your home office must meet certain criteria. It can be a separate room of a home or an apartment, or dual use space with a devoted portion used for an office, but it must be "regularly and exclusively used for the business," explains Alan E. Weiner, senior tax partner at Holtz Rubenstein Reminick Llp in Melville. "Working at the kitchen table would not qualify the kitchen as a home office."
It is recommended that home-based workers commit 10% percent of the square footage of their home to office space that they use exclusively for work.
The IRS uses three main criteria to determine if your home office qualifies as a tax deduction:
1. The home office must be used regularly. It doesn’t have to be full time, but enough time to maintain a business.
The IRS doesn't offer a clear definition of regular use--only that you must use that part of your home for business on a continuing basis, not just for occasional or incidental business. You can probably meet this test by working a couple of days a week from home, or a few hours each day.
2. The home office must be “exclusive.” The office cannot have a dual purpose such as your business computer also being used as your family computer.
This means that you use a portion of your home only for business. If you use a room of your home for your business and also for personal purposes (dual use), you don't meet the exclusive use test. But, you can set aside a portion of a larger room if it is used only for business.
3. Storing inventory or product samples at home.
If you store inventory or samples at home, you can deduct expenses for the business use of your home, whether or not you use the storage space exclusively for business. This space must be in your home, and you may use the space for other purposes as well as long as you use it regularly for your business’s inventory or samples.
Beyond the above three criteria, be ready to prove to the IRS that you are entitled to take the home office deduction. Here are just a few extra steps you can take to help legitimize your home office expenses:
- Photograph your home office and draw a diagram showing the location of the office in your home. Keep this information in your tax folder.
- Have your business mail sent to your home.
- Use your home address on your business cards and stationery and in all business ads.
- Get a separate phone line for the business.
- Have clients or customers visit your home office and keep a log of those visits.
- Keep track of the time you spend working at home.
Consider these home office deductions when compiling receipts and talking to your tax advisor:
- Mortgage or rent - Part of the total cost of owning and maintaining your home can be used toward your home office deduction. Calculate the square footage that is solely used for business. You can deduct 10% of your home expenses.
- Gas, electric, home heating oil and water.
- Trash pick up, snow removal and property taxes.
- Allowable improvements, repairs and maintenance.
- Pest control and home security.
Once you have taken your home office deduction, you may take your other business deductions separately on Schedule C of Your Federal Income Tax Return. Even if you don't qualify for the home office deduction, you can still deduct necessary business expenses that you incur at home on Schedule C, such as:
- A separate business telephone line (your primary line cannot be used as a deduction).
- Long-distance phone calls.
- Office supplies and office equipment.
- Capital expenses - Up to $5,000 deduction for a first year start-up, along with many other deductions.
So, as this tax season wraps up, try to fend off those perpetual myths swirling around the subject of home office deductions and resist the urge to take tax advice from your neighbor’s brother’s uncle. To best avoid the risk of being audited yet still receive all the benefits of a home office deduction, the professionals suggest we do our homework, obtain professional advice and record our legitimate business expenses. Bottom line - if you are a home business owner and you’re not taking these deductions, you’re missing out on some great tax savings!