Deduct Home Office Expenses?

Technology has made it possible for more people to work from home. If you’re among them, you may be eligible to deduct “home office” expenses related to using your home for business purposes.

Potentially Deductible Expenses

Examples of home office expenses include:Office Expenses

  • Utilities
  • Homeowners insurance
  • Security systems
  • Home repairs
  • Trash removal
  • Depreciation

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The most common way to determine the amount of a home expense allocable to business use of the home (the deductible amount) is to multiply the expense by the percentage of your home’s total square footage devoted to business use.

Example: Jamie, a freelance graphic designer, uses a 120 square foot extra bedroom in her 1,200 square foot condo as her office. If she otherwise qualifies, Jamie may deduct 10% (120/1,200) of her home expenses.

A second approach basically divides the number of rooms used for business by the total number of rooms in the home to determine the deductible percentage. This method sometimes results in a larger deduction.

Qualifying for the Deduction

The home office deduction may be available if you use part of your home as your principal place of business, taking into account the relative importance of the activities you perform at each place where you conduct business and the amount of time you spend in each of those places. Your home may qualify as your principal place of business if it’s the only fixed location where you perform substantial administrative and management activities for your business.

Even if your home isn’t your principal place of business, you may be eligible for a deduction if:

  • You use part of your home to meet or work with clients, customers, or patients in the normal course of business or
  • Your work space is located in a structure that’s separate from your home — a detached garage, for example.

Another requirement for the home office deduction is that you use the space in your home exclusively and regularly for business purposes. The exclusive-use requirement can be difficult for many taxpayers to meet.

Example: Tom is a home-based management consultant who does most of his work on a personal computer located in his home office. Tom often lets his kids use the computer for homework assignments in the evenings. Because Tom does not use his home office exclusively for business, he can’t claim the home office deduction.

There are exceptions to the exclusive-use rule for space used regularly to store product samples or inventory and for certain in-home daycare facilities.

If You’re an Employee

You must meet additional criteria to qualify for the home office deduction if you’re an employee. The deduction will be available only if you use the home office for the convenience of your employer (based on all the facts and circumstances) and your employer does not rent the space from you. You won’t qualify if your use of the home office is merely helpful or appropriate.

Potential Downside

As generous as the home office deduction can be, there is a potential tax downside. Gain resulting from selling your home will be taxable to the extent of depreciation deductions that were allowed for your home office for periods after May 6,
1997.

Office Expenses

MARCH

15 Corporations: Calendar-year corporations file 2011 tax return (Form 1120) and pay any tax due. S corporations file Form 1120S. For an automatic six-month filing extension, file Form 7004 and deposit the estimated tax due.

APRIL

17 Individuals: File 2011 income-tax return (Form 1040, 1040A, or 1040EZ) with the IRS. For an automatic six-month extension, file Form 4868 and deposit the estimated tax due.

17 Individuals: Pay the first installment of 2012 estimated tax with Form 1040-ES.

17 Partnerships: File 2011 calendar-year partnership return (Form 1065). For an automatic five-month extension, File Form 7004.

17 Corporations: Deposit first installment of 2012 estimated tax.

30 Employers: File Form 941, Employer’s Quarterly Federal Tax Return; quarterly deposit due.

MAY

10 Employers: Deferred due date for Form 941, if timely deposits were made.

15 Exempt Organizations: File 2011 Form 990, 990-EZ,
or 990-N, if the organization reports on a calendar-year basis.

15 Partnerships and S Corporations: If an election to use a tax year other than a required tax year was made, file Form 8752 to report the required payment.