A Primer on Home Office Deductions

The benefits of having to work at home comes with rewards and risks that make telecommuting and operating a home based business click. One of these rewards is enjoying the benefits of getting home office deductions on your income taxes. You can deduct expenses incurred for using your home as a place of business and these deductions come with certain requirements such as portions of real estate taxes, rent, mortgage interest, utilities, insurance, or maintenance of the said business premise.

In general, there are two main reasons on how you can be eligible for home office deductions. First, you need to use the home as your primary place for business – exclusively and regularly. If there is a separate structure used for business purposes, this may be included so long as it is related to your home business. Second, you need to exclusively use the place for storing your inventory or product samples, which can come in a form of rental property, or that you use the place as a daycare center. There are additional qualifications that may apply for telecommuters like having their place of business used for their employer’s convenience and that the employer must not rent any part of the freelancer’s home. In short, your home office should purely be a place of business, where you meet your business clients, for you to qualify for home office deductions on your taxes.

What Type of Expenses Qualify for Home Office Deductions:

1. Real Estate Taxes

2. Deductible Mortgage Interest

3. Eligible Mortgage Insurance Premiums

4. Casualty Losses

5. Insurance

6. Rent

7. Repairs

8. Home Office Security System

9. Utilities/Services ( only deducted on portions where it is used for business purposes )

Ten Important Things You Need to Know About Home Office Deductions

1. You can claim a home office deduction on your home office’s depreciation, which includes its wear and tear. The value of your land is excluded from this computation. There is a huge difference between repairs and permanent improvements. Any major home improvements are considered permanent, adding value to your home, and which cannot be declared as a home office deduction.

2. To qualify for a home office deduction for your daycare, you need to be licensed or certified in caring for children, those who are 65 years old or older, or those who are physically or mentally ill. Foods consumed by your daycare members are eligible for home office deductions, except for those served for personal consumption by you or your family. Keep all receipts for filing.

3. You can have a home office tax deduction of up to $250,000 ( or $500,000 for married couples making a joint return ) on your home for sale. Make sure that you have lived on this home as your primary residence for at least two years,

4. You need to report any gain you have on your home by using the IRS Schedule D ( Form 1040 ). If you have sold the business part of your home, you may use the IRS Form 4797.

5. Your home office furniture and equipment must be used for business only to qualify for home office deductions on your taxes.

5. You need to research on your listed property’s depreciation rate, specially if you fail to be eligible for more than half of the qualifying requirements set, You need to declare your gross income and property’s adjusted basis in order to know any excess.

6. Note that a previous personal space converted into a home office cannot qualify as a home office deduction. You may depreciate your home’s value otherwise.

7. You must keep records as evidence of your home office being used for business, for a maximum of three years from the return date or date filed section. These evidences may be in the forms of receipt, checks, service orders, and other proofs of business transactions taking place.

8. Eligible mortgage premiums and real estate taxes may qualify for home office deductions by simply filling up IRS Form 8829. The remainder amount is deductible from your Form 1040.

9. For telecommuters, itemize your home office deductions on business expenses using Schedule A or IRS Form 1040. For pending reimbursements of expenses, report this under Schedule A, Line 21.

10. To compute for the amount of your home office tax deduction, you may divide the area of your home office by your home’s total area, or you may divide the number of rooms used for your home office with the total rooms in your home.

To sum it all up, you can get home office deductions on your taxes when you declare business expenses, not personal ones. Get yourself familiar with the requirements involving home office deductions and this can be done by reading the IRS Publication 587. You may also get in touch with the IRS ( Internal Rvenue Service ) by calling 1-800-829-3676 or 1-800-TAX-FORM. Visit them online at www.irs.gov for more detail. Below are the forms you will be needing in your home office deductions:

1. Schedule F ( Form 1040 )

2. Form 4562 – Declaration and Amortization ( including listed property info )

3. Form 8829 – Expenses for Business Use of Your Home

4. Schedule C ( Form 1040 ) – Profit or Loss from Business

5. Form 1065 or 1065 B for partnerships, joint ventures, and those not qualified as a sole proprietor

RESOURCES:

Duermyer, Randy. “ Office-in-Home Tax Deductions – Home Business use of Your Home. “ 2009.
About.com. http://homebusiness.about.com/od/money/a/homeofftax.htm

IRS.gov. “ Claiming a Deduction for Your Home Office. “ November 2009.
http://www.irs.gov/newsroom/article/0,,id=108138,00.html

IRS.gov. “ Publication 587: Business Use of Your Home. “ 2008.
http://www.irs.gov/pub/irs-pdf/p587.pdf

IRS.gov. “ Home Office Deduction Reminders. “ November 2007.
http://www.irs.gov/newsroom/article/0,,id=163079,00.html