One of the most complicated parts to filing taxes as self-employed is knowing your tax deductions. A big write-off is your home office space and utilities used to maintain that space. But there are a lot of extremely important things you need to know before you use this valuable tax deduction! Learn if you can write off your home office space, how to do so and the risks of doing so!
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First you need to understand what qualifies as a home office deduction:
Your home office space must be a dedicated space for your business. If you even occasionally use the space to pay your personal bills or make personal phone calls, the IRS does not consider the space tax-deductible.
Your home office space must be a specified place with boundaries. While it is not required your space be in its own room, it is suggested you find a way to identify the borders of your office- maybe with partitions or furniture for example.
The space must be the designated place where you do the majority of your administrative work.
Once you have established your home office space, you will next want to
know exactly how much of it is tax-deductible.
Knowing how much you can write off on your taxes is actually the simple part of this whole complicated tax situation. You must know the total square footage of your home and the square footage of your office. Here is a quick guide (about half-way through the article) that explains how to figure your square footage.
Once you have those two numbers figured out, follow this simple equation:
Square feet of office ? Total square footage of entire home = Percentage of business
Before we go into how to use your percentage of business use as a deductions lets discuss the
utilities and other expenses you can also write off and how much of it is deductible.
According to a guide found at About.com, you can write off your utilities and mortgage interest by the same percentage you figured above. But they point out an important point. If you started working at home part-way through the year, you must pro-rate the time spent working out of your home office.
Now that you know what is tax-deductible, how do you file and claim your write-off?
Ahh…here is where things get slightly complicated. What you are writing off is the actual depreciation of your home office space. The IRS will release a table that will give you the number you must use to figure your deduction. The table for filing your 2011 taxes has not been released just yet, but for your own reference and to see the instructions set forth by the IRS to figuring your depreciation value you can view Publication 587 page 10-11 from tax year 2010. But remember to get updated information later this year or early in the year when the IRS updates this publication.
Once you figure your deprecation value you will use this information to file form 8829- expenses for business use of your home. Any tax consultant and even tax preparing software can handle this task for you!
Finally, are there risks involved with claiming the home office space tax deduction?
It seems quite ridiculous that anyone would choose not to write off their home office space. But there are a few risks involved with using this deduction.
In previous years, writing off your home office space increased your chance to being audited by the IRS. Thankfully, my research (online) shows that in recent years this has become less and less of a reason for audit. But if you are audited for any reason, understand the rules of filing your home office space is strict. You must be accurate in your measurements and it truly has to be a dedicated space!
Your Home Office Deduction could be taxable when you sell your home. Again, recent years has made some changes to the extent this affects home business owners, but it is still a concern that should be looked into if you plan to sell your house in the future but considering taking the home office tax deduction.
Do you Rent? You can still get deductions too!
IRS Form 8829 gives instructions for how to file your deduction as a renter. You simple replace your mortgage cost with your rent amount!
Publication 587 (page 9) says this about figuring your deductions as a renter:
“If you rent the home you occupy and meet the requirements for business use of the home, you can deduct part of the rent you pay. To figure your deduction, multiply your rent payments by the percentage of your home used for business.”
My disclaimer: I am NOT a tax professional. This is simply a guide to what I have learned with experience and studying online. ALWAYS take the advice of a tax professional or other reliable sources over mine! (then come back and tell me I am wrong so I can fix my claims ) Thank You.
Sign up for our newsletter to catch-all of the Posts in our Tax Help Series! More about tax deductions coming up next!
- Can I Write Off My Internet Expense on Taxes?
- What is Self-Employment Tax? 2013 [updated]
- 5 Home Offices in Small Spaces
- File Your Work at Home Taxes- TurboTax
- What to Wear When You Work at Home
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