Tax Hacks 2012 – Home Office Deductions

Photo (cc) by geishaboy500

It’s tax time again. By now you should have received your W-2 from your employer and other paperwork from those who paid you interest: You’ve got till April 17 to take care of business.

Starting today we kick off a series we call Tax Hacks: tricks to save you time, money, and hassle with your annual chore from Uncle Sam.

Are you a telecommuter or self-employed? In the video below, Money Talks News founder and CPA Stacy Johnson breaks down the basics about that tricky home office deduction. If you’ve ever passed it up because you feared an audit, check this out, then read on for more.

A home office deduction could be worth thousands, so make sure you take advantage of your eligible business expenses. Here’s how you know if, and how much, you can deduct from working at home…

Exclusive use

IRS Publication 587 says, “To qualify to deduct expenses for business use of your home, you must use part of your home … exclusively and regularly as your principal place of business.” That sounds straightforward, but there are some key terms that aren’t spelled out. The first of these is “exclusively,” and here’s how it works.

  1. The space can be as small as a desk or as big as a room – there’s no size requirement, and there don’t have to be walls or partitions marking it off. It just has to be a “separately identifiable space” and used exclusively for business.
  2. The space you want to deduct expenses for cannot be used for personal purposes – so the couch you watch TV on doesn’t count, and even if you do all your accounting in the dining room, eating there nixes the deduction.
  3. You can ignore the previous point if the business use is “storage” or “daycare,” but there is an entirely different set of requirements you have to meet. Storage space has to be for product inventory you intend to sell, and your home has to be “the only fixed location” of your business. So you don’t qualify if you’re just storing extra business equipment, or operate in a commercial space and keep spare stock at home. Daycares have to meet and maintain state licensing requirements – you can’t claim the deduction just because your kids are always running in and out of the office.
  4. Like independent contractors or sole proprietors, employees can deduct home office expenses – but there are additional restrictions. Your use has to be for the company’s convenience (because they lack space, for instance) instead of yours (it’s easier to work from home). You also can’t double-dip by renting the space to your employer and claiming the deduction.

Primary/principal place

The other major tricky term is “principal.” Here’s what the IRS means by that…

  1. It’s OK to have more than one place of business and claim the deduction. But you can only claim the home office if it’s where you do the majority of the work, or certain kinds of work.
  2. If your home office isn’t where you spend the most time or do the most important part of your job, it’s still a valid deduction if you use it “exclusively and regularly for administrative or management activities” such as billing, record keeping, ordering, writing reports, or booking appointments. So people like plumbers, whose job is to visit other people’s homes and businesses for a living, can still potentially claim the deduction.
  3. There are several situations that don’t automatically disqualify your home office, including: having somebody else handle the administrative stuff, handling those kinds of tasks minimally outside the office or while traveling (“places that are not fixed locations of your business”), or primarily using your home office for administrative tasks even though another place in your business has ample space for them.
  4. Another big exception for doctors, dentists, attorneys, and many other professionals: If part of your home is used exclusively and regularly to meet with clients, patients, or customers, it still qualifies for the deduction without being your primary place of business. But telephone or video calls and occasional visits don’t count – you have to meet in person, regularly.
  5. It’s OK to take a partial deduction if you met the requirements only for part of the year – just make sure you get the math straight.

Figuring the deduction

If you thought all the allowances and exceptions were messy, at least the IRS has a flow chart for that.

The hard part is doing the math, which isn’t quickly summed up. If you use tax software, you have a leg up. If not, you may need a free home office deduction calculator, a tax pro, or a little patience.

If you file Schedule F (Form 1040) or are an employee or business partner, use this home office deduction worksheet to figure things out. If you’re self-employed and file a Schedule C (Form 1040), use this example instead.

Whatever you use, you’ll definitely need to know the total square footage of your office space and home, because you can only deduct the percentage of expenses in your home that the business uses. So if you have a 2,000-square-foot home and use a 200-square-foot spare bedroom as a home office, you can deduct up to 10 percent of the rent or mortgage payments, utilities, insurance, and so on. Stuff that’s only for the business area, like paint, can be fully deducted.

Bottom line? Don’t shy away from this deduction if you’re eligible. Take the time to figure it out and save some money, but document everything. This is an area of the tax law rife with abuse, so the IRS does keep a watchful eye.

We’ll have a lot more tax hacks in the coming days. In the meantime, check out 8 Tips to Turn Your Vacation into a Tax Deduction and make sure you don’t throw out anything important with 7 Tips for Spring Cleaning Your Finances.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
10 Common Ways Seniors Get Scammed
10 Common Ways Seniors Get Scammed

Here’s what to watch for to make sure you don’t fall prey to some of the biggest rip-offs targeting seniors.

5 Secrets to Keeping Your Brain Sharp as You Age
5 Secrets to Keeping Your Brain Sharp as You Age

Forget young at heart — science says these tricks will keep you young in mind.

Top 5 Activities That People Dream of Doing in Retirement
Top 5 Activities That People Dream of Doing in Retirement

No. 1 isn’t visiting grandkids, and No. 4 might surprise you.

19 Things You Should Never Buy at a Grocery Store
19 Things You Should Never Buy at a Grocery Store

These household necessities are overpriced at the grocery store. Get them cheaper at these places instead.

Big-Ticket Things You Should Never Buy
Big-Ticket Things You Should Never Buy

In this week’s podcast: Are you wasting big money on these common purchases?

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.