Do You Take a Home Office Deduction?
According to the Internal Revenue Service (IRS), the home office deduction allows those who work at home to deduct expenses for the part of the home they use for business. For instance, a person who is paying a $600 mortgage and uses 1/6 of the space in the home for business could deduct $100/month. The home office deduction is available to both renters and homeowners.
There are two requirements for taking a home office deduction. First, you must make regular and exclusive use of the area you are claiming for business purposes. Second, the area you are claiming must be your principal place of business.
In order to meet the regular and exclusive use requirement, you must regularly use the same part of your home exclusively to conduct business. For instance, if you have a spare bedroom where you do most of your writing, but that room is also used for sewing, housing weekend guests, playing computer games, and sending private emails, the space wouldn't meet the standard for exclusivity.
To meet the principal place of business requirement, you must be able to show that your home is your principal place of business. If you work in an office all day and only occasionally bring home work at night, your home would not be considered your principal place of business and you would not meet the second requirement.
Pros and Cons
The chief pro of taking a home office deduction is, of course, lower out-of-pocket tax liability. A home office deduction results in both a reduction of the Self Employment Tax and of your Adjusted Gross Income.
Another pro is that, once you have established your office as your home, you can take a transportation deduction whenever you leave your home to meet a client or conduct other work-related business.
But home office deductions are not all sunshine and bliss. If you take a home office deduction and you own your house, you will have to pay a capital gains tax on the "business" part of your home when you are ready to sell your house.
Taking a home office deduction also results in reduced benefits from your retirement plan and social security when you are ready to stop working.
Perhaps the biggest con, however, is that taking a home office deduction is the equivalent to the IRS of waving a red flag in front of a bull. Taking this deduction will make you a likely candidate for an audit, and if the deduction is disallowed, you will have to pay back taxes and penalties. Worse, audits tend to turn up other problems as well, so you may face other tax liabilities.
I live in a one-bedroom apartment. I have a corner desk where I write and edit every evening and weekend. I asked my bookkeeper about taking a home office deduction, and she advised against it for the following reasons:
I also use my office area to pay bills and answer personal emails, thus I cannot claim it is used exclusively for work.The desk takes up such a small percentage of my apartment, the resulting deduction wouldn't help me much on taxes anyway.
What she said made sense, so I listened to her advice. I still deduct business expenses such as supplies, utilities, and legal and consulting fees, but I leave the home office deduction alone.
Do you take a home office deduction? If so, how has it worked out for you?