How to Get the Most Out of Your Home Office Deduction

Many people are self-employed and work from home these days. It’s more convenient and it’s more economical. You avoid the stress of commuting on busy freeways, plus you can work in your pajamas if you want to. Around tax time, people start thinking about whether or not they can deduct expenses for a home office. Actually, you should know a few things about this so you can maximize your deductions throughout the whole year.

There are three common “tests” to learn whether or not you can deduct home office expenses discussed below. Passing any of the three tests will qualify you to take a home office deduction.

Test One
Is this space used exclusively and on a regular basis as your principle place of business? Your space will be considered the principal place of business if you regularly perform management or administrative activities at that location or your home office is the most important place you conduct business compared to any other locations you conduct business.

Test Two
Do you use the space to meet with patients, clients or customers? If so, you will meet this test as long as your space is used regularly and exclusively to meet with patients, clients or customers.

Test Three
Is your space a separate structure which is used regularly and exclusively for your business? If so, it qualifies. Examples of a separate structure would be an unattached garage, detached pool house, etc.

Remember, passing any of these three tests will qualify you for a home office deduction. Did you notice something in common though? All three tests require you to use the space exclusively and regularly for business.

What Deductions Can I Take?
Using the simplified method, you can claim $5 per square foot of home office space up to 300 square feet. There’s a $1,500 cap on that at the moment, but tax laws change annually. You can also claim both direct and indirect expenses. One example of a direct expense would be installing better lighting in your home office. Indirect expenses include utility bills, insurance and maintenance related to your whole house. You can only deduct a portion of your indirect expenses.

Simplified Versus Standard Method
This is where many people get a bit confused. If you aren’t sure about which way to go, then run the calculations for both to see which is most lucrative. Your accountant can help you decide. If you’re using tax filing software, you usually have the option of doing both calculations. The simplified method is easier. You get a set amount depending upon the size of your home office.

With the Standard method, you must input all your direct and indirect expenses. You should also have receipts to back up your claims. Using this method, you are basically listing actual expenses, such as utility bills, insurance, home repairs and depreciation. The final amount of this deduction will depend on the total amounts you list, the size of your home and the size of your dedicated office space.

Get Help!
Tax laws change more often than Texas weather. Filing a tax return can be confusing and stressful. Though many people use online software these days, it’s important to take advantage of all legal deductions. No one wants to pay more money than they owe. If you feel too stressed out about filing your own taxes, then hire a professional accountant to help. Often, their fees are partly or completely paid by the increase in your tax refund. If you do get audited, your accountant will be there to help. Peace of mind is a valuable commodity.