I am not a licensed accountant (nor do I play one on TV), but IRS rules exist in a weird twilight zone between accountancy and law. The Internal Revenue Code is, after all, a law, promulgated by legislators. But most legislators probably don’t have the background or knowledge base to be mucking about in this area . . . which is why the code is such an incomprehensible behemoth to all but the most sophisticated of those who know how to play its game.
Nonetheless, here are some tidbits about taking a home office deduction that I just learned . . . so I thought I’d share:
The home office deduction sounds like it would be a great thing for small business owners. After all, many of us work at home, and it’s not as though the IRS is always so generous when it comes to deductions for the “little guys.” Deducting a portion of rent/mortgage interest, utilities, insurance, repairs, etc., is a very delicious prospect.
However, there’s a catch (you knew there would be, didn’t you?).
- The part you are deducting must be used exclusively for a trade or business. Not occasionally, or even often, but exclusively. That’s why it’s such a red flag for auditing the tax returns for small business owners.
- The home office must be the principal place of business for your company. Not the place where you bring your paperwork after a busy day in the office because you won’t be interrupted by annoying phone calls. If there’s no other location where you can handle the administration or management of your company, your home office may very well qualify.
- [And this is the new morsel I learned] If you deduct home office expenses, you may not get the full benefits of the tax exclusions when you sell your residence. Carving out a portion of your home for the business deductions in effect disqualifies it from the deductions you get from considering it part of your residential property.
Like most IRS rules, the home office deduction can be laden with traps for the unwary. Speak to your accountant to see whether it really will be worth your while to claim a home office deduction. You may find that the headaches of segregating your space for home/business use may be too great for the risk of getting flagged . . . or that the tax benefits upon selling your house may outweigh what you could claim for the home office.
This entry was posted on Tuesday, December 30th, 2008 at 10:19 am and is filed under Business Planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.2 Responses to “The Lowdown on Home Office Deductions”
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January 3rd, 2009 at 11:04 am
The Home Office Deduction: To Take Or Not To Take
IRS rules can be tricky
One of the many perceived benefits of working from home is the ability to deduct a portion of your mortgage interest, utilities, insurance , repairs, etc.. I work at home exclusively and am very glad to be able to take advan…
January 5th, 2009 at 8:03 am
[...] Making It Legal: The home office deduction sounds like it would be a great thing for small business owners. After all, many of us work at home, and it’s not as though the IRS is always so generous when it comes to deductions for the “little guys.” Deducting a portion of rent/mortgage interest, utilities, insurance, repairs, etc., is a very delicious prospect. [...]