The IRS closely monitors this deduction and it is difficult to pass the tests the IRS has laid out. However, don't let that stop you from taking this deduction in fear of an audit. The first and most important requirement for this deduction is that you must use this space in your home exclusively for you business.
Generally speaking, it will be a separate room(s) in the home. It can also be a section of a room if you clearly divide the room between the business section and the section that would include personal activities. This separate room cannot be invaded by kid's toys or used as a study room that other family members can use the computer and printer on occasion, even you use it exclusively for 16 hours a day. The occasional interruption when someone in your family needs you or making a personal call from time to time will not violate the spirit of this rule. The next important requirement for this deduction is that the room must be used regularly.
Although there is no exact definition of what constitutes regular use, but it cannot be some room in the house that you occasionally use because every now and then you need the space. It should be a room that you use on a regular basis and in proportion to how much time you devote to your business. If you run an accounting business part-time and use the room four to seven nights per week for a couple of hours each night, then this should qualify.
If you run you're accounting business full time and use the room six to ten hours a day, then this should also meet the requirement. It will be up to the individual IRS auditor to determine if you meet the spirit of the regular use test. The third most important requirement is that it must be the principal place of business or a place where you regularly meet customers. This test is easier to pass than in previous years to 2006.
As long as you manage your business from the home office and you don't have another office for the business elsewhere, then you will most likely pass the principal place of business test, assuming you pass the exclusive and regular use test. Just keep in mind that the more activities, time, and money you make while physically in your home office, the higher the probability you will pass this test. You will want to review IRS special form 8829. It outlines all of the records you should keep to help prove your write-offs are legitimate. This includes photographs of the desk, computer, filing cabinets, and other related office equipment.
It wouldn't hurt to have your business cards showing your home address and a business phone number at the home. Also keep a log on a calendar of any customers you meet in your office and how many hours you spend each week in your home office. Measure the space in square feet you are using and compare that against the total square feet space available in your home.
If you use 200 square feet for your office, and your home is 3000 square feet, then you can claim 200/3000 or 6.67%. Multiply this percentage against your mortgage payments, utilities, internet, phone, and other home-related expenses. That is a brief summary of how to qualify for a home office deduction. There are many more rules that could trip up the above qualifications, including Day Care Facilities, storage, and depreciation, and how it affects your self-employment taxes.
There is also a cap on how much you can deduct for the business use of your home. Figuring out a basis for the value of your home, repairs and maintenance, and several other calculations are also required. Some things like furniture and equipment can earn a depreciation deduction regardless of whether you pass the home office test.
Fortunately home business tax software such as TurboTax Home and Business will walk you through all the steps of the home office tax deduction calculations. . If you're going to use a tax accounting service, make sure you go over these kinds of deductions with the tax professional. Bring this article with you and ask them if the have experience with how to prepare returns for home businesses and all the home office deductions that are available to you. If they hesitate or stutter, go somewhere else.
If could cost you thousands or worse, earn you an audit!.
Robert Rogers is a writer in the Washington DC area. For more free information on TurboTax Home and Business and details on home office deductions, visit: http://turbo-tax.com
