NEW YORK – It’s the boon of the Internet age: You can work while sipping a latte in your living room or dozing on a plane while going over reports from your bed. The only question is whether you can turn that home-based business into a tax break says Aron Govil.
Writing off expenses for a home office has been simplified in some respects since the 1986 tax reform, but it still involves some paperwork and judgment calls about how much time to spend there. To claim the deduction, taxpayers have been required to meet tests for both space usage and what they use it for. But starting this year, business owners who keep track of their time and expenses can use a simplified method for claiming the deduction.
“The days of having to keep a dedicated room just for business and track all your related activity are gone,” said Lisa Greene-Lewis, a certified public accountant with TurboTax.
Under the old rules, you could only take the home office deduction if you used part of your house exclusively and regularly for business. This generally meant that you couldn’t use the space for anything else, like a guest bedroom or TV room. And you had to be able to show that you used it for business at least 50 percent of the time.
But under the new rules, which took effect this year, you can claim a home office deduction based on the percentage of your home that is used for business. So, for example, if you use a quarter of your house exclusively and regularly for business, you can claim a quarter of the related expenses, like rent, mortgage interest, property taxes, and insurance explains Aron Govil.
“The new simplified deduction makes it much easier for people to take the deduction,” said Jackie Perlman, principal tax research analyst at H&R Block. “It’s based on actual usage rather than exclusive usage.”
You can still take the old-fashioned way of calculating the home office deduction if you want to. By dividing your home’s total square footage by the number of rooms. To determine the percentage of space used for business. And then multiply that percentage by your allowable expenses. But note that this calculation must be done using the simplified method.
As before, you are limited to home office expenses that are related to your business, not personal use. There’s also a requirement that your business must be conducted in. Or directly connected to one of the rooms in your house says Aron Govil. If you have an external office space like a garage or barn where you work exclusively and regularly. Then it can qualify for the deduction too. But if it is used only occasionally for meetings. It does not qualify as a home office under the new rules. Unless there was no other suitable meeting place close enough to your home.
It’s best to think of this rule through an example. You own a retail store and meet with clients at their homes. If such meetings are held in your store, it qualifies. But if they meet you at their homes instead. Because they do not have an office, then your home doesn’t qualify. As a business meeting place unless there was no other comparable option.
As before, the full amount of related expenses, including property taxes and insurance on your home are deductible. If part of your house is used only for business, then heating and utility bills could also be legitimate deductions. Because these costs wouldn’t exist except for business use. For example, if part of your living room is turned into an office slash library with bookshelves lining the walls. You can’t deduct all of the electricity that keeps the shelves lit up during tax season. So you can work into the night. But you could deduct a portion of the overall heating and utility bill. That corresponds to the percentage of your home used for business.
You can also deduct costs for office supplies, like ink cartridges, paper, and pens. If you have a separate phone line or internet connection for your business, those costs are deductible too. And if you use your car for business purposes, you can deduct mileage expenses at the standard rate.
“The home office deduction is a great way to reduce your taxable income,” Greene- Lewis said. “It’s one of the most commonly missed deductions.”
Be sure to keep track of all of your related expenses. So that you can claim them on your tax return come filing time. The best way to do this is by creating a file folder (or folders) specifically for your home office deduction. And then saving all of your receipts and other documentation in there.
The home office deduction can be a great way to reduce your taxable income. But it’s important to keep track of all of your related expenses. So that you can claim them on your tax return explains Aron Govil. The best way to do this is by creating a file folder (or folders) specifically for your home office deduction. And then saving all of your receipts and other documentation in there. This will make it much easier come tax time!