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A growing number of Americans are working at home these days. In our increasingly digitized society, it is far easier to conduct business without the need for a central meeting place. For this reason, those who are employees use home offices as well as start-up entrepreneurs.
In the past, it was widely believed that claiming the home office deduction would set off a red flag at the IRS and trigger an audit. However, with so many millions of taxpayers that potentially qualify, this deduction is becoming more common. Proof that the home office is gaining acceptance by the IRS is the simplification of the deduction starting in tax year 2013, more on that later.
Qualifying as a Home Office: There are two specific criteria you must meet to qualify for a home office deduction: use a designated area of your home exclusively for business and use it on a regular basis.
Exclusivity: Though it need not be an entire room, you should have a specific area of your home that is designated for your home office. For example, if you have a desk, office chair, computer, and a couple filing cabinets in one corner of your basement, this area would qualify. On the other hand, if you occasionally set up your laptop in the family room and do work while watching TV, this would not qualify. The area needs to be permanent and designated for business use.
Regular Business: Your home office does not need to be your principle place of business, but you must use it regularly as an essential part of your operations. For example, there are many entrepreneurs that conduct business on site; such as general contractors, plumbers, electricians, landscaping, etc. In these cases, you may only be in your office a couple times a week to process paperwork, but you can still claim your home as an office.
Employees may also qualify for the home office deduction under certain circumstances. The main criteria for an employee is the company they work for does not have a workspace set up for them anywhere else. So if you work on site but take your work home sometimes to complete in the evening, this would not qualify. There are ‘grey’ areas when an employee works from home most of the week but goes to the office one or two days. If you fall into this category, it is best to speak to a professional accountant about your specific circumstance.
Simplified Deduction: Until 2013, keeping track of the paperwork in order to claim a home office could be quite onerous. There were “direct” and “indirect” expenses for rent/mortgage, phone, utilities and numerous others. Expenses were then divided by the percentage of your home used for business to arrive at your deduction.
You may still itemize your home office deductions, but now there is a much easier way. Under the simplified rules, you may now arrive at your deduction by multiplying the number of square feet used for business by $5 (up to a maximum of 300 square feet or $1500). This reduces substantially the amount of paperwork needed to claim this valuable deduction.