Does Your Home Office Net You a Tax Deduction?
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
As technology makes it increasingly easier to work from anywhere, home offices have become common. Today nearly 25% of all employed people do some or all their work from home.
If you’re part of that 25%, you may be able to deduct certain expenses, which can save you money at tax time. But before your write off that spare bedroom, know the IRS has strict rules on whether or not your home office qualifies for a tax deduction. Working with your tax advisor, you should follow the rules closely to receive the maximum tax benefit without triggering an audit. Here are the basics of what you need to know:
Regular and exclusive use. For your home office to qualify for the deduction, the primary criterion is that you must use it exclusively for conducting business. Exclusively means exclusively. If you use an extra room as your office, you can take the deduction for that room. If you have a desk in your daughter’s playroom, it probably won’t pass the exclusive-use test.
The home office must also serve as your principal place of business. Remote employees and salespeople without a physical office elsewhere may be able to deduct home office expenses if they use that space regularly for business. If you work out of your employer’s office most of the time and use your home office to work from home on Friday afternoons or check email on the weekends, it likely fails the principal place of business test. You can also deduct expenses for a separate freestanding structure, such as garage-turned-photography studio, if you use it solely for business.
Actual or simplified? Think you still qualify? You may want to enlist the help of a tax professional to help you determine what the best method is of claiming your deduction, whether that person is doing your taxes or you’re filing them on your own.
First, calculate the percentage of your home used as an office. If your office 150 square feet and you have a 1,500-square -foot home, for example, you can deduct 10% of certain expenses as your home office deduction. Once you have the ratio of home office to home calculated, you have two deduction options: the detailed “actual” method or the “simplified” method. The size of your office , your home’s value, and your total expenses will determine which method will yield the most benefits. Here’s how each works:
Actual method. Under the Actual method, you can deduct two types of expenses:
• Direct: You get a full deduction on expenses that apply only to the home office, such as painting or repairs to that area
• Indirect: You get a deduction based on the ratio you previously calculated for expenses that apply to your entire home, such as utilities, a security system, general repairs, and renter’s or homeowner’s insurance
Additional considerations: Homeowners who use the actual method for home office deduction may have to pay capital gains tax on the office portion of the home when they sell.
Simplified method. The simplified method is a single calculation that appeals to people who are entitled to write something off but don’t keep track of records. To calculate your deduction, multiply the home office square footage by $5. A business owner with a 150-square-foot office would receive a $750 deduction. The IRS limits the deduction to 300 square feet, or $1,500.
Additional considerations: If you use the simplified method, you can’t deduct depreciation for the business portion of the home, and if you have more expenses than income, you can’t carry over the excess to subsequent years, as you can with the actual method.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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