This is a great post from Chuck Newton. In fact, I decided why try to add to it or take from it. I am including Chucks entire post below. Great job Chuck breaking down the home office tax deduction for us.
There are two ways to show the IRS that a home office qualifies for tax deductions on your tax return. You must show on your tax return that you use your home office exclusively meaning it is your ‘principal place of business (as it is in my case), or regularly, meaning it is the place where you meet with your clients in the normal course of your business.
In order for the home office to qualify as your principal place of business you must spend most of your working hours in your home office and most of your taxable business income must come from activities in your home office.‘ If it comes into dispute, you must be able to show the IRS that your home office is your most important place of doing business or that you spend more time working in your home office than anywhere else.’ If your home office is a structure not attached to your home, such as a stand-alone garage, chances are you can take the tax deduction on your tax return with ease if you satisfy the exclusive use tax test and regular basis tax test discussed earlier. A detached structure does not have to qualify as a principal place of business or a place for meeting patients, clients, or customers.
If your home office qualifies for a deduction, you can deduct on your tax return real estate tax, mortgage interest, utilities, operating expenses, and depreciation. You cannot deduct on your tax return the total that you incur for all of the above expenses.’ You must allocate the expenses to business and personal use on your tax
‘ ‘ return using one of two methods.’ The first is to calculate the percent of the square footage of your home office of you entire house.’ Then you deduct the resulting percentage to your tax deductible expenses.’ Alternatively, if all of the rooms in your house are about the same size you may base your deduction percentage on a comparison of those rooms used in your home office.’ So, if your house has 5 rooms and you use 1 room for a home office, you can deduct 20% of your total expenses from your taxes.Also your deductions on your tax return for utilities, maintenance, and insurance costs, depreciation, or rent, may not exceed the net income derived from your home office after mortgage interest, real estate tax, and casualty losses are subtracted. If you have no income for the tax year no tax deduction is allowed on your tax return. You may carry forward to future tax years any tax deductible expenses disallowed in the current tax year.
Source for Post Chuck Newton.
What are the limits on “maintenance” expenses. Is it pretty much everything that goes into maintaining my house, i.e. my lawn service? That’s an expense I’d like to allocate a portion of to my home office!
Hello Home Office Warrior,
You are providing an informative and useful service for home-based indies. Great work!
And thank you for mentioning my blog. I am always pleased to get the word out on helpful info for the self-employed — I call them indies — and I’ll definitely mention H-O-W.
Indies need all the help they can get. They especially need to be careful because there is so much misinformation out there. I tell my clients and readers to always know their source. Watch out for tax advice from Aunt Tillie or Daddy’s accountant who has never met a self-employed tax return.
Chuck Newton falls into the incorrect advice pot with Aunt Tillie. His column on home office is wrong on several points. Here’s a couple corrections:
To take a home office deduction –
1. You do not need to spend most of your work time in your home office. If you use you home office for administrative tasks only — like billing and phone calls — it qualifies.
2. You do not need to make most of your income from work in your home office. There is no money requirement on home office qualification.
I want to be sure your readers don’t cheat themselves by using the home office rules as Chuck laid them out. If they want to get more and correct info there’s a piece on my blog 3 Rules for Home Office Expense … everybody’s asking about them that they might want to check out.
Best,
June Walker
Tax & Financial Consultant to Indies since 1979