ROSELAND – The country’s economic downturn has created a new legion of entrepreneurs who are working from home after losing a job. As the year comes to a close and these people begin gathering information for their 2010 tax returns, many will consider using their home office as a tax deduction for the first time.
But caution is in order, according to the tax experts at the New Jersey Society of Certified Public Accountants (NJSCPA). While it sounds simple, it may not be as easy as you think to deduct your home office. You may be able to save money on your tax bill by claiming a deduction for your home office, but you must be sure to comply with Internal Revenue Service (IRS) criteria. While only one percent of taxpayers are audited each year, home office deductions are one of the “flags” that seem to raise the agency’s interest.
Do you qualify?
According to the IRS, there are two basic requirements for your home to qualify as a legitimate deduction:
- Regular and Exclusive Use. You must regularly use part of your home exclusively for conducting business.
- Principal Place of Your Business. You must show that you use your home as your principal place of business.
- Generally, deductions for a home office are based on the percentage of your home devoted to business use.
What can I deduct?
The types of deductible expenses may include mortgage interest, insurance, utilities, repair costs and depreciation. The home office deduction is available for homeowners and renters, and applies to all types of homes, regardless of whether you live in a mansion or a mobile home.
Telecommuters, take note: If you are an employee and use a part of your home for business, you may qualify for a deduction for its business use. You must meet the first two IRS criteria above, and in addition:
- Your business use must be for the convenience of your employer, and
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
- If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.
Visit the IRS website (http://www.irs.gov/publications/p587/index.html) to view Publication 587, Business Use of Your Home, which details the types of expenses you can deduct, records you should keep, how you should detail the deduction and more.
Regardless of whether you ultimately qualify for the home office deduction, you can still deduct all business expenses that are not for the use of your home. If you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal portions. Examples include:
- Business telephone expenses
IRS Form 8829, Expenses for Business Use of your Home (http://www.irs.gov/pub/irs-pdf/i8829.pdf), is used to compute your home office deductions.
A CPA can help
In a survey by the National Association of the Self Employed, 94 percent of respondents said they use a home office for their business, but only 27 percent take the home office deduction. Why? Reasons range from the strict criteria used by the IRS to not knowing about the deduction. The highest percentage of respondents, 21 percent, was concerned about an IRS audit if they claimed the deduction. Don’t be afraid to take valid deductions. You should take every opportunity to reduce your tax burden. If you are unsure how to deduct your home office, a CPA can help.
If you don’t have a CPA, you can easily locate one online using the NJSCPA’s free, online Find-A-CPA service. Just go to www.findacpa.org, and in a few clicks you can locate a highly qualified professional who can assist you.
For more information on various personal financial matters, visit the NJSCPA’s public service website at www.MoneyMattersNJ.com. While visiting, you can subscribe to Your Money Matters, the NJSCPA’s free, monthly email
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