Additional Tax Issues for Telecommuters
If you work from home for an employer, you need to meet the requirements that the home business operator meets that have been discussed - regular and exclusive use - no personal use, etc. - except that your working from home has to be for the convenience of your employer. If you employer doesn't provide you with a place to work, as might be the case for a remote call center employee, for example, you probably qualify so long as you don't mix personal use and business use of the area of the home you are claiming. If your employer provides an office for you but you occasionally work from home, you probably won't qualify to take the deductions.
Calculate the Portion of the Home Used Exclusively for Business
Generally, the amount that you can deduct depends on the percentage of your home that is used for business. If you use a bedroom that is 20 feet by 10 feet within a house that has 2,000 square foot of living space, your deduction would be 10 percent (200 divided by 2,000) of your utilities and other deductible expenses. If the rooms in your house, condo or apartment are all about the same size you can use an even easier calculation. For example, if you live in a 4-room apartment and the rooms are approximately the same size and you use one room exclusively for your business you can claim 25 percent of your expenses (1 room divided by 4 rooms).
Other Limitations on Tax Deductions
The deduction will be limited if your gross income from your business is less than your total business expenses. The IRS provides a worksheet you can use to see if your deductions are limited. If so, you can carry some or all of the deductions you weren't allowed to include in this return on next year's return.
Where the Home Office Deduction is Reported
Your Home Office deductions are calculated using IRS Form 8829. The allowable amounts are then transferred to Schedule C, if you are a home business operator, or to Schedule A if you are a telecommuting employee. Therefore, telecommuting employees must itemize deductions in order to claim the Home Office deductions. In some cases, these employees who work from home might find that the standard deduction is a better deal for them even without the Home Office deduction.
A Note About Mortgage Interest and Property Taxes
If you qualify for the Home Office deduction, you'll probably want to claim the portion (percentage) attributable to your home office here instead of taking the full amount on Schedule A in your itemized deduction. So you might list 20 percent of your mortgage and property taxes on Form 8829 and the other 80% on Schedule A. The reason you would want to do this if you are self-employed is because when you transfer the amount to your Schedule C, you are in effect reducing the amount of Social Security taxes (Schedule SE) you'll be required to pay on your business earnings.
Keeping Expense Records and Proving Your Eligibility
If you qualify to take the Home Office deduction be sure to keep good records including photos of your work area you can use to show the IRS your office is used only for business and not in combination with any personal use. You can also have your business mail sent to your home, set up a separate phone line exclusively for business purposes in your home office, and log the time that you spend working at home. You just might save a personal visit from an IRS auditor and avoid other problems, too.
Another Side Benefit of Your Home Office
If your home qualifies as your principal place of business, you can deduct your commuting expenses between your home and another work location. For example, if you are a consultant who has to sometimes work at client locations, you can deduct your commuting expenses to get to and from that location. That's one nice feature that people who don't have a home business would like to have.
Getting More Information on Business Tax Deductions
Although IRS publications can be confusing for most readers, the IRS does provide a great deal of additional information on issues involving the Home Office deduction, including:
- You should make it a point to secure IRS Publication 587 for more details on claiming Home Office tax deductions.
- If you want to claim the business use portion of depreciation on a home that is your primary residence, you will also want to get Publication 551 that discusses Adjusted Basis, which is used in calculating depreciation of your home.
- You'll want Publication 946 if you need to correct inaccurate depreciation deductions in prior years.
- If you plan to sell the home that was the principal location of your business and you've claimed depreciation deductions on the home, you'll want to consult Publication 523, which discusses business use of your home when it's sold (The amounts you deducted in prior years for depreciation could very well end up being taxed as a capital gain when you sell your home.)
Of course, you may decide that all of the hassle and confusion just isn't worth claiming the deduction after all. It might still be worth your while to run the numbers and see what you have to gain if you do claim the full deductions allowable. You may also decide that it's finally worth the expense to hire a qualified tax professional to make your life easier. Again, it would depend on what you stand to gain or lose and if you feel you need a tax accountant for other aspects of your business - usually a very good idea.