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When you work from home it makes sense to have a space in your home dedicated to work. It makes even more sense when you realize how much you can save on your taxes by having a qualified home office.
I have heard many people, even other professional tax preparers say that the IRS requirements for a home office are too strict, that calculating the taxes is too complicated, (especially when you sell your home), and that claiming a home office is like waving a red flag in front of an auditor.
The truth is, the requirements are strict, but not difficult to follow. All tax forms are too complicated, and, if you claim your home office properly you don’t need to worry about being audited.
The tax savings can be substantial. Not only do you get to deduct a portion of your rent or mortgage interest, you also get a deduction for repairs and maintenance, utilities, and office furniture. A sole proprietor using just 10% of the home as a qualified home office can potentially have thousands of dollars worth of deductions saving hundreds in taxes each year. A home office also qualifies as a place of business and will make more of your auto miles business miles. As an example, $5,000 in home office expenses will save a sole proprietor at least $1,250 in taxes.
To be a qualified home office your office must be used regularly for your business. It must also be used exclusively for business. This is where most people trip up. You have to think of your home office the same as any business office. This means that any use that is not business use disqualifies the home office. So you can’t have guests sleep in your office, and the kids can’t use the computer to do homework. There are two exceptions to the exclusive rule. Space used as a daycare does not need to be exclusive, and the same is for true for the storage of inventory or product samples.
Home office deductions are not limited to the self-employed. If you work for someone else you may also be able to claim a home office deduction. The home office must be for the convenience of the employer, and your employer must not pay you rent for your home office.
And just as a side note, if your tax preparer ever tells you that a tax deduction is “too complicated” you need to find another tax preparer!