Week two of our series. Today, we will dive into another often missed or misunderstood topic. Home office-related expenses.
IRS is pretty strict on the definition of a “home office.” They want it to be a specific area (preferably a separate room) that is used exclusively for the related business purpose.
Remember last week? Besides businesses, you could have a home office that you use for managing a rental, or a farming operation, or even as a statutory employee. Also, the IRS likes to see that the “home office” is your principal place of doing business. (This rule has exceptions, so if it is not your “principal place of doing business” don’t quit, see a professional tax preparer for help on how you may still qualify for this great deduction.)
Some things you will need to know. First off, the square footage of the actual office space. Second, you will need the total square feet of your home. (The IRS allows you to use “inside measurement” as well as reduce it for common areas like hallways, stairways, and bathrooms.)
Finally, you will need to keep track of all related expenses to maintaining your home. Mortgage Interest (or rent expense), property taxes (if applicable), insurance, repairs and maintenance, utilities (don’t include internet, I’ll explain in the future), etc. Also, in the first year of deducting the home office, you will need home purchase (and all improvements) costs (take out land related cost) to begin depreciation expense.
There is a side benefit of deducting a home office expense. That being related to last week’s article (auto expenses). When it comes to allowable auto expenses, you only get to deduct business related miles, not commuting miles. If you have a home office, then driving away from your “home office” to go to some other business-related location, all the miles are considered “business miles” instead of “commuting miles.” How about that?! Let me hammer this point in. When you deduct home office costs, not only do you save taxes on the directly related home office expense deduction, but you potentially get to deduct more business miles for auto expenses as well.
There is a special form to use when deducting home office expenses. It is form 8829. You can download a copy of that form by going to the IRS website (www.irs.gov) and searching that form.
Oh, by the way, there is a “simplified method” that the IRS came up with recently for deducting home office expenses. It doesn’t require keeping track of any expenses, including those necessary to depreciate your home. You just take $5 per square foot of the exclusive office space used. This almost always ends up being a smaller expense to deduct, but it is much easier to compute. Remember, having a home office (even using the “simplified method”) qualifies more auto miles, which might be a huge deduction if your business auto use is large and the distance from your home to the first place of business is a lot.
Did you hear? Prov 27:8 says, “Like a bird that strays from its nest is a man who strays from his home.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com. Also on Facebook.