The home office deduction sounds like it would be a great thing for small business owners. After all, many of us work at home, and it’s not as though the IRS is always so generous when it comes to deductions for the “little guys.” Deducting a portion of rent/mortgage interest, utilities, insurance, repairs, etc., is a very delicious prospect.
However, there’s a catch (you knew there would be, didn’t you?).
• The part you are deducting must be used exclusively for a trade or business. Not occasionally, or even often, but exclusively. That’s why it’s such a red flag for auditing the tax returns for small business owners.
• The home office must be the principal place of business for your company. Not the place where you bring your paperwork after a busy day in the office because you won’t be interrupted by annoying phone calls. If there’s no other location where you can handle the administration or management of your company, your home office may very well qualify.
• [And this is the new morsel I learned] If you deduct home office expenses, you may not get the full benefits of the tax exclusions when you sell your residence. Carving out a portion of your home for the business deductions in effect disqualifies it from the deductions you get from considering it part of your residential property.
Speak to your accountant to see whether it really will be worth your while to claim a home office deduction.
Photo by sean dreilinger.