The right way to do home office deductions

March 31, 2011

— Stephanie Rabiner is a contributor to FindLaw’s Free Enterprise blog. FindLaw is a Thomson Reuters publication. This article originally appeared here. —

Some people believe that home office deductions are akin to begging the IRS to audit your taxes. While this can be true in some situations, home office tax deductions, if done properly, are completely legal and can provide a big payoff.

So if you work from home, consider the following tips. Home office tax deduction rules are a bit tricky, but with a little forethought and attention to detail, you should be just fine.

Home office deductions are attached to the percentage of your home that is used for business purposes. Therefore, the first thing you need to do is figure out, with respect to square footage, the percentage of your home designated as an office.

To take the initial tax deduction, the IRS requires that you use the space exclusively and regularly as either (a) your principal place of business; (b) a place to meet with clients; or (c) if the office is a separate structure, in connection with your business.

Once you meet these requirements, the home office tax deductions start flowing.

You will be able to deduct the designated percentage of household expenses, such as rent, mortgage payments, utility bills, repairs, insurance and home depreciation.

You will also be eligible for home office deductions in the form of expenses that are unique to your business. For example, office furniture, technology, supplies, a telephone line, and the Internet.

Keep in mind that to take a home office tax deduction, you need to be able to tie it to your business. And, if only a percentage of that expense is attributable to your business, only that portion can be deducted.

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One comment

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You’re right. I am using a double storeyed shophouse as a business space, but I’m staying upstairs as my living quarters. The total built up space is 1800 square feet, and the upstairs is 800 square feet, leaving the 1000 square feet downstairs as my business and office area, which is tax-deductible, income generating and brand building for me. Done right, and it can be a blessing. Done wrong, and it’d be hell.

I think doing some research, being exact and drawing up the operational processes and requirements will be useful for anyone planning to work from home.

Some benefits include savings in time and money from decreased travelling, and increased productivity, but we all know that there are much distractions at home (the kids yelling, need to “do” the house work etc, and all these needs to be considered as well.

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