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Last Minute Tax Advice: Home Office Deductions

last minute home office deductions

Do you work from home and, if so, maintain a home office? Have you procrastinated, waiting until the last minute to file your taxes? If so, this article is for you. Thanks to a government holiday, taxes are due on April 18, 2016 not April 15, 2016 [1], so you still have a little time.

This article provides advice on how to factor home office deductions, courtesy of Barbara Weltman [2], tax and business attorney, and author of several small business books, including “J.K. Lasser’s Small Business Taxes [3]” and “The Complete Idiot’s Guide to Starting a Home-based Business [4].” Small Business Trends interviewed Weltman by telephone.

Two Ways to Take Home Office Deductions

Deduct Actual Expenses

According to Weltman, there are two ways to go about filing home office deductions: the hard way and the easy way.

The hard way is to deduct actual expenses, and the easy way is to rely on the IRS standard deduction.

“To deduct actual expenses, you have to make an allocation for the space in your home that you use regularly and exclusively for business,” Weltman said. “Then, you factor in both direct and indirect expenses.”

“For example, if you use one room for your home office — a bedroom that you’ve converted into an office let’s say — and you paint it, that’s a direct cost,” Weltman said. “You’re only dealing with the home office in that case so you can deduct the entire expense.

“If, on the other hand, you’re talking about the mortgage or utilities, that’s an indirect expense, and you can only take a percentage based on the square footage your home office represents.”

Use IRS Standard Allowance

If trying to figure out actual expenses seems too complicated, Weltman said that the IRS created a standard allowance [5] — $5 per square foot up to 300 square feet. “It does not take into account what your expenses actually are,” Weltman said.

To make the determination as to which option could save your more on your taxes, Weltman suggested looking at all the expenses associated with running your home office, both direct and indirect, such as mortgage interest, utilities, homeowner’s insurance, security monitoring, home repair warranties, depreciation and more, and then compare that to the IRS standard allowance.

One expense Weltman noted had to do with telephone service.

“You can’t deduct the basic service cost of the first telephone land line to your home, even if you’re using it for your office,” Weltman said. “If you have a second line, that’s deductible. It’s a direct cost and, therefore, fully deductible.”

She also noted that cell phones are not subject to that restriction, just land line phones.

Home Office Deductions an Audit Risk?

When asked whether or not claiming home office deductions raises a red flag with the IRS in terms of being an audit risk, as some suggest, Weltman said that, according to the Small Business Administration, 52 percent of all businesses are home-based [6] and that because the IRS did create the simplified home office deduction, as previously noted, she felt that was a misnomer.

Despite that, businesses still have to qualify for home office deductions, Weltman said. She provided this advice:

“If your office is downtown, for example, but you bring work home, that does not qualify as a home office. Your home office has to be the principal place that you conduct business. That said, if you meet with clients at your home during the ordinary course of business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.”

To learn more about home office deductions, visit the IRS website [7].

Hourglass [8] Photo via Shutterstock