The Home Office Deduction is a very popular deduction for small business owners. Statistics show that 3.4 million taxpayers took the deduction in 2010.
It is also a deduction that is often improperly taken and/or calculated.
To simplify this area of tax law the IRS just announced a safe harbor rule.
The IRS estimates that this will collectively save small business owners an estimated 1.6 MILLION hours. I hope the IRS is right as the cost and effort of preparing tax returns has become extremely onerous.
The basics of the safe harbor are:
- Determine the square footage of the portion of the home used in a qualified business use of home – not to exceed 300 square feet.
- Multiple that number by $5.00
- Thus, the new deduction is capped at a deduction of $1,500 per year.
You still have to show that the portion of the home is used for “qualified business.” The main issue is that the space must be used REGULARLY and EXCLUSIVELY for business.
Beware some say that this deduction is a favorite target of the IRS. Some also say it increases your chances of an audit in the first place.
It is important to know the rules and keep substantiation to prove exclusive use. Here are some suggestions:
- Take pictures of your office each year and provide to your return preparer.
- Don’t use the space at all for personal purposes
- Even occassional personal use will cause you to lose the deduction
- Do not store personal items in the space
- Keep good records of client meetings at home
- Keep good records of expenses related to your business use of the home
To learn more about the details of the Home Office deduction read IRS Publication 587.