Can You Claim a Home Office Deduction?

September 20, 2010 by
Filed under: Self Employed, Tax Deductions, Uncategorized 

 For many people who own their own business, claiming a home office is a great tax deduction.  Some people who work for employers can also claim a home office, but they must also meet the requirement that it’s for the benefit of the employer. What about you?  Should a home office deduction be on your tax return this year?

 The first criteria for a home office is “regular and exclusive”.  This basically means that you have a defined space that is only used for business.  It doesn’t mean you have to have four walls, your defined space can be a section of another room.  For example, let’s say you have a desk in your bedroom that you do your office work out of.  You make your business calls there, the computer is there, it’s your business headquarters.  Your bedroom can’t be your home office, but that corner of your bedroom certainly is.  Many people think that since they don’t have a dedicated room to call an office that the home office deduction isn’t available to them.  That’s not true.  Let’s say that this guy’s bedroom is 12×14 feet.  His office space is basically his desk, his chair and a file cabinet that takes up about 5×8 feet.  His home office space is 40 square feet.  Granted, that’s not much of an office, but it’s still going to help reduce his taxes and that’s the whole point isn’t it?.

 Let’s go back to the “exclusive” use idea again.  Let’s say you’re using your kitchen table for you office.  (To be honest, it’s my favorite place to work.)  The problem is, because its the kitchen table, it doesn’t qualify as exclusive use.  Come five o’clock (at least at my house) I clean the table off and get ready for dinner.  I actually have another spot in the house that I do claim as my home office, and I really do work up there.  It doesn’t mean I never work at the kitchen table, it just means that I don’t claim the kitchen as my home office. 

 The concept of office space as a function of business is changing.  How many people do you know would say their office is at Starbucks?  The cab of their truck?  Wherever their Blackberry is?  (The IRS doesn’t yet allow Starbucks receipts to be claimed as office rent expense, but I wish they did.)  For many people, these places really are their offices, but they still need a place where they can regularly store paperwork and/or product and receive mail. Starbucks may seam like your main office, but I would argue that you could also claim a home office deduction if you made space for it. 

 Now if you actually meet clients in your home, the home office deduction is almost a gimme.  Also, if your home has a separate structure where you do business, that’s pretty much guaranteed. Qualified daycare providers have special rules for claiming the home office deduction, but they definitely are able to claim a portion of the home expenses against their business income. 

 So what home office claims are going to get denied?  Well, one example that didn’t work was a woman who had a party plan business.  Every week she was hosting parties in her home for 10-20 couples selling her product.  She had claimed her whole house as a home office business deduction because the guests had full run of her house during the weekly parties.  Right about now you may be wondering, “what the heck was she selling anyway?”  Pretty mundane stuff actually.  If you’re selling a home party product like Avon, or Pampered Chef, you can claim a home office deduction for the storage of your product.  You can also claim office space for your administrative duties.  I would even go so far as to say you could claim an area of your home if you used it exclusively for your home parties on a regular basis like this woman did.  But, claiming your whole house (including your kid’s bedrooms, your bedroom, your kitchen, your personal bathroom) …that’s not going to fly. 

 Many people are afraid that a home office deduction guarantees an audit.  That’s not the case.  But, there are trip points that will make the IRS look closer at your return like claiming the whole house in the example above. Be sure to have a professional prepare, or at least review, your return when you claim a home office.  The money you spend up front will be well worth it in the time and taxes saved.

Comments

7 Comments on Can You Claim a Home Office Deduction?

  1. Brandalyn on Sun, 6th Jan 2013 12:47 pm
  2. Hi, I’ve been reading your articles and they are very informative. Ok, so I have been working on starting a small business (Food Truck) since 2010 and have been incurring start up expenses regularly. I have registered the business name, registered with the dept. of taxation for sales and use tax, got an EIN for sole proprietorship and got the state business license already. I have spent about $16,500 in start up costs so far. There are still a few more costs before actually opening to make revenue. I am building and customizing the truck to my specific needs from the ground up (empty box truck). My question, can I write off or deduct the start up expenses I have incurred so far on this years taxes? I am a sole proprietor so will file any business stuff on my personal tax return. Can you inform me or suggest to me any advice? Anything would be greatly appreciated! Thank you

  3. Admin Roberg on Sun, 6th Jan 2013 9:14 pm
  4. Hi Brandalyn,
    How awesome! I hope your food truck is a big success. So you’ve got start up costs. Those costs are capitalized. You can elect to deduct up to $5000 of business start up costs and $5000 of organizational costs under $50,000. The rest would have to be amortized.
    Now since you had no business income in 2012, you may want to hold off on claiming those costs–a Schedule C with $0 in income is an audit target. Since you’ll be making income next year, you could put your start up costs on next year’s returns.
    I’m normally and claim now, pay later, but for this year, I’m leaning towards claiming the expenses later because of the new tax rules.

  5. Brandalyn on Tue, 8th Jan 2013 1:03 pm
  6. Thank you very much for your advice! It’s very helpful! I was wondering about the cost of the truck that we bought and the insurance and storage spot we have had to pay on it during the build process. Could I claim any of those expenses this tax year?

  7. Brandalyn on Tue, 8th Jan 2013 1:05 pm
  8. Oh also, the mileage that we have put on the truck taking it back and forth from getting the work done on it? Is that something I can claim too? Again, thank you so very much!

  9. Admin Roberg on Tue, 8th Jan 2013 9:56 pm
  10. Hi Brandalyn,
    With trucks you either claim mileage or actual expenses–but remember the actual expenses are based on the mileage so you need to keep good records. I recommend visiting a professional to help you sort all this out. Good luck.

  11. Mary on Sat, 4th Jan 2014 7:50 pm
  12. I became a doula in 2013, took the training course, built website (did free work) to get everything up and running, I just made money for the first time (jan. 2014) do I have to do anything with my expenses for the 2013 taxes or hold it all for next year? Thank you so much!

  13. Jan Roberg on Sat, 4th Jan 2014 9:23 pm
  14. Hi Mary,
    Congratulations on becoming a doula. That’s pretty cool! You have two ways to do your taxes (okay probably more than that, but I’m looking at two ideas.)

    You can claim your expenses now–or claim them in 2014 as start up costs because you didn’t make any money until 2014.

    It sort of depends on what works best for you. Personally, I hate showing business expenses on a tax return with zero income on it. It’s a screaming red flag for an audit. Which is why I normally prefer to push the expenses to 2014 and count them as start up costs.

    That said, I have no problem with showing a loss during a first year of business if there’s some income on the return. You said that you did free work to get your website built–that’s actually barter and that counts as real income. Let me explain:

    Let’s say you did $1000 worth of doula work in exchange for $1000 worth of website work. You would list $1000 of income and you’d put the $1000 cost of website as an expense–they wash each other out. But–now you showed some income, and you can then write off your other expenses as well. Technically you should issue 1099Bs to each other. Here’s a link: http://www.irs.gov/pub/irs-pdf/f1099b.pdf

    It’s a thought.

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