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Is the Home Office Deduction for You?

DeskFor ages it has seemed that claiming the home office deduction on your tax return was a sure-fire invitation for an IRS audit. In fact, on many occasions, taxpayers had been advised to forego claiming this deduction even when they seemed to satisfy the IRS requirements to legitimately take the deduction. The IRS’s stance was based on the relative ease and susceptibility of abuse when it came to the home office deduction.

Over time, the IRS has recognized that advancements in technology had evolved to the point where it made it much easier to operate one’s business out of the home, rather than incurring the cost of maintaining a separate office and traveling to and from an offsite location. These advancements have made it easier and rewarding for business owners and employees to perform their profession in an efficient manner out of one’s home.

As US News notes, unlike more obvious deductions, many people aren't sure if they qualify to take the home office deduction. But with the large number of American small businesses based out of an owner's home–including more than half of all small businesses, according to theSmall Business Administration–those who qualify shouldn't hesitate to claim the home office deduction.

There are two approaches available that a taxpayer can follow to calculate a potential home office deduction. The first approach is referred to as the “simplified” option. The second approach is called the “regular” method.

The simplified option, a relatively new approach, can significantly reduce the recordkeeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses. Taxpayers using the regular method, instead of the optional method, must determine the actual expenses of their home office. Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use, as explained by the IRS.

When you meet the requirements, as noted by Nerd Wallet, you can claim the deduction whether you’re a homeowner or a renter. You can also use the deduction for any type of home where you reside: a single family home, an apartment, a condo or a houseboat.

Requirements to Claim the Deduction

Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction, as explained by the IRS:

  • Regular and Exclusive Use

    You must regularly use part of your home exclusively for conducting business.

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    Principal Place of Your Business

    You must show that you use your home as your principal place of business. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use.

Do you have the support you need to manage your small business bookkeeping? Schedule a 30-minute appointment to speak with a local small business adviser.

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