If you work from a home office or telecommute, don't miss out on available tax deductions. In this article, we'll look at the IRS rules that cover using part of your home as an office.
If you are an employee working from home with your company’s blessing, you may meet one of the qualifications necessary for claiming home office expenses already – “The regular and exclusive business use must be for the convenience of your employer.” (IRS Tax Tip 2008-53)
Note: I am not a tax professional or attorney. I have just worked from home (as an employee) for the last six years.
Your agreement about taking it home may include some requirements, such as maintaining an Internet subscription, an unlimited long distance telephone plan, and maybe even equipment such as a flatbed scanner that can copy documents to PDF files or a laser printer that can provide high-quality printouts of PDF files. These are what I agreed to provide in my last two telecommuting jobs.
Before we get too far into this, if you haven't already been doing it, I suggest creating an Excel spreadsheet to keep track of monthly and yearly expenses. Your accountant will want to know how much of these resources were used for work and how much were used for personal use. Home office organization is important, and you'll want your records to be impeccable if ever questioned.
IRS Publication 587 deals with qualifying for and figuring the deduction, deducting expenses, rules for business furniture and equipment, record keeping, and includes a worksheet to determine the deduction for using part of your home for a telecommuting job as an employee or as a self-employed person's home office.
Exclusive Use Test: “To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.”
In other words, to deduct a home office, you need a home office space that is not shared with any other family use. In my case, I added a room in my garage that is used only as my office. My associate and Bright Hub Contributing Editor Rebecca Scudder says, "I know that the income tax rules don't require that you have a permanent partition - but I really wish my home office had a door that I could shut."
The rules also state that the office area must be used regularly. This basically means that you go to work in that area each working day.
The formula for finding the business percentage of your set-aside home office space is simply to divide the square footage (length x width) or your office area by the square footage of the entire house. If all of the rooms in your house are about the same size, you can divide the number of rooms used in business to the total number of rooms in your house.
Here’s an example included in IRS Publication 587: Your office is 240 square feet and your home is 1,200 square feet. Your business percentage is 20%.
Does your home office have a separate telephone line and/or internet connection? (Mine does.) If so, the phone and Internet charges are *expenses* involved in keeping and doing your telecommuting job or conducting business in your home office. The rules note that these expenses, as long as your employer is not paying for them or reimbursing you for them, are deductible business expenses, even if you’re an employee.
Also note that the IRS always considers the first home phone line as personal use. You need the second line for to meet the exclusive use test.
Expenses for utilities and services, such as electricity, gas, trash collection, etc. can be deducted in the same ratio as the business use of your home office.