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Filing for Tax Deductions on Home Office Space

written by: Lamar Stonecypher•edited by: John Garger•updated: 5/18/2011

The IRS allows a reasonable number of deductions for expenses associated with maintaining a home office. Learn about which deductions are allowed and how you can lower your tax liability by claiming expenses from operating a home office or business.

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    For Employees That Telecommute

    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)

    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.

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    For Telecommuters and the Self-Employed

    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 and Definition: “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.

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    Business Use Percentage

    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.

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    Other Rules

    Publication 587 covers many other deductions, such as what you can do if you rent your home, repair your home, install a security system, have homeowners insurance, and many other things. It’s worth reading in depth.

    Property Bought for Business Use: This part covers things like personal computers, copiers, flatbed scanners, printers, etc. that were purchased specifically for business use in your set-aside office area.

    When I set up my home office, the first thing I needed to do was purchased some home-office furniture. First I bough a Mission-style desk that became the centerpiece of activity. To that I've added a bookcase from a yard sale, a file cabinet that was being disposed of by a bank, and a folding table for my notebook. My home office is not beautiful, but it is functional.

    As this section of tax law is complicated, I'd certainly propose that you get some help from a tax professional in figuring out what is depreciable and what is deductible as an expense.

    Recordkeeping: "You must keep your records for as long as they are important for any tax law." They then go on to suggest that three years from the return due date or the date filed, or two years after the tax was paid is sufficient.

    Where to Pay: The rule states, “As an employee, you must itemize deductions on Schedule A (Form 1040) to claim a deduction for the business use of your home and any other employee business expenses."

    To read the full text of the publications above, go to the IRS website and enter in the search field “IRS Tax Tip 2008-53" or “IRS Publication 587."

    There are lots of other considerations involved in taking it home, like maintaining motivation, self-discipline, and enthusiasm outside a normal office environment. Working from home is not freedom, freedom, freedom as some of my friends have suggested to me. If you’re taking it home or already working from home, I hope you enjoy your work. Thanks for reading this.