Whether you run a business from your home or you telecommute for your employer, you may be eligible to claim some expenses on your federal income taxes. Home office deductions can be tricky, and many people have gotten into trouble with the IRS for being too liberal with these deductions.
The IRS has simplified the rules over the past couple of years to make it easier for people working from home.
Follow these do’s and don’ts to maximize your deductions and minimize your risks.
Do make sure that what you’re claiming as your home qualifies as a home. According to the IRS, this includes renting or owning a house, condominium, apartment, townhouse, boat or mobile home. It doesn’t include a hotel, motel or inn.
Don’t file using the 1040EZ tax form if you want to itemize your business use deductions. You can use the 1040 Schedule A, 1040 Schedule C and Form 8829 to claim home office expenses.
Do claim a tax deduction if you work at home as your “principal place of business,” you’re a self-employed contractor or a small business owner and you have a designated space at home that you use “regularly and exclusively” for conducting business. If you have another place you work, but also regularly work in your home, you can claim a home office tax deduction.
Don’t claim a home office tax deduction if you’re an employee whose home is your “principal place of business” unless you work at home for the “convenience of your employer.” You also must use at least a part of your home regularly and exclusively for work. You can’t rent any space to your employer while you’re working as an employee, though, and you can’t work at home just because it’s “helpful.”
Do calculate the percentage of your home used regularly and exclusively for business. First, determine the number of square feet your home has. Next, establish the square footage that’s eligible to claim. One option is to measure the space you use regularly. This might be a bedroom converted into a fully furnished home office, the corner of a room with a desk and a chair, or a dedicated workshop in your barn or garage. The other option is to calculate a percentage of your home’s space. For example, if your home has five rooms and you use one for business, it’s 20% of the total square footage.
Don’t claim more than the maximum allowance of 300 square feet for business space. You can deduct $5 per square foot. If you provide day care or use your home for storage, this amount may be less. Check IRS Worksheet 587 for deduction guidelines.
Do keep records for business expenses if you plan to take a deduction. According to the IRS website, you can deduct necessary and ordinary expenses such as advertising, vehicle usage, travel, office and work supplies, and business taxes and salaries. These are fully deductible.
Don’t fabricate business activity expenses, records or information so you can pay less in taxes. If you’re caught, you can be charged with tax fraud. Upon conviction, charges and penalties for individuals range from up to 12 months in prison and/or up to $100,000 for a misdemeanor, and up to five years in prison and/or up to $250,000 for a felony. You may also have to pay the cost of prosecution if you’re found guilty.
While preparing your taxes, seek help from a professional or consult the IRS if you’re unsure how to fill out the forms. If you guess at the answers and you make a mistake, you could get into trouble. You could also fail to take a deduction and miss out on tax credits.
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