If you use part of your home for your business, you may be able to take the home office deduction. Read on to find out if you qualify, how to calculate your deduction, and why you must keep excellent records for your home business.
Do I Qualify for the Home Office Deduction?
Small business owners or self-employed individuals who work from home can most likely take advantage of the home office deduction in 2020. Unfortunately, W-2 employees are not eligible for the home office deduction, even if you’ve been working from home during the pandemic. To determine if you qualify, you’ll want to reference IRS Publication 587.
If a portion of your home is used “exclusively and regularly” as your principal place of business or you have a “place where you meet or deal with patients, clients, or customers in the normal course,” then you most likely qualify for the home office deduction.
There are a few additional qualifications. Your business is used as a separate structure that’s not attached to a home and is used exclusively and regularly in connection with a trade or business or used for storage of inventory, rental use, or as a daycare facility.
How Can I Calculate the Value of My Deduction?
Once you determine that you qualify for the home office deduction, you’ll need to calculate your deduction value. Here are your two options:
Percentage of your home: Rather than deducting actual expenses, you’ll want to calculate your home office percentage. If you’re not a math wizard, here’s a quick breakdown of how you determine this:
If your home office space is 1,000 square feet, and your entire home is 4,000 square feet, the percentage of your home is 25% (1,000 ÷ 4,000 = 0.25).
Simplified square footage: This method uses a prescribed rate multiplied by the allowable square footage used in the home. The current prescribed rate is $5 per square foot, with a maximum of 300 square feet.
Deduct Your Expenses: You can deduct your home office percentage from many of your household expenses, such as mortgage interest, taxes, maintenance and repairs, insurance, utilities, and other expenses.
Will the IRS Audit My Deduction?
While the home office deduction used to have a reputation of being a red flag for an audit, there’s no need to fear getting audited if you keep excellent records that satisfy the IRS. If you do happen to get audited, it’s essential to understand your right for representation and right to appeal your disagreements with the IRS Office of Appeals and tax courts. Having a tax team who is fully versed in your particular case may prove to save you thousands of dollars in back taxes. Fortunately, our tax attorneys have successfully represented our clients and their interests in connection with a tax audit.
What Kind of Records Should I Keep?
As we previously mentioned, keeping excellent records will not only bring you peace of mind, but it will also help you if the IRS decides to audit you. Here’s a rundown of the records you should keep:
- Copies of Form 1098 showing the interest you paid on your mortgage each year
- Property tax bills
- Your lease agreement if you rent
- Utility and insurance bills
- Receipts for any home office expenses
If you qualify for the home office deduction, make sure to take full advantage of it. As tax experts, we urge you to do reliable and thorough bookkeeping for your business so determining your home office deduction is a painless process.
Contact America’s Top Tax Experts
Are you wondering how to take full advantage of the home office deduction? Work with a trusted tax lawyer so you can keep as much as your hard-earned money as possible. Contact US Tax Shield today at (877) 829-3535 for your free no-obligation consultation.
