Working from home usually requires a desk, computer and self-motivation, but it always requires knowledge of how to maneuver through the often confusing tax laws that can cost some entrepreneurs a serious headache if not understood correctly.
When working from home, it’s imperative to know what you can write off as a business expense and what you cannot, lest the IRS
some day come knocking on your door.
First and foremost, you must have a clearly defined “home office.”
Cliff Ennico, a nationally recognized expert on small business law, author and former host of the PBS television series, “Money Hunt,” explained that a “home office” is any part of the home considered the “principal place” you conduct business. He advises clients to hire a contractor to measure the space, since people often underestimate the size of their “office.”
“As long as you don't have a place of business elsewhere, the IRS will treat this space as a ‘home office’ for tax purpose,” Ennico said. “While having a separate room or outbuilding is helpful, even part of a room can be a ‘home office’ as long as it's used exclusively for business purposes.”
A type of deduction the IRS will not allow: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns, while his family also uses it for recreation. In this example the den is not used exclusively for the attorney’s profession, so a business deduction cannot be claimed.
What if you don’t have a separate room for your office? Ennico recommends using duct tape to mark the floor and walls to clearly indicate where the office is. It’s not pretty, but effective.
“It's not very pleasing aesthetically, but if you are ever audited by the IRS it will show that you are following the rules closely and taking yourself seriously as a ‘real’ business,” he said.
The biggest rule to follow is to make sure your office space is strictly used for business. That means decorating your office space for work, not your personal life, Ennico added. Picture of the spouse and kids are OK, but items like a crib or doggie-bed are no-nos.
“And make sure your artwork is appropriate to your business - anime prints are okay if you sell anime related artwork on eBay, but it's not appropriate if you sell European antiques on eBay,” Ennico said.
According to Uncle Sam, in order to deduct certain storage, rental or daycare-facility use, you are required to use the property regularly but not exclusively. The IRS also says the amount you can deduct depends on the percentage of your home used for work; expenses are limited if your gross income is less than your total business expenses. The government says that to be deductible, a business expense must be both “ordinary” in your field of work and “necessary” for your business.
Here are some home office deductions to consider when filing your taxes:
-The home office itself. When deducting "home office" expenses, you can take only the "home office percentage" of the total amounts -- the square footage of your home office divided by the square footage of your entire home. So, Ennico explained, if your home office is 1,000 square feet and your entire home is 4,000 square feet, you can deduct 25 percent (1,000/4,000) of each eligible "home office" expense.
-Office computer, office phone, and other business equipment used exclusively for business.
-Depreciation on office equipment or other capital expenses that usually have a life of a year or more and increase the quality and quantity of products and services you can offer. The current maximum deduction is $250,000, so most small businesses simply "expense" their equipment purchases without depreciating them. If a business buys more than $250,000 in equipment in a given year, however, the excess amount must be depreciated.
-Mortgage interest and real estate taxes may be able to be deducted under certain conditions. It’s best to check the IRS Web site for when you can do this.
-Home office repairs, maintenance expenses, utilities.
-Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. This can be any program designed to cause a computer to perform a certain function.