The Home Office Deduction

If you're one of the 4 million Americans who work from home, you can claim a nice deduction on your tax return.

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Lots of people are unclear about how the home office tax deduction works, and because they're unclear, they worry that if they do make claims, they'll receive an IRS audit (yikes). But if you legitimately qualify for the deduction, there shouldn't be a problem. Here are the ground rules.

What's Qualifies As An Office?

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According to Bankrate.com, you can claim home office deductions if:

  • Your home office is a portion of your home that's used regularly and exclusively for your business needs. Your kitchen table or your kid's playroom doesn't qualify—it has to be an area that's all about business.
  • This business part of your home must be either your principal place of business, or per the IRS, a place where you exclusively do your billing, keep your books and records, or other administrative duties for your business.

What You Can Claim

If a portion of your home is dedicated to business, you can enjoy a whole bunch of deductions:

  • You can deduct a portion of your home's real estate taxes, mortgage interest, rent, utilities, insurance depreciation, plus maintenance.
  • But note this: According to TurboTax, the total amount you can deduct depends on the percentage of your home that's used for business. To figure that out, measure your office square footage and find out what percentage it is of the total area of your home. For example, if your office measures 150 square feet, and the total area of your house is 1,200 square feet, your business percentage would be 12.5% (1,200 divided by 150).
  • Another important point: The amount of deductions for your home office can't be higher than the net annual income from the business. So if you claim $45,000 in deductions in 2012, but your business will only make $35,000, you're claiming too much.

From the Horse's Mouth

The best way to learn about how your home office qualifies is through software like TurboTax or a CPA. Or, just read up on things through the IRS website:

  • Check out the IRS page on home office deductions—we found it very clear.
  • If you hate reading tax mumbo jumbo, the IRS also has a video (thank you!), with a friendly IRS representative explaining what's allowable for small-business owners.

Ryan Homes Tip: Keep records on how you use your home office, take pictures of your home office, and store them with your tax records.