If you haven't filed your taxes already, make sure you're taking every deduction to which you're entitled. If you use part of your home for work, the National Association for the Self-Employed says you shouldn't, among other things, forget to take home office deductions if you qualify.
But before you claim those deductions, you need to know the rules.
Basically, if you use a portion of your home for business purposes on a "regular and exclusive'' basis, you may be able to take a home office deduction whether you are self-employed or work for someone else. However, it all turns on the words "regular" and "exclusive."
By the IRS definition, "exclusive'' means you have dedicated a specific area of your home to conduct your business or trade or to meet with clients or customers. When the agency says "regular,'' it means the area is used regularly for your business. Incidental or occasional business use is not regular use. You do not meet the requirements of exclusive business use if the area in question is used for both business and personal purposes.
There is an exception to the exclusive portion of the rule if, for instance, you're a plumber who obviously can't perform that trade from home. If you use your house to do the administrative work of your plumbing business and you don't have another location where you do such work, you may be entitled to home office deductions.
Be careful not to confuse personal expenses as business expenses when claiming home office deductions. The IRS says taxpayers commonly and erroneously claim their basic local telephone service as a deduction. The first telephone line into a home is a nondeductible personal expense. However, charges for business long-distance phone calls on that line are deductible. You also can deduct the cost of a second line into a home used exclusively for business.
Other expenses that you may be able to deduct for business use of the home include a portion of your home's real estate taxes, mortgage interest or rent, utilities, insurance, depreciation, painting and repairs. To find out what qualifies as deductible business expenses, go to www.irs.gov/smallbiz. Then search for "business expenses." For the most part, your deductions in these expense categories are determined by the percentage of your home that is used to conduct your small business.
If you work for someone else, there are different hoops you have to jump through before you can take the home office deductions. As an employee, you can claim deductions for home office expenses only if the regular and exclusive business use of the house is for the convenience of your employer. And you can't be renting any part of your home to your employer and use the rented portion to perform services for your employer.
If you use your home to provide day care or to store inventory or product samples, different rules apply.
One more thing: If your gross income from the small business operated out of your home is less than your total business expenses, your deduction for certain business expenses is limited. However, those expenses that can't be deducted because of this limitation can be carried forward to the next tax year (again limited to the gross income for that year).
To fully understand the IRS rules in this area, read Publication 587 "Business Use of Your Home.'' The publication is available at www.irs.gov or by calling (800) 829-3676. The publication includes a number of examples and a chart to help you determine if your home office qualifies as your principal place of business.
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