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Understanding Home Office Tax Deductions

Home Based Business: Understanding Home Office Tax Deductions

The home-office tax deduction can be tricky, and its definition is constantly changing. But if documented properly, it can be a financial boon to your home-based business.

“If you want to take it, you have to use that space in your home regularly and exclusively as your principal place of business,” says Barbara Weltman, author of The Complete Idiot’s Guide to Starting a Home-Based Business. “The kitchen table is never going to qualify for a home office.”

But if you do have a designated home office, Weltman says there are many potential avenues for tax savings. “You get to deduct a portion of expenses like rent – or if you own your home, your real estate taxes and mortgage interest, utilities, insurance, maintenance, all those things – at a percentage usually based on the square footage that your home office takes in your home,” she says. “So, if you use 10% of the floor space in your home as an office, then 10% of all those expenses are part of your home office deduction, along with any direct expenses. If you use one room in your home as your office and you paint that room, you can allocate the entire cost of that.”

And Weltman says you can tie the home-office deduction into other possible tax write-offs. “Once you establish that you have a home office, any business cost driving to and from your home office is fully deductible,” she says. “Every time you go out to the bank, to visit suppliers, to go see a customer – all of that travel to and from home you can deduct. But you have to track your mileage to get that write-off.”

One word of caution: If you decide to file a home-office deduction with your tax return, carefully document all expenses related to your home office, and maintain those records after you file that year. Mindy Lilyquist, founder and creative director for Epiphany Marketing Management, says tax returns that include these deductions are more closely scrutinized. “It just throws up an audit flag to the IRS,” she says. “Even though you can, I’ve never taken it because I don’t want to be put into that pool.”