Home-Office Tax Deduction Refresher & When Work At Home Yields Tax Deductions

Patrick Clark for Bloomberg writes: To claim the home-office deduction, or not to claim? That’s a decision millions who work at home are wrestling with now.  On the one hand, the deduction can be quite valuable: When Karen E. Klein wrote about the subject for Bloomberg Businessweek last year, the executive director of H&R Block’s (HRB) research and analysis division estimated that the average home-office deduction was worth more than $2,600.  On the other hand, filing for the deduction is notoriously complex. Several years ago, I spent hours agonizing over the 43-line Form 8829 (PDF), then broke out a tape measure and a calculator to determine what percentage of my rental apartment’s square footage my home office occupied. For homeowners, the process is more complex, at least for those filers deducting portions of their mortgage payments and home depreciation. It’s no wonder that when the U.S. Department of the Treasury announced a plan to streamline the process beginning in tax year 2013—more on this below—the agency said that simplifying the process would save 1.6 million hours annually in tax prep time.

As a postscript to my home-office adventure, my returns for the following tax year were audited, and I’ve always believed that the IRS targeted me for my use of the deduction in a previous filing. It’s not really as simple as that: Claiming the home-office deduction may increase your chances of being audited, says Sandy Botkin, a former IRS lawyer and author of Lower Your Taxes—Big Time, but the deduction is only one factor in a complex formula.

With April 15 closing in, it’s worth revisiting Klein’s article. The key points: If you want to claim the deduction, you should make sure your home office really is an office—not a desk in the corner of the family den. Also, that you’re using the home office as your primary place of business, as defined by the IRS. If you meet the requirements, you can deduct a portion of your home’s expenses, including insurance, utilities, and rent.

An employee in a large company can claim the home-office deduction, too, if they meet the government’s requirements—which include the stipulation that the filer works from a home office for the convenience of her employer. It’s complicated, and you’ll want to read the IRS instructions (PDF) carefully or talk to someone who knows them well.

As far as the simplification push, starting with their 2013 returns, taxpayers will be able to skip some of the more complex calculations currently required for the deduction and simply write off $5 per square foot of home office, up to $1,500 or 300 square feet. Don’t rejoice too quickly: As Botkin wrote in a blog post after the new option was announced, the simplified process will save time, but for many taxpayers, the $1,500 cap will be less than what they would have claimed by completing the lengthier form.

When Work At Home Yields Tax Deductions

Robert R Wood for Forbes writes: You sometimes work at home, but should you claim a deduction on your taxes? People worry it will flag their return, yet more than half of working Americans own or work for a small business. Many are home-based or have home offices. Some businesses go virtual and recruit home-based employees.  But no matter how much you work at home, do you qualify for a deduction? Starting with 2013 tax returns filed in 2014, the IRS is easing some home office deductions. See IRS simplifies the home-office deduction, for 2013. In the meantime, Section 280A(c) of the tax code is strict.

To qualify, a home office must be used regularly and exclusively for business. You can’t use your home office as a family room and you shouldn’t have a TV or chess table in the corner. It sounds silly, but taxpayers lose over such details. In Bulas v. Commissioner, an accountant claimed one room—plus an adjacent hallway and bathroom—was exclusively for business. But because his children occasionally used the bathroom, it wasn’t exclusively for business.
In addition, the deduction is limited to income from the business. If you run a home-based eBay business from a spare room off your garage (and you don’t use that room for anything else), you could deduct the cost of utilities attributable to that space. You could even depreciate that portion of your home. But if you lose money on your eBay venture before you get to your home office deduction you don’t qualify. See IRS Tax Tip 2011-53.
Home office deductions involve filling out a 43-line form (Form 8829) with complex allocations of expenses, depreciation and carryovers of unused deductions. You generally must use part of your home exclusively and regularly:

• As your principal place of business;
• As a place to meet or deal with patients, clients or customers in the normal course of your business; or
• If the business portion of your home is a separate structure not attached to your home, then “in connection with your trade or business” (a more watered-down standard).
• Other deduction possibilities include certain storage use, rental use, or daycare-facility use. In these cases, you must use the property regularly for business, but not exclusively for business.
• If you are an employee, the regular and exclusive business use must be for the convenience of your employer. That usually means the employer must require you to work at home (get it in writing).

A section of a room can qualify if it is clearly partitioned and you can show personal activities are excluded from the business portion. Still, these rules are unforgiving and the IRS tends to interpret them strictly.